Monetary Policy - cash rate/domestic market operations (1 Viewer)

[snowbunny]

Could someone please explain to me the use of domestic market operations

is setting the cash rate and buying/selling CGSs two different policy instruments?

I understand buying and selling of CGSs and how it affects the money supply, but does this affect the cash rate, then in turn, interest rates? or are they different things?

I know im confusing, sorry but thanks to anyone who understands my confusion and can help!

 

[snowbunny]

ok thanks!

so market operations influences the money supply which in turn affects the cash rate, leading to increased or decreased cost of borrowing (interest rates)

 

[gnrlies]

The purchase and sale of government securities affects the supply of funds in the market.

I.e. they sell securities, and banks purchase them with currency, and the money supply falls. Or they buy securities, and the RBA purchases them with currency which increases the money supply.

This then has an impact on the cash rate as the supply of money contracts (or expands).

The current method of monetary policy is to maintain a target cash rate, so each day the RBA makes the appropriate security transactions so that the cash rate is at 6%.

The cash rate influences all other interest rates in a complicated process that you dont need to know.

 

[P_Dilemma]

Remember that Monetary Policy is a DEMAND SIDE instrument, even though its aim is to affect supply. They name the policy on the basis of it's effect, not on it's mechanisms, apparently...

-P_D

 

[mitsui]

a question, in our answers about monetary policies, esp essays

to what extend do we need to explain about ESA? do we just mention them?

thanks.

 

[sunjet]

just say they are accounts held with the RBA to manage settlements or something.

 

[gnrlies]

Remember that Monetary Policy is a DEMAND SIDE instrument, even though its aim is to affect supply. They name the policy on the basis of it's effect, not on it's mechanisms, apparently...

-P_D

I think you might be confusing this....

Monetary Policy is a demand side instrument because it affects aggregate demand through consumption and investment.

It doesn't directly affect supply....

 

[snowbunny]

thanks everyone!

im glad we dont need to know the whole process of how the cash rate affects interest rates

 

[s-m-arky]

Remember that Monetary Policy is a DEMAND SIDE instrument, even though its aim is to affect supply. They name the policy on the basis of it's effect, not on it's mechanisms, apparently...

-P_D

Just like to point out that these are the policies: External policy, micro-economic reform, monetary policy, wages policy and fiscal policy. The OBJECTIVES of the policy (ie, their aims) are, respectively, external stability, micro-economic reform (same name as policy), Low inflation + price stability, economic growth, and low unemployment.

 

[Marzaa]

I thought the cash rate was the price at which the RBA set for their govt. securities, so if govt raised price of securities, cash rate would increase, hence banks buy more securities hence contraction in money supply

am i wrong?