ABSTRACT
Monetary policies involve discretionary changes in a nation's money supply, which are caused mainly by central bank tools that affect either the monetary base or money multiplier. Forward guidance (FG) is a central bank tool that promotes financial market stability by transparently communicating future monetary targets to the public. Central banks have five major monetary tools to change their nations' or currency areas' money supplies. These tools are: open market operations; foreign exchange (FX) market intervention; the discount rate; the percent of customers' deposits that must be held by banks as required reserves; and the nominal interest rate that banks receive on the reserves they deposit at the central bank. Three of the five monetary tools affect a nation's monetary base, namely, open market operations; FX market intervention; and/or discount rate. The required reserve ratio is the percent of reserve assets that banks are required to hold against customers' deposits.
