9w MonBank '26fall v3

Reserve Targets and the Federal Funds Rate

The lecture explains the trade-off between targeting non-borrowed reserves and targeting the federal funds rate (FFR):

• If deposits increase, demand for reserves shifts right. Without a central-bank response, the equilibrium FFR rises. To keep the FFR at its target, the central bank must supply additional non-borrowed reserves.
• If deposits decrease, demand for reserves shifts left and the FFR would fall if the central bank did nothing. To restore the FFR to its target, the central bank must reduce non-borrowed reserves.

The central point is that a central bank generally cannot hold both the quantity of non-borrowed reserves and the FFR at fixed targets at the same time. It must choose which one to target and adjust the other as needed.

Criteria for Choosing a Policy Instrument

An effective policy instrument should be:

• Observable and measurable: The central bank must be able to monitor it quickly and measure it accurately.
• Controllable: The central bank must be able to influence or set it.
• Predictably connected to policy goals: The central bank should be able to anticipate how changes in the instrument affect its goals.

Taylor Rule as a Guide to Interest-Rate Setting

The lecture presents the Taylor rule as one way to estimate a suitable short-term interest-rate target, such as the FFR. The rule combines:

• The inflation rate
• The equilibrium real federal funds rate
• Half the inflation gap
• Half the output gap

The inflation gap is the difference between current inflation and the inflation target. For example, inflation of 4% against a 2% target creates a 2-percentage-point inflation gap.

The output gap compares actual output with potential output. In the example, real GDP growth of 4% against potential growth of 2% gives a 2-percentage-point output gap.

The rule can be represented as:

FFR target = inflation rate + equilibrium real rate + half the inflation gap + half the output gap

Using the lecture’s example—4% inflation, a 1% equilibrium real rate, a 2% inflation gap, and a 2% output gap—the calculation is:

• Inflation: 4%
• Equilibrium real rate: 1%
• Half the inflation gap: 1%
• Half the output gap: 1%
• Implied FFR target: 7%

The rule is presented as a guide rather than a fixed command. Its estimate can differ from the actual federal funds rate, though the two may show similar broad trends.

Output, Inflation, and NAIRU

The lecture describes the output gap as an indicator of possible future inflation: output growing above its potential level may signal rising inflationary pressure.

It also defines NAIRU as the non-accelerating inflation rate of unemployment—the unemployment rate at which inflation has no tendency to change. In the lecture’s account:

• Unemployment above NAIRU is associated with falling inflation.
• Unemployment below NAIRU is associated with rising inflation.

Broader Monetary-Policy Themes

The closing recap refers to inflation targeting, hierarchical and dual mandates, and other monetary-policy goals, including employment, economic growth, price stability, and interest-rate stability.

Speakers and Sources Featured

• Speaker: One lecturer or instructor, whose name is not given in the subtitles.
• Source or concept referenced: The Taylor rule, attributed in the lecture to an economist named Taylor; no first name is provided.
• Institutions and terms discussed: Central banks and the Federal Reserve are discussed, but no separate institutional speaker is featured.