2016/9/20 Open Market Operations Open Market Repurchase Agreements Repurchase Agreement(Repo) Reverse Repurchase Agreement An agreement with a commitment by the seller The central bank senis secu rities to dealers and (dealer) of security to buy it back from the agrees to repurchase them at a higher price purchaser at a specified higher price at a designated future date It contracts the short-term liquidity in the banking ector before the central bank buys back the It represents a collateralized short-term loan where the security serves the collateral In the repurchase transaction, the central bank What is the difference between Repo and provides short-term liquidity to the banking open market operation? sector. The wording in China is different. Discount rate Discount Rate he US Fed Discount rate Proceeds from discount loans are also the interest rate charged to commercial bar reserves and increase the banks capacity in other depository institutions on loans they making loans from their regional Federal Reserve Bank facility--the discount window, i. e, the cost of n increase in the discount rate discourages capital financed by the central bank. anks from borrowing from the Fed, thereby Discount windows provides very short-term the total amounts of loans provided to firms. vernight)loan extension, short-term loan a decrease in the discount rate encourages extension and seasonal credit extension to banks to borrow from the fed Monetary Policy Monetary Aggregates Monetary policy aims to controlling the total Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth and the pressure for How do we calculate the total amount of money in the economy?2016/9/20 3 Open Market Operations • Repurchase Agreement (Repo) – An agreement with a commitment by the seller (dealer) of security to buy it back from the purchaser at a specified higher price at a designated future date. – It represents a collateralized short‐term loan where the security serves the collateral. – In the repurchase transaction, the central bank provides short‐term liquidity to the banking sector. 1‐13 Open Market Repurchase Agreements • Reverse Repurchase Agreement – The central bank sells securities to dealers  and agrees to repurchase them at a higher price – It contracts the short‐term liquidity in the banking sector before the central bank buys back the security. • What is the difference between Repo and open market operation? • The wording in China is different. 1‐14 Discount Rate • The US Fed Discount rate – the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility‐‐the discount window, i.e., the cost of capital financed by the central bank. – Discount windows provides very short‐term (overnight) loan extension, short‐term loan extension and seasonal credit extension to commercial banks. 1‐15 Discount Rate • Proceeds from discount loans are also reserves and increase the bank’s capacity in making loans. • An increase in the discount rate discourages banks from borrowing from the Fed, thereby the total amounts of loans provided to firms. • A decrease in the discount rate encourages banks to borrow from the Fed. 1‐16 Monetary Policy Easing Tightening Required Reserve Ratio   Open Market Operation Repo Reverse Repo Discount Rate   1‐17 Monetary Aggregates • Monetary policy aims to controlling the total money in the economy. • Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth, and the pressure for inflation. • How do we calculate the total amount of money in the economy? 1‐18