economics macro policy question. (1 Viewer)

[LoanWoolfq]

is the below modeling correct?

• Loosening

• RBA Buys CGS

  Banks Gain Money

  Banks Decrease Rate of Interest

  By increasing the supply of cash, banks will lend their excess supply of cash at lower rates.

• Tightening
  

  RBA Sells CGS

  Banks Lose Money

  Banks Increase Rates of Interest

  • By decreasing the supply of cash, banks will decrease their lending by increasing interest rates.

 

[#RoadTo31Atar]

Yes but you should use the right terms for it

 

[LoanWoolfq]

such as...enlighten me.

 

[mrlouis1]

In a skeletal sense this is correct. Just make sure you know the motives for why the banks change their rates of interest (i.e. they are selective when loaning money).

Also you didn't mention the cash rate surprisingly i.e. the rate at which the RBA LENDS money to the banks in their Exchange Settlement Accounts or the what happens in the overnight cash market when these funds are bought/sold. Hence, you are missing aspects of monetary policy a band 6 student would have in their notes
i.e.
Tightening: RBA sells securities -> Creates shortage of BORROWABLE funds in the cash/financial market (overnight) -> the RBA therefore increase their cash rate -> Banks retaliate by increasing their IR
For simplicity, think cash rate = interest rate

Hope this helps

 

[LoanWoolfq]

could you please give me a run down on those two points mr louis?
it would be greatly appreciated and it would solidify your knowledge for you!

 

[LoanWoolfq]

Creates shortage of BORROWABLE funds in the cash/financial market (overnight) -> the RBA therefore increase their cash rate -> Banks retaliate by increasing their IR

this is the bit i dont get?

 

[LoanWoolfq]

specifically

the RBA therefore increase their cash rate -> Banks retaliate by increasing their IR

 

[#RoadTo31Atar]

such as...enlighten me.

domestic OMOs, cash rate, cash market, ESA balance, liquidity

 

[LoanWoolfq]

thanks. yes i do understand that...i "skeletonise" stuff to learn it and then fill it in.
the only question i have, is DMO the same as domestic OMO?

 

[#RoadTo31Atar]

Yes it's the same thing afaik