In materials science, a single crystal (or single-crystal solid or monocrystalline solid) is a material in which the crystal lattice of the entire sample is continuous and unbroken to the edges of the sample, with no grain boundaries. The absence of the defects
associated with grain boundaries can give monocrystals unique
properties, particularly mechanical, optical and electrical, which can
also be anisotropic, depending on the type of crystallographic structure.
These properties, in addition to making some gems precious, are
industrially used in technological applications, especially in optics
and electronics.
Because entropic effects favor the presence of some imperfections in the microstructure of solids, such as impurities, inhomogeneous strain and crystallographic defects such as dislocations, perfect single crystals of meaningful size are exceedingly rare in nature.
The necessary laboratory conditions often add to the cost of
production. On the other hand, imperfect single crystals can reach
enormous sizes in nature: several mineral species such as beryl, gypsum and feldspars are known to have produced crystals several meters across.
The opposite of a single crystal is an amorphous structure where the atomic position is limited to short-range order only. In between the two extremes exist polycrystalline, which is made up of a number of smaller crystals known as crystallites, and paracrystalline phases.
Single crystals will usually have distinctive plane faces and some
symmetry, where the angles between the faces will dictate its ideal
shape. Gemstones are often single crystals artificially cut along
crystallographic planes to take advantage of refractive and reflective
properties.
Production methods
Although
current methods are extremely sophisticated with modern technology, the
origins of crystal growth can be traced back to salt purification by
crystallization in 2500 BCE. A more advanced method using an aqueous
solution was started in 1600 CE while the melt and vapor methods began
around 1850 CE.
Single-crystal growth methods tree diagram
Basic crystal growth methods can be separated into four categories
based on what they are artificially grown from: melt, solid, vapor, and
solution. Specific techniques to produce large single crystals (aka boules) include the Czochralski process (CZ), Floating zone (or Zone Movement), and the Bridgman technique. Dr. Teal and Dr. Little of Bell Telephone Laboratories were the first to use the Czochralski method to create Ge and Si single crystals. Other methods of crystallization may be used, depending on the physical properties of the substance, including hydrothermal synthesis, sublimation, or simply solvent-based crystallization. For example, a modified Kyropoulos method can be used to grow high quality 300 kg sapphire single crystals. The Verneuil method, also called the flame-fusion method, was used in the early 1900s to make rubies before CZ.
The diagram on the right illustrates most of the conventional methods.
There have been new breakthroughs such as chemical vapor depositions
(CVD) along with different variations and tweaks to the existing
methods. These are not shown in the diagram.
In the case of metal single crystals, fabrication techniques also include epitaxy and abnormal grain growth in solids.
Epitaxy is used to deposit very thin (micrometer to nanometer scale)
layers of the same or different materials on the surface of an existing
single crystal.
Applications of this technique lie in the areas of semiconductor
production, with potential uses in other nanotechnological fields and
catalysis.
It is extremely difficult to grow single crystals of the
polymers. It is mainly because that the polymer chains are of different
length and due to the various entropy reasons. However, topochemical
reactions are one of the easy methods to get single crystals of the
polymer.
Applications
Semiconductor industry
One
of the most used single crystals is that of Silicon in the
semiconductor industry. The four main production methods for
semiconductor single crystals are from metallic solutions: liquid phase epitaxy (LPE), liquid phase electroepitaxy (LPEE), the traveling heater method (THM), and liquid phase diffusion (LPD).
However, there are many other single crystals besides inorganic single
crystals capable semiconducting, including single-crystal organic
semiconductors.
A high-purity (99.999 %) tantalum single crystal, made by the floating zone process, some single crystalline fragments of tantalum, and a high-purity (99.99% = 4N) 1 cm3 tantalum cube for comparison. This photo was taken by Alchemist-hp.
Monocrystalline silicon used in the fabrication of semiconductors and photovoltaics is the greatest use of single-crystal technology today. In photovoltaics, the most efficient crystal structure will yield the highest light-to-electricity conversion. On the quantum scale that microprocessors operate on, the presence of grain boundaries would have a significant impact on the functionality of field effect transistors by altering local electrical properties.
Therefore, microprocessor fabricators have invested heavily in
facilities to produce large single crystals of silicon. The Czochralski
method and floating zone are popular methods for the growth of Silicon
crystals.
Other inorganic
semiconducting single crystals include GaAs, GaP, GaSb, Ge, InAs, InP,
InSb, CdS, CdSe, CdTe, ZnS, ZnSe, and ZnTe. Most of these can also be
tuned with various doping for desired properties. Single-crystal graphene is also highly desired for applications in electronics and optoelectronics with its large carrier mobility and high thermal conductivity, and remains a topic of fervent research.
One of the main challenges has been growing uniform single crystals of
bilayer or multilayer graphene over large areas; epitaxial growth and
the new CVD (mentioned above) are among the new promising methods under
investigation.
Organic semiconducting single crystals are different from the
inorganic crystals. The weak intermolecular bonds mean lower melting
temperatures, and higher vapor pressures and greater solubility.
For single crystals to grow, the purity of the material is crucial and
the production of organic materials usually require many steps to reach
the necessary purity.
Extensive research is being done to look for materials that are
thermally stable with high charge-carrier mobility. Past discoveries
include naphthalene, tetracene, and 9,10-diphenylanthacene (DPA).
Triphenylamine derivatives have shown promise, and recently in 2021,
the single-crystal structure of α-phenyl-4′-(diphenylamino)stilbene
(TPA) grown using the solution method exhibited even greater potential
for semiconductor use with its anisotropic hole transport property.
