ec3332-SemI1112Lec6 (1)

ec3332-SemI1112Lec6 (1) - Money and Banking I EC3332 Sem I...

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Unformatted text preview: Money and Banking I EC3332 Sem I, 2011-2012 Lec 7: Central Banking and Money Supply Roadmap OLG model Of money Inflation Non-anticipated inflation- Value of money- Rate of return- Neutrality- Cost of inflation- Optimal monetary policy- Growing economy- Inflation/unemployment- Noisy policy- Lucas critique Add other assets 2 monies capital Inside money- Indeterminacy of exchange rate- Foreign exchange controls- rate of return dominance- liquidity- intermediation- rate of return equality- dynamic inefficiency- Tobin effect- Fisher equation Next… Monetary policy with banks and central banks. Another asset: Government bonds Budget constraint of the government Taxes Central Bank Central Bank Central Banking and Money Supply Financial intermediation: privately created assets serve as money. The monetary authority regulate money- creating institutions To control the total stock of money. To enhance revenue from seigniorage. Central Banking and Money Supply If inside money replaces fiat money: Government cannot raise any seigniorage Prices may have to be expressed in another unit A central bank has the following tools: Printing fiat money Reserve requirements Loans to banks Legal Restrictions One way to prevent people from not using fiat money is simply to require them to use it. Legal Restrictions An example is a reserve requirement . Sets the minimum reserves each bank must hold to customer deposits and notes. Normally in the form of fiat currency stored in a bank vault (vault cash), or with a central bank that sets the minimum reserves each bank must hold to customer deposits and notes. Normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank Legal Restrictions An alternative is to prohibit the banks from issuing their own currency. US: Liberty Dollars promoted by NORFED (National Organization for the Repeal of the Federal Reserve and the Internal Revenue Code). In 2006 declared a federal crime by Justice Department and in 2009 the founder, Bernard von NotHaus arrested and indicted. Reserve Requirements China’s Monetary Policy Use of RR to control money supply: http://www.businessweek.com/news/2011-06-1 US Reserve Requirement Financial intermediaries must hold a legally specified fraction of their deposits in fiat money. US: Reserves must be held in the form of vault cash or deposits with the Federal Reserve Banks. US: Reserves on checkable (current account or demand) deposits No Reserve Requirements Some other countries have to reserve requirements: Australia, Canada, New Zealand, UK, Sweden, Mexico....
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ec3332-SemI1112Lec6 (1) - Money and Banking I EC3332 Sem I...

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