Monetary policy

Price Level Targeting A central bank framework that targets an absolute price level path, requiring the central bank to offset past shortfalls through future overshoots—ensuring long-run price stability and anchoring expectations.

Primary Dealer Credit Facility An emergency overnight lending window that the Federal Reserve opens directly to primary dealers during credit market stress, bypassing traditional banking channels.

Prime Rate The prime rate is the interest rate at which commercial banks lend to their most creditworthy customers, closely tracking the federal funds rate.

Purchasing Power Parity vs Market Exchange Rate Purchasing power parity vs market exchange rate: when rates diverge and which metric to use for economic comparisons.

Quantitative Easing Quantitative easing is a central bank's large-scale purchases of long-term securities when interest rates are at or near zero to inject money and lower longer-term interest rates.

Quantitative Easing and Central Bank Balance Sheet Expansion Quantitative easing (QE) is when a central bank purchases long-term assets to expand its balance sheet and inject money into the economy. Learn how QE works and why it is not printing money.

Quantitative Easing Framework A monetary policy approach in which central banks buy long-term securities to lower long-term interest rates when short-term rates are near zero.

Quantitative Easing Taper Gradual reduction of central bank asset purchases used to signal the wind-down of accommodative monetary policy and prepare markets for eventual rate increases.

Quantitative Easing vs Credit Easing: Key Differences Quantitative easing vs credit easing: understand how central banks differ in targeting monetary base size versus asset composition.

Quantitative Easing vs Money Printing: What Is the Difference QE swaps existing assets for cash without expanding the money supply; money printing creates new cash, making it more directly inflationary.

Quantitative Tightening Quantitative tightening is a central bank's reduction of its balance sheet by allowing securities to mature or by selling assets, shrinking the money supply and tightening financial conditions.

Quantitative Tightening The mechanics of shrinking a central bank balance sheet by allowing securities to mature without reinvestment.

Quantitative Tightening and Its Impact on the Money Supply How central banks shrink balance sheets through quantitative tightening to drain reserves and reduce broad money supply growth.

Quantitative Tightening: How Central Banks Shrink Their Balance Sheets Quantitative tightening explained: the mechanics of passive runoff and active asset sales, and why balance sheet shrinkage affects financial markets differently than rate hikes.

Rate Corridors Upper and lower interest-rate bounds set by central banks to contain overnight rates within a target range.

Rate-Setting Mechanism Procedures and decision frameworks central banks use to determine and implement policy interest rates.

Real Effective Exchange Rate Explained Understand the real effective exchange rate (REER)—how it adjusts bilateral rates for inflation and weights them by trade, and what it tells you about competitiveness.

Real Interest Rate The real interest rate is the interest rate adjusted for inflation, reflecting the true cost of borrowing and the true return on savings.

Real Interest Rate vs Nominal Interest Rate Real interest rate vs nominal interest rate: why the difference matters for investment decisions and understanding true borrowing costs.

Repo and Reverse Repo Operations Short-term collateralised borrowing and lending through which central banks adjust system liquidity daily.

Repo Rate The interest rate on repurchase agreements, a short-term secured lending market that anchors overnight borrowing costs for banks and institutions.

Repo Rate vs Reverse Repo Rate: Key Differences The repo rate and reverse repo rate are opposite operations: one is the rate the central bank lends to banks; the other is the rate it borrows from them. Both serve as monetary policy tools.

Representative Money Representative money is a token or note that represents a claim on a commodity, such as a dollar bill redeemable for gold.

Repricing Risk The mismatch between assets and liabilities that reprice at different times, exposing financial institutions to net-interest-margin swings.

Reserve Averaging A central banking technique that allows commercial banks to average their required reserves across a maintenance period, smoothing short-term funding volatility.

Reserve Currency A currency held in large quantities by foreign central banks as part of their international reserves.

Reserve Currency and the Role of Central Banks Central banks hold foreign exchange reserves to support currency stability, ensure liquidity in crises, and finance imports. Reserve-currency status affects monetary policy independence.

Reserve Currency Status: Benefits and Costs for the Issuing Country How reserve currency status brings financial privilege and seigniorage to a nation, while imposing persistent trade deficits and currency volatility.

Reserve Requirement Ratio Explained What is a reserve requirement ratio, how fractional-reserve banking works, and why central banks have moved it toward zero.

Reserve Requirement Ratio of Zero: What It Means for Banks What does zero reserve requirement mean for banks—explains why central banks have dropped reserve requirements to zero and what replaces them as constraints on lending.

