Moral Suasion

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Definition of 'Moral Suasion'

Moral suasion is a non-coercive economic policy that relies on persuasion and moral pressure to achieve desired outcomes. It is often used by central banks to influence the behavior of banks and other financial institutions.

One example of moral suasion is when the Federal Reserve Bank of the United States (the Fed) raises interest rates. This makes it more expensive for banks to borrow money, which in turn discourages them from lending to businesses and consumers. As a result, economic growth slows down and inflation is reduced.

Another example of moral suasion is when the Fed sells Treasury bonds. This increases the supply of bonds in the market, which drives down their prices. As a result, the yield on bonds increases, which makes it more attractive for investors to buy them. This reduces the amount of money available for lending, which has the same effect as raising interest rates.

Moral suasion is often used in conjunction with other monetary policy tools, such as open market operations and changes to the reserve requirement. It is a powerful tool that can be used to effectively manage the economy.

However, moral suasion is not always effective. For example, if banks are not convinced that the Fed's actions are in their best interests, they may not comply with its requests. In addition, moral suasion can take time to work, and it may not be able to overcome other economic factors that are driving the economy in a particular direction.

Overall, moral suasion is a valuable tool that can be used to influence the behavior of financial institutions and achieve desired economic outcomes. However, it is important to understand its limitations and to use it in conjunction with other monetary policy tools.

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