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Money in the Modern World

Josef Jílek and Roman Matousek

The book explains the framework of the money, liquidity and monetary policy in the USA, the Eurozone, Japan, and the United Kingdom. Even if the book is based on contemporary banking practice, it arises from careful examination of the historical development of opinions on money, liquidity and monetary policy. The authors claim that money and liquidity (and the financial system as a whole) are demonstrated best through financial statements (balance sheet and income statement) which are based on accounting. Thus any operation is clarified through double-entry record. Furthermore, the fundamentals of the payment systems are outlined.

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Part III: Monetary policy 151

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151 Part III: Monetary policy 7 Basics of monetary policy This and the next chapters deal with the basics of monetary policy, monetary policy instruments, operating targets, intermediate targets, ultimate targets, in- flation targeting, monetary policy transmission mechanism, monetary policy rules and foreign exchange interventions. The chapters are closed with descrip- tion of the monetary policy of the Fed, the Eurosystem, the Bank of Japan and the Bank of England. 7.1 Monetary policy framework Throughout the centuries, the growth of money stock was considered the deci- sive factor of the overall long-term price trends. Currently, the major part of money in developed countries takes form of clients’ deposits at commercial banks, and the governments have transferred responsibility for monetary devel- opment into the hands of central banks. Monetary policy among countries has converged substantially during the last two decades. The differences are negligible when not taking into account the way how central authorities formulate monetary policy. Nowadays, monetary policy consists in the regulation of the short-term interest rates by the cen- tral bank with a view to achieve price stability. That is the core of monetary policy. Monetary policy exists only in market-oriented countries, for prices in centrally planned economies are subject to direct regulation. But inflation does not depend solely on interest rates. There are a number of other factors determining inflation as well. However, these factors are out of central bank’s control. Taxation and governmental expenditures are considered to represent one of the key factors. Central bank’s care...

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