Money and Monetary Policy

Money and
Monetary
Policy
Meaning and Functions of Money
• The functions of money

– medium of exchange
– means of storing wealth
– means of evaluation
– means of establishing value of future
claims and payments
• What should count as money?
– narrow definitions of money
– broad definitions of money
Financial System in the UK
• The key role of banks

– deposits and loans
– liabilities and assets
– retail and wholesale deposits and loans
• Liabilities
– sight deposits
Balance sheet of UK banks: February 2003
• Liabilities
– sight deposits
– time deposits
• Liabilities
– sight deposits
– time deposits
– certificates of deposit
• Liabilities
– sight deposits
– time deposits
– certificates of deposit
– repos
• Assets
– cash and balances with the Bank of

England
• Assets

England
– short-term loans
• Assets

England
– short-term loans
– longer-term loans
• Liquidity and profitability
– profitability
– liquidity
• the liquidity ratio
• The central bank
– Bank of England, ECB, Fed, etc.
– functions
• note issue
• acts as a bank
– to the government
– to overseas central banks
• overseas activities of banks
• provides liquidity to the banks
– lender of last resort
• operates monetary and exchange rate
policy
• The London money market
– the discount and repo markets
• discounting
• the repo market
• last-resort facilities by Bank of England
– the parallel money markets
• the inter-bank market
• inter-companies deposit market
• market for certificates of deposit, etc.
• foreign currencies market
The Supply of Money
• Definitions of the money supply
– monetary base
– broad money
• Definitions in the UK
– definitions in the UK: M0, M4

UK monetary aggregates: (end February 2003)
£ million
Cash outside Bank of England 36 861

+ Banks’ operational deposits with Bank of England 91
= M0 36 952
Cash outside banks (in circulation) 30 630

+ Private-sector retail bank and building society deposits 676 969
= Retail deposits and cash in M4 (also known as M2) 707 599
+ Private-sector wholesale bank and b.s. deposits + CDs 295 996

= M4 1 003 595
£ million

= M0 36 952


= M4 1 003 595
£ million

= M0 36 952


= M4 1 003 595
The Supply of Money
– monetary base
– broad money
– definitions in the UK: M0, M4
– euro zone definitions: M1, M2, M3

UK monetary supply using ECB measures:
(end February 2003)
£ million
Currency in circulation 31 351

+ Overnight deposits 513 292
= M1 544 643
+ Deposits with agreed maturity up to 2 years 81 696

+ Deposits redeemable up to 3 months' notice 296 518
= M2 922 857
+ Repos 88 978
+ Money market funds and paper 57 496
= M3 1 069 331
(end February 2003)
£ million

= M1 544 643

= M2 922 857
+ Repos 88 978
= M3 1 069 331
(end February 2003)
£ million

= M1 544 643

= M2 922 857
+ Repos 88 978
= M3 1 069 331
The Supply of Money
– monetary base
– broad money
• The creation of credit
The Supply of Money
– monetary base
– broad money
– simple illustration
Credit creation: Banks' original balance sheet
Credit creation: Effect of a new deposit of £10bn
Credit creation: Full effect of a new deposit of £10bn
The Supply of Money
– monetary base
– broad money
– the bank multiplier
The Supply of Money
– monetary base
– broad money
• 1/L
The Supply of Money
– monetary base
– broad money
• 1/L
– the real world
The Supply of Money
– monetary base
– broad money
• 1/L
– the real world
• no precise bank multiplier
The Supply of Money
• Causes of increases in money supply
– banks reduce liquidity ratio
– inflow of funds from abroad
– PSNCR and its financing
• Money supply: exogenous or

