V Central Banks
V Origins
* Swedish Sveriges Riksbank 1668
* The Old Lady of Threadneedle Street 1694
* Most central banks formed late 1800's and early 1900's
* Most recent: 1999 ECB - headquarters in Frankfurt
V Functions
V Bank to the Government
* Government depositories
* Fiscal Agent
V Bank to Banks
* Lender of last resort (LLR) - The possibility of "contagion"
* Holds deposits of banks
* Clears checks
* Regulates Banks
* Conducts Monetary Policy
* Influences the Exchange Rate
V Central Bank Balance Sheet
*
FedTAccount
FedTAccount

* Securities and currency in circulation are the big items
* Monetary base is:
* Since assets = liabilities, the left side of the balance sheet is roughly equal to the monetary base.
V Central Banks and Money Creation
V Functions of money
* Medium of Exchange
* Unit of account
* Store of value
* Standard of deferred payment (?)
V The Measurement of the "Money Supply" - the Monetary Aggregates
* A fractional reserve banking system
* The monetary base
V The Bank to Bank Money Creation Process
* New money is created when a bank lends its excess reserves.
* The money creation process is limited by the amount of reserves and the reserve requirement.
V The Money Multiplier
* R = q x D The amount of reserves (R) equals the reserve requirement (q) times the demand deposits (D)
* ∆R = q x ∆D
* 1/q x ∆R = ∆D
* 1/q is the simple money multiplier
* The change in reserves times the money multiplier equals the change in the money supply.
* In the real world, the money multiplier is smaller because...
V Tools of Monetary Policy - The Fed
* Set the required reserve ratio - rarely done.
* Set the discount rate
V Conduct open market operations
* If the Fed buys US Gov't securities in the open market...
* If the Fed sells
V The FOMC - Its Structure and Role
* FOMCSacredTable1
* Why 19 and 12?
* The job I want!!!!!
V The ECB
V Two rates on central bank advances
V Discount Rate - 1% below the interbank rate but with a credit quota
* Banks borrow up to the quota limit because the rate is lower.
* The quota establishes the limit on reserves lent to banks.
* The Lombard rate - The marginal interest rate - above market rates. A penalty rate for situations of illiquidity.
* These two rates establish the lower and upper limits of interest rates for banks to borrow reserves.
V The Bank of Japan
* Discount rate below the interbank rate with no quota limits.
* It has "discretionary" rationing of credit.
* It can buy and sell private financial instruments!
V China & Russia
* Direct credit constraints on the amounts that banks can lend!
V Other Central Bank Powers
* Set interest rate restrictions, minimum down payment requirements, margin requirements, etc