Provides a nominal anchor for the economy, Is ensuring domestic financial stability (lender of last resort, reducing or preventing banking and financial crises); Bank of note issue; Banker, Agent and Adviser to the Government; Bankers' Bank; Clearing Agent
- Public announcement of medium-term numerical targets for inflation -Institutional commitment to price stability as the primary goal of monetary policy -Information strategy in which many variables are used for deciding about policy instruments -Increased transparency of the monetary policy strategy through communication with the public and the markets -Increased accountability of central bank
What are the core ingredients of inflatiom targeting?
- Commitment to a low and stable inflation rate - Commitment is publicly expressed in terms of announced numerical inflation target and the definition of relevant price index - Central bank has instrument independence
- Clarification of the objectives of monetary policy - Adoption of institutional structures for the conduct of monetary policy - Adoption of inflation targeting as the strategy of implementing monetary policy
What is the relation between money growth and inflation?
Inflation expectations affect the wage and price setting pattern This affects actual inflation Low and stable inflation can be maintained if public expectations are firmly anchored It can lead to self-fulfilling expectational equilibria
If monetary policy is implemented via interest rate rules, nominal interest rate needs to move more than one-to-one with inflation. But central bank can also control money supply to provide nominal anchor
- Central bank should avoid too optimistic targets - Cyclical factors have only short-term effects on real economic variables - Not all fluctuations should be stabilized - Stabilization policy of central bank should be defined in terms of gaps (deviations from benchmark)
- Delegating monetary policy to an independent central bank with a mandate to maintain price stability - Delegating monetary policy to another country via: pegged (fixed) exchange rate, currency board or monetary union
It is type of exchange rate regime, where value of currency is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as for example gold
Political influence over monetary policy leads to excessive inflation and less stable real economic activity. There is negative correlation between average inflation rate and various measures of central bank independence among developed economies.
- Policy framework must ensure that the economy has a nominal anchor – price stability is a primary objective of monetary policy - Policy framework should be transparent - Policy framework should contain mechanisms to promote accountability of central bank
What are the components of the monetary policy strategy?
- draws up annual monetary policy guidelines - presents the report to the sejm - sets NBP base interest raes - sets ceilings on the liabilities arising from loans - approves the NBP financial plan - accepts the annual accounts of the NBP
Money market rates affect loan and deposit rates at commercial banks and thus the size of loans, the demand within the economy and the inflation rate. The set of monetary policy instruments used by the NBP enables it to determine interest rates on the market
They are conducted with commercial banks to limit of overnight rates fluctuations; these include the lombard loan and the banks' time deposits at the NBP (overnight deposits). NBP credit-deposit operations affect the level of interest rates on the money market;
- collateral consists of Treasury securities and the amount of loan may not exceed 80% of their nominal value -loan matures on the next business day after the date of it being granted -loan is granted upon repayment of a loan granted previously