monetary policy tools 1 monetary policy changes in monetary policy tools in order to affect...
TRANSCRIPT
1
Monetary Policy Tools
2
Monetary Policy
Changes in Monetary Policy Tools in order to affect Aggregate Expenditures
Increase AE
Decrease AE
3
Monetary Policy Objectives
Maintain “stable prices” = inflation below 3%.
today:?www.mnb.huMaintain “sustainable economic
growth” = Output Growth at least 3%
Today:?
4
GDP - Hungary2007 1.Q.: 102,3%2008 1.Q.: 101,9%
2009 1.Q.: 93,3%2009 4.Q.: 92,8%
2010 1.Q :100,1%2010 2.Q: 100,9%
-16-14-12-10-8-6-4-2024681012
-16-14-12-10-8-6-4-202468
1012
01 Q
1
01 Q
3
02 Q
1
02 Q
3
03 Q
1
03 Q
3
04 Q
1
04 Q
3
05 Q
1
05 Q
3
06 Q
1
06 Q
3
07 Q
1
07 Q
3
08 Q
1
08 Q
3
09 Q
1
09 Q
3
10 Q
1
% (A
nnua
lrat
e of
gro
wth)
% (A
nnua
lrat
e of
gro
wth)
Households' consumption Government consumptionGross fixed capital formation Inventories and statistical discrepanciesNet exports GDP growth
6
Monetary policy goals
Price stabilityHigh employmentEconomic growthInterest rate stabilityStability of financial marketsStability in foreign exchange
markets
7
Monetary Policy Tools
1. Open Market Operations: Buying or Selling Bonds to the public.
2. Required Reserve Ratio. 3. Changing the Discount Rate.4. Changing Margin Requirements5. Using “Moral Suasion”.
8
1. Open Market Operations
Name: from the Bank of England
Refinancing loans only to special institutions
Government papers are on the open market, for everyone
9
1. Open Market Operations
To sell open market instruments =
Reduce national bank money
To buy open market instruments=
Create money
10
1. Mechanism of Open Market Operations
The entire banking system consists of only five banks
and they hold their reserves at the Fed.
Example r = 20%
11
Hungarian required rate of reserves
1994 13% + 6%1995 17% +8.5%2000 11% + 4%2008 2% -
12
Banking System DepositsBank 1 has
10,000Bank 2 has
30,000Bank 3 has
40,000Bank 4 has
15,000Bank 5 has
5,000
D=100,000
d1= 10,000d2= 30,000d3= 40,000
d4= 15,000d5= 5,000
Total deposits in the banking system are $100,000
13
Reserves = 20% of Deposits
Bank 1 has 10,000 (0.2) = 2,000 in reserves
Bank 2 has 30,000(0.2) =6,000 in reserves.
Bank 3 has 40,000(0.2) =8,000 in reserves
Bank 4 has 15,000(0.2)=3,000 in reserves
Bank 4 has 5,000(0.2)=1,000 in reserves
All BanksReserves
R=20,000
Total reserves in the banking system are $20,000
14
Ms = Deposits + Currency outside banks.
All BanksReserves
R=20,000
All BanksDeposits
D=100,000
d1= 10,000d2= 30,000d3= 40,000
d4= 15,000d5= 5,000
r = 0.2
R=20,000 D=100,000
Ms = 100,000
L= 80,000
80,000 are in loans.
15
The Fed’s AccountFederalReserveBank
R=20,000Bank 1= 2,000Bank 2= 6,000Bank 3= 8,000Bank 4= 3,000Bank 5= 1,000
Bonds
Assets Liabilities
The Fed holds Government bonds as part of their Assets.
Bank’s reserves are liabilities to the Fed
16
The Fed Buys $100 in Bonds From Mr. Anderson
5000Bonds
Assets Liabilities
100 Bond Mr. Anderson
5100Bonds
Fed pays with a check $100
FED
R=20,000Bank 1= 2,000Bank 2= 6,000Bank 3= 8,000Bank 4= 3,000Bank 5= 1,000
17
Mr. Anderson Deposits the Fed’s Check at Bank
1Fed pays with a check
New depositAt bank One
$100
All BanksDeposits
D=100,000
d1= 10,000d2= 30,000d3= 40,000
d4= 15,000d5= 5,000
$100 d1=10,100
18
R=20,000Bank 1= 2,000Bank 2= 6,000Bank 3= 8,000Bank 4= 3,000Bank 5= 1,000
A Bond Purchase Increases Bank’s Reserves
5000Bonds
Assets Liabilities
100 Bond Mr. Anderson sells bond
5100Bonds
Bank 1 presents the checkto the Fed for clearing
$100
FED
=2,100
Fed credits Bank One’s reserves
19
With $100 in extra reserves…
1
rD D = x D
R
1
0.2D D = x 100
D D=500
Deposits increase by 500 when reserves increase by 100.This 500 includes a 400 increase in loans.
