Monetary policy

Asset Purchase Programme A Bank of England framework for purchasing gilts and corporate bonds to inject liquidity and ease financial stress.

Average Inflation Targeting A framework allowing inflation to exceed target in some periods if it averages the target over time.

Average Inflation Targeting Explained Average inflation targeting is a central bank framework that aims for inflation averaged over time rather than a fixed annual rate, allowing temporary undershoots during recoveries.

Average Inflation Targeting vs Inflation Targeting Average inflation targeting (AIT) allows inflation to overshoot the target after falling short, creating a symmetric makeup period. Standard inflation targeting targets a fixed point.

Balance Sheet Expansion The growth of a central bank's total assets through quantitative easing and other unconventional monetary policy tools.

Balance-Sheet Runoff Balance-sheet runoff is a central bank's gradual reduction of its assets by allowing securities to mature without reinvestment, shrinking the money supply.

Balanced-Approach Rule vs Taylor Rule How the Fed's balanced-approach rule and the Taylor rule differ in weighting output gaps, producing divergent rate prescriptions during recoveries.

Bank of England The Bank of England is the central bank of the United Kingdom, responsible for monetary policy, financial stability, and banking supervision.

Bank of Japan The Bank of Japan is the central bank of Japan, charged with managing monetary policy, maintaining price stability, and supporting the world's third-largest economy.

Bank Rate vs Policy Rate: What Is the Difference? Clarifies the distinction between bank rate and policy rate across central bank frameworks, and when the terms refer to identical or separate rates.

Bank Reserve Injection Adding reserves directly into the banking system to increase the money supply and support credit availability.

Bank Reserve Requirements: Why They Matter for Lending How reserve requirements affect the cost of credit and monetary policy, and why advanced economies have shifted toward zero.

Base Money Creation Base money creation is the process by which a central bank increases the monetary base—the money it directly controls—through asset purchases or lending.

Base Rate Transmission The chain by which a central bank's policy rate change flows through banking institutions to consumer and business lending rates and deposit yields.

Basis Point Sensitivity DV01 and duration as the standard measures of how much a bond or portfolio loses (or gains) when interest rates move by one basis point.

Broad Money vs. Narrow Money The distinction between highly liquid cash and demand deposits versus savings instruments and near-money claims.

Central bank A central bank is a country's bank-of-banks, the setter of interest rates, and the lender of last resort. It executes monetary policy and tries to maintain price stability and financial system health.

Central Bank Accountability Mechanisms How central banks are held accountable through parliamentary oversight, published mandates, inflation reports, and independent audits.

Central Bank Balance Sheet A central bank's balance sheet shows its assets (bonds and loans) and liabilities (reserves and currency), revealing the scale of monetary policy and financial stress.

Central Bank Collateral Frameworks: What Assets Are Eligible? Understand how central banks define which securities can serve as collateral for emergency lending and how haircuts and eligibility rules change during crises.

Central Bank Communication and Market Expectations How central bank speeches, minutes, dot plots, and press conferences shape rate expectations and asset prices before policy action.

Central Bank Credibility and Its Effect on Inflation Expectations How central bank credibility shapes inflation expectations and why loss of trust forces harsher rate hikes to restore price stability.

Central Bank Digital Currency A sovereign-backed electronic liability issued by a central bank, designed for fast, programmable, and traceable payments at retail or wholesale scale.

Central Bank Digital Currency: How a CBDC Works How central bank digital currencies work, their design choices—retail vs wholesale, account-based vs token-based—and how they differ from bank deposits and private stablecoins.

Central Bank Dot Plot Explained How the Federal Reserve dot plot is constructed, what each dot means, and why markets react strongly despite its non-binding guidance.

Central Bank Exit Strategy After Quantitative Easing How central banks unwind quantitative easing: passive runoff vs active sales, sequencing, and financial stability risks involved in shrinking balance sheets.

Central Bank Independence Central bank independence is the degree to which a central bank is insulated from political pressure and can pursue long-term monetary stability without elected officials interfering.

Central Bank Independence: Why It Matters Why central bank independence from political pressure matters for inflation control and the empirical evidence linking independence to lower, more stable prices.

Central Bank Interest Rates Policy rates set by central banks to control monetary policy, inflation, and employment.

Central Bank Loss Function in Monetary Policy A loss function quantifies how central banks weigh the costs of inflation vs output gaps, expressed as an equation that guides interest-rate decisions.

Central Bank Policy Tools Instruments used by central banks to influence money supply, credit availability, and interest rates to achieve macroeconomic goals.

