Monetary Policy Tools

By Donald E. Ehmke

Money Creation

In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased.

Reserve Requirements

The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves(rather than lend out). These required reserves are normally in the form of cash stored physically in a bank vault(vault cash) or deposits made with a central bank.

Setting Rates

The discount rate is the interest rate that the Federal Reserve charges on loans to financial institutions.

Open Market Operations

An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open market. A central bank uses them as the primary means of implementing monetary policy.

Using Monetary Policy Tools

The Federal Reserve uses these monetary policy tools to adjust the money. Why the Fed would want to change the money supply, and the effects of monetary policy, are the subjects of the next section.