Reserve Requirements Reserve requirements are rules mandating that banks hold a minimum fraction of their deposits as cash or reserves at the central bank, constraining their ability to lend.

Reserve Requirements Explained: How Central Banks Set Minimum Ratios Reserve requirements are minimum deposits banks must hold in reserve. Learn how central banks set and adjust these ratios and why advanced economies have moved toward zero.

Reserve-Draining Operations Explained Reserve-draining operations are central bank tools—term deposits, reverse repos, central bank bills—that withdraw excess reserves from the banking system to influence short-term interest rates.

Reverse Repo Facility A reverse repo facility is a central bank's standing offer to borrow cash from financial institutions using securities as collateral, draining liquidity from the financial system.

Risk Management Approach to Central Bank Policy How central banks weight downside risks asymmetrically and adjust policy based on tail risk rather than point forecasts.

Risk-Free Rate The theoretical yield on a default-free investment, typically proxied by government debt or overnight repo, and the benchmark discount rate in valuation models.

Securities Lending Facility A central bank programme that lends Treasury or gilt holdings to primary dealers and financial institutions to relieve collateral shortages.

Securities Market Programme The ECB's 2010 sovereign bond purchases designed to restore market function while offsetting monetary impact through sterilization.

Seigniorage Revenue a government earns from issuing currency when the face value exceeds the production cost.

Seigniorage: How Governments Earn Revenue From Issuing Money Seigniorage is the profit a government makes from creating money—the difference between printing costs and face value. It's a hidden tax on inflation.

Shadow Banking and Its Effect on the Money Supply Shadow banking creates near-money outside the M-series measures, affecting credit growth and inflation independent of central bank policy.

Shadow Open Market Committee An independent group of economists and market professionals who critique Federal Reserve policy and influence broader monetary economics discourse.

Shadow Rate and the Zero Lower Bound How central banks estimate a shadow policy rate to measure unconventional monetary policy strength when nominal rates hit zero.

Short-Rate Model Stochastic models like Vasicek and Cox-Ingersoll-Ross that describe how the instantaneous interest rate evolves over time and price fixed-income securities.

SOFR SOFR is the Secured Overnight Financing Rate, a risk-free benchmark interest rate based on actual overnight repo transactions, replacing USD LIBOR.

SOFR Successor The Secured Overnight Financing Rate, the Federal Reserve's replacement for LIBOR—a transaction-based benchmark for overnight secured lending that underpins trillions in derivatives and floating-rate bonds.

SONIA SONIA is the Sterling Overnight Index Average, a benchmark interest rate for overnight unsecured lending in sterling, replacing GBP LIBOR.

Speculative Attack on a Currency Peg: How It Unfolds How speculators exploit misaligned currency pegs by depleting central bank reserves, forcing devaluation or abandonment of fixed exchange rates.

Standing Lending Facility The overnight borrowing window that sets the ceiling of the central bank's policy rate corridor, providing guaranteed liquidity to banks.

Standing Repo Facility A standing repo facility is a central bank's standing offer to lend reserves to banks via repurchase agreements at a fixed rate, providing a reliable liquidity backstop.

State-Contingent Forward Guidance Central bank forward guidance tied explicitly to economic thresholds rather than calendar dates, committing to future policy based on conditions.

Stepped Interest Rate: Definition and How It Works A stepped interest rate adjusts at pre-agreed intervals or milestones, starting low and rising over time. Common in fixed-term savings accounts, tiered CDs, and structured bonds.

Sterilisation of Foreign Exchange Intervention How central banks offset domestic liquidity changes caused by buying or selling foreign currency, isolating monetary policy from the balance of payments.

Sterilised Intervention and the Money Supply How central banks conduct foreign exchange interventions without changing the domestic money supply.

Sterilised vs Unsterilised Foreign Exchange Intervention How sterilised and unsterilised foreign exchange intervention differ: sterilisation offsets money-supply changes, while unsterilised allows them.

Sterilization Offsetting the money-supply effects of foreign-exchange intervention through domestic open-market operations.

Sterilization Operations Central bank offsetting transactions that neutralize the monetary impact of foreign-exchange or asset purchases, leaving the money supply unchanged.

Symmetric vs Asymmetric Inflation Targets Symmetric targets treat over- and undershots equally; asymmetric targets tolerate one direction more, with measurable effects on employment and financial stability.

Targeted Longer-Term Refinancing Operations European Central Bank loans to commercial banks conditional on the banks extending credit to non-financial borrowers.

Taylor Rule The Taylor Rule is a formula that links a central bank's policy interest rate to inflation and economic growth, providing a simple guideline for monetary policy decisions.