Please wait while the transcript is being prepared...
0:00
My name is John Hearn.
I'm a Senior Lecturer
at the IFS University College,
London.
I'm going to talk to you
about Monetary Policy:
The Challenge of Interest Rates.
0:13
Monetary policy is defined
as the central bank managing
the overall level of
aggregate monetary demand
in the economy,
using two main policy levers.
Firstly, it can manage
the volume of money,
leaving interest rates to be
determined by market forces.
Secondly, it can manage
the price of money,
or what is usually referred
to as the interest rate.
And that is the challenge posed
by this lecture.
Before we move on, please note
that both monetary policy
and fiscal policy
make up the government's
demand management policies.
Fiscal policy is defined
in the same way
as monetary policy, that is,
managing the overall level
of aggregate demand.
And the only difference
is in the levers used.
Where fiscal policy makes
its adjustments
through spending, taxation,
and borrowing,
monetary policy makes
its initial adjustment
to the volume of money
or the price of money.
1:10
To understand why interest rates
were chosen
exclusively as
the main policy lever
by almost all central banks
around the world,
you need to understand
the structure
of the money supply.
This incorporates
two main components.
These are cash,
which is notes and coins,
and the money created
by bank lending,
which we're going to refer
to as credit money.
Most people find it easy
to understand
that cash is money,
although they find it difficult
to grasp that more than
90 percent of money
is a claim on cash
that could not be honored
at one point in time
if everyone demanded their money
in cash.
This means that
the whole monetary system
functions as long as
everyone holding money
is confident that
they can access
cash whenever they need it.
A simple rule is to remember
that all cash is money,
but not all money is cash.
That is why the monetary system
of advanced economies
is often considered fragile
and liable to be damaged
by shocks
which affect confidence.
In addition to this,
we also need to understand
how this money supply
is converted
into monetary demand.
