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The University of Sydney Faculty of Economics and Business MONETARY ECONOMICS {6 credit points} ECOS3010 — 2009: S EMESTER 2 Tony Aspromourgos WEEK III : MONEY SUPPLY CONTROL—KEY POINTS 3.1 orthodox money multiplier analysis 3.2 determinants of (changes in) the quantity of outside & inside money 3.3 uncertainty, interest-inelasticity of base demand & interest-rate-setting monetary policy 3.4 banks & liquidity crises: prudential supervision & lender of last resort [‘panics’ (runs) & systemic crises (‘contagions’)] 3.5 credit rationing READING: M.K. Lewis & P.D. Mizen (2000) Monetary Economics , Oxford: Oxford University Press; ch. 13 (‘The Transmission Mechanism’: 322–41). C. Goodhart (1987) ‘monetary base’, in PDE vol. 3: 500–02. C. Goodhart (1987) ‘central banking’, in PDE vol. 1: 385–87. C. Kindleberger (1987) ‘financial crisis’, in PDE vol. 2: 339–40. G. Stevens (2008) ‘Liquidity and the Lender of Last Resort’, RBA Bulletin May: 83–91. [Pp. 87–90 in particular deal with lender-of-last-resort, in the context of the 2007–2008 credit crisis. This reading is set for week 13 as well.] 3.1 orthodox money multiplier analysis The traditional, textbook, money-multiplier analysis, in the first instance, should be treated as an identity . Starting with these two definitions: H = C + R M = D + C [for definitions of these 5 terms, see Lewis & Mizen 2000: 325–7] By manipulation of these two identities, one arrives at a typical money-multiplier equation: M = {[1+( C / D )]/[( C / D )+( R / D )]}. H = mH expressing the quantity of money M in terms of the money multiplier – in the ‘{}’ brackets ( m , necessarily greater than unity) – and the quantity of high-powered, base, or ‘outside’ money ( H ). This result cannot be argued with, once one accepts the two initial definitions, since it is entirely a pure deduction from those two identities. But imputing causation to the money- multiplier equation is another matter. The traditionally supposed causation is from H to M , supposing m to be stable, or independent of H and M and predictable, or merely predictable. For reasons explained in lectures, this suggested causation – if it was ever plausible – seems not to be plausible in contemporary circumstances. (More on this under 3.3 below.) 3.2 determinants of (changes in) the quantity of outside & inside money An alternative approach to conceptualizing determinants of the quantity of money is the ‘credit counterparts approach’, based on a ‘flow-of-funds’ framework (see Lewis & Mizen 2000: 329–
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2 31). Their treatment assumes the economic system is constituted by 4 sectors: the private sector of the domestic economy – divided into the private-non-financial sector (the whole private sector
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mon_econ_week3 - The University of Sydney Faculty of...

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