Download MONEY

MONEY
•
Definition of Money
- money is an intermediary device that facilitates exchange
- includes notes and coin but also other assets such as current and deposit
accounts
- can be distinguished from a barter system
Functions of Money
•
Medium of Exchange
- especially important in a sophisticated economy as barter would be
inefficient
•
Unit of Account
- money provides a means of valuing goods and services
•
A Means of Storing Value (not good in times of inflation)
•
A Means of Deferred Payment
MONEY (con)
•
Forms of Money
- can take many forms e.g. primitive such as rocks, salt and cows to metal such
as gold and silver (commodity money) to fiat currencies such as banknotes,
credit cards and electronic transactions
•
Essential Characteristic of Good Money Medium
- essential requirement is liquidity i.e. that whatever medium is used is readily
accepted
•
Other Desirable Characteristics
- portability i.e. that is should be easy to carry
- durability i.e. that it should remain intact for some time
- heterogeneity i.e. that money issued is accepted as valid
- divisibility i.e. that it should be available in acceptable denominations
MONEY SUPPLY
• Brief History of Money
- rise of modern banking in middle ages
• Components of Money Supply
M0 - cash (notes and coin)
M1 - cash + current accounts (narrow money supply)
M3 - cash + current + deposit accounts (broad money supply)
• Money v Near-Money
- money is readily acceptable in exchange
- near-money represents financial assets closely related to money but
not readily acceptable in exchange
- examples; time deposits, stocks and shares, bills and securities etc.
Definition of Money
• Following entry into the Eurozone, the term used is
“Ireland’s contribution to the Eurozone’s money supply”.
• 2001, € billion
•
Currency
=
318.5
• +
Overnight deposits =
1,744.7
• =
M1
=
2,063.2
• +
Deposit (3 months maturity )
= 2,384.0
• =
M2
=
4,447.1
• + Money market fund shares =
870.5
• =
M3 =
5,327.6
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
FINANCIAL SYSTEM IN IRELAND
•
Central Bank
- this is the coordinating bank responsible for overall management of
the system. It is now incorporated with the European System of
Central Banks (ESCB)
•
Associated (Commercial) Banks
- these are the general retail banks dealing directly with the public
(Bank of Ireland, Allied Irish Banks, Ulster Bank (owned by Royal Bank of
Scotland) and Danske Bank (formerly Irish National Bank)
•
Merchant (Investment) Banks
- these are wholesale business banks and often subsidiaries of the main
Associated Banks (Investment Bank of Ireland, Allied Irish Investment
Bank, Guinness Mahon etc.)
•
Finance (Industrial) Banks
- these again are often subsidiaries of the main banks and deal with
smaller business (Bank of Ireland Finance, Allied Irish Finance, UDT etc)
FINANCIAL SYSTEM IN IRELAND (con)
•
Other Financial Institutions
- these comprise other larger amalgamations such as Permanent TSB (formerly Irish
Life Permanent) and First Active (taken over and now amalgamated with Ulster Bank)
and miscellaneous smaller banks
Anglo Irish Bank (first nationalised as IBRC and now in liquidation) started from
being a small bank in the 80’s to rival the two main banks in size before its recent
collapse
•
Building Societies (EBS)
- many of these have now become more widely diversified and have merged
with other financial institutions companies. EBS is the most prominent
survivor and will the taken over by another financial institution
Irish Nationwide made huge looses during the property bubble and like Anglo
Irish and now in liquidation (as component of IBRC)
•
Insurance Cos.
- these include general (e.g. Axa and Liberty Insurance - formerly Quinn Insurance)
and life (e.g. Norwich and Irish Life - now recently sold to a Canadian insurance co)
•
Post Office Savings Bank
- deals with smaller savings , though now given an expanded role
FINANCIAL SYSTEM IN IRELAND (con)
• Credit Unions
- operate on a voluntary basis ; however because of their size now
getting more commercialised in approach
• Money Market
- deals with short term loans of less than 1 yrs. duration; much used
by financial institutions
• Capital Market
- Main institution here the Stock Exchange which trades in
Government Gilts and company equities
• Other Markets
- foreign exchange, futures, hedge funds etc.
