Problem_Set_1_Solutions - ECO V3265 Fall 2006 Problem Set...

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ECO V3265 Perry Mehrling Fall 2006 Problem Set #1—Balance Sheets (due Friday Sept 21, 4pm, Lehman 4) The purpose of this problem set is to investigate the natural hierarchy in balance sheets, a hierarchy that extends from dealers to banks to central banks to the IMF. 1. Central Bank Balance Sheet: a) Use the information in Table 1 (last column) to update the consolidated balance sheet reported by Bindseil (p. 57, Table 2.7). US Fed: Factors affecting reserves, Wed 12 Sept 2007, in billions of US dollars Gold and other foreign assets 13 Currency in circulation 813 Float 0 Government deposits 5 Other Assets 40 Required clearing balances 7 Reverse RP 33 Capital, other liabilities 41 US government paper outright 818 Repurchase agreement 45 Discount window 7 Reserves of Banks 25 Total 925 Total 925 Some judgments underlying this consolidation include: 1) SDRs included with gold as asset 2) Treasury currency included with government paper 3) Reverse RP added as a separate category. This appears to be the equivalent of deposits by foreign central banks. Why are your numbers not exactly like this? Maybe you used the weekly average numbers. Maybe you used the previous week’s numbers. b) The big numbers on the balance sheet are government securities as an asset and currency as a liability. Why is currency a liability? Currency is a liability because it represents a promise to pay. The easiest way to see this is to consider how the Fed makes payments to foreign central banks. If they won’t accept dollars, the Fed has to pay them in their own currency, gold, or SDRs. c) Comparing the current balance sheet with Bindseil’s, can you detect signs of the Fed’s actions to stem the current financial turmoil? Look specifically at discount window borrowing, unusually large reserve holding by member banks, and unusually large reserve holding by foreign accounts (foreign central banks).
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This note was uploaded on 04/07/2008 for the course ECON v3265 taught by Professor Mehrling during the Spring '08 term at Columbia.

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Problem_Set_1_Solutions - ECO V3265 Fall 2006 Problem Set...

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