chapter 15 “money supply process” group one group one members & roll #-- htoo mg2 latt / 8 ...
TRANSCRIPT
CHAPTER 15
“MONEY SUPPLY
PROCESS”
Gro
up
On
e
Group One Members & Roll #--1. Htoo Mg2 Latt / 82. Chaw Su Aung Win /
53. Kyauk Kay Khine / 124. Ohnmar Aye / 355. Toe Thiri Tun / 486. Nan El Khaung / 267. Chan Htut /4
MBF- Batch 1Master of Banking and Finance Programme, Yangon, Myanmar. 1
The Economics of Money, Banking, and Financial Markets: 10E, Frederic S. Nishkin
9th N
ov 2
013
OBJECTIVES OF STUDY
How money supply process is determined?
How the Banking System Create Deposit?
Who control money supply?
What cause it to change?
How might control of it be improved?
Gro
up
On
e
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Three Players in the money supply process
Depositors
Banks
The
central
bank
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Three Players in the money supply process
The centr
al bank
The Central Bank –
The government agent that oversees the banking system.
Responsible for the conduct of monetary policy.
In Myanmar called Central Bank
In US called Federal Reserve System
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Three Players in the Money Supply Process
Banks – (Depository Institutions)
The financial intermediaries that accept deposits from individuals and institutions.
Make Loans- Commercial Banks, Savings and loan associations, mutual savings banks and credit unions.
Banks
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Three Players in the money supply process
Depositors- Individuals and institutions that hold deposits in the banks
Depositors
The three player in the money supply process:
The Central Bank (or) Federal Reserve System
- is most important player. - conducts monetary policy involves
actions that affect the balance sheet
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Assets
Government
Securities
Loans to Financial
Institutions
Liabilities
Currency in
Circulation
Reserves
Balance SheetFederal Reserve System
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Government Securities
• The Fed’s holdings of securities issued by U.S Treasury
Loans to Financial
Institutions
• Fed provide reserves to the banking system is by making loans to banks and other financial institutions.
Balance SheetFederal Reserve System
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Balance SheetFederal Reserve System
Currency in circulation
• is the amount of currency in the hands of the public
Reserves
• Fed hold deposits from all bank with their accounts.
• Reserves consist of deposits at the fed + physically stored in the bank vaults.
• Fed provides reserves to banking system at rate called the discount rate.
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More on Reserves
• Fed requires banks to hold a fraction (10%) of deposits as reserves. - It is called Required Reserve Ratio
IN MYANMAR
Central Bank of Myanmar requires commercial banks to hold 10% of Deposits as reserves and 50% of 10% reserves has to place at Central Bank as reserves.
Additional holding of cash are called excess reserves.
Total reserves = Required Reserves + Excess Reserves
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Note: Fed does not pay interest on liabilities, but collects interest on its assets. It means that Fed gives Bonds to commercial banks for their placing of reserve.
Earnings (in billions) go to federal government and pay for the operation of the Fed.
TOTAL RESERVE
Excess Reserve
50% of the 10% Reserve
10% of Deposit
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Control of Monetary Base
MB (high-powered money) = Currency in circulation + Reserves
Open Market Operations
• Fed exercises control over monetary base through(i) Purchases or sales of government securities in open
market(ii) (ii) Extension of discount loans to banks
• A purchase of bonds by the Fed is called an open market purchase • A sale of bonds by the Fed is called an open market sale
MB C R
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Control of the Monetary BaseOpen Market Purchase of $100 of bonds from Bank with a $100 check
The Banking System
Assets Liabilities
Securities -$100
Reserve +$100
Assets Liabilities
Securities + $100 Reserve +$100
Federal Reserve System
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Control of the Monetary Base
Nonbank Public
Assets Liabilities
Securities -$100
Checkable Deposits +$100
Assets Liabilities
Reserves + $100 Checkable Deposits + $100
Banking System
Open Market Purchase of $100 of bonds from person or corporation who deposits the Fed’s check in a local bank
Assets Liabilities
Reserve +$100
Fed Reserve System
Securities + $10014
The result of the Fed’s Open Market Purchase
Result:
Reserves increase by the amount $ 100
The Monetary Base increase by the same amount $ 100
MB C R
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If the seller receive currency for the check
Assets Liabilities
Assets Liabilities
Nonbank Public
Fed Reserve System
Securities -$100
Currency in C +$100
Securities + $100 Current in circulation +$100
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Result:
Reserves unchanged
The currency in circulation increase by the amount $ 100
Thus, The Monetary Base increase by the same amount $ 100
Conclusion: Effect on MB of OMP is certain and effect on Reserves depends on whether seller of bond keeps proceeds in currency or deposits.