Single
crystals have unique physical properties due to being a single grain
with molecules in a strict order and no grain boundaries.
This includes optical properties, and single crystals of silicon is
also used as optical windows because of its transparency at specific infrared (IR) wavelengths, making it very useful for some instruments.
Sapphires: Better known as the alpha phase of aluminum oxide (Al2O3)
by scientists, sapphire single crystals are widely used in hi-tech
engineering. It can be grown from gaseous, solid, or solution phases.
The diameter of the crystals resulting from the growth method are
important when considering electronic uses after. They are used for lasers and nonlinear optics.
Some notable uses are as in the window of a biometric fingerprint
reader, optical disks for long-term data storage, and X-ray
interferometer.
Indium Phosphide:
These single crystals are particularly appropriate for combining
optoelectronics with high-speed electronics in the form of optical fiber
with its large-diameter substrates.
Other photonic devices include lasers, photodetectors, avalanche photo
diodes, optical modulators and amplifiers, signal processing, and both
optoelectronic and photonic integrated circuits.
Aluminum oxide crystals
Germanium:
This was the material in the first transistor invented by Bardeen,
Brattain, and Shockley in 1947. It is used in some gamma-ray detectors
and infrared optics. Now it has become the focus of ultrafast electronic devices for its intrinsic carrier mobility.
Arsenide:
Arsenide III can be combined with various elements such as B, Al, Ga,
and In, with the GaAs compound being in high demand for wafers.
Cadmium Telluride: CdTe crystals have several applications as substrates for IR imaging, electrooptic devices, and solar cells. By alloying CdTe and ZnTe together room-temperature X-ray and gamma-ray detectors can be made.
Electrical conductors
Metals
can surprisingly be produced in single-crystal form and provide a means
to understand the ultimate performance of metallic conductors. It is
vital for understanding the basic science such as catalytic chemistry,
surface physics, electrons, and monochromators. Production of metallic single crystals have the highest quality requirements and are grown, or pulled, in the form of rods. Certain companies can produce specific geometries, grooves, holes, and reference faces along with varying diameters.
Of all the metallic elements, silver and copper have the best conductivity at room temperature, setting the bar for performance.
The size of the market, and vagaries in supply and cost, have provided
strong incentives to seek alternatives or find ways to use less of them
by improving performance.
The conductivity of commercial conductors is often expressed relative to the International Annealed Copper Standard,
according to which the purest copper wire available in 1914 measured
around 100%. The purest modern copper wire is a better conductor,
measuring over 103% on this scale. The gains are from two sources.
First, modern copper is more pure. However, this avenue for improvement
seems at an end. Making the copper purer still makes no significant
improvement. Second, annealing
and other processes have been improved. Annealing reduces the
dislocations and other crystal defects which are sources of resistance.
But the resulting wires are still polycrystalline. The grain
boundaries and remaining crystal defects are responsible for some
residual resistance. This can be quantified and better understood by
examining single crystals.
As anticipated, single-crystal copper did prove to have better conductivity than polycrystalline copper.
Electrical resistivity ρ for silver (Ag) / copper (Cu) materials at room temperature (293 K)
However, the single-crystal copper not only became a better conductor
than high purity polycrystalline silver, but with prescribed heat and
pressure treatment could surpass even single-crystal silver. Although
impurities are usually bad for conductivity, a silver single crystal
with a small amount of copper substitutions proved to be the best.
As of 2009, no single-crystal copper is manufactured on a large
scale industrially, but methods of producing very large individual
crystal sizes for copper conductors are exploited for high performance
electrical applications. These can be considered meta-single crystals
with only a few crystals per meter of length.
Pigtail from single-crystal blade casting
Single-crystal turbine blades
Another
application of single-crystal solids is in materials science in the
production of high strength materials with low thermal creep, such as turbine blades.
Here, the absence of grain boundaries actually gives a decrease in
yield strength, but more importantly decreases the amount of creep which
is critical for high temperature, close tolerance part applications.
Researcher Barry Piearcey found that a right-angle bend at the casting
mold would decrease the number of columnar crystals and later, scientist
Giamei used this to start the single-crystal structure of the turbine
blade.
As such, numerous new materials are being studied in their
single-crystal form. The young field of metal-organic-frameworks (MOFs)
is one of many which qualify to have single crystals. In January 2021
Dr. Dong and Dr. Feng demonstrated how polycyclic aromatic ligands can
be optimized to produce large 2D MOF single crystals of sizes up to 200
μm. This could mean scientists can fabricate single-crystal devices and
determine intrinsic electrical conductivity and charge transport
mechanism.
The field of photodriven transformation can also be involved with
single crystals with something called single-crystal-to-single-crystal
(SCSC) transformations. These provide direct observation of molecular
movement and understanding of mechanistic details.
This photoswitching behavior has also been observed in cutting-edge
research on intrinsically non-photo-responsive mononuclear lanthanide
single-molecule-magnets (SMM).
Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rate of inflation). Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies. Today most central banks in developed countries conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system. A third monetary policy strategy, targeting the money supply,
was widely followed during the 1980s, but has diminished in popularity
since that, though it is still the official strategy in a number of emerging economies.
The tools of monetary policy varies from central bank to central
bank, depending on the country's stage of development, institutional
structure, tradition and political system. Interest rate targeting is
generally the primary tool, being obtained either directly via
administratively changing the central bank's own interest rates or
indirectly via open market operations.
Interest rates affect general economic activity and consequently
employment and inflation via a number of different channels, known
collectively as the monetary transmission mechanism, and are also an important determinant of the exchange rate. Other policy tools include communication strategies like forward guidance and in some countries the setting of reserve requirements. Monetary policy is often referred to as being either expansionary (stimulating economic activity and consequently employment and inflation) or contractionary (dampening economic activity, hence decreasing employment and inflation).