20
When Bank One’s Reserves Increase
Bank One holds now more reserves than required,
Bank One will make more loans To other banks To the public
The loans generated become new deposits at other banks which keep 20% as reserves and loan the rest…
21
The Effect of a 100 purchase of bonds by the Fed.
All BanksReserves
R=20,100
All BanksDeposits
D=100,500
d1= 10,100d2= 30,100d3= 40,100
d4= 15,100d5= 5,100
r = 0.2
R=20,100D=100,500
Ms = 100,500 and 80,400 of that is loans.
Note that deposits increased in all banks…
L= 80,400
22
Three Kinds of Reserves
Required Reserves (RR). The amount that must be held by law, the required reserve ratio times deposits:
RR = r(D)Actual Reserves (AR). The amount of
reserves actually held by the bank. This could be higher or lower than RR.
Excess Reserves(ER). Any amount held above required reserves.
23
Deposits = 10,000Reserves = 2,000
r=20%
New Deposit= 100
New Loan = 80Loans = 8,000
Deposits = 30,000Reserves = 6,000
r=20%
New Deposit= 80
New Loan = 64
Loans = 24,000
Bank One
Bank Two
Hold as reserves=16
The Fed’s Purchase Step by Step
Deposits = 40,000Reserves = 8,000
r=20%
New Deposit= 64
New Loan = 64
Loans = 32,000
Bank Three
Hold as reserves = 12.8
After three steps, deposits have increased by: 100 + 80 + 64 = 244…
Hold as reserves=20
Becomes a new deposit
24
At the end of the Money Multiplier Process…
D = 100,000R = 20,000
r=20%
L = 80,000
All BanksBefore
All BanksAfter
D = 100,500R = 20,100
r=20%
L = 80,400
D R=100; D D=500; D L = 400
25
In Summary
When the Fed Buys Bonds
New Reserves become available for banks to loan out
Money is createdThe Money
Supply increases.
D = 100,000R = 20,000
r=20%
L = 80,000
DD = DR(1/r) DR = Fed’s Purchase
R=20%
DL = DD - DR
26
All Short term interest rates change with the fed funds rate
Fed Injects/ erase new reserves to the banking system
1. Open Market OperationsFed
buys/sells bonds from the public or banks Money/Credit
easier/harder to get
Federal Funds Rate Decreases/Increases
Long Term interest rates change
Investment Changes
27
2. Reserve ratio
1913 FEDTo ensure:
banks’ liquidityTo defend depositors
Now:To serve monetary policyUsually differentiated rates
28
2. Reserve ratio
Influence loan interest ratesHow?
29
2.Changing the Required Reserve Ratio.
D = 100,000R = 20,000
r=20%
L = 80,000
All Banks
r = 10%
AR = 20,000RR = 10,000ER = 10,000
New loan = 10,000 New Deposit Hold 10%=1,000New loan = 9,000 New Deposit Hold 10%= 900New loan = 8100 New Deposit Hold 10%=810
DD = DR(1/r)
DD = 10,000(1/0.1)
DD = 100,000 D = 200,000
New loan …
30
2. Changing the Required Reserve
Ratio.
D = 100,000R = 20,000
r=20%
L = 80,000
All BanksBefore
The Fed Decreases r to 10%
D = 200,000R = 20,000
L = 180,000
Reserves did not change.Now 20,000 in reserves must be 10% of total deposits
20,000= (0.1) D D = 20,000/0.1D= 200,000
r=10%
All BanksAfter
31
When the Required Reserve Ratio decreases
to 10%
Deposits increase by 100,000.
Reserve Required Ratio
Where to find?
www.federalreserve.gov
www.mnb.hu
.
33
3. The Discount Rate: d
The interest rate charged by the Federal Reserve Bank on
loans to Banks.
d =5%
34
Decreasing the Discount Rate d
When funds from the Fed become “cheaper” banks find it less necessary to hold excess reserves…
In case of need, banks can borrow funds from the Fed at low .d
Banks are induced to borrow from the fed rather than keep excess reserves to cover emergencies…
35
A decrease in d: two possible scenarios
1. Banks borrow more reserves from the Fed
Reserves in the banking system increase: the Fed injects new reserves which generate new loans and new deposits
2. Decreases Excess Reserves Banks hold on to less excess reserves
and thus make more loans generating new deposits.
The Money Supply Increases
36
4. Margin Requirements
The fraction of the stock’s price that must be put up by the person buying the stock:
the Down payment
37
Margin RequirementsSelected Years
501994901958
501974501953
651970751947
7019631001945
501962751942
701960501940
MarginYearMarginYear
WAR
Infla
tion
Recess
ion
38
5. Moral Suasion and the Gentlemens Agreements:
The Omen of things to come
“Those found cheating will be suspended from school”
39
Fed’s Actions
Public Statement“The Fed hopes that banks show
more restraint in providing consumer credit, because inflation is a problem”
Official Fed Policy Statements “The Fed will raise interest rates by
25 basis points”Direct Appeals
Letters to bank presidents.
40
Thank you!