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Transcript
Money Supply Measures Monetary Base = Currency + depository institution balances at the Fed Currency = coin + paper money Money supply is total amount of money in economy. Two money supply measures are (CDs) money aggregates Monetary base and money supply are not same thing (definitions are different). Monetary Base Graph 9/15 2 M1 Graph 3 Money Supply Comments • Money supply is believed to be important. • While Fed can completely control the monetary base, it is M1 and M2 that more directly control the real sector. • But Fed doesn’t have full control over M1 and M2. • Note that most of the money supply aggregates that comprise M1 and M2 are determined by private decisions which the Fed can’t control. Thus Fed only has monetary base to influence M1 and M2. • In other words, the Fed, via the monetary base, can only imprecisely control M1 and M2. 4 Six Goals of Monetary Policy Set by the Humphrey-Hawkins Act of 1978 • Full employment • Economic growth • Price index stability • Interest rate stability • Stable financial system • Stable foreign exchange markets Monetary policy first impacts the financial sector. Then financial sector affects the real sector. Two schools of thought on how this works. 9/15 5 Actual Fed Funds Rates 1955-present 6 Fed Funds Rates 2004-2008 7 Monetarist Economists • Monetarists believe – key explanatory variable is the money supply – people will buy more if feel they have “more money,” and spend less if feel they have “less money.” – idea is to use monetary policy to influence the money supply. – in this way, adding reserves should promote economic growth, reducing reserves should slow the economy. 8 Keynesian Economists • Keynesians believe – key explanatory variable is the interest rate – John Maynard Keynes was influential British economist of 1930s. – money supply does not make that much difference – believe economic growth is stimulated by falling interest rates, and slowed by rising rates 9 Repos & Reverse Repos on Fed Bal Sheet Used by Fed for temporary adjustments to money supply. Repurchase agreements. Securities sold by dealers under agreement to repurchase on a certain date at a certain price. (adds reserve balances to the banking system) Reverse repurchase agreements. Securities purchased by dealers under agreement to resell back on a certain date at a certain price. (drains reserve balances from the banking system) repo -- economic equivalent of Fed making a collateralized loan reverse repo -- economic equivalent of Fed involved in collateralized borrowing 10 Repos & Reverse Repos on Fed Bal Sheet Repurchase agreement (dealer borrows from Fed) Fed buys securities from dealer for X Dealer repurchases securities from Fed for X+interest Reverse repurchase agreement (dealer loan to Fed) Fed sells securities to dealer for X Fed repurchases securities from dealer for X+interest Repos used all over the financial world. Need to study repos hard. It is called a repo or reverse repo depending upon how it looks to a dealer. 11 Things for Sure To Know for Exam Night Exam, Tues Sept 20, MLC, 7pm Know everything on all slides of Modules 1.1, 1.2 and 1.3 (up to this slide). Definitions of monetary base and M1 Know: 11 types of financial intermediaries 5 services offered by intermediaries 5 risks faced by financial institutions 5 purposes of a central bank 6 goals of monetary policy 12