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Chapter 11

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Chapter 11

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  1. Chapter 11 The central bank, Depository Institutions, and the Money Supply Process .

  2. The central bank and bank reserve • Loan and deposit expansion by the banking system • The simple multiplier model of the money supply process • Policy implications

  3. Open Market Operations • Open market operations are the buying and selling of government securities by the Fed • open market operations affect the supply of reserves available to depository institutions • the volume of reserves affects the banking system’s ability to extend loans to expand the money supply 公开市场业务:央行在公开市场上买卖政府证券。

  4. Credit Availability Money Supply Reserves Lending Deposit Creation Interest Rates The Money Supply Process Open Market Operations

  5. Open Market Operations • When the Fed buys securities, reserves of depository institutions rise • When the Fed sells securities, reserves of depository institutions fall

  6. Open Market Operations • Suppose the Fed wishes to increases the supply of reserves by $1,000 • the trading desk (交易室)of the New York Fed will buy $1,000 of Treasury securities • the Fed pays for these securities by writing a check • the sellers will deposit these checks into the banking system (assume they use HLT National Bank) • the Fed will credit the bank’s account at the Fed

  7. Open Market Operations • After the open market purchase • the Fed has $1,000 more in securities and the dealers have $1,000 less in securities • the public gets $1,000 in checks from the Fed • these deposits are assts to the public and a liability to the Fed • After the checks are returned to the Fed • the bank has $1,000 more in its account at the Fed

  8. The Effect of Open Market Operations on Reserves

  9. Discount Loans • The Fed controls the amount of required reserves that depository institutions must hold • If depository institutions cannot meet their required reserves, they may borrow reserves at the discount window • the interest rate charged by the Fed is called the discount rate

  10. Discount Loans • Changes in the discount lending also affect the volume of reserves in the banking system • when the Fed makes a discount loan, reserve assets increase by the amount of the loan • the effect is the same as an open market purchase • when the loan is repaid, reserve assets fall • the effect is the same as an open market sale

  11. The Effect of Discount Loans on the Monetary Base

  12. Discount Loans • The Fed cannot completely control the amount of borrowing from the discount window • can encourage or discourage borrowing by lowering or raising the discount rate • the Fed can refuse to make a discount loan

  13. Open Market Purchases Increases in Discount Loans Factors that increase reserves: Open Market Sales Decreases in Discount Loans Factors that decrease reserves: Factors That Affect the Reserves of Depository Institutions

  14. Other Factors that Change Reserves • Other factors can affect reserves • The Fed can respond to changes in reserves caused by these other factors with offsetting open market operations 公开市场冲销业务:为了对冲其他因素引起的基础货币的变化,央行在公开市场上买卖政府债券。

  15. Other Factors that Change Reserves • Example: • The check-clearing process can take a few days • deposits and reserves in the banking system may be temporarily higher than they otherwise would be • this is called the Federal Reserve float • the Fed can offset this by selling securities if it wishes

  16. Assets Reserves Loans Liabilities Checkable Deposits Prototype Balance Sheetfor a Bank

  17. Loan and Deposit Expansion • After the checks from the Fed clear, HLT National bank has $1,000 in new reserves • if the Fed insists that HLT hold required reserves equal to 10% of checkable deposits, the remaining 90% of reserves are excess reserves • $100 of the new reserves are required reserves • $900 of the new reserves are excess reserves • HLT will lend the $900 in excess reserves 法定准备金:央行要求存款机构必须持有的准备金数量。 超额准备金:超出央行要求的存款机构必须持有的准备金数量的那部分准备金。

  18. Loan and Deposit Expansion at HLT National Bank

  19. Loan and Deposit Expansion • Use excess reserve to acquire asset: • HLT’s balance sheet shows a $900 increase in assets (the loan) and a $900 increase in liabilities (new deposit) • The customer who took out the loan will likely spend the funds • they will become redeposited into the banking system (assume at Second National Bank)

  20. Transactions between HLT National Bank and Second National Bank

  21. Loan and Deposit Expansion • This transaction reduces HLT’s deposits and liabilities by $900 • The initial deposit at HLT is balanced by a $100 rise in reserves (all required) and a $900 rise in loans • HLT is fully loaned up • has no excess reserves left to lend(银行没有多余的储备来发放贷款)

  22. Loan and Deposit Expansion • Second National Bank is not fully loaned up • has $810 in excess reserves to lend • if the loan is made, the funds will likely be spent and then redeposited in the banking system (assume at Third National Bank)

  23. Transactions of Second National Bank and Third National Bank

  24. Loan and Deposit Expansion • As the loans of one depository institution increase, the use of the loan proceeds by the borrower leads to a deposit inflow at another institution • this increases total deposit liabilities and reserve assets