• Financial Regulator (formerly IFSRA) etc
• Brokers
CENTRAL BANK
General functions
•
Issuance of currency
- The Central Bank normally has complete control over this function. However
in some countries commercial banks also issue notes e.g. Northern Ireland and
Scotland. This can lead to a problem where such notes are not recognised
elsewhere in the UK
•
Management of Exchange Rates
- The Central Bank has power to (artificially) influence the exchange rate of a
currency. For example if a currency e.g. sterling is deemed too weak, the
Central Bank (Bank of England) could use other reserve currencies such as
euros and dollars to buy sterling on the foreign exchange markets. This
would increase the demand for sterling and thereby its price
•
Management of Gold Reserves
- Though it is a relic of the past when commodity money was used Central
Banks still have gold in their reserves which they are entrusted to guard safely
CENTRAL BANK (con)
Government Bank
• Holder of Government account
- just as a commercial bank acts for the public, the Central Bank acts for the
Government holding (and managing) its very large account
•
Management of Debt
- The Government will generally require to borrow money which can be raised
through the issuing of various types of government securities (gilts). The
Central Bank generally manage this function though for some years now in
Ireland it has been carried out by a specialist body - the NTMA (National
Treasury Management Agency).
•
Advises on economic policy
- A considerable amount of research into economic developments in the
economy is carried out by the Central Bank. It then advises the Government
(usually advocating prudence and caution) in its conduct of economic policy.
This advice (in Ireland) is contained in the Central Bank Bulletin (published
each quarter).
CENTRAL BANK (con)
Bankers Bank
• Licensing and supervising authority
- In order to operate a bank must obtain a license that is issued by the Central Bank which
can be taken away in the case of misconduct. Also the Central Bank is generally entrusted
with the day to day supervision of the financial system. In Ireland another special body which is however closely associated with the Central Bank - has been set up for this
purpose. It is called the Irish Financial Services Regulatory Authority (IFSRA) or now more
simply the Financial Regulator. Because of huge failures in regulating the banks during the
property boom this function has now been reincorporated within the Central Bank (Central
Bank and Financial Services Authority of Ireland). European regulation has been of a
somewhat general nature (e.g. capital requirement) and geared to stability of individual
banks rather than overall systemic risks of failure
•
Holds Deposits of Financial Institutions
- Banks hold their own accounts with the Central Bank. At the end of each day they settle up
their own debts with each other through cheques drawn on these accounts (clearing
accounts).
Also for security reasons they need to minimise the amount of cash kept on the premises. So
most of this cash is held for safe keeping with the Central Bank
•
Sets reserve requirements
- Though vital for meeting customer requirements, the holding of cash is not profitable for
banks. Thus there is a need for reserve ratios whereby they are legally required to hold a
certain percentage of their reserves in cash. This ratio is set by the Central Bank.
Reserve ratios of banks now arguably far too low 1.5% - 2.5% of cash reserves
CENTRAL BANK (con)
•
Provides Lending Facility
- The Central Bank also provides a lending facility for the banks which
enables them to obtain additional liquidity if in danger of running short of
cash. The "Bank Rate" or Minimum Lending Rate is the rate of interest
charged by the Central Bank for this purpose and can represent an important
use of monetary policy.
Though the Central Bank can act as "lender of last resort" in a dire
emergency, normally this is not exercised with banks expected to finance most
of their liquidity needs from the money markets. However in the recent
financial crisis in Ireland huge resort to this facility has been required by the
Irish banks who effectively are not able to borrow from other sources. The
ECB has now withdrawn unconditional support in this regard thereby forcing
Ireland into the recent EU/IMF bailout (where effectively money for the banks
will be provided at a much higher interest rate)
•
Applies Additional Measures when Required
- The Central Bank can call for additional deposits to be made with it (for
example when too much credit is extended). Also in certain cases it may
impose penalty restrictions on banks for extending too much credit.
