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Economics (3rd edition): Making sense of the Modern Economy by Saugato Datta

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3 Macroeconomic management: fiscal and monetary policy

Monopoly power over money

Central banks have a huge influence over the financial system. How do they conduct monetary policy?

DURING THE COLD WAR, Russian leaders’ every word was scrutinised by an army of Kremlinologists. Now, that honour is accorded to the world’s central bankers, whose pronouncements are pored over by throngs of well-paid financial analysts.

For all central banks’ importance, they remain tiny participants in huge financial markets. So how do they affect prices, ie, interest rates, in those markets? Consider America. Its fixed-income market (government and private) was worth some $13.6 trillion in 1999. Every day hundreds of billions of dollars of these securities change ...

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