Glossary: M04 — Monetary Policy
| Term | Definition |
|---|
| Central bank | Institution responsible for monetary policy and banking supervision |
| Open market operations | Central bank buying/selling government securities to affect money supply |
| Policy rate | Interest rate set by central bank (refinancing rate) |
| Reserve requirement | Minimum reserves commercial banks must hold at the central bank |
| Monetary transmission mechanism | Process by which monetary policy affects the real economy |
| Quantitative easing (QE) | Central bank purchases of securities to increase money supply when rates near zero |
| Inflation targeting | Monetary policy framework with explicit inflation target |
| Interest rate targeting | Monetary policy focused on achieving a specific interest rate |
| Exchange rate targeting | Pegging the domestic currency to another currency |
| Zero lower bound | Limit where nominal interest rates cannot fall significantly below zero |
| Liquidity trap | Situation where monetary policy is ineffective because banks hoard reserves |
| Central bank independence | Degree to which central bank operates free from political pressure |
| Central bank credibility | Market trust in the central bank’s commitment to its objectives |
| Central bank transparency | Clarity and openness of central bank communication |
| Neutral rate of interest | Interest rate that neither stimulates nor constrains economic growth |
| Expansionary monetary policy | Policy aimed at increasing money supply and reducing interest rates |
| Contractionary monetary policy | Policy aimed at decreasing money supply and increasing interest rates |
| Lender of last resort | Central bank’s role in providing liquidity to banks in financial distress |