MONETARY POLICY
Central Bank Responsible for Monetary Policy: Key elements –
1.
Control of money supply. It is important to control the amount of money in circulation. Though
putting extra money into circulation can stimulate economic activity, too much money can lead to
inflation. This in fact is the central means used by the ECB with the goal to prevent average
inflation in the Eurozone from rising above 2%. The term “quantitative easing - now widely used
in the US - refers to an increase in the money supply
2.
Changing the interest rate. Interest rates throughout the financial sector are closely related to
each other. Therefore if the Central Bank lowers its own rate this usually leads to a general
reduction in interest rates which stimulates economic activity (through additional investment and
consumer spending). One of the problems with the current credit squeeze is that a marked
disparity has opened up as between the Central Bank rate which is close to zero, and other market
interest rates (thus reducing the power of the Central Bank to markedly influence situation)
3.
Managing the exchange rate. The value of the exchange rate with other currencies is very
important as it affects trade. For example due to the higher value of the euro in recent years
against sterling, it is now cheaper to import goods from the UK (and to visit there on holiday).
However it is more expensive to export goods into the UK market. Though this is a very important
issue currently for the Irish economy, the ECB does not generally attempt to influence exchange
rate
4.
Other measures. Formerly credit controls were widely used in Ireland, though with the single
financial market in Europe these are no longer used (a failure which has had disastrous
consequences. However other measures such as reserve ratios and banking legislation can also
impact on monetary policy.
EUROPEAN CENTRAL BANK
Since 1999 all national Central Banks in the EU are part of the European
system.
This federal arrangement is referred to as the European System of Central
Banks (ECSB). The system embracing the 17 member countries of the
Eurozone is referred to as the Eurosystem with decisions taken by an executive
board - referred to as the European Central Bank (ECB)
Most of the traditional functions of national Central Banks are now controlled
by the ECB.
•
Currency i.e. the Euro is now issued through the ECB; our national Central
Bank then acts as an agent for the ECB in printing notes and minting coins for
the Irish economy
•
The power to control exchange rates for Eurozone countries has now ceased
•
The terms (interest rate) on which lending to other banks is now set is through
the European Central Bank. Therefore the ECB can control the overall amount
of credit extended
•
The European Central Bank also controls the reserve ratio of the banks.
EUROPEAN CENTRAL BANK (con)
However the national Central Bank still can play a regulatory role though this was
exercised during the Celtic Tiger through the Financial Regulator that was to
a degree independent of the Central Bank. Due to the great failures to deal with
the emerging bank problems at this time it has now been reincorporated within the
Central Bank and given a significant increase in resources. New EU supervisory framework
for the banking system to be introduced in 2013
•
The National Central Bank still acts as banker to the Government.
•
However the amount which can be lent out (and the manner in which borrowing takes
place) is again controlled at a European level
•
So overall now the role of the national Central Banks (within the EMU) is to carry out
the policy that has been agreed at a European level
•
In other words independent monetary policy - with respect to money supply, interest
rates or exchange rates - has now ceased for Eurozone countries
•
Recently arising out of the severe financial crisis in Ireland, the ECB has played a
prominent role in terms of providing much additional liquidity to the banking system
SUPPLY OF MONEY
•
The money supply represents the amount of money in circulation. There are
different ways of measuring the amount of money (the precise components of
which keep changing). As of now the following definitions apply in the Eurozone
1. M0 - the amount of cash (i.e. notes and coin).
2. M1 - the amount of cash + current accounts which is referred to as the narrow money
supply. Current accounts are included here as they provide the basis for payment by
cheque, debit (e.g. laser) or credit card. Also overnight deposits included!
