Download The Monetary System

© 2007 Thomson South-Western
The Goals of chapter 29
• To examine the role of money in the economy.
• To provide the background for the following
analysis:
-- the long-run effects of changes in the
quantity of money (Inflation is a monetary
phenomenon.)
-- the short-run effects of changes in the
quantity of money on unemployment rate and
economic growth rate.
© 2007 Thomson South-Western
THE MEANING OF MONEY
•Money(貨幣) is the set of assets in an economy
that people regularly use to buy goods and services
from other people. That is, goods and services buy
money, and money buys goods and services in
monetary economy.
•Imagine that there was no item in the economy
widely accepted in exchange for goods and service.
People would have to rely on barter exchanges to
obtain the things they need. That is, good and
service buy goods and service in the barter
economy.
© 2007 Thomson South-Western
The Functions of Money
• Money has three functions in the economy:
– Medium of exchange (交易媒介)
– Unit of account (計價單位)
– Store of value (價值儲藏)
© 2007 Thomson South-Western
The Functions of Money
• Medium of Exchange
– A medium of exchange is an item that buyers give
to sellers when they want to purchase goods and
services.
– A medium of exchange is anything that is readily
acceptable as payment.
© 2007 Thomson South-Western
The Functions of Money
• Unit of Account
– A unit of account is the yardstick people use to
post prices and record debts.
• Store of Value
– A store of value is an item that people can use to
transfer purchasing power from the present to the
future.
© 2007 Thomson South-Western
The Functions of Money
• Liquidity (流動性)is the ease with which an
asset can be converted into the economy’s
medium of exchange.
© 2007 Thomson South-Western
The Kinds of Money
• Commodity money (商品貨幣)takes the form
of a commodity with intrinsic value.
– Examples: Gold, silver, cigarettes.
• Fiat money is used as money because of
government decree.
– It does not have intrinsic value.
– Examples: Coins, currency, check deposits.
– The acceptance depends as much on expectations
and social convention as on government decree.
© 2007 Thomson South-Western
The Kinds of Money
• Even through fiat money has no intrinsic value,
when one person decides to hold fiat money,
she is confident that, in the future, another
person will accept the money, in exchange for
something that she does value. That is, the
value of fiat money is determined by the
confidence.
© 2007 Thomson South-Western
Money in the U.S. Economy
• The quantity of money circulating in the
economy, called the money stock(貨幣存量),
has a powerful influence on economic
activities.
• Currency (現金)is the paper bills and coins in
the hands of the public.
• Demand deposits (活期存款)are balances in
bank accounts that depositors can access on
demand by writing a check or using ATM.
© 2007 Thomson South-Western
台灣貨幣定義
• M1A
M1A=通貨發行淨額+支票存額+活期存款
• M1B (1979.12.31後始有)
M1B=M1A+活期儲蓄存款
• M2
M2=M1B+定期存款+定期儲蓄存款+外幣存款
© 2007 Thomson South-Western
Two Measures of the Money Stock for the U.S. Economy
Billions
of Dollars
M2
$6,398
• Savings deposits
• Small time deposits
• Money market
mutual funds
• A few minor categories
($5,035 billion)
M1
$1,363
0
• Demand deposits
• Traveler’
s checks
• Other checkable deposits
($664 billion)
• Currency
($699 billion)
• Everything in M1
($1,363 billion)
© 2007 Thomson South-Western
台灣貨幣存量:1980-2006
3500000
台灣M1A
3000000
2500000
2000000
1500000
1000000
M1A
500000
0
1980M01 1983M03 1986M05 1989M07 1992M09 1995M11 1999M01 2002M03 2005M05 2008M07
© 2007 Thomson South-Western
台灣貨幣存量:1980-2006
9000000
台灣M1B
8000000
7000000
6000000
5000000
4000000
3000000
2000000
M1B
1000000
0
1980M01 1983M04 1986M07 1989M10 1993M01 1996M04 1999M07 2002M10 2006M01
© 2007 Thomson South-Western
台灣貨幣存量:1980-2006
台灣M2
30000000
25000000
20000000
15000000
10000000
5000000
M2
0
1980M01 1983M02 1986M03 1989M04 1992M05 1995M06 1998M07 2001M08 2004M09 2007M10
© 2007 Thomson South-Western
Where Is All The Currency?
• In 2004 there was $699 billion of U.S.
currency outstanding.
– That is $3,134 in currency per adult.
• Who is holding all this currency?
No one knows for sure, but there are two
plausible explanations:
– Currency held abroad
– Currency held by illegal entities
© 2007 Thomson South-Western
THE FEDERAL RESERVE SYSTEM
• Whenever an economy relies on a system of
fiat money, some agency must be responsible
for regulating the system.
