Lecture 6 The Money Market Analysis(宏观经济学(南开大学,龚刚)

Lecture6MoneyMarketAnalysisMacroeconomicsI.IntroductionTheobjectiveofthischapteristostudyhowmoneyandinterestrateisdeterminedinthemoneyandfinancialmarket.Themoneyandfinancialmarketisthemarketinwhichmoneyandvariousfinancialassets(suchas,bondsandstocks)areexchanged.I.IntroductionTheFunctionsofMoneyMediumofExchangeStoreofValueUnitofAccountI.IntroductionTypesofmoneyinmoderneconomyM1:•CurrencyandNotes(issuedbycentralbank),alsocalledhighpoweredmoneyormonetarybase.•checkabledeposit.M2:M1+Non-checkablesavingdepositetc.M3:M2+LargetimedepositNote:M1isthemostliquidmoneyfollowedbyM2andM3.II.TheDemandforMoneyTransactionDemandforMoney:Moneyisamediumoftransaction.Thetransactiondemandformoneyisthosemoneythatisholdfortransactionalpurpose.ItisassumedthatthetransactiondemandformoneyisrelatedtonominalGDP.II.TheDemandforMoneyAssetDemandforMoneyMoneyisalsoanasset.Theassetdemandformoneyisthosemoneythatisdemanded(orhold)becauseofmoneyasanasset.However,unliketheotherassets,suchasbonds,stocks,etc.,moneymay(orevendoesnot)generateinterestrate.Comparingtootherassets,itsonlyadvantageistheliquid.Thereforeitcanbeexpectedthatwheninterestrateofotherassetsincrease,thedemandformoneywilldecline.II.TheDemandforMoneyAssetDemandforMoney(continued)interestrateofanasset(bond)(1)whereP1isthefacevalue,P0isthecurrentmarketvalueofthebond,iistherateofreturnwhichisalsotheinterestrate.Thisindicatesthatinterestrateisnegativelyrelatedtothemarketpriceofbond,giventhefacevalue.100PPiPII.TheDemandforMoneyTheTotalDemandforMoneyThetotaldemandformoneyisthesumoftransactiondemandformoneyandassetdemandformoney:Md=h·P·Y－k·i(seethefigure)II.TheDemandforMoneyTheTotalDemandforMoney(continued)III.TheMoneyMarketEquilibriumTheSupplyofMoneyInthestandardtextbooks,thesupplyofmoneyisoftenregardedasbeingcontrolledbythecentralbank,andthereforeitisoftenassumedtobeexogenuous:(seethefigure)MMsIII.TheMoneyMarketEquilibriumiMs0TheSupplyofMoney(continued)MIII.TheMoneyMarketEquilibriumTheMoneyMarketEquilibriumThemoneymarketequilibriumistheconditionatwhichwhichfurtherindicatesGiventhemoneysupplyandnominalGDP,itistheinterestvariationthatensuresthemoneymarketequilibrium(seethefigure).sdMMMhPYkiIII.TheMoneyMarketEquilibriumTheMoneyMarketEquilibrium(continued)III.TheMoneyMarketEquilibriumHowDoestheInterestRateVariationEnsuretheMoneyMarketEquilibrium(mechanismanalysis)Supposetheinterestratetobelowerthantheequilibriuminterestrate.Inthiscase,therewillbeanexcessdemandformoneyindicatingpeoplewillselltheirbondstoexchangeformoney.III.TheMoneyMarketEquilibriumMechanismAnalysis(continued)Thereforeinthebondmarket,therewillbeexcesssupplyofbond.Thiswillreducethebondpriceandhenceraisetherateofreturnonbond,whichisameasureofinterestrate.III.TheMoneyMarketEquilibriumTheeffectofmoneysupplyincreaseIII.TheMoneyMarketEquilibriumTheeffectofmoneysupplyincrease(continued)TheimpactofmoneysupplyincreaseisthedecreaseininterestrateWhatistransmissionmechanism?IV.HowDoestheCentralBankCreatetheMoneySupplyTheStructureofModernBankingSystemVariousCommercialBanks12FederalReserveBanksTheCommissionofOpenMarketOperationBoardofGovernorsIV.HowDoestheCentralBankCreatetheMoneySupplyTheWorkingofCommercialBanks:ThemostimportantpartofFederalReserveSystemisthecommercialbank.Wethusneedtodiscusshowcommercialbankmaketheirbusiness:Attractingdepositfromthepublicatnoorverylowinterestrate;Usingthepublicdeposittolendoutatahigherinterestrate(owntheprofitfromtheinterestdifferential);IV.HowDoestheCentralBankCreatetheMoneySupplyTheWorkingofCommercialBanks(continued):However,theycannotuseallthedepositfromthepublicforlending.Someofthemmustbekeptasreserve(denotedasR);TheReserveRatio(denotedasr)r=R/DwhereDisthedepositfromthepublic.IV.HowDoestheCentralBankCreatetheMoneySupplyTheWorkingofCommercialBanks(continued)Apparently,thereserveratioisaveryimportantpolicyvariableforabank.Lowreserveratiomaycausethedangerthatthebankcannotmeetalargedepositwithdrawnfromthepublic(causingbankruptcy).Yetahighreserveratiomaycauselessloanandhencelessprofit.IV.HowDoestheCentralBankCreatetheMoneySupplyTheBenefitandResponsibilityofCommercialBanksintheFederalReserveSystemBenefit:Inthecaseofemergencyneedingcash,thecommercialbankcanborrowthemoneyfromtheFederalReserveBankatitsdiscountwindow.Thiswillefficientlyavoidthepossibilityofbankruptcy.IV.HowDoestheCentralBankCreatetheMoneySupplyTheBenefitandResponsibilityofCommercialBanksintheFederalReserveSystem(continued)Responsibility:Thecommercialbankshouldnotabusethisbenefit.TheyshouldregularlymaintaintherequiredreserveaccordingtotherequiredreserveratiodesignedbytheFederalReserveSystem:actualreserverequiredreserveIV.HowDoestheCentralBankCreatetheMoneySupplySomeBasicConceptsandNotations:TheRequiredReserve(R*)=RequiredReserveRatio(r*)Deposit(D)ExcessReserve(Re)=ActualReserve(R)-RequiredReserve(R*)IV.HowDoestheCentralBankCreatetheMoneySupplyTheMultiplierProcessofMoneyCreationPreviously,wehavesaidthatthecentralbankcancontrolthemoneysupply.Yetwhatcentralbankcandirectlycontrolistheh