3. M2 - this includes more illiquid assets such as time deposits that are redeemable
within two years
4. M3 - Added now to the previous total are further debt security instruments,
repurchase agreements and money market funds. This is referred to as the broad
money supply.
However there are many other definitions of the money supply depending on which
financial assets are included. Due to changing technology and the creation of new
financial instruments distinctions as between money and near-money have become
more arbitrary and the precise form of the money supply used owes more to
pragmatic than theoretical distinctions
CONTROLLING MONEY SUPPLY
•
The importance of the money supply is that there is very close link between it and the
inflation rate (the quantity theory of money).
MV = TP (M = money supply, V = velocity of circulation, T = level of transactions, P
= price level)
- If too much money is in circulation prices will rise.
- By the same token if the money supply is reduced this should help to
reduce the level of inflation.
•
Measures to reduce money supply generally operate by decreasing the amount of
liquidity (i.e. cash) in the banking system. Because of the reserve requirements legally
imposed on the banks, this means that they can create less credit (thereby reducing the
amount of money in circulation).
•
The usual way of changing this liquidity is through open-market operations (i.e. the
buying and selling of government securities).
When these are sold to the banks they have to part with cash (which reduces liquidity).
In reverse manner when these are bought back from the banks it increases liquidity
leading in turn to more money in circulation.
One of the big problems of course with the present credit squeeze is that the normal
monetary means of influencing credit are simply not working due to a sharp reduction
in confidence in the overall system.
Controlling the Money Supply
• Central Bank can influence the rate of change in the money
supply by:
• 1. Open market operations. Most important.
Buy government bonds  Increase Ms.
Sell government bonds  decrease Ms.
• 2. Changing the reserve requirement.
An increase reduces the money multiplier and vice versa.
• 3. Main refinancing operation (MRO).
Commercial banks have a “liquidity deficit”. Must borrow
from the ECB for reserves and currency.
• MRO is the rate the ECB charges on loans.
Changes in this rate will be passed on by the commercial
banks. ECB can dictate interest rates.
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
Continued
• In practice, the money supply can be difficult to control.
• Also the problem of which definition of the Ms should the CB attempt to
control.
• The narrow or broad definition?
• In most countries, M1, M2 and M3 do not necessarily move together.
• ECB attempts to constrain M3 to an annual growth rate of 4.5%.
• So far the ECB has been reasonably successful.
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
January
1999
2000
2001
2002
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
July
June
May
April
March
February
January
December
November
October
September
August
July
June
May
April
March
February
January
December
November
October
September
August
July
June
May
April
March
February
January
December
November
October
September
August
July
June
May
14
April
March
February
Annual % change
Money supply in the Eurozone
16
M1
M2
M3
12
10
8
6
4
2
0
CREDIT CREATION
• Banks can in fact create money. This is due to the fact that they are
required to keep only a small amount of what is deposited with them in
the form of cash
• Imagine for example a monopoly bank, where all money that people
receive is deposited in a branch of this bank. Also assume for
convenience that the reserve requirement (i.e. the proportion which
must be kept in cash) is 10%
Therefore if €100 is deposited in a branch the bank can lend out €90
which is then deposited in some other branch. 90% of this deposit can
in turn be lent out (€81) which is again deposited and then in turn 90%
of the resulting deposit and so on
It can easily be proved that ultimately €1000 will be generated as a
result of this initial deposit
So the credit multiplier here 10 i.e. 1/(1/10) which is one divided by
the original fraction which must be saved.
CREDIT MULTIPLIER IN PRACTICE
• However in practice the credit multiplier would not be so large
1) People do not necessarily deposit money received in banks. Some
for example may be hoarded or other money go into non-bank
institutions.
2) Money can leak out of the banking system to be deposited in
institutions abroad.
