11-03-29-Switch of Government Deposits no OMO

11-03-29-Switch of Government Deposits no OMO - = 1/3...

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Government Deposits At Chartered Banks: Part I March 29, 2011
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Money-Supply Analysis When a shock hits the domestic money- supply system, we record the initial effects in red . This includes all cheque-clearing, such that balance sheets balance. In response various actors make further transactions. These are shown in green. The new equilibrium is shown in blue .
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Increase in Government Deposits At Chartered Banks (GD): Part I The Government of Canada holds chequable accounts at both the Bank of Canada and at Chartered Banks. When the Government switches funds from one account to the other it has monetary consequences There are two possible responses by the Bank of Canada: here we assume that the Bank does not conduct open market operations.
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Bank of Canada assets liabilities Gov’t Bonds Currency Deposits 1. Banks 2. Gov’t -1 = +1 +1 -1/3 = +2/3 +1/3
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Unformatted text preview: = +1/3 Chartered Banks Assets Liabilities Deposits at Bank Of Canada Deposits 1. Public 2. Gov’t of Canada Gov’t Bonds Bank Loans +1 -1/3 = +2/3 +1 = +1 +1 =+1 +4/3 = +4/3 Public Assets Liabilities Deposits at Chartered Banks Gov’t Bonds Currency Bank Loans Net Worth +1/3 = +1/3 +1 = +1 +4/3 = +4/3 Commentary • Switching One Billion Dollars Of Government Deposits From The Bank Of Canada To The Chartered Banks Causes The Monetary Base To Increase By An Equal Amount. • However, The Increase In The Deposits With Them Will Cause Chartered Banks To Want To Hold Further Reserves. Commentary, Concluded • There Are Excess Reserves Initially, So Banks Will Want To Make More Loans. • The Effect Is Expansionary (The Money Supply Increases), But Not So Much As Is Provided By An Equal Sized Open Market Operation....
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