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Central banks’ monetary policy as a means for economic control

Reduced interest rates on debt attract new debtors demanding debt money. This in turn leads to an expansion of the debt money in circulation. Moreover, artificially low-interest rates make investments profitable that destroy capital. Investment opportunities that were not profitable have become profitable due to the reduction in capital costs. Such a distortion is never sustainable and the boom must eventually turn into a bust which is explained very well in the article “Bitcoin and The Business cycle” by Ben Kaufman.

In the following, you can find information on the banks refinancing rates at central banks. Data on the recent development of the Federal Reserve’s (Fed) overnight bank funding rate can be found here. The current overnight bank funding rate is at 0.05%. Information on the European Central Bank’s (ECB) marginal lending facility, which is the interest rate for banks to borrow money overnight and the rate on refinancing over one week through main refinancing operations can be found here and here. Both forms of funding require collateral in the form of securities. The current rate of the marginal lending facility is at 0.25% and the main refinancing operation is at 0%.

The central bank’s ability to directly influence the economy through asset purchases

“Once short-term interest rates reach the effective lower bound [which is 0.5%], it is not possible for the central bank to provide further stimulus to the economy by lowering the rate at which reserves are remunerated. One possible way of providing further monetary stimulus to the economy is through a programme of asset purchases (QE).” Bank of England, Quaterly Bulletin, 2014 Q1

Before delving deeper into the implications of quantitative easing (QE) on the economy, the concept of QE is explained. Quantitative easing essentially means that the central bank buys assets in large quantities from the market. In this process, banks act as intermediaries. The bank can either sell assets...

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