Monetary policy affects the economy through financial channels like interest rates, exchange rates and prices of financial assets. This is in contrast to fiscal policy, which relies on changes in taxation and government spending as methods for a government to manage business cycle phenomena such as recessions. In developed countries, monetary policy is generally formed separately from fiscal policy, modern central banks in developed economies being independent of direct government control and directives.
How best to conduct monetary policy is an active and debated research area, drawing on fields like monetary economics as well as other subfields within macroeconomics.
Monetary
policy has evolved over the centuries, along with the development of a
money economy. Historians, economists, anthropologists and numismatics
do not agree on the origins of money. In the West the common point of
view is that coins were first used in ancient Lydia in the 8th century BCE, whereas some date the origins to ancient China. The earliest predecessors to monetary policy seem to be those of debasement, where the government would melt coins down and mix them with cheaper metals. The practice was widespread in the late Roman Empire, but reached its perfection in western Europe in the late Middle Ages.
For many centuries there were only two forms of monetary policy: altering coinage or the printing of paper money. Interest rates, while now thought of as part of monetary authority,
were not generally coordinated with the other forms of monetary policy
during this time. Monetary policy was considered as an executive
decision, and was generally implemented by the authority with seigniorage
(the power to coin). With the advent of larger trading networks came
the ability to define the currency value in terms of gold or silver, and
the price of the local currency in terms of foreign currencies. This
official price could be enforced by law, even if it varied from the
market price.
Reproduction of a Song dynasty note, possibly a Jiaozi, redeemable for 770 mò.
Paper money originated from promissory notes termed "jiaozi" in 7th century China. Jiaozi did not replace metallic currency, and were used alongside the copper coins. The succeeding Yuan Dynasty
was the first government to use paper currency as the predominant
circulating medium. In the later course of the dynasty, facing massive
shortages of specie to fund war and maintain their rule, they began
printing paper money without restrictions, resulting in hyperinflation.
Central banks and the gold standard
With the creation of the Bank of England in 1694, which was granted the authority to print notes backed by gold, the idea of monetary policy as independent of executive action began to be established.
The purpose of monetary policy was to maintain the value of the
coinage, print notes which would trade at par to specie, and prevent
coins from leaving circulation. During the period 1870–1920, the
industrialized nations established central banking systems, with one of
the last being the Federal Reserve in 1913. By this time the role of the central bank as the "lender of last resort"
was established. It was also increasingly understood that interest
rates had an effect on the entire economy, in no small part because of
appreciation for the marginal revolution in economics, which demonstrated that people would change their decisions based on changes in their opportunity costs.
The establishment of national banks by industrializing nations
was associated then with the desire to maintain the currency's
relationship to the gold standard, and to trade in a narrow currency band
with other gold-backed currencies. To accomplish this end, central
banks as part of the gold standard began setting the interest rates that
they charged both their own borrowers and other banks which required
money for liquidity. The maintenance of a gold standard required almost
monthly adjustments of interest rates.
The gold standard is a system by which the price of the national
currency is fixed vis-a-vis the value of gold, and is kept constant by
the government's promise to buy or sell gold at a fixed price in terms
of the base currency. The gold standard might be regarded as a special
case of "fixed exchange rate" policy, or as a special type of commodity
price level targeting. However, the policies required to maintain the
gold standard might be harmful to employment and general economic
activity and probably exacerbated the Great Depression in the 1930s in
many countries, leading eventually to the demise of the gold standards
and efforts to create a more adequate monetary framework internationally
after World War II. Nowadays the gold standard is no longer used by any country.
Fixed exchange rates prevailing
In 1944, the Bretton Woods system was established, which created the International Monetary Fund
and introduced a fixed exchange rate system linking the currencies of
most industrialized nations to the US dollar, which as the only currency
in the system would be directly convertible to gold.
During the following decades the system secured stable exchange rates
internationally, but the system broke down during the 1970s when the
dollar increasingly came to be viewed as overvalued. In 1971, the
dollar's convertibility into gold was suspended. Attempts to revive the
fixed exchange rates failed, and by 1973 the major currencies began to
float against each other. In Europe, various attempts were made to establish a regional fixed exchange rate system via the European Monetary System, leading eventually to the Economic and Monetary Union of the European Union and the introduction of the currency euro.
Money supply targets
Monetarist economists long contended that the money-supply growth could affect the macroeconomy. These included Milton Friedman who early in his career advocated that government budget deficits during recessions be financed in equal amount by money creation to help to stimulate aggregate demand for production.
Later he advocated simply increasing the monetary supply at a low,
constant rate, as the best way of maintaining low inflation and stable
production growth. During the 1970s inflation rose in many countries caused by the 1970s energy crisis, and several central banks turned to a money supply target in an attempt to reduce inflation. However, when U.S. Federal Reserve Chairman Paul Volcker
tried this policy, starting in October 1979, it was found to be
impractical, because of the unstable relationship between monetary
aggregates and other macroeconomic variables, and similar results
prevailed in other countries. Even Milton Friedman later acknowledged that direct money supplying was less successful than he had hoped.
Inflation targeting
In 1990, New Zealand as the first country ever adopted an official inflation target
as the basis of its monetary policy. The idea is that the central bank
tries to adjust interest rates in order to steer the country's inflation
rate towards the official target instead of following indirect
objectives like exchange rate stability or money supply growth, the
purpose of which is normally also ultimately to obtain low and stable
inflation. The strategy was generally considered to work well, and
central banks in most developed countries have over the years adapted a similar strategy.
