economics macro policy question. (1 Viewer)

LoanWoolfq

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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.
 

mrlouis1

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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

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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

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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

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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?
 

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