Lecture 7_Monetary Sector_2015

Lecture 7_Monetary Sector_2015 - Macroeconomic Policy...

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Macroeconomic Policy Analysis in Low Income Countries Lectures 7: Money and Monetary Policy By Dr. Mark Ellyne
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Goals of the Lecture How to measure the money supply, and understand the monetary survey and the central bank balance sheet. Quantity Theory of Money. Difference between monetary targeting and inflation targeting. Identify the monetary linkages to other sectors of the economy. Dr. M Ellyne – Macro Policy Analysis 2
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What is Money for Economist Means of payment Either notes and coins; or Bank deposits Unit of account Store of value Who produces money? Is a credit card a form of money? M- Pesa? 3
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Scope of the Financial System 4
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What is the Relationship Between Money and Prices? Imagine an Island in perfect financial equilibrium; Helicopter doubles the money supply one night; What happens the next day? Output Prices Wealth Distribution 14- March 2015 5
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Measuring The Money Supply M3 = (Broad Money) + Foreign currency deposits + Time & savings deposits + M1 (Narrow money) M2 = Demand deposits + Currency in circulation Dr. M Ellyne – Macro Policy Analysis 6
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Two Sides of the Money Supply ‘Monetary Survey’ Assets Net foreign assets (NFA) Central bank ODC Domestic Credit Net claims on govern. (NCG) Net claims on private sector (NCP) Other items, net (OIN) Liabilities Broad Money (M3) Foreign currency deposits M2 Time & saving depos M1 Currency in circ Demand depos 7
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How to Think About the Money Supply Must think about the ‘demand for money’ or the asset side of monetary survey. What affects each element of the asset side? 8
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Demand for Net Foreign assets Institutions: Central bank net foreign assets (NFA cb = Foreign reserves less any central bank borrowing) Commercial bank foreign assets and liabilities (in response to customers demands) Dr. M Ellyne – Macro Policy Analysis 9
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Government Demand for Credit (Net) from: Central bank credit [NCG cb ] (or printing money) Bank lending [NCG odc ] (treasury bills) Private sector lending (Tbills) (not part of money) Dr. M Ellyne – Macro Policy Analysis 10
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Private Sector Credit Demand (Net) from: Central Bank = 0 Banks (NCP) (loans, overdrafts,…) Dr. M Ellyne – Macro Policy Analysis 11
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Other Items, Net Other Miscellaneous Assets and Liabilities of Banks (net other assets) bank’s capital (liability), profits and reserves (asset), suspense accounts – uncompleted transactions, exchange valuation – for forex movements Dr. M Ellyne – Macro Policy Analysis 12
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How the Money Supply is Linked to the Economy? M3 = Link Net foreign assets (NFA) ->BOP + Net credit to government (NCG) ->Fiscal + Net credit to private sector (NCP) ->Real + Other items net (OIN) ->Banks Dr. M Ellyne – Macro Policy Analysis 13
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Do Exchange Rate Changes Affect the Money Supply?
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