The Global Financial Crisis of 2008 sparked controversy over the
use and flexibility of the inflation targeting employed. Many economists
argued that the actual inflation targets decided upon were set too low
by many monetary regimes. During the crisis, many inflation-anchoring
countries reached the lower bound of zero rates, resulting in inflation
rates decreasing to almost zero or even deflation.
As of 2023, the central banks of all G7 member countries can be said to follow an inflation target, including the European Central Bank and the Federal Reserve, who have adopted the main elements of inflation targeting without officially calling themselves inflation targeters. In emerging countries fixed exchange rate regimes are still the most common monetary policy.
The
instruments available to central banks for conducting monetary policy
vary from country to country, depending on the country's stage of
development, institutional structure and political system. The main monetary policy instruments available to central banks are interest rate policy, i.e. setting (administered) interest rates directly, open market operations, forward guidance and other communication activities, bank reserve requirements, and re-lending and re-discount (including using the term repurchase market. While capital adequacy is important, it is defined and regulated by the Bank for International Settlements, and central banks in practice generally do not apply stricter rules.
Expansionary policy occurs when a monetary authority uses its
instruments to stimulate the economy. An expansionary policy decreases
short-term interest rates, affecting broader financial conditions to
encourage spending on goods and services, in turn leading to increased
employment. By affecting the exchange rate, it may also stimulate net export.
Contractionary policy works in the opposite direction: Increasing
interest rates will depress borrowing and spending by consumers and
businesses, dampening inflationary pressure in the economy together with
employment.
Key interest rates
2016 meeting of the Federal Open Market Committee at the Eccles Building, Washington, D.C.
For most central banks in advanced economies, their main monetary policy instrument is a short-term interest rate.
For monetary policy frameworks operating under an exchange rate anchor,
adjusting interest rates are, together with direct intervention in the foreign exchange market (i.e. open market operations), important tools to maintain the desired exchange rate. For central banks targeting inflation directly, adjusting interest rates are crucial for the monetary transmission mechanism
which ultimately affects inflation. Changes in the central banks'
policy rates normally affect the interest rates that banks and other
lenders charge on loans to firms and households, which will in turn
impact private investment and consumption. Interest rate changes also affect asset prices like stock prices and house prices, which again influence households' consumption decisions through a wealth effect. Additionally, international interest rate differentials affect exchange rates and consequently US exports and imports. Consumption, investment and net exports are all important components of aggegate demand. Stimulating or suppressing the overall demand for goods and services in the economy will tend to increase respectively diminish inflation.
The concrete implementation mechanism used to adjust short-term interest rates differs from central bank to central bank.
The "policy rate" itself, i.e. the main interest rate which the central
bank uses to communicate its policy, may be either an administered rate
(i.e. set directly by the central bank) or a market interest rate which
the central bank influences only indirectly.
By setting administered rates that commercial banks and possibly other
financial institutions will receive for their deposits in the central
bank, respectively pay for loans from the central bank, the central
monetary authority can create a band (or "corridor") within which market
interbank short-term interest rates will typically move. Depending on
the specific details, the resulting specific market interest rate may
either be created by open market operations by the central bank (a
so-called "corridor system") or in practice equal the administered rate
(a "floor system", practised by the Federal Reserve among others).
As an example of how this functions, the Bank of Canada sets a target overnight rate,
and a band of plus or minus 0.25%. Qualified banks borrow from each
other within this band, but never above or below, because the central
bank will always lend to them at the top of the band, and take deposits
at the bottom of the band; in principle, the capacity to borrow and lend
at the extremes of the band are unlimited.
Yield curve becomes inverted when short-term rates exceed long-term rates.
The
target rates are generally short-term rates. The actual rate that
borrowers and lenders receive on the market will depend on (perceived)
credit risk, maturity and other factors. For example, a central bank
might set a target rate for overnight lending of 4.5%, but rates for
(equivalent risk) five-year bonds might be 5%, 4.75%, or, in cases of inverted yield curves, even below the short-term rate.
Many central banks have one primary "headline" rate that is
quoted as the "central bank rate". In practice, they will have other
tools and rates that are used, but only one that is rigorously targeted
and enforced. A typical central bank consequently has several interest
rates or monetary policy tools it can use to influence markets.
Marginal lending rate – a fixed rate for institutions to borrow money from the central bank. (In the USA this is called the discount rate).
Main refinancing rate – the publicly visible interest rate the central bank announces. It is also known as minimum bid rate and serves as a bidding floor for refinancing loans. (In the USA this is called the federal funds rate).
Deposit rate, generally consisting of interest on reserves – the rates parties receive for deposits at the central bank.
Open market operations
Mechanics of open market operations: Demand-Supply model for reserves market
Through open market operations,
a central bank may influence the level of interest rates, the exchange
rate and/or the money supply in an economy. Open market operations can
influence interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank. Each time a central bank buys securities (such as a government bond or treasury bill), it in effect creates money.
The central bank exchanges money for the security, increasing the
monetary base while lowering the supply of the specific security.
Conversely, selling of securities by the central bank reduces the
monetary base.
Temporary lending of money for collateral securities ("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed maturity loans (of one week and one month for the ECB) are auctioned off.
Forward guidance is a communication practice whereby the central bank
announces its forecasts and future intentions to influence market
expectations of future levels of interest rates.
As expectations formation are an important ingredient in actual
inflation changes, credible communication is important for modern
central banks.
Reserve requirements
A run on a Bank of East Asia branch in Hong Kong, caused by "malicious rumours" in 2008.
