Learn about key concepts in fixed income securities, including bond pricing and term structure of interest rates, interest rate risk management, interest rate derivatives, inflation, fed funds and monetary policy, term structure modeling, continuous time modeling, and no arbitrage modeling.
Central banks have been pulling out all the stops in monetary-policy terms; not just in the form of quantitative easing but in the low level of interest rates.
It may, however, change the operational details; textbooks that describe monetary policy in terms of the money multiplier will have to be rewritten.
As Mervyn King, the former governor of the Bank of England, put it, "Our understanding of the economy is incomplete and constantly evolving … To describe monetary policy in terms of a constant rule derived from a known model of the economy is to ignore this process of learning".
We analyze how Brazilian financial markets, in particular interest rate futures, react to monetary policy in terms of both deeds (that is, changes in the policy rate) and words (that is, central bank communication).
"If we hadn't had the monetary policy, long-term rates might be a lot higher than they are".
Stopping it from swelling would mean an even tighter monetary policy—short-term interest rates are already nudging 60%—and bigger public borrowing.
Under current conditions, as long as the recovery remains weak, with considerable slack between actual and potential output, subdued inflationary expectations and highly accommodative monetary policy, long-term interest rates are likely to remain low.
This kind of sterilisation is in theory an independent instrument of policy because it leaves monetary policy (defined in terms of the money supply) unchanged.The standard reference on sterilised intervention is "Does Foreign Exchange Intervention Work?", by Kathryn Dominguez and Jeffrey Frankel, published by the Institute for International Economics in 1993.