  25. Loan and Deposit Expansion • The change in deposits at each depository institution can be represented as the change in required reserves plus the change in excess reserves • the change in required reserves is equal to 10% of the deposit inflow • the change in excess reserves is equal to 90% of the deposit inflow

  26. The Simple Multiplier Model • The process of creating money and credit from increases in reserves will end when all reserves become required reserves • the banking system is fully loaned up

  27. The Simple Multiplier Model • Required reserve assets (RR) are equal to the required reserve ratio (rD) multiplied by the amount of deposit liabilities (D) RR = rD D • Excess reserves (ER) are equal to total reserves (TR) minus required reserves ER = TR – RR

  28. The Simple Multiplier Model • If total reserves are equal to required reserves TR = RR = rD  D D = TR/rD D = 1/rD  TR • We shall refer to 1/rD as the simple money multiplier(简单货币乘数)

  29. The Simple Multiplier Model • For any change in total reserves, the change in deposits will equal D = 1/rD  TR • In our example, the increase in deposits from the $1,000 increase in reserves will be D = 1/0.10  $1,000 = $10,000

  30. The Simple Multiplier Model • The simple multiplier process is a reflection of what is called the fractional reserve banking system • a depository institution must hold reserve assets equal to a fraction of deposit liabilities • The smaller the required reserve ratio is, the larger will be the simple money multiplier • 部分准备金银行体系:在这种银行体系下,单个银行必须持有的法定准备金等于其存款负债的一个比例。

  31. The Required Reserve Ratio and the Simple Money Multiplier

  32. The Simple Multiplier Model • The whole process can be viewed as an inverted pyramid • the original injection by the Fed leads to an increase in reserve assets and liabilities and leaves banks with excess reserves • the banks respond by extending loans • these loans are deposited in other banks who then also make loans • the process continues until all banks are loaned up

  33. The Simple Multiplier Model • As a result, the original injection of reserves can support a multiple expansion in loans and deposits

  34. An Inverted Pyramid Representing the Money Supply and the Monetary Base

  35. The Multiple Expansion of Deposits and Loans in the Banking System (Initial Increase in Reserves of $1,000 and a Multiplier of 10)

  36. The Multiplier Effect of an Increase in Reserves

  37. Policy Implications • A given dollar change in reserves will lead to a larger change in the money supply • If the multiplier was as simple as 1/rD, the Fed could control the money supply precisely • in reality, the multiplier is more complicated and is not under the Fed’s complete control

  38. Some Complicating Realities in the Multiplier Model • In our simple model, we assumed that banks do not hold excess reserves • in fact, banks do choose to hold excess reserves • these excess reserves are leakages from the flow of new deposits • this will lower the volume of loans and deposits created at each stage

  39. Some Complicating Realities in the Multiplier Model • We also ignored the fact that individuals will choose to hold some currency • this means that all loan proceeds may not become redeposited in the banking system • this will also reduce the flow of reserves and deposits from bank to bank

  40. Modifying the Multiplier Model • Total reserves are equal to required reserves plus excess reserves TR = RR + ER TR = rDD + ER • Assume that depository institutions hold excess reserve assets equal to a constant proportion of deposit liabilities (eD) where e = ER/D

  41. Modifying the Multiplier Model • This means that TR = rDD + eD = (rD + e)D • This means that, for a given change in total reserves, the change in deposits will be

  42. Modifying the Multiplier Model • The multiplier is now smaller than before • The multiplier is not under the complete control of the Fed • the Fed cannot control e

  43. Modifying the Multiplier Model • The public can also affect the money multiplier by its currency-holding behavior • Assume the public wants to hold currency equal to a constant proportion of its checkable deposits (cD) where c = C/D

  44. Modifying the Multiplier Model • Thus, the money supply is equal to M = D + C = D + cD = (1 + c)D • We define the monetary base (MB) as the sum of reserves and currency in the hands of the public MB = TR + C MB = (rD + e)D + cD = (rD + e + c)D

  45. Modifying the Multiplier Model • Rearranging, we get • The money supply is equal to deposits plus currency

  46. Modifying the Multiplier Model • Rearranging, we get

  47. Modifying the Multiplier Model • In terms of changes in the money supply that result from changes in the monetary base, we get • We will refer to this as the money multiplier

  48. Factors that Affect theMoney Multiplier

  49. Factors that Affect theMoney Multiplier

  50. The Fed’s Control over the Money Supply • The Fed’s control of the money supply is not complete • the public controls c (the proportion of deposits held as currency) • depository institutions control e (the proportion of deposits held as excess reserves)