Download M1 and M2 in Turkey

Asset Markets
• Let’s take a closer look at this market.
Money Market
Financial MarketBond Market
Equities Market
Money Market
• What is money?
Without it, modern economies could not
function
Historical Development of Money
• No Money: Barter Economy (goods for goods)
• Money as a medium of Exchange:
Goods
Money
Goods
Lydian Coin (Western Turkey), 700-637 B.C.
• How did all start? (shells, barley, peppercorns, gold, and
silver)
– Precious metals, (Metals objects were introduced as money
around 5000 B.C. By 700 BC, the Lydians became the first in the
Western world to make coins.)
–
History of money
– Precious metals, (Metals objects were introduced
as money around 5000 B.C. By 700 BC, the Lydians
became the first in the Western world to make
coins.)
– Paper money (fully) backed by gold,
– Paper money fractionally backed by gold,
– Fiat money,
Chinese note 1368-1399 (size of a sheet of notebook paper)
Properties of a Good Medium of
Exchange
1. Acceptable
2. Standardized quality (diamonds, clear or not)
3. Durable (fish, strawberry, do they last)
1. Valuable relative to its weight (cement)
2. Divisible (diamonds, pay for bread)
The Functions of Money
1) Medium of Exchange
2) Unit of account
3) Store of Value
New York Note, 1776
4) Standard of deferred payments
Precious metals are easily divisible into
standardized coins and do not lose value when
made into smaller units : COINS
Initial stages of development of
money
• Coins,
• “Bank Notes” start of Paper money,
– Fully backed by gold.
– Fractionally backed by gold,
• Fiat Money
What is the supply? (more efficient)
Why is money important?
• Using standardized coins or paper bills made it
easier to determine prices of goods and
services,
• the amount of money in the system also plays
an important role in setting prices.
Inflation or deflation
Money Supply
Delegated to Central Banks
Money Supply Today
• Money supply (M1)
Currency (in circulation) + demand deposits (TL and
Foreign Currency)
229,091,917,800 TL
• Money supply (M2)
M1 + Time deposits (TL and Foreign Currency)
930,652,330,000 TL
M1 and M2 in Turkey
800000000
700000000
600000000
500000000
M1
400000000
M2
300000000
200000000
100000000
0
2005
2006
2007
2008
2009
2010
2011
2012
US Money Supply
12000
10000
8000
6000
M1
M2
4000
2000
0
Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct.
2011
2012
Can the Central Bank change MS?
• YES!!!
• HOW?
– With some tools known as monetary policy tools.
(Tools are instruments that a policy maker can
change in order to influence the workings of an
economy)
Monetary Policy Tools
1. Discount Rate,
2. Reserve Requirement ratio,
3. Open Market Operations.
How do they work?
Need to look at how banking system work and
money changes hands…
Commercial Banks
• Banks are profit seeking institutions.
– They accept deposits,
– They give loans
• Public Banks (Ziraat, Halk …)
and Private banks (IsBank, Akbank, Garanti …)
Commercial Banks Balance Sheets
Assets
Liabilities
Reserves
Deposits
Loans
Short and long term
borrowing
Building and Equipment
Other Liabilities
Other Assets
Total Liabilities
Stock holders equities
Total Assets
Total liabilities + stock
holders’ equities
Rules that commercial banks follow:
• Hold the required reserve ratio determined by
Central Bank.
If required reserve ratio (rr) is 15%, then in
equilibrium
(Reserves/ Deposits)*100 ratio=15 %.
e.g. If Total Deposits are 2000 billion TL, then
reserves need to be 300 billion TL.
(Reserves/ Deposits)*100 ratio=(300/2000)*100=15 %
A new deposit comes into Bank One
Change Assets
Reserves
Change Liabilities
+1000
Deposits
+1000
+1000
Total Liabilities +1000
Loans
Total Assets
Bank One uses this new deposits in
giving out new loans
Change Assets
Change Liabilities
Reserves
+ 150
Loans
+ 850
Total Assets
+1000
Deposits
+1000
Total Liabilities +1000
(Reserves/deposits)*100= 15 %.
Result: Creates a new loan equal to 850.
The new loan comes back to Bank Two
Change Assets
Reserves
Change Liabilities
+850
Deposits
+850
+850
Total Liabilities +850
Loans
Total Assets
Change Assets
Change Liabilities
Reserves
+127.5 (850*0.15)
Loans
+722.5 (850*0.85)
Total Assets
+850
Deposits
+850
Total Liabilities +850
New loans of 722.5 TL are created by Bank Two
This will repeat ∞ times
• Total change in the deposits:
1000+ (0.85*1000)+(0.85*1000)2+(0.85*1000)3+…
(0.85*1000)∞
1
1
=
= 6.67
• Total change =
1! 0.85 0.15
• Change in total deposits= 1 *inital change in deposits
RR
Money supply
• Money market
• Tools to increase the
MS
1) Discount rate increase,
2) Reserve requirement
ratio decrease,
3) Open Market
Operations (Buy
bonds)
I
Q of money
Money demand
• Money market
• Types of Money
demand
1) Transaction demand,
2) Speculative demand,
3) Precautionary
demand,
I
Q of money
• MD= L(Y, i) or
• MD= 5*Y – 3*i
Money demand
• Money market
• If Y increases, then MD
curve shifts to the right
I
• MD= L(Y, i) or
• MD= 5*Y – 3*i
Q of money
Money market equilibrium
• Money market
MS=MD
I
• Money supply
MS= 1000
Q of money
• Money demand
MD= L(Y, i) or
MD= 5*Y – 3*I
(For a given Y level you will
be able to determine
equilibrium interest rate)
Money market equilibrium
• Money market
MS=MD
I
• Money supply
MS= 1000
Q of money
• Money demand
MD= L(Y, i) or
MD= 5*Y – 3*I
(For a given Y level you will
be able to determine
equilibrium interest rate)
Central Bank Balance sheet
Assets
Liabilities
FX and Gold Reserves
Currency in Circulation
Government
Required Reserves
Open Market Operations
Free Reserves
Other
Capital
Central Bank (TCMB) Balance Sheet
Central Bank
Central Bank
Determination of output
• Equilibrium in
1. GOODS and SERVICES Market and
2. MONEY Market
(Demand side of the economy)
Goods and Money Markets
What is in the model?
GOODS MARKET
• The AEd= Y equality
MONEY MARKET
• MD=MS equality
• Other variables:
Cd, Id, Gd, NXd, T, YD,
-----------------------------IS Curve
• Other variables:
Y, i
-------------------------------LM Curve
IS – LM model
i
• Goods market
• Money Market
i
IS
LM
Y
Y
IS curve
IS-LM equilibrium
• Equilibrium in both markets
IS
i
LM
Y
IS-LM equilibrium
• Expansionary Monetary Policy
IS
i
LM
Y
IS-LM equilibrium
• Expansionary Fiscal Policy:
IS
i
LM
Y
Mathematical model of the IS-LM
• See class notes and homework assignment