A Monetary Intertemporal Model

A Monetary Intertemporal Model - A Monetary Intertemporal...

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A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy What is Money? •Medium of exchange •Store of value •Unit of account Measures of Money Monetary Base (outside money): currency in circulation plus bank reserves (reserves essentially zero in Canada) M1: currency in circulation plus transactions deposits at some financial institutions. M2: M1 + savings deposits at some financial institutions. The Fisher Relation A nominal bond is an asset that sells for one unit of money in the current period and pays off 1 + R units of money in the future period . R is the nominal interest rate , which is the rate of return on a bond in units of money. The real interest rate r is the real rate of return on a nominal bond Monetary Intertemporal Model •Type of cash-in-advance model .•Several periods but we focus on the “current” and “future” periods. •Representative consumer, representative firm,
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Unformatted text preview: banks , and government. •Consumers and firms require cash on hand to purchase goods, or can use “credit cards,” which involves obtaining credit from the bank. New markets we work with Supply and demand of credit card balances (CCB): • Banks supply CCB • Consumers and firms demand CCB Supply and demand of money: • Consumer and firm demand money • Central bank supplies money Transactions Deposits, Time Deposits, Credit Card Balances • Transactions deposits –can be withdrawn as currency at the beginning of the period. No interest within the period .• Time deposits –held until the following period, earning nominal interest rate R. • Credit card balances –bank charges a fee of q per unit of credit card balances (in real terms). Balances must be paid off by the end of the period....
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