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Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Monetary Policy & International Finance
Mishkin, Chapter 1
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Why study monetary policy ?
Money Supply
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money and inflation
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money and inflation: Selected countries 2003 - 2013
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money and inflation: USA 1950 - 2016
(Prices)
(Money Supply)
Money is used as a
mechanism for storing
wealth
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money and interest rates
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money growth and interest rates: USA 1960 - 2016
(Money)
Source: research.stlouisfed.org
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money, interest rates and financial fragility
“.. by lowering the cost of credit and increasing the value of assets, low
interest rates could provide the breeding ground for asset price and credit
booms. In this regard, the current developments in Swiss mortgage and real
estate markets are telling: real estate prices and mortgage credit have been
growing with considerable momentum for several years already.
Importantly, the growth rates of both prices and credit volumes are at
levels which cannot be fully explained by fundamental factors. This has led
to the built-up of imbalances which increase the risk of a substantial price
corrections and of loan losses. “
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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According to S&P 500, Low interest rates is accerlating
Switzerland 2000-2015 mortgage growth. Slashing of interest rates does not
seem to imply a spur in the mortgage market
(Investment decisions), maybe helps with sustaining
growth.
3.50
240.00
3.00
190.00 2.50
2.00
140.00
1.50
100 in the
year 2000.
1.00
90.00
0.50
0.00
40.00
-0.50
-10.00 -1.00
2000 2003 2006 2009 2012 2015
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Why study international finance?
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Trade: Swiss imports/exports
350
In bn CHF
300
250
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Imports Exports
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Capital flows: Portfolio and other investment
250%
200%
150%
100%
50%
0%
Portfolioinvestments_Assets Portfolioinvestments_Liabilities
Other_Investment_Assets Other_Investment_Liabilities
Other investment: Currency and deposits of SNB and banks; Loans of SNB,
public sector and other sectors Sources: snb.ch; GDP from seco.ch
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Example:
Nestle invest in Local Infrastructure in
Capital flows: Foreign direct investment Germany (Foreign Direct Investment)
200%
180%
160%
140%
FDI / GDP
120%
100%
80%
60%
40%
20%
0%
Swiss_FDI_abroad
FDI_in_Switzerland
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Exchange rates affects value of assets when denominated in
the foreign currency.
Exchange rate CHF: 2000 - 2017 Snce the Financial Crisis, CHF has significantly appreciated
against the EUR.
120
100
80
60
Index : Jan 2000 = 100
40
20
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Any exchnage rate changes will
Multinational corporations: Swiss examples affect the value of the assets of the
company.
Sources: Nestlé Annual Report 2016, Swatch Group Annual Report 2015
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Exchange rate fluctuations heavily affect MNCs
110
105
100
Index 1.1.2015 = 100
95 Swisscom
90 Nestle
Swatch
85
CHF/USD
80
75
70
02.01.2015 17.01.2015 01.02.2015 16.02.2015
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Exchange rate fluctuations and the real economy
Source: http://www.swissmem.ch/en/news-medien/news/mem-industrie-die-frankenstaerke-hinterlaesst-deutliche-spuren.html
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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International finance and monetary policy
Source: https://en.wikipedia.org/wiki/Impossible_trinity#/media/File:Impossible_trinity_diagram.svg
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Financial Markets & Institutions
Mishkin Chapter 2
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Relevance for monetary policy
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Direct finance: Financial markets
Financial Financial
Intermediaries/ Intermediaries/
Investment Bank Investment Bank
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Financial instruments & markets
Traditional Monetary Policy only targets the Money market only!
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Financial instruments and monetary policy
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Money market instruments
REPO
Agreements
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Capital market instruments: USA
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Capital and money market: Switzerland
Outstanding Amount
In bn CHF 2000 2008 2013
Capital Market
Shares and other equity (domestic
341 436 571
issuers)
Debt securities (domestic issuers excl.
238 267 287
Gov.)
Debt securities General Government 103 138 133
Money Market
Money market instruments (Swiss bank
54 93 78
liab.)
Interbank lending (Swiss bank liab.) 525 664 407
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Financial market structure and monetary policy
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Indirect finance: Financial intermediaries
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Financial intermediaries: Rationale
• Risk sharing
− interest rate risk
− liquidity risk
Asset
transformation
− credit risk
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Financial intermediaries: US
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Asset structure: Swiss banks December 2016
Regional-
Big banks Cantonal Raiffeisen-
in % of total assets Big banks and savings
(domestic only) banks banks
banks
Cash 13% 25% 15% 10% 9%
Customer Loans (incl.
43% 57% 70% 85% 80%
mortgages)
Interbank Loans 10% 5% 3% 2% 3%
Tradable Securities 7% 3% 2% 0% 1%
Sources: SNB
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Liability structure: Swiss banks December 2016
Regional-
Big banks Cantonal Raiffeisen-
in % of total assets Big banks and savings
(domestic only) banks banks
banks
Liabilities from financial
8% 0% 0% 0% 1%
instruments
Sources: SNB
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Key messages
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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Self-Study 1
Monetary Policy and International Finance (3,168), Prof. Dr. Martin Brown
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