Monetary policy
A central bank's management of interest rates and the money supply to steer inflation and output. A country with a fixed exchange rate and open capital markets cannot run one of its own.
Where you will meet it
Monetary policy appears in 9 learning outcomes on the CFA syllabus. A few of them:
- Explain repurchase agreements, what they are used for and the risks they carry
“Dealers use repo to finance inventory and reverse repo to borrow securities for short sales, and central banks use it to conduct monetary policy.”
- Set out what central banks do and the goals they pursue
“Their defining modern role is the conduct of monetary policy, usually around an explicit inflation target, sometimes alongside an employment objective.”
- Explain the term structure of yield volatility and how it influences the volatility of prices
“Short-term yields tend to be the most volatile because they respond directly to monetary policy and economic news, while long-term yields are anchored by expectations of average rates over many years.”
- Explain what fiscal and monetary policy may do to exchange rates
“With high mobility, tight monetary policy raises rates, attracts inflows and appreciates the currency, and fiscal expansion also lifts rates and appreciates it.”
Practise it
Practise monetary policy until it is automatic: questions that explain every wrong option.
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