The result of the Fed’s Open Market Purchase
Note:
At local bank vault cash falls by $100, deposits at Fed increase by same amount.
I.e., the transaction is simply a switch from one type of reserves to another. 17
Open Market SaleOpen Market Sale of $100 of bonds from person who pays cash
Assets Liabilities
Assets Liabilities
Nonbank Public
Fed Reserve System
Securities +$100
Currency in C - $100
Securities - $100 Currency in circulation -$100
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Result:
Reserves unchanged
The currency in circulation decrease by the amount $ 100
Thus, The Monetary Base decrease by the same amount $ 100
If instead, person uses a check written on a local bank reserves fall by $100.
Conclusion: Effect on MB of OMS is certain, effect on Reserves depends on whether buyer of bond uses currency or checkable deposits.
The result of the Fed’s Open Market Sale
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Overall Conclusion
The effect of open market operations on the monetary base is much more certain than the effect on reserve.
• Fed can control MB using Open Market Operations more effectively than it can control reserves.
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Shifts From Deposits into Currency(Jane Brown permanently withdraws $100 from her checking account.)
Result: R ↓ $100, MB unchanged
Affecting reserves without changing MB
Nonbank Public
Assets Liabilities
Currency in C +$100
Checkable Deposits -$100
Fed Reserve System
Assets Liabilities
Currency in circulation +$100
Reserves -$100
Banking System
Assets Liabilities
Reserves -$100 Checkable Deposits -$100
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Discount Loans
Also affect MB, Suppose Fed makes $100 loan to First National Bank
Result: R increase , MB increase
Reverse happens when bank pays of a discount loan (I.e., all of the +’s become –’s).
Banking System
Assets Liabilities
Reserves +$100 Discount Loans +$100
Fed Reserve System
Assets Liabilities
Discount Loans +$100 Reserve +$100
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Factors outside Fed’s control
• Certain factors affect the MB that are outside the control of the Fed
1. Float - results from check clearing process that occurs at the Fed
* first increase reserves of depositing bank * second (later) decrease the reserves of bank on which check is
drawn * result is temporary increase in MB
2. Treasury deposits at Fed
* whenever Treasury moves deposits from commercial banks to Fed the result is a decrease in MB
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Deposit Creation: Single Bank
First National Bank
Assets Liabilities
Securities -$100
Reserves +$100
First National Bank
Assets Liabilities
Deposit +$100
First National Bank
Assets Liabilities
Securities -$100
Reserves +$100
Loans +$100
Securities -$100
Loans +$100Deposit +$100
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Deposit Creation: Banking SystemBank A
Assets Liabilities
Reserves + $100 Deposits +$100
Assets Liabilities
Reserves +$10
Loans + $90
Assets Liabilities
Deposits +$90 Reserves +$90
Assets Liabilities
Loans + $81
Reserves +$9
Bank A
Bank B
Bank B
Deposits +$100
Deposits +$90
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Deposit Creation
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Deposit Creation
If Bank A buys securities with $90 check
Seller deposits $90 at Bank B and process is same
Whether bank makes loans or buys securities, get same deposit expansion
Bank A
Assets Liabilities
Reserves + $10 Deposits +$100
Securities + $90
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Deposit Multiplier
Simple Deposit Multiplier
ΔD = 1 / rr x ΔR
Deriving the formula
R = RR = r × D
D = 1 × R rr
ΔD = 1 × ΔR rr
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Deposit Creation: Banking System as a Whole
Banking System
Securities - $ 100 Deposits + $1000
Reserves + $100
Loans + $1000
Critique of Simple Model
Deposit creation stops if: 1. Proceeds from loan kept in cash 2. Bank holds excess reserves
Assets Liabilities
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Money MultiplierM = m × MB
Deriving Money MultiplierR = RR + ER RR = r × D R = (r × D) + ER
Adding C to both sides R + C = MB = (r × D) + ER + C 1. Tells us amount of MB needed support D, ER and C 2. Increase in C or ER is not multiplied
MB = (r × D) + (e × D) + (c ×D) = (r + e + c) × D
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D = 1 × MBr + e + c
M = D + (c × D ) = (1 + c) × D
M = 1 + c × MBr + e + c
m = 1 + cr + e + c
m < 1/r because no multiple expansion for currency and because as D ↑ ER ↑ (I.e., m is much less than 10 from simple model)
↑ r or ↑ c or ↑ e results in ↓ m and M.
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Excess Reserves Ratio, e
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Factors Determining Money Supply
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Money Supply
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Determinants of the Money Supply
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Deposits at Failed Banks: 1929–33
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e, c: 1929–33
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Money Supply and Monetary Base: 1929–33
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Your Thought!Discuss about something?
Thank You
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