3) Banks do not in fact lend out all spare money in possession. Indeed
nearly half typically goes into a range of financial investments. One of
the big problems now is that because of a severe bad debt problem
banks have a vested interested in maintaining deposits received thus
restricting credit creation
4) The Central Bank will tend to regulate the overall amount of credit
created
5) The credit multiplier can work downwards as well as upwards i.e.
when the amount of deposits placed in banks falls
CREDIT MULTIPLIER (con)
• One of the big problems in recent years with financial systems
generally related to the ease in which credit could be created. This was
due to a number of reasons
- philosophy of deregulation with respect to financial institutions
generally giving them a much greater degree of freedom
- low liquidity ratios with relation to such institutions
- low interest rates internationally creating a greater demand of credit
- access to international money markets making it easier for banks to
obtain additional liquidity
- lack of adequate banking supervision
In Ireland situation was greatly exacerbated by the concentration of so
much lending in a massive domestic property bubble
DEMAND FOR MONEY
•
•
As we know there is a demand for goods and services which is related to their
price.
Likewise there is a demand for money which is related to its price (i.e. the
interest rate).
Thus as the interest rate rises, the demand for money will decrease;
conversely, when the rate of interest falls, the demand for money will increase.
In other words normally there is not much of an incentive to invest in other
financial assets when the interest rate (as at present) is very low. However
because of fears of recession people are now willing to save a considerable
amount (even at low interest rates). So in the current climate liquidity
preference has greatly decreased (causing a shift to the left in the demand for
money curve).
People have a demand for money (i.e. a desire to hold cash rather than other
financial assets) arising from three motives
1. Transactions motive: there is a need for cash to carry out transactions at the
consumer, firm and governmental level
2. Precautionary motive: there is a need for cash to carry out unexpected
expenditures (This could especially apply to current bank practice!)
3. Speculative motive: there is a need for cash - especially in banks and
insurance cos. - to buy financial assets (such as government bonds) at the
appropriate time.
DETERMINATION OF INTEREST RATES
• Just as the equilibrium price of goods and services is determined where
supply = demand, likewise the equilibrium price of money (i.e. the
interest rate) is determined where the supply of money = the demand
• Again just a change in the supply (or demand) of a good will change
its price, likewise a change in the supply (or demand) for money will
change the interest rate
• If the supply of money for example is increased, this will result in a
fall in the interest rate. Lower interest rates then will tend to stimulate
investment and consumer spending leading to expansion in the
economy and growth in employment.
• If the supply of money is reduced e.g. to bring down inflation, this will
lead to an increase in the interest rate which unfortunately may lead to
a slowdown in economic growth.
Thus it can be difficult to control inflation and maintain employment at
the same time.
Equilibrium in the money market
Rate of interest
MS
re
L
O
Me
Money
The demand for and supply of money
Rate of interest
M S'
MS
r2
r1
L
O
Q2
Q1
Money
A SPECTRUM OF INTEREST RATES
• The Central Bank Rate (Minimum Lending Rate) is the rate which the
Central Bank charges its own lenders (i.e. financial institutions).
• Because this influences the cost of lending by the institutions
themselves this then affects the whole spectrum of rates throughout the
economy
• Some of the important lending rates would relate to interest rates on
various bank loans, mortgage rates, money market rates and rates on
government bonds and other securities
• Important deposit rates relate to what banks offer on demand deposits
and other time deposits
• Various factors affect calculation of rates - rate of inflation, no. of
conversion periods and whether true or instalment rates
Increase in GNP
M3
i2
i1
Md 2
Increase in
GNP leads to
an increase
in interest
rates.
Md 1
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
INTEREST RATES IN PRACTICE
• Distinction as between real and nominal rate: inflation has a key effect
on nominal rates (In certain situations real rates may be negative!)
• Due to the close connection as between the major financial markets,
interest rates in one market tend to be strongly influenced by interest
rates in another (due to the risk of destabilising capital flows): thus
global conditions are very important in determining interest rate levels.