Historically, bank reserves have formed only a small fraction of deposits, a system called fractional-reserve banking. Banks would hold only a small percentage of their assets in the form of cash reserves as insurance against bank runs. Over time this process has been regulated and insured by central banks. Such legal reserve requirements were introduced in the 19th century as an attempt to reduce the risk of banks overextending themselves and suffering from bank runs, as this could lead to knock-on effects on other overextended banks.
A number of central banks have since abolished their reserve
requirements over the last few decades, beginning with the Reserve Bank
of New Zealand in 1985 and continuing with the Federal Reserve in 2020.
For the respective banking systems, bank capital requirements provide a check on the growth of the money supply.
Loan activity by banks plays a fundamental role in determining
the money supply. The central-bank money after aggregate settlement –
"final money" – can take only one of two forms:
physical cash, which is rarely used in wholesale financial markets,
central-bank money which is rarely used by the people
The currency component of the money supply is far smaller than the
deposit component. Currency, bank reserves and institutional loan
agreements together make up the monetary base, called M1, M2 and M3. The Federal Reserve Bank stopped publishing M3 and counting it as part of the money supply in 2006.
Central banks can directly or indirectly influence the allocation of
bank lending in certain sectors of the economy by applying quotas,
limits or differentiated interest rates.
This allows the central bank to control both the quantity of lending
and its allocation towards certain strategic sectors of the economy, for
example to support the national industrial policy, or to environmental
investment such as housing renovation.
The Bank of Japan used to apply such policy ("window guidance") between 1962 and 1991.The Banque de France also widely used credit guidance during the post-war period of 1948 until 1973 .
The European Central Bank's ongoing TLTROs operations can also be
described as form of credit guidance insofar as the level of interest
rate ultimately paid by banks is differentiated according to the volume
of lending made by commercial banks at the end of the maintenance
period. If commercial banks achieve a certain lending performance
threshold, they get a discount interest rate, that is lower than the
standard key interest rate. For this reason, some economists have
described the TLTROs as a "dual interest rates" policy.
China is also applying a form of dual rate policy.
Exchange requirements
To
influence the money supply, some central banks may require that some or
all foreign exchange receipts (generally from exports) be exchanged for
the local currency. The rate that is used to purchase local currency
may be market-based or arbitrarily set by the bank. This tool is
generally used in countries with non-convertible currencies or partially
convertible currencies. The recipient of the local currency may be
allowed to freely dispose of the funds, required to hold the funds with
the central bank for some period of time, or allowed to use the funds
subject to certain restrictions. In other cases, the ability to hold or
use the foreign exchange may be otherwise limited.
In this method, money supply is increased by the central bank
when it purchases the foreign currency by issuing (selling) the local
currency. The central bank may subsequently reduce the money supply by
various means, including selling bonds or foreign exchange
interventions.
Collateral policy
In
some countries, central banks may have other tools that work indirectly
to limit lending practices and otherwise restrict or regulate capital
markets. For example, a central bank may regulate margin lending,
whereby individuals or companies may borrow against pledged securities.
The margin requirement establishes a minimum ratio of the value of the
securities to the amount borrowed.
Central banks often have requirements for the quality of assets
that may be held by financial institutions; these requirements may act
as a limit on the amount of risk and leverage created by the financial
system. These requirements may be direct, such as requiring certain
assets to bear certain minimum credit ratings, or indirect, by the central bank lending to counter-parties only when security of a certain quality is pledged as collateral.
Unconventional monetary policy at the zero bound
Other
forms of monetary policy, particularly used when interest rates are at
or near 0% and there are concerns about deflation or deflation is
occurring, are referred to as unconventional monetary policy. These include credit easing, quantitative easing, forward guidance, and signalling.
In credit easing, a central bank purchases private sector assets to
improve liquidity and improve access to credit. Signaling can be used to
lower market expectations for lower interest rates in the future. For
example, during the credit crisis of 2008, the US Federal Reserve indicated rates would be low for an "extended period", and the Bank of Canada
made a "conditional commitment" to keep rates at the lower bound of 25
basis points (0.25%) until the end of the second quarter of 2010.
Further similar monetary policy proposals include the idea of helicopter money
whereby central banks would create money without assets as counterpart
in their balance sheet. The money created could be distributed directly
to the population as a citizen's dividend. Virtues of such money shocks
include the decrease of household risk aversion and the increase in
demand, boosting both inflation and the output gap. This option has been increasingly discussed since March 2016 after the ECB's president Mario Draghi said he found the concept "very interesting". The idea was also promoted by prominent former central bankers Stanley Fischer and Philipp Hildebrand in a paper published by BlackRock, and in France by economists Philippe Martin and Xavier Ragot from the French Council for Economic Analysis, a think tank attached to the Prime minister's office.
Some have envisaged the use of what Milton Friedman once called "helicopter money" whereby the central bank would make direct transfers to citizens
in order to lift inflation up to the central bank's intended target.
Such policy option could be particularly effective at the zero lower
bound.
Nominal anchors
Central
banks typically use a nominal anchor to pin down expectations of
private agents about the nominal price level or its path or about what
the central bank might do with respect to achieving that path. A nominal
anchor is a variable that is thought to bear a stable relationship to
the price level or the rate of inflation over some period of time. The
adoption of a nominal anchor is intended to stabilize inflation
expectations, which may, in turn, help stabilize actual inflation.
Nominal variables historically used as anchors include the gold standard, exchange rate targets, money supply targets, and since the 1990s direct official inflation targets.
In addition, economic researchers have proposed variants or
alternatives like price level targeting (some times described as an
inflation target with a memory) or nominal income targeting.
