Lecture4_free - Lecture 4 Balance Sheets and T-Accounts...

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Lecture 4 Balance Sheets and T-Accounts Readings: Bain and Howells (2009)-Chapter 1 Mishkin (2009)-Chapter 14 Section 4.1 Balance Sheet Basics The balance sheet naming structure used in Bain and Howells will be useful for us. Central Bank Assets Liabilities Discount Loans (CB Loans to Banks) BL cb Deposits of Commercial banks D b Loans to the Government GL cb Notes and Coin with Commercial Banks C b Government Securities (holdings) G cb Notes and Coin with non-bank public C p Government Deposits D g Commercial Banks Assets Liabilities Banks holdings of notes and coin C b Customer Deposits D p Banks deposits with the CB (Reserve Acct.) D b Capital and Shareholders Funds (Net Worth) F s Banks holdings of loans to money market ML b Banks holdings of securities G b Loans to General Public L p Loans to Government or Public Sector L g Or more simply. Increases in Central Bank (“CB”) liabilities C b ,C p , and D b leads to an increase in the monetary base (Note this is M 0 ). Mishkin (2009) points out that the U.S. Treasury liabilities (coinage) is also part of the monetary base. For the most part we will ignore this. Federal Reserve Notes are IOU’s from the Fed, and are a liability. There is no intrinsic value for these notes since our currency is not backed by any commodity. 1
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Assets Liabilities Discount Loans (CB Loans to Banks) BL cb Deposits of Commercial banks D b + C b Government Securities (holdings) G cb + GL cb Notes and Coin with non-bank public C p Commercial Banks: Simple Assets Liabilities Cash (Also a part of Reserves) C b Customer Deposits D p Reserves D b Capital and Shareholders Funds (Net Worth) F s Loans L p + L g + ML b Securities G b Section 4.2 T-Account Basics In our study of open market operations and other transactions, we assume we have a commercial banking system that is balanced and then examine the transactions only. Thus a T-account looks like a balance sheet, but only includes entries for things that change on balance sheets. First we examine what happens when the central bank makes an open market purchase of a bond that a bank holds. Notice that the banks’ balance sheet is essentially unchanged. The difference is that the bank is now more liquid, and it’s reserves have gone up. The monetary base, currency + reserve account ( C b + C p + D b ) includes both bank holdings and public holdings of currency. Narrow money (a.k.a. the Money Supply or M 1 is defined as currency + public deposits at commercial banks ( C p + D p ). Here, we first examine the situation where government securities are purchased from the banking system by the CB. This is known as an Open Market Operation where the CB is trying to expand the money supply. Commercial Banks
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This note was uploaded on 05/22/2011 for the course ECON 430 taught by Professor Neveu during the Spring '11 term at James Madison University.

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Lecture4_free - Lecture 4 Balance Sheets and T-Accounts...

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