mishkin ch 14
TRANSCRIPT
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Chapter 14
Determinants of
the Money Supply
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Copyright 2007 Pearson Addison-Wesley. 14-2
M m MB=
The Money Supply Model
Define money as currency pluscheckable deposits: M1
The Fed can control the monetary basebetter than it can control reserves
Link the money supply (M) to the
monetary base (MB) and let mbe themoney multiplier
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Derivin the Money Multiplier !
Assume the desired level o !urren!y Cand e"!ess reservesER
gro#s proportionally #ith !he!$a%le depositsD
&henc ' (C / D) ' !urren!y ratio
e' (ER / D) ' e"!ess reserves ratio
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Derivin the Money Multiplier !!
&he total amount o reserves * + e,uals the sum o
re,uired reserves * + and e"!ess reserves * +.
&he total amount o re,uired reserves e,uals the re,uired
reserve ratio times the amount o
R
RR ER
R = RR + ER
!he!$a%le deposits
-u%situting or in the irst e,uation
&he /ed sets r to less than 1
RR = r ? D
R = (r ? D) + ER
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Derivin the Money Multiplier !!!
&he monetary %aseMBe,uals !urren!y*C+ plus reserves*R+
MB = R + C = (r ) + +
, ,
.
,
.
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Derivin the Money Multiplier !"
c = {C / D} = = { / } =
= ( ) + ( ) + ( ) = (+ +)
=1
+ +
= +=
= + ( )=(1+)
=1+
+ +
=1+
+ +
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!ntuition #ehind the Money Multiplier
r= = 0.10= = 400
= = 800
= = 0.8
= (1) =+ = 1,200
=400
800= 0.5
=0.8
800= 0.001
=1+0.5
0.1+0.001+0.5 =1.5
0.601 = 2.5
,
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Factors that Determine
the Money Multiplier
$hanes in the re%uired reserve ratio r
The money multiplier and the money supply are
neatively related to r
$hanes in the currency ratio c
The money multiplier and the money supply are
neatively related to c
$hanes in the e&cess reserves ratio e
The money multiplier and the money supply are
neatively related to the e&cess reserves ratio e
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Factors that Determine
the Money Multiplier (cont'd)
The e&cess reserves ratio eis neativelyrelated to the market interest rate
The e&cess reserves ratio eis positivelyrelated to e&pected deposit outflos
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Copyright 2007 Pearson Addison-Wesley. 14-10
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pen market operations are controlledby the Fed
The Fed cannot determine the amount of
borroin by banks from the Fed
Split the monetary base into to components
MBn= MB - BR M = m(MBn+ BR)
The money supply is positively related to boththe non*borroed monetary base MBn andto the level of borroed reserves+ BR,fromthe Fed
,dditional Factors
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Copyright 2007 Pearson Addison-Wesley. 14-12
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Copyright 2007 Pearson Addison-Wesley. 14-13
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Copyright 2007 Pearson Addison-Wesley. 14-1
-&plainin Movements
in the Money Supply
ver lon periods+ the primary
determinant of movements in the money
supply is the nonborroed monetarybase+ hich is controlled by the Fed's
open market operations
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Copyright 2007 Pearson Addison-Wesley. 14-1
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Copyright 2007 Pearson Addison-Wesley. 14-17
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Copyright 2007 Pearson Addison-Wesley. 14-1