Monetary Policy
Target Market Variable
Long Term Objective
Popularity
Inflation Targeting
Interest rate on overnight debt
Low and stable inflation
Usual regime in developed countries today
Fixed Exchange Rate
The spot price of the currency
Usually low and stable inflation
Abandoned in most developed economies, common in emerging economies
Money supply targeting
The growth in money supply
Low and stable inflation
Influential in the 1980s, today official regime in some developing countries
Gold Standard
The spot price of gold
Low inflation as measured by the gold price
Used historically, but completely abandoned today
Price Level Targeting
Interest rate on overnight debt
Low and stable inflation
A hypothetical regime, recommended by some academic economists
Nominal income target
Nominal GDP
Stable nominal GDP growth
A hypothetical regime, recommended by some academic economists
Mixed Policy
Usually interest rates
Various
A prominent example is the US
Empirically, some researchers suggest that central banks' policies can be described by a simple method called the Taylor rule, according to which central banks adjust their policy interest rate in response to changes in the inflation rate and the output gap. The rule was proposed by John B. Taylor of Stanford University.
Under this policy approach, the official target is to keep inflation, under a particular definition such as the Consumer Price Index,
within a desired range. Thus, while other monetary regimes usually also
have as their ultimate goal to control inflation, they go about it in
an indirect way, whereas the inflation targeting employs a more direct
approach.
The inflation target is achieved through periodic adjustments to the central bank interest rate
target. In addition, clear communication to the public about the
central bank's actions and future expectations are an essential part of
the strategy, in itself influencing inflation expectations which are
considered crucial for actual inflation developments.
Typically the duration that the interest rate target is kept
constant will vary between months and years. This interest rate target
is usually reviewed on a monthly or quarterly basis by a policy
committee. Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target.
The inflation targeting approach to monetary policy approach was
pioneered in New Zealand. Since 1990, an increasing number of countries
have switched to inflation targeting as its monetary policy framework.
It is used in, among other countries, Australia, Brazil, Canada, Chile, Colombia, the Czech Republic, Hungary, Japan, New Zealand, Norway, Iceland, India, Philippines, Poland, Sweden, South Africa, Turkey, and the United Kingdom.
In 2022, the International Monetary Fund registered that 45 economies
used inflation targeting as their monetary policy framework. In addition, the Federal Reserve and the European Central Bank
are generally considered to follow a strategy very close to inflation
targeting, even though they do not officially label themselves as
inflation targeters. Inflation targeting thus has become the world’s dominant monetary policy framework.
However, critics contend that there are unintended consequences to this
approach such as fueling the increase in housing prices and
contributing to wealth inequalities by supporting higher equity values.
Fixed exchange rate targeting
This policy is based on maintaining a fixed exchange rate
with a foreign currency. There are varying degrees of fixed exchange
rates, which can be ranked in relation to how rigid the fixed exchange
rate is with the anchor nation.
Under a system of fiat fixed rates, the local government or
monetary authority declares a fixed exchange rate but does not actively
buy or sell currency to maintain the rate. Instead, the rate is enforced
by non-convertibility measures (e.g. capital controls,
import/export licenses, etc.). In this case there is a black market
exchange rate where the currency trades at its market/unofficial rate.
Under a system of fixed-convertibility, currency is bought and
sold by the central bank or monetary authority on a daily basis to
achieve the target exchange rate. This target rate may be a fixed level
or a fixed band within which the exchange rate may fluctuate until the
monetary authority intervenes to buy or sell as necessary to maintain
the exchange rate within the band. (In this case, the fixed exchange
rate with a fixed level can be seen as a special case of the fixed
exchange rate with bands where the bands are set to zero.)
Under a system of fixed exchange rates maintained by a currency board
every unit of local currency must be backed by a unit of foreign
currency (correcting for the exchange rate). This ensures that the local
monetary base does not inflate without being backed by hard currency
and eliminates any worries about a run on the local currency by those
wishing to convert the local currency to the hard (anchor) currency.
Under dollarization,
foreign currency (usually the US dollar, hence the term
"dollarization") is used freely as the medium of exchange either
exclusively or in parallel with local currency. This outcome can come
about because the local population has lost all faith in the local
currency, or it may also be a policy of the government (usually to rein
in inflation and import credible monetary policy).
Theoretically, using relative purchasing power parity (PPP), the rate of depreciation of the home country's currency must equal the inflation differential:
rate of depreciation = home inflation rate – foreign inflation rate,
which implies that
home inflation rate = foreign inflation rate + rate of depreciation.
The anchor variable is the rate of depreciation. Therefore, the rate
of inflation at home must equal the rate of inflation in the foreign
country plus the rate of depreciation of the exchange rate of the home
country currency, relative to the other.
With a strict fixed exchange rate or a peg, the rate of
depreciation of the exchange rate is set equal to zero. In the case of a
crawling peg,
the rate of depreciation is set equal to a constant. With a limited
flexible band, the rate of depreciation is allowed to fluctuate within a
given range.
By fixing the rate of depreciation, PPP theory concludes that the
home country's inflation rate must depend on the foreign country's.
Countries may decide to use a fixed exchange rate monetary regime
in order to take advantage of price stability and control inflation. In
practice, more than half of nations’ monetary regimes use fixed
exchange rate anchoring. The great majority of these are emerging economies, Denmark being the only OECD member in 2022 maintaining an exchange rate anchor according to the IMF.
These policies often abdicate monetary policy to the foreign
monetary authority or government as monetary policy in the pegging
nation must align with monetary policy in the anchor nation to maintain
the exchange rate. The degree to which local monetary policy becomes
dependent on the anchor nation depends on factors such as capital
mobility, openness, credit channels and other economic factors.