Central Bank Profit and Loss: Do Central Banks Make Money? Explains how central banks generate seigniorage and interest income, and why they can operate with negative equity despite accounting losses.

Central Bank Reaction Function How a central bank reaction function maps economic conditions to policy rate decisions, and why analysts estimate it to anticipate future monetary policy moves.

Central Bank Swap Lines Bilateral agreements between central banks that provide foreign-currency liquidity during crises, allowing each bank to draw on currency reserves of the other.

Central Bank Swap Lines Explained How central bank currency swap lines work, why they activate during crises to prevent dollar funding shortages, and their role in global financial stability.

Commercial Paper Funding Facility A Federal Reserve programme that purchases short-term corporate debt directly to restore functioning in commercial paper markets during credit crises.

Commodity Money Commodity money is money that has intrinsic value from the material it is made of, such as gold, silver, or other precious metals.

Contractionary Monetary Policy Contractionary monetary policy is a central bank's effort to raise interest rates and reduce the money supply to cool inflation and prevent economic overheating.

Corridor System The two-rate operating system where the central bank sets an overnight lending ceiling and deposit floor, confining interbank rates within a predictable band.

Corridor System Framework where market interest rates float within central bank-defined bounds, maintaining operational control without fixing rates.

Corridor System vs Floor System in Monetary Policy Compare corridor vs floor system monetary policy. Corridor systems use standing facilities to bound rates; floor systems set a paid interest rate on reserves. Both target a policy rate.

Crawling Peg Exchange Rate: Definition and How It Differs From a Fixed Peg A crawling peg allows a currency's official target rate to adjust gradually, usually monthly or quarterly. It balances fixed-peg stability with the reality of inflation differences.

Credibility and Anchoring Inflation Expectations How central banks build credibility so households and firms set wages and prices in line with the inflation target, and what happens when anchoring slips.

Credit Channel The mechanism by which central bank rate changes amplify through bank lending and borrowers' balance sheets.

Credit Creation Mechanism The process by which commercial banks expand the money supply by issuing loans, creating deposit money that circulates in the economy.

Credit Easing Targeted central bank asset purchases that alter the composition of the balance sheet to direct credit to specific markets.

Credit Spread The difference between the yield on a risky bond and a risk-free bond of the same maturity, compensating investors for default risk.

Currency Carry Trade: Mechanics and Risks How currency carry trade mechanics work: borrowing in low-interest currencies to invest in high-yield ones, uncovered interest parity, and unwinding risks.

Currency Crisis: Causes, Warning Signs, and Stages A currency crisis unfolds through predictable stages: reserve depletion, speculative attack, and collapse. Identifying warning signs can help investors and policymakers respond.

Currency Devaluation vs Depreciation Currency devaluation is a government-directed revaluation of a fixed rate; depreciation is market-driven decline in floating rates. Learn the key distinctions.

Currency In Circulation Physical currency notes and coins in public hands, excluding bank reserves—a measure of money supply accessible without institution intermediation.

Currency Internationalisation: How a Currency Goes Global Currency internationalisation steps: how nations move from domestic to global finance—trade invoicing, offshore markets, reserve holdings, and policy frameworks.

Currency Misalignment: Overvalued and Undervalued Currencies How to assess whether a currency trades above or below its fundamental value and what macroeconomic distortions persistent misalignment creates.

Currency Peg: How a Fixed Exchange Rate Is Maintained How does a currency peg work: mechanics of defending a fixed exchange rate, reserve drawdowns, interest rate tools, and conditions under which pegs break.

Currency Substitution vs. Full Dollarization Currency substitution lets residents hold foreign money voluntarily; dollarization is official adoption of another nation's currency. Each carries distinct economic tradeoffs.

Currency Union: Benefits and Costs for Member Countries How currency unions eliminate transaction costs and price transparency while surrendering monetary sovereignty and exchange-rate adjustment flexibility.

Deposit Contraction The reverse of deposit expansion: how a drain of reserves shrinks the total stock of bank deposits through cascading loan repayments and reduced lending.

Deposit Expansion Multiplier The process by which a single new bank deposit generates a cascade of secondary deposits and credit creation throughout the banking system.

Discount Rate The discount rate is the interest rate at which a central bank lends to commercial banks, acting as a monetary policy tool and a safety valve for the banking system.

Discount Rate Fed Interest rate at which the Federal Reserve lends reserves to commercial banks; the backstop to overnight lending markets.