Mishkin slides - Mishkin ch.14 The Money Supply Process R...

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[Notes on Mishkin Ch.14 - P.1]·Monetary Base M1 = m ·- Message: Fed can control M1 by controlling MB, but not perfectly. - Assumes “normal” conditions: interest rates > 0. Later examine crises. R ±:: ;NJ;DI?EDI 7D: FH;F7H; <EH #;: #KD:I C7HA;J 7D7BOI?I²- Show how the Fed can control balance sheet items other than MB. - Introduce distinction between dynamic and defensive open market operations.- Derive a money multiplier for M2. - Case studies: the Great Depression and the 2007-09 crisis.
Mishkin ch.14: The Money Supply ProcessRObjective: Show howthe Fed controls stocks of money; focus on M1. - Macro theory simply assumes that the Fed can set “M” via open market operations. - Point here: control is indirect – relies on assumptions about banks and depositors. RFocus on M1: Money = Currency + DepositsM1 = C + D 1. Show that the Fed can control the monetary base
2. Derive a money multiplier so that M1 = Multiplier ·Monetary Base M1 = m ·- Message: Fed can control M1 by controlling MB, but not perfectly. - Assumes “normal” conditions: interest rates > 0. Later examine crises. R ±:: ;NJ;DI?EDI 7D: FH;F7H; <EH #;: #KD:I C7HA;J 7D7BOI?I²- Show how the Fed can control balance sheet items other than MB. - Introduce distinction between dynamic and defensive open market operations.- Derive a money multiplier for M2. - Case studies: the Great Depression and the 2007-09 crisis.
MB
[Notes on Mishkin Ch.14 - P.2]Balance Sheet Analysis: Monetary Aggregates at Banks and at the FedR ³7B7D9; 0>;;J E< J>; ³7DA?D= 0OIJ;C²Assets Liabilities Loans D Checkable Deposits Securities Time Deposits etc. R Reserves BR Borrowed Reserves R ³7B7D9; 0>;;J E< J>; #;:;H7B /;I;HL;: includes all of MB but only part of M1.Assets Liabilities Securities C Currency BR Discount loans R Bank reserves Gold Check Float Treasury Dep. Foreign CB Dep. RMoney stock M1 = Sum of monetary aggregates C+D from both balance sheets. [Similar for M2. Note that currency includes Treasury coins – small amount ignored to simplify.]R *ED;J7HO 87I; *³ ´ µ/² ;N9BKI?L;BO ED J>; #;: 87B7D9; I>;;J¶RLinkages: R = Bank Reserves = Banks’ deposits at Fed + Vault cash BR = Borrowed Reserves = Discount loans from Fed
[Notes on Mishkin Ch.14 - P.3]Open Market Operations (OMO) and the Monetary BaseExamine with numerical examples Initial Fed Balance Sheet(normal: assets mostly securities; liabilities mostly currency)Assets Liabilities Securities 99 Currency 90 Discount Loans 1 Reserves 5 MB = 95 Treasury/CB Dep. 5 Example 1: Purchase of securities with payment to a bank’s reserve account: Assets Liabilities Securities +1 Reserves +1 New Fed Balance Sheet:Assets Liabilities Securities 100 Currency 90 Discount Loans 1 Reserves 6 MB = 96 Treasury/CB Dep. 5 Find: Open market purchases increase the monetary base one-for-one.
[Notes on Mishkin Ch.14 - P.4]Example 2: Sale of securities with payment from a bank’s reserve account: Assets Liabilities Securities -1 Reserves -1 New Fed Balance Sheet:Assets Liabilities Securities 98 Currency 90 Discount Loans 1 Reserves 4 MB = 94 Treasury/CB Dep. 5 Find: Open market sales reduce the monetary base one-for-one. Example 3: Purchase of securities with currency issued to the publicAssets Liabilities Securities +1 Currency +1 New Fed Balance Sheet:Assets Liabilities Securities 100 Currency 91 Discount Loans 1 Reserves 5 MB = 96 Treasury/CB Dep. 5 RConclude: Open market operations change MB one-for-one, regardless how the Fed pays for them.