Money supply targeting
In
the 1980s, several countries used an approach based on a constant
growth in the money supply. This approach was refined to include
different classes of money and credit (M0, M1 etc.) The approach was
influenced by the theoretical school of thought called monetarism. In the US this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman.
Central banks might choose to set a money supply growth target as a nominal anchor to keep prices stable in the long term. The quantity theory
is a long run model, which links price levels to money supply and
demand. Using this equation, we can rearrange to see the following:
π = μ − g,
where π is the inflation rate, μ is the money supply growth rate and g
is the real output growth rate. This equation suggests that controlling
the money supply's growth rate can ultimately lead to price stability
in the long run. To use this nominal anchor, a central bank would need
to set μ equal to a constant and commit to maintaining this target.
While monetary policy typically focuses on a price signal of one form or another, this approach is focused on monetary quantities.
However, targeting the money supply growth rate was not a success
in practice because the relationship between inflation, economic
activity, and measures of money growth turned out to be unstable. Consequently, the importance of the money supply as a guide for the conduct of monetary policy has diminished over time,
and after the 1980s central banks have shifted away from policies that
focus on money supply targeting. Today, it is widely considered a weak
policy, because it is not stably related to the growth of real output.
As a result, a higher output growth rate will result in a too low level
of inflation. A low output growth rate will result in inflation that
would be higher than the desired level.
In 2022, the International Monetary Fund registered that 25
economies, all of them emerging economies, used some monetary aggregate
target as their monetary policy framework.
So far, no central banks have implemented this monetary policy.
However, various academic studies indicate that such a monetary policy
targeting would better match central bank losses and welfare optimizing monetary policy compared to more standard monetary policy targeting.
Price level targeting
Price level targeting is a monetary policy that is similar to inflation targeting except that CPI growth
in one year over or under the long term price level target is offset in
subsequent years such that a targeted price-level trend is reached over
time, e.g. five years, giving more certainty about future price
increases to consumers. Under inflation targeting what happened in the
immediate past years is not taken into account or adjusted for in the
current and future years.
Nominal anchors and exchange rate regimes
The different types of policy are also called monetary regimes, in parallel to exchange-rate regimes.
A fixed exchange rate is also an exchange-rate regime. The gold
standard results in a relatively fixed regime towards the currency of
other countries following a gold standard and a floating regime towards
those that are not. Targeting inflation, the price level or other
monetary aggregates implies floating the exchange rate.
Type of Nominal Anchor
Compatible Exchange Rate Regimes
Exchange Rate Target
Currency Union/Countries without own currency, Pegs/Bands/Crawls, Managed Floating
Money Supply Target
Managed Floating, Freely Floating
Inflation Target (+ Interest Rate Policy)
Managed Floating, Freely Floating
Credibility
The short-term effects of monetary policy can be influenced by the degree to which announcements of new policy are deemed credible.
In particular, when an anti-inflation policy is announced by a central
bank, in the absence of credibility in the eyes of the public inflationary expectations
will not drop, and the short-run effect of the announcement and a
subsequent sustained anti-inflation policy is likely to be a combination
of somewhat lower inflation and higher unemployment (see Phillips curve § NAIRU and rational expectations).
But if the policy announcement is deemed credible, inflationary
expectations will drop commensurately with the announced policy intent,
and inflation is likely to come down more quickly and without so much of
a cost in terms of unemployment.
Thus there can be an advantage to having the central bank be
independent of the political authority, to shield it from the prospect
of political pressure to reverse the direction of the policy. But even
with a seemingly independent central bank, a central bank whose hands
are not tied to the anti-inflation policy might be deemed as not fully
credible; in this case there is an advantage to be had by the central
bank being in some way bound to follow through on its policy
pronouncements, lending it credibility.
There is very strong consensus among economists that an
independent central bank can run a more credible monetary policy, making
market expectations more responsive to signals from the central bank.
Contexts
In international economics
Optimal
monetary policy in international economics is concerned with the
question of how monetary policy should be conducted in interdependent
open economies. The classical view holds that international macroeconomic interdependence is only relevant if it affects domestic output gaps and inflation, and monetary policy prescriptions can abstract from openness without harm.
This view rests on two implicit assumptions: a high responsiveness of
import prices to the exchange rate, i.e. producer currency pricing
(PCP), and frictionless international financial markets supporting the
efficiency of flexible price allocation.
The violation or distortion of these assumptions found in empirical
research is the subject of a substantial part of the international
optimal monetary policy literature. The policy trade-offs specific to
this international perspective are threefold:
First, research suggests only a weak reflection of exchange rate
movements in import prices, lending credibility to the opposed theory of
local currency pricing (LCP).
The consequence is a departure from the classical view in the form of a
trade-off between output gaps and misalignments in international
relative prices, shifting monetary policy to CPI inflation control and
real exchange rate stabilization.
Second, another specificity of international optimal monetary
policy is the issue of strategic interactions and competitive
devaluations, which is due to cross-border spillovers in quantities and
prices. Therein, the national authorities of different countries face incentives to manipulate the terms of trade
to increase national welfare in the absence of international policy
coordination. Even though the gains of international policy coordination
might be small, such gains may become very relevant if balanced against
incentives for international noncooperation.