• The Federal Reserve (Fed) serves as the
central bank in U.S.A.
– It is designed to oversee the banking system.
– It regulates the quantity of money in the economy.
© 2007 Thomson South-Western
THE FEDERAL RESERVE SYSTEM
• The Fed was created in 1913 after a series of
bank failures convinced Congress that the
United States needed a central bank to ensure
the health of the nation’s banking system.
© 2007 Thomson South-Western
THE FEDERAL RESERVE SYSTEM
• The primary elements in the Federal Reserve
System are:
– The Board of Governors
– The 12 Regional Federal Reserve Banks
– The Federal Open Market Committee
© 2007 Thomson South-Western
The Fed’s Organization
• The Fed is run by a Board of Governors, which
has seven members appointed by the president
and confirmed by the Senate.
• Among the seven members, the most
important is the chairman of Board of
Governors.
– The chairman directs the Fed staff, presides over
board meetings, and testifies about Fed policy in
front of Congressional Committees.
© 2007 Thomson South-Western
The Fed’s Organization
• The Board of Governors
– Serve staggered 14-year terms so that one comes
vacant every two years.
– President appoints a member as chairman to serve
a four-year term.
© 2007 Thomson South-Western
The Fed’s Organization
• The Federal Reserve Banks
– 12 district banks
– Nine directors in each regional FRB.
• Three appointed by the Board of Governors.
• Six are elected by the commercial banks in the district.
• The directors appoint the district president,
which is approved by the Board of Governors.
• The New York Fed implements some of the
Fed’s most important policy decisions.
© 2007 Thomson South-Western
The Federal Reserve System
© 2007 Thomson South-Western
The Fed’s Organization
• Three Primary Functions of the Fed
– Regulates banks to ensure they follow federal laws
intended to promote safe and sound banking
practices.
– Acts as a banker’s bank, making loans to banks and
as a lender of last resort.
– Conducts monetary policy by controlling the
money supply.
© 2007 Thomson South-Western
The Federal Open Market Committee
• It serves as the main policy-making organ of
the Federal Reserve System.
• It meets approximately every six weeks to
review the economy.
© 2007 Thomson South-Western
The Federal Open Market Committee
• The Federal Open Market Committee (聯邦公
開市場操作委員會，FOMC) is made up of
the following voting members:
– The chairman of Fed and the other six members of
the Board of Governors.
– The president of the Federal Reserve Bank of New
York.
– The presidents of the other regional Federal
Reserve banks (four vote on a yearly rotating
basis).
© 2007 Thomson South-Western
The Federal Open Market Committee
• Monetary policy is conducted by the Federal
Open Market Committee.
– The money supply refers to the quantity of money
circulating in the economy.
– Monetary policy is the setting of the money supply
by policymakers in the central bank.
© 2007 Thomson South-Western
The Federal Open Market Committee
• Open-Market Operations
– The money supply is the quantity of money
available in the economy.
– The primary way in which the Fed changes the
money supply is through open-market operations.
– The Fed purchases and sells U.S. government
bonds.
© 2007 Thomson South-Western
The Federal Open Market Committee
• The power of central bank rests on the two
principles: prices rise when central bank prints
too much money and society faces a short-run
trade-off between inflation and unemployment.
• Open-Market Operations
– To increase the money supply, the Fed buys
government bonds from the public.
– To decrease the money supply, the Fed sells
government bonds to the public.
© 2007 Thomson South-Western
我國央行經營目標
• 促進金融穩定
• 健全銀行業務
• 維護對內及對外幣值之穩定
• 於上列目標範圍內，協助經濟發展
© 2007 Thomson South-Western
我國央行決策機構
• 央行設理事會，置理事11人至15人，其中
央行總裁、財政部長及經濟部長為當然理
事，並為常務理事外，理事中應有實際經
營農業、工商業、銀行業至少各1人。
© 2007 Thomson South-Western
我國央行理事會的職權
• 有關貨幣、信用及外匯政策事項之審議
• 央行資本額調整之審議
• 央行業務計畫之核定
• 央行預算、決算之審議
• 央行重要章則之審議及核定
• 央行各分行設立及撤銷之審議
• 央行各局、處、會正副主管及分行經理任免之核定
© 2007 Thomson South-Western
BANKS AND THE MONEY SUPPLY
• Banks can influence
the quantity of
demand deposits in
the economy and the
money supply.
© 2007 Thomson South-Western
BANKS AND THE MONEY SUPPLY
• Reserves (準備)are deposits that banks have
received but have not loaned out.
• In a fractional-reserve banking system, banks
hold a fraction of the money deposited (部分
準備制銀行體系) as reserves and lend out the
rest.