At present developments in US financial markets are exercising a
major influence on international markets generally
• Exchange rates can play an important role: when an exchange rate is
strong, interest rates can be lower than would otherwise be the case
• Economic uncertainty can lead to a weakening of exchange rate (and
possible need for consequent increase in interest rates)
• Distinction as between saving and borrowing rates, short and long
term, way interest rates are calculated e.g. APR or flat rates, timing of
interest repayments etc.
INTEREST RATES IN IRELAND
• As a small open economy, interest rates set by ECB can often be
unsuited to domestic economic conditions. This was especially the
case during the Celtic Tiger boom where low interest rates greatly
accentuated the rapid increase in credit generated
• Keynes believed that in a recession interest rates have a limited impact
on economic activity. Thus the current very low ECB rate may have
little impact in stimulating a recovery in the economy
• Likewise, other investment and consumer spending may not greatly
benefit
• In effect in a severe recession the demand for money greatly increases
and becomes insensitive to a fall in interest rate; also a liquidity trap
arises at low rates; in any any case there is a limit to how low a rate
may go
• Long term benefits could however arise as the reduction in expenditure
will lead to a drop in inflation: this could help to reduce costs, improve
competitiveness and strengthen exchange rate
• Also savers may benefit from higher (real) interest rates though this in
turn is likely to lead to reduced spending at a time of recession
RECENT FINANCIAL PROBLEMS
•
The recent international financial crisis has highlighted fundamental weaknesses in
the overall system
•
Since the early 90’s increasing deregulation of banking activity has been in evidence
•
Opportunities for speculative profits especially pertain to financial products
•
In order to reduce risk and thereby increase opportunities for profits, effectively a
complex pyramid scheme of financial products has been created bearing no clear
relationship with the real economic world of goods and services
•
The rapid extension of credit led to a situation where many were enabled to
effectively live beyond their means; justifying such a situation in overall economic
terms thereby required the creation of a bubble economy where the value of assets
used as collateral for loans became heavily inflated
•
Due to the rapid improvement in technology esp. IT and communications, a loss in
confidence anywhere in system can become quickly magnified in global financial
markets thus greatly increasing the threat of systemic failure
IRISH FINANCIAL PERSPECTIVE
•
Problems with Irish banks were greatly compounded by a prolonged property
bubble
•
In the latter phases of this cycle, extensive loans were made to property
developers. Contrary to past behaviour when such lending would have been
financed out of customers’ deposits a high proportion of such lending was
made through additional money financed from international money markets
using highly inflated existing property values as collateral for loans
•
For a variety of reasons financial regulation has been especially weak in
Ireland
- historic close links as between Central Bank and main financial institutions
- desire to more readily attract through easy regulation multinational
companies and financial institutions to Ireland
- confusing split in responsibilities between Central Bank, Financial Regulator
and Competition Authority
Former malpractice of major banks not properly punished
•
•
Extremely rapid growth of Anglo Irish Bank led to attempted emulation in
lending by other institutions
PRESENT POSITION
•
When Irish financial system was threatened with collapse following international
upheavals in Sept. 2008, Government introduced first a limited and then an unlimited
guarantee of bank deposits for a certain time period
•
The blanket guarantee of the banking system by the Gov. in Sept. 2008 let to a banking
debt crisis becoming a sovereign crisis. Subsequent requests by the government to
“burn” bondholders was stoutly resisted by the ECB leading to a socialisation of the
banking debt with respect to domestic taxpayers
•
Though not really of systemic importance to system, Government nationalised Anglo
Irish Bank (which had massive liabilities)
•
Tens of billions of euro have already been pumped into main banks (esp. Anglo Irish)
and AIB and Bank of Ireland in an initial attempt at recapitalisation. However further
funding - likely to be extensive - is still required (mainly by Government)
•
A massive rescue scheme for banks was been launched called NAMA.