Third, open economies face policy trade-offs if asset market
distortions prevent global efficient allocation. Even though the real
exchange rate absorbs shocks in current and expected fundamentals, its
adjustment does not necessarily result in a desirable allocation and may
even exacerbate the misallocation of consumption and employment at both
the domestic and global level. This is because, relative to the case of
complete markets, both the Phillips curve and the loss function include
a welfare-relevant measure of cross-country imbalances. Consequently,
this results in domestic goals, e.g. output gaps
or inflation, being traded-off against the stabilization of external
variables such as the terms of trade or the demand gap. Hence, the
optimal monetary policy in this case consists of redressing demand
imbalances and/or correcting international relative prices at the cost
of some inflation.
Corsetti, Dedola and Leduc (2011)
summarize the status quo of research on international monetary policy
prescriptions: "Optimal monetary policy thus should target a combination
of inward-looking variables such as output gap and inflation, with
currency misalignment and cross-country demand misallocation, by leaning
against the wind of misaligned exchange rates and international
imbalances." This is main factor in country money status.
In developing countries
Developing
countries may have problems establishing an effective operating
monetary policy. The primary difficulty is that few developing countries
have deep markets in government debt. The matter is further complicated
by the difficulties in forecasting money demand and fiscal pressure to
levy the inflation tax by expanding the base rapidly. In general, the
central banks in many developing countries have poor records in managing
monetary policy. This is often because the monetary authorities in
developing countries are mostly not independent of the government, so
good monetary policy takes a backseat to the political desires of the
government or is used to pursue other non-monetary goals. For this and
other reasons, developing countries that want to establish credible
monetary policy may institute a currency board or adopt dollarization.
This can avoid interference from the government and may lead to the
adoption of monetary policy as carried out in the anchor nation. Recent
attempts at liberalizing and reform of financial markets (particularly
the recapitalization of banks and other financial institutions in
Nigeria and elsewhere) are gradually providing the latitude required to
implement monetary policy frameworks by the relevant central banks.
Trends
Transparency
Beginning with New Zealand in 1990, central banks began adopting formal, public inflation targets
with the goal of making the outcomes, if not the process, of monetary
policy more transparent. In other words, a central bank may have an
inflation target of 2% for a given year, and if inflation turns out to
be 5%, then the central bank will typically have to submit an
explanation. The Bank of England
exemplifies both these trends. It became independent of government
through the Bank of England Act 1998 and adopted an inflation target of
2.5% RPI, revised to 2% of CPI in 2003. The success of inflation targeting in the United Kingdom has been attributed to the Bank of England's focus on transparency.
The Bank of England has been a leader in producing innovative ways of
communicating information to the public, especially through its
Inflation Report, which have been emulated by many other central banks.
The European Central Bank adopted, in 1998, a definition of price stability within the Eurozone as inflation of under 2% HICP.
In 2003, this was revised to inflation below, but close to, 2% over the
medium term. Since then, the target of 2% has become common for other
major central banks, including the Federal Reserve (since January 2012) and Bank of Japan (since January 2013).
Effect on business cycles
There continues to be some debate about whether monetary policy can (or should) smooth business cycles. A central conjecture of Keynesian economics is that the central bank can stimulate aggregate demand
in the short run, because a significant number of prices in the economy
are fixed in the short run and firms will produce as many goods and
services as are demanded (in the long run, however, money is neutral, as
in the neoclassical model). However, some economists from the new classical school contend that central banks cannot affect business cycles.
Behavioral monetary policy
Conventional macroeconomic models assume that all agents in an economy are fully rational. A rational agent
has clear preferences, models uncertainty via expected values of
variables or functions of variables, and always chooses to perform the
action with the optimal expected outcome for itself among all feasible
actions – they maximize their utility. Monetary policy analysis and decisions hence traditionally rely on this New Classical approach.
However, as studied by the field of behavioral economics that takes into account the concept of bounded rationality, people often deviate from the way that these neoclassical theories assume. Humans are generally not able to react in a completely rational manner to the world around them
– they do not make decisions in the rational way commonly envisioned in
standard macroeconomic models. People have time limitations, cognitive biases, care about issues like fairness and equity and follow rules of thumb (heuristics).
This has implications for the conduct of monetary policy.
Monetary policy is the final outcome of a complex interaction between
monetary institutions, central banker preferences and policy rules, and
hence human decision-making plays an important role.[76]
It is more and more recognized that the standard rational approach does
not provide an optimal foundation for monetary policy actions. These
models fail to address important human anomalies and behavioral drivers
that explain monetary policy decisions.
An example of a behavioral bias that characterizes the behavior of central bankers is loss aversion: for every monetary policy choice, losses loom larger than gains, and both are evaluated with respect to the status quo.
One result of loss aversion is that when gains and losses are symmetric
or nearly so, risk aversion may set in. Loss aversion can be found in
multiple contexts in monetary policy. The "hard fought" battle against
the Great Inflation, for instance, might cause a bias against policies
that risk greater inflation.
Another common finding in behavioral studies is that individuals
regularly offer estimates of their own ability, competence, or judgments
that far exceed an objective assessment: they are overconfident.
Central bank policymakers may fall victim to overconfidence
in managing the macroeconomy in terms of timing, magnitude, and even
the qualitative impact of interventions. Overconfidence can result in
actions of the central bank that are either "too little" or "too much".
When policymakers believe their actions will have larger effects than
objective analysis would indicate, this results in too little
intervention. Overconfidence can, for instance, cause problems when
relying on interest rates to gauge the stance of monetary policy: low
rates might mean that policy is easy, but they could also signal a weak
economy.
These are examples of how behavioral phenomena may have a
substantial influence on monetary policy. Monetary policy analyses
should thus account for the fact that policymakers (or central bankers)
are individuals and prone to biases and temptations that can sensibly
influence their ultimate choices in the setting of macroeconomic and/or
interest rate targets.
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