© 2007 Thomson South-Western
BANKS AND THE MONEY SUPPLY
• The reserve ratio(準
備率，以R表示) is
the fraction of
deposits that banks
hold as reserves.
© 2007 Thomson South-Western
Money Creation with Fractional-Reserve
Banking
• When a bank makes a loan from its reserves,
the money supply increases.
• The money supply is affected by the amount
deposited in banks and the amount that banks
loan.
– Deposits into a bank are recorded liabilities.
– The fraction of total deposits that a bank has to
keep as reserves is called the reserve ratio.
– Loans become an asset to the bank.
© 2007 Thomson South-Western
Banking Money Creation with FractionalReserve Banking
• This T-Account shows
a bank that…
– accepts deposits,
– keeps a portion
as reserves,
– and lends out
the rest.
• It assumes a
reserve ratio (R)
of 10%.
First National Bank
Assets
Liabilities
Reserves
Deposits
$10.00
$100.00
Loans
$90.00
Total Assets
Total Liabilities
$100.00
$100.00
© 2007 Thomson South-Western
Money Creation with Fractional-Reserve
Banking
• Assume that when one bank loans out money,
that money is generally deposited into another
bank.
• This creates more deposits and more reserves
to be lent out.
• When a bank makes a loan from its reserves,
the money supply increases.
© 2007 Thomson South-Western
The Money Multiplier
• How much money is eventually created by the
new deposit in this economy?
• The money multiplier (貨幣乘數) is the
amount of money the banking system
generates with each dollar of reserves.
© 2007 Thomson South-Western
The Money Multiplier
Increase in the Money Supply = $190.00!
First National Bank
Assets
Reserves
$10.00
Liabilities
Deposits
$100.00
Loans
Second National Bank
Assets
Reserves
$9.00
Liabilities
Deposits
$90.00
Loans
$90.00
Total Assets
Total Liabilities
$100.00
$100.00
$81.00
Total Assets
$90.00
Total Liabilities
$90.00
© 2007 Thomson South-Western
The Money Multiplier
Original deposit = $100.00
• 2nd Natl. Deposit = 90.00 (=.9 x $100.00)
• 3rd Natl. Deposit = 81.00 (=.9 x $ 90.00)
• 4th Natl. Deposit = 72.90 (=.9 x $ 81.00)
• … and on until there are just pennies left to
lend!
• Total money created by this $100.00 deposit is
$1000.00. (= 1/.1 x $100.00)
© 2007 Thomson South-Western
The Money Multiplier
• The money multiplier is the reciprocal of the
reserve ratio (R):
M = 1/R
• Example:
– With a reserve requirement, R = 20% or .2:
– The money multiplier is 1/.2 = 5.
© 2007 Thomson South-Western
The Fed’s Tools of Monetary Control
• The Fed has three tools in its monetary toolbox:
– Open-market operations (公開市場操作)
– Changing the reserve requirement (調整準備率)
– Changing the discount rate (調整貼現率)
© 2007 Thomson South-Western
The Fed’s Tools of Monetary Control
• Open-Market Operations
– The Fed conducts open-market operations when it
buys government bonds from or sells government
bonds to the public:
• When the Fed sells government bonds, the money
supply decreases.
• When the Fed buys government bonds, the money
supply increases.
© 2007 Thomson South-Western
The Fed’s Tools of Monetary Control
• Reserve Requirements
– The Fed also influences the money supply with
reserve requirements.
– Reserve requirements are regulations on the
minimum amount of reserves that banks must hold
against deposits.
© 2007 Thomson South-Western
The Fed’s Tools of Monetary Control
• Changing the Reserve Requirement
– The reserve requirement is the amount (%) of a
bank’s total reserves that may not be loaned out.
– Increasing the reserve requirement decreases the
money supply.
– Decreasing the reserve requirement increases the
money supply.
© 2007 Thomson South-Western
The Fed’s Tools of Monetary Control
• Changing the Discount Rate
– The discount rate is the interest rate the Fed
charges banks for loans.
• Increasing the discount rate decreases the money supply.
• Decreasing the discount rate increases the money supply.
© 2007 Thomson South-Western
Problems in Controlling the Money Supply
• The Fed’s control of the money supply is not
precise.
• The Fed must wrestle with two problems that
arise due to fractional-reserve banking.
– The Fed does not control the amount of money that
households choose to hold as deposits in banks.
– The Fed does not control the amount of money that
bankers choose to lend.
