Daily Archives: February 7, 2016

Money and Banking – Part 5: FAQs about central banking

By Eric Tymoigne

Previous posts studied the balance sheet of the Fed, definitions and their relation to the balance sheet of the fed, and monetary-policy implementation. This post answers some FAQs about monetary policy and central banking. Each of them can be read independently.

Q1: Does the Fed target/control/set the quantity of reserves and the quantity of money?

The Fed does not set the quantity of reserves and does not control the money supply (M1). It sets the cost of reserves; that is it.

In terms of reserves, the Fed was created to provide an “elastic currency,” i.e. to provide monetary base according to the needs of the economic system in normal and panic times. It would be against this purpose to implement monetary policy by unilaterally setting the monetary base without any regards for the daily needs of the economy system.

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