Chapter 16
Tools of Monetary Policy
Chapter 16 examines in detail the tools at the Fed’s (and the European Central Bank’s) disposal
for conducting monetary policy. To fully understand how these tools are used in the conduct of
monetary policy, this chapter shows how they affect the federal funds rate directly. Students are
introduced to the nitty gritty of how the Fed wields these tools and are exposed to current debates
on whether Fed policymaking could be made more effective by altering their use of these tools.
One topic that frequently does not get enough attention in money and banking courses is the
lender-of-last-resort function of discounting. I feel this function should be stressed in class
because students find it inherently interesting in the wake of the recent massive operations by the
Fed during the global financial crisis. Also students will be particularly interested in the section
on the nonconventional monetary policy tools used to combat the financial crisis and the Great