ECN 204 Lecture Notes - Lecture 8: Overnight Rate, Quantitative Easing
Document Summary
Monetary policy has the following advantages over fiscal policy: The main disadvantage of monetary policy is that it is limited by the zero lower bound on nominal interest rates: The target for the overnight rate can not be reduced below. 0. 25% (which normally would mean a lower bound for the operating bound of 0%, but the bank has a special rule in place making the lower bound equal to the target when the target is. If the target for the overnight rate is already at 0. 25% and the. Bank wants interest rates (i. e. , interest rates other than the overnight rate) to go lower, it can resort to unconventional measures such as quantitative easing the purchase of financial assets by a central bank: These actions push up the price of the financial assets, thereby reducing their yield (the rate of return earned on the asset). Example: suppose that a certain bond makes fixed interest payments of /year in perpetuity (i. e. , forever).