© 2007 Thomson South-Western
央行獨立性指標之編製
• 政治獨立性 (political independence) 係指行政部門與央
行之間從屬關係，任免央行理事主席(或總裁)的程序，財
經首長在央行決策過程中所扮演的角色以及行政部門和央
行兩方官員互動方面以及接觸頻繁程度。此外，衡量央行
政治性獨立程度時，還著重以下因素: 央行理事、理事主席
或總裁的任期，央行所制定的貨幣政策或其他重大決策是
否須由行政部門事先核定方可執行，以及央行的法定經營
目標。
© 2007 Thomson South-Western
央行獨立性指標之編製
• 經濟獨立性 (economic independence) 係指執行貨
幣政策時央行的選擇政策工具時是否受到行政部門所
加諸的外在限制。在實際編製時，經濟上獨立程度是
指央行是否必須直接承購政府公債，央行是否須對政
府短期融通或臨時墊借。
© 2007 Thomson South-Western
Index of central bank independence
CBI
(LVAU)
country
Switzerland
Germany
United States
Denmark
Canada
Netherlands
United Kingdom
Australia
France
Sweden
New Zealand
Italy
Spain
Belgium
Japan
Norway
0.68
0.66
0.51
0.47
0.46
0.42
0.31
0.28
0.27
0.27
0.27
0.22
0.21
0.19
0.16
0.14
Turnover
Rate
Average
Inflation
(1973-88)
Developed Countries
0.13
3.1
0.10
3.4
0.13
6.4
0.05
8.6
0.10
7.2
0.05
4.3
0.10
6.7
n.a.
9.5
0.15
8.2
0.15
8.3
0.15
12.2
0.08
12.5
0.20
12.4
0.13
6.0
0.20
4.5
0.08
8.2
Standard Error
Inflation
(1973-88)
Per Capita Real
GNP Growth Rate
(1973-87)
2.1
2.0
3.3
3.3
2.8
3.2
4.8
2.7
3.5
2.8
3.2
5.4
4.7
3.4
4.1
2.4
1.4
1.8
1.6
1.1
2.8
1.1
2.0
1.4
1.5
1.5
0.7
2.9
1.2
1.5
2.6
3.0
© 2007 Thomson South-Western
Index of central bank independence
CBI
(LVAU)
country
Chile
Argentina
Venzuela
Mexico
Taiwan
Malausia
South Korea
Singapore
Brazil
Thailand
0.49
0.44
0.37
0.36
0.34
0.34
0.32
0.27
0.26
0.26
Turnover
Rate
Average
Inflation
(1973-88)
Standard Error
Inflation
(1973-88)
Developing Countries
0.45
51.8
59.1
0.93
356.7
253.5
0.30
12.7
7.5
0.15
50.2
39.3
0.23
7.2
9.9
0.13
5.1
4.4
0.43
10.9
9.3
0.37
5.4
7.9
n.a.
273.3
203.9
0.20
8.0
6.9
Per Capita Real
GNP Growth Rate
(1973-87)
0.7
-0.5
-0.3
1.2
6.5
3.7
7.2
6.1
2.4
4.9
© 2007 Thomson South-Western
A near perfect negative correlation
between inflation and central bank
independence
© 2007 Thomson South-Western
A strong negative correlation between
inflation variability and central bank
independence
© 2007 Thomson South-Western
No clear relation between GNP growth
and central bank independence
© 2007 Thomson South-Western
No clear relation between the variability of
economic growth and central bank independence
© 2007 Thomson South-Western
No clear relation between per capita economic
growth and central bank independence
© 2007 Thomson South-Western
No clear relation between the variability of per
capita economic growth and central bank
independence
© 2007 Thomson South-Western
Low correlation between unemployment
rate and central bank independence
© 2007 Thomson South-Western
Low correlation between the variability of
unemployment rate and central bank independence
© 2007 Thomson South-Western
No clear relation between real interest
rate and central bank independence
© 2007 Thomson South-Western
Low correlation between the variability of real
interest rate and central bank independence
© 2007 Thomson South-Western
Summary
• The term money refers to assets that people
regularly use to buy goods and services.
• Money serves three functions in an economy:
as a medium of exchange, a unit of account,
and a store of value.
• Commodity money is money that has intrinsic
value.
• Fiat money is money without intrinsic value.
© 2007 Thomson South-Western
Summary
• The Federal Reserve, the central bank of the
United States, regulates the U.S. monetary
system.
• It controls the money supply through openmarket operations or by changing reserve
requirements or the discount rate.
© 2007 Thomson South-Western
Summary
• When banks loan out their deposits, they
increase the quantity of money in the economy.
• Because the Fed cannot control the amount
bankers choose to lend or the amount
households choose to deposit in banks, the
Fed’s control of the money supply is imperfect.
© 2007 Thomson South-Western