How do central banks control inflation? A guide for the perplexed
added by Alvaro Gornes · updated 2y ago
added by Alvaro Gornes · updated 2y ago
Central banks are tasked with managing the money supply, which in turn should affect their currency’s value and inflation. To expand the money supply, most advanced countries buy their own bonds and give the seller currency, and to reduce the money supply, they sell their bonds and pull currency out of circulation. Interest rates can also be adjust
... See moreWhen the central bank manipulates the interest rate lower than the market clearing price by directing banks to create more money by lending, they are at once reducing the amount of savings available in society and increasing the quantity demanded by borrowers while also directing the borrowed capital toward projects which cannot be completed. Hence
... See moreThe sum total of the contribution of both these schools of thought is the consensus taught in undergraduate macroeconomics courses across the world: that the central bank should be in the business of expanding the money supply at a controlled pace, to encourage people to spend more and thus keep the unemployment level sufficiently low. Should a cen
... See moreJohanna added
As per the dominant regime of political economy, the artificial money is introduced to the financial sector by means of “open market operations” in which central banks purchase financial instruments on the market to add to their balance sheets in order either to boost the prices of these assets, lower the borrowing costs of corporations, or both at
... See moreAs per the dominant regime of political economy, the artificial money is introduced to the financial sector by means of “open market operations” in which central banks purchase financial instruments on the market to add to their balance sheets in order either to boost the prices of these assets, lower the borrowing costs of corporations, or both at
... See moresari added