Implementing Monetary Policy ...

MP involves influencing the cost and availability of money in the economy. The RBA uses
two instruments to conduct MP :

~ Controlling growth in the money supply called monetary targeting. (Used 1970s -early 1980s )
~ influencing the general level of interest rates through the setting a short term rate such as the cash rate. called rate setting monetary targeting

In the current setting of a deregulated financial sector, the RBA does not directly control or
regulate interest rates changed by banks. The RBA attempts to set up short term interest rates
or cash rate through domestic market operations. They then hope that changes in the cash
rate will flow on to the general level of interest rates in the market place charged by banks.

How does Monetary Policy actually work?

DOMESTIC MARKET OPERATIONS

Market operations refers to the purchase and sale of second hand government securities by the RBA for the purpose of influencing interest rates.


~ changes in interest rates affects the demand for money in the economy
~ changes in interest rates influences level of spending and aggregate demand
~ changes in demand for money will be allowed by the RBA by a change in the money supply.

One important point is that a distinction must be made between deficit financing and
domestic market operations

DEFICIT FINANCING

New gov securities sold in order to finance a Budget deficit.
Gov. is simply borrowing money from thepublic and then spending it 
This has no impact on the money supply. ...itborrows from the public and is used elsewhere


DOMESTIC MARKET OPERATIONS

Second hand securities bought and sold  between RBA and private sector.
Involves the use of money in the over night cash market.