endogenous?
– Relationship between money supply and
the rate of interest
The supply of money curve: (a) exogenous money supply
MS
Rate of interest
O
Quantity of money
The supply of money curve: (b) endogenous money supply
MS
Rate of interest
O
Quantity of money
The Demand for Money
• The motives for holding money
– transactions and precautionary motive
– assets or speculative motive
– the total demand for money
• Determinants of demand for money
– money national income
– frequency with which people are paid
– financial innovations
– speculation about future return on assets
– rate of interest
The demand for money (liquidity preference) curve
Rate of interest
Md
O
Money
Monetary Equilibrium
• Equilibrium in the money market
– equilibrium interest rate where D and S
of money are equal
Equilibrium in the money market
MS
Rate of interest
re
Md
O Me
Money
of money are equal
• Equilibrium in the foreign exchange
market
of money are equal
market
– increased money supply leads to lower
interest rates
of money are equal
market
– increased money supply leads to lower
interest rates
– lower interest rates lead to a lower
exchange rate
• Effects of changes in money supply on
national income
– effect on interest rates
• Ms↑ → r↓
The demand for and supply of money
MS
Rate of interest
r1
Md
O Q1
Money
The demand for and supply of money
MS ' MS
Rate of interest
r2
r1
Md
O Q2 Q1
Money
national income
• Ms↑ → r↓
– effects of changes in interest rates on
investment
• r↓ → I↑
national income
• Ms↑ → r↓
investment
• r↓ → I↑
– effects of changes in interest rates on the
exchange rate, and imports and exports
• r↓ → er↓→ X↑, M↓
national income
• Ms↑ → r↓
investment
• r↓ → I↑
– effects of changes in interest rates on the
exchange rate, and imports and exports
• r↓ → er↓→ X↑, M↓
– effects of changes in investment, imports
and exports on national income
• I↑, X↑, M↓ → Y↑
Monetary Policy
• The significance of monetary policy
• The policy setting
– relationship between the government
and the central bank
– degree of central bank independence
• Medium- and long-term policy

– control of banks’ liquidity ratio
– restricting size of PSNCR
Monetary Policy
• Short-term monetary control
– techniques to control money supply
• open-market operations
• reduced central bank lending to the banks
• funding
• variable minimum reserve ratios
– techniques to control interest rates
• announcing changes in interest rates
• backing up announcements
– operations in the discount and repo markets
– credit rationing
Effectiveness of Monetary Policy
• Medium and long-term control over

the money supply: reducing PSNCR
– automatic fiscal stabilisers
– the desire to cut taxes
– difficulty in cutting government
expenditure
• Short-term control of the money
supply
– use of money supply targets
– ways in which banks resist attempts to
restrict the growth in the money supply
– demand-determined money supply
• Effectiveness of controlling interest

rates
– inelastic demand for loans
• problem of possibly high interest rates
An inelastic demand for loans
Assume that the authorities

want to reduce the
Rate of interest
demand for money to Q2
r1
Demand for loans
O Q2 Q1
Loans
An inelastic demand for loans
A large rise in the

rate of interest (to r2)
Rate of interest
will be necessary
r2
r1
Demand for loans
O Q2 Q1
Loans

rates
• reasons for an inelastic demand for loans

rates
– unstable demand for money

rates
• problem of changing expectations

rates
• speculation

rates
• speculation
– possible conflict between domestic
goals and exchange-rate goals

rates
• speculation
• Using monetary policy

rates
• speculation
• Using monetary policy
– use of interest rates to meet inflation
target

Money and Monetary Policy

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Money and Monetary Policy

Hochgeladen von

Copyright:

Verfügbare Formate

Money and

• The functions of money

• The key role of banks

– cash and balances with the Bank of

– cash and balances with the Bank of

– cash and balances with the Bank of

• Definitions of the money supply

– definitions in the UK: M0, M4

Cash outside Bank of England 36 861

Cash outside banks (in circulation) 30 630

+ Private-sector wholesale bank and b.s. deposits + CDs 295 996

Cash outside Bank of England 36 861

Cash outside banks (in circulation) 30 630

+ Private-sector wholesale bank and b.s. deposits + CDs 295 996

Cash outside Bank of England 36 861

Cash outside banks (in circulation) 30 630

+ Private-sector wholesale bank and b.s. deposits + CDs 295 996

• Definitions of the money supply

– definitions in the UK: M0, M4

– euro zone definitions: M1, M2, M3

Currency in circulation 31 351

+ Deposits with agreed maturity up to 2 years 81 696

Currency in circulation 31 351

+ Deposits with agreed maturity up to 2 years 81 696

Currency in circulation 31 351

+ Deposits with agreed maturity up to 2 years 81 696

– inflow of funds from abroad

– PSNCR and its financing

• Money supply: exogenous or

• Medium- and long-term policy

• Medium and long-term control over

• Effectiveness of controlling interest

Assume that the authorities

demand for money to Q2

Demand for loans

A large rise in the

Demand for loans

• Effectiveness of controlling interest

• Effectiveness of controlling interest

• Effectiveness of controlling interest

• Effectiveness of controlling interest

• Effectiveness of controlling interest

• Effectiveness of controlling interest

• Effectiveness of controlling interest

Das könnte Ihnen auch gefallen