Greenwich University
Lecturer:Dr Jeff Powell
BSc Econ
Macroeconomics 1; Monetary Policy
20/2/2023
ADMINISTRATIVE ISSUES
Good news re strike- heard that industrial action is paused for two weeks.
No strikes on Tues Wed Thurs- back to normal schedule. Hope that during those two weeks there are
negotiations, and mid-to-late-March strikes cancelled. Worst case scenario- one more strike day in
March but easily handled and should not affect this module
Your essay due on 24th Feb, reminder of Inez sessions.
Extenuating Circumstances(-will give you two additional weeks for submission
Optional Module Choice have till 17/3 to choose next year’s modules on programme Moodle -
seepage and dashboard
PY001 BSc Econ- on there you can find module handbooks, plus videos and his session
MONETARY POLICY
See article Joseph Stiglitz re how to fight inflation. Focuses On US but there are some key points that don’t get
discussed elsewhere.
Was originally shared with you a couple of weeks ago but not discussed.
Article-what is driving inflation ;is interest rate hiking cycle the right choice?
What is driving inflation? 2 things:
o 1)Supply shock from first COVID Then Ukraine war
o 2) Shift in demand from doing everything at home to external social activities putting pressure on
services again
Does interest rate hiking cycle address these 2 issues ? His argument is no. Hike might disincentive
investment needed to address supply side restraints- i.e., capacity bottle necks.
We need to identify bottlenecks and address them rather than take short terms hikes to deal with
them rather than use ‘blunt tools’ of raising short term interest rates.
See also Podcast from ???? Bloomberg production- features Isabella Weber argument similar
arguments to Stigmitz + her input /output analysis to id those sectors that are key transmission
sections from supply bottlenecks to price rises and what policies can address this.
KEY-Interest rate rise not always wrong but also not always optimal but dominant economic
narrative is to push up interest rates, control wages etc. radio, social media
MONETARY POLICY
Session will look at BOE and structure, tools it employs, theory and evidence on interest rate and
effect on expenditure
Also look at unconventional tools e.g., QE + QT.
From 1990-2008
Monetary policy basic approach from 30 years 1990 to 2008 and in last year based on following:
If inflation picks up:
o central bank increase the short term interest rate
o commercial banks have to pay more for funds from bank
o commercial banks increase interest rates to customers- assume this will discourage borrowers,
less people employed, put downward pressure on prices> leading to less credit creation
After 2008
1
, Greenwich University
Lecturer:Dr Jeff Powell
BSc Econ
Macroeconomics 1; Monetary Policy
20/2/2023
2008> what if inflation rate is too low.
Traditional response is to:
Cut interest rate.
Banks get funds more cheaply and give cheaper loans to customers
More spending on consumer goods and drive on economic activity
But central banks can’t force banks to lend out more or corporations and households to borrow-
but see China and state control, issue of ‘ force’
Governance of the bank of England- see also Moodle.
The governor is selected by the Chancellor for 8 year term which can be renewed once. Political
appointment
Monetary policy committee- decision making committee re interest rates and policy tools. Has: 9
members>, governor, 3 deputies (responsible for 3 main working groups- monetary, financial stability,
banking and supervision) chief economist BOE + 4 external members
Monetary policy committee used to meet monthly now 6 weekly and minutes are published after the
fact
If BOE fails to achieve target governor has to file report to chancellor/ MPS
If missing target for inflation- Bailey has had to appear to explain why over target- accountability to
political system> Treasury
Committee has hawks and doves- some in favour of high interest rate others not
KEY -use of term’ money multiplier’-your text book( this week’s reading) puts forward the view that if
central banks can increase commercial banks holding of resources ,that commercial banks expansion re
lending to firms and household will increase in fixed proportion to their base reserves
THIS IS WRONG
Wrong causality – banks make loans based on profit making- can firms and households make them
money? Once they make loan where there are reserve requirements by law or need- then they will
decide how many reserves to hold and adjust
KEY-causality runs from private sector demand for credit to reserve holdings- central bank can’t
control credit. Can’t change reserve levels and manipulate credit= monetarist. Central banks can’t
control money supply > BOE has written policy papers against this
CENTRAL BANK TOOLS PRE-2008
Pre 2008 was a single world monetarily- then post 2008 to now- which do we want to live in the long term ?
Tools before 2008
Some argue we should be trying to get back to this: back to ‘ standing facilities.
Standing facilities
Lending- will lend to commercial banks at penalty rate and banks must offer collateral
Provides upper boundary of interest rate in the money market( why borrow from private bank at 6%
when central bank offers 5%?)
Deposit facilities- banks deposit excess reserves at the central bank- central bank offering lower
interest rates
2
Lecturer:Dr Jeff Powell
BSc Econ
Macroeconomics 1; Monetary Policy
20/2/2023
ADMINISTRATIVE ISSUES
Good news re strike- heard that industrial action is paused for two weeks.
No strikes on Tues Wed Thurs- back to normal schedule. Hope that during those two weeks there are
negotiations, and mid-to-late-March strikes cancelled. Worst case scenario- one more strike day in
March but easily handled and should not affect this module
Your essay due on 24th Feb, reminder of Inez sessions.
Extenuating Circumstances(-will give you two additional weeks for submission
Optional Module Choice have till 17/3 to choose next year’s modules on programme Moodle -
seepage and dashboard
PY001 BSc Econ- on there you can find module handbooks, plus videos and his session
MONETARY POLICY
See article Joseph Stiglitz re how to fight inflation. Focuses On US but there are some key points that don’t get
discussed elsewhere.
Was originally shared with you a couple of weeks ago but not discussed.
Article-what is driving inflation ;is interest rate hiking cycle the right choice?
What is driving inflation? 2 things:
o 1)Supply shock from first COVID Then Ukraine war
o 2) Shift in demand from doing everything at home to external social activities putting pressure on
services again
Does interest rate hiking cycle address these 2 issues ? His argument is no. Hike might disincentive
investment needed to address supply side restraints- i.e., capacity bottle necks.
We need to identify bottlenecks and address them rather than take short terms hikes to deal with
them rather than use ‘blunt tools’ of raising short term interest rates.
See also Podcast from ???? Bloomberg production- features Isabella Weber argument similar
arguments to Stigmitz + her input /output analysis to id those sectors that are key transmission
sections from supply bottlenecks to price rises and what policies can address this.
KEY-Interest rate rise not always wrong but also not always optimal but dominant economic
narrative is to push up interest rates, control wages etc. radio, social media
MONETARY POLICY
Session will look at BOE and structure, tools it employs, theory and evidence on interest rate and
effect on expenditure
Also look at unconventional tools e.g., QE + QT.
From 1990-2008
Monetary policy basic approach from 30 years 1990 to 2008 and in last year based on following:
If inflation picks up:
o central bank increase the short term interest rate
o commercial banks have to pay more for funds from bank
o commercial banks increase interest rates to customers- assume this will discourage borrowers,
less people employed, put downward pressure on prices> leading to less credit creation
After 2008
1
, Greenwich University
Lecturer:Dr Jeff Powell
BSc Econ
Macroeconomics 1; Monetary Policy
20/2/2023
2008> what if inflation rate is too low.
Traditional response is to:
Cut interest rate.
Banks get funds more cheaply and give cheaper loans to customers
More spending on consumer goods and drive on economic activity
But central banks can’t force banks to lend out more or corporations and households to borrow-
but see China and state control, issue of ‘ force’
Governance of the bank of England- see also Moodle.
The governor is selected by the Chancellor for 8 year term which can be renewed once. Political
appointment
Monetary policy committee- decision making committee re interest rates and policy tools. Has: 9
members>, governor, 3 deputies (responsible for 3 main working groups- monetary, financial stability,
banking and supervision) chief economist BOE + 4 external members
Monetary policy committee used to meet monthly now 6 weekly and minutes are published after the
fact
If BOE fails to achieve target governor has to file report to chancellor/ MPS
If missing target for inflation- Bailey has had to appear to explain why over target- accountability to
political system> Treasury
Committee has hawks and doves- some in favour of high interest rate others not
KEY -use of term’ money multiplier’-your text book( this week’s reading) puts forward the view that if
central banks can increase commercial banks holding of resources ,that commercial banks expansion re
lending to firms and household will increase in fixed proportion to their base reserves
THIS IS WRONG
Wrong causality – banks make loans based on profit making- can firms and households make them
money? Once they make loan where there are reserve requirements by law or need- then they will
decide how many reserves to hold and adjust
KEY-causality runs from private sector demand for credit to reserve holdings- central bank can’t
control credit. Can’t change reserve levels and manipulate credit= monetarist. Central banks can’t
control money supply > BOE has written policy papers against this
CENTRAL BANK TOOLS PRE-2008
Pre 2008 was a single world monetarily- then post 2008 to now- which do we want to live in the long term ?
Tools before 2008
Some argue we should be trying to get back to this: back to ‘ standing facilities.
Standing facilities
Lending- will lend to commercial banks at penalty rate and banks must offer collateral
Provides upper boundary of interest rate in the money market( why borrow from private bank at 6%
when central bank offers 5%?)
Deposit facilities- banks deposit excess reserves at the central bank- central bank offering lower
interest rates
2