The most vulnerable loans of the banks (relating to toxic development deals) have been
transferred to this agency.
However the future operation of NAMA itself raises many important problems
PROBLEMS WITH NAMA
•
The Government offered €54 bl. For loans with an estimated market value of €47 bl.
This represents a premium therefore of €7 bl. (to be borne by taxpayer)
Since the initial announcement estimated market value of loans fell considerably
further. So the haircut imposed by NAMA on loans has been much more extensive than
anticipated thus weakening the capital position of the banks further
•
Most of the bank loans have not been transferred to NAMA; big problems are now
arising with many of these loans esp. household mortgages
•
Considerable confusion exists as to the manner of operation by NAMA. Indeed strictly
speaking it will be controlled by a specials SPV (Special Purpose Vehicle ) with the
majority of shares owned by private institutions
•
Though NAMA is supposed to be designed to increase credit extended by banks to
private sector, this in fact has not happened and is highly unlikely in the near future
•
The secretive manner in which NAMA operates leads to possibility of significant abuses
arising
•
Little has been done to address the widespread sense of social injustice arising from
bank management failures
RECENT DEVELOPMENTS
•
Losses in Irish banks eventually rose well in excess of even the most
pessimistic forecasts
•
Massive bank debts have been compounded by a substantial hole in budgetary
finances significantly increasing overall debt problem
•
With private debt also at a unusually high level the overall burden has raised
doubts about Ireland’s ability to eventually repay such debt. A growing
problem with respect to mortgage debt has raised renewed fears regarding the
adequate capitalisation of the banks
•
Ireland’s problems have become tied in with an overall European problem
with the future of the Euro now very much under threat
•
The recent EU/IMF package to help Ireland is somewhat misconceived as it it
is actually creating even more debt in a bid to ensure repayment of existing
debt. In any case the assumptions on which it is based are not likely to be
realised
•
The EU’s response to the growing problem has been so inadequate that it
increases fears with respect to the possibility of widespread financial collapse
throughout Europe
RECENT DEVELOPMENTS
•
Despite several austere budgets since 2008, the budget deficit debt remains
stubbornly high at 9% of GDP
•
Though exports have performed extraordinarily well prospects for growth in
immediate future seem limited due to recession in many prominent trading
partners
•
Government at present trying to renegotiate promissory note payments in
relation to Anglo Irish Bank. Present proposals centre on lengthening the
repayment periods thereby substantially reducing annual payments
•
Likewise Government is attempting to obtain substantial repayment for
taxpayers’ money poured into AIB and Bank of Ireland. Though it has been
conceded that we are a special case little progress has yet been made on this
issue
Keynesian Macroeconomic Model
• How does a change in the money supply impact on the key
macroeconomic variables?
1. The supply and demand for money determines the nominal
interest rate.
2. Changes in the real interest rate affects investment
expenditure (IE).
3. Changes in IE, in turn, determine the position of the
aggregate demand curve.
4. Changes in the AD curve affects the growth rate,
unemployment and inflation.
Note that the IE curve represents the link between the money
market and the goods and services market.
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
Keynesian Macroeconomic Model
• How does a change in the money supply impact on the key
macroeconomic variables?
• 1. The supply and demand for money determines the interest
rate.
• 2. Changes in the interest rate affects IE.
• 3. Changes in IE, in turn, determine the position of the
aggregate demand curve.
• 4. Changes in the AD curve affects the growth rate,
unemployment and inflation.
• Note that the IE curve represents the link between the money
market and the goods and services market.
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
Monetary policy
Natural
real
GNP
Price level
AS 1
P
Goods and
services
market
A
1
AD1
Real GNP
Real
interest
rate
Interest sensitive
expenditure (IE) curve
r
1
IE
Nominal
interest
rate
€ billions
1
Ms
Money market
i1
Md
£ millions
 Leddin and Walsh Macroeconomy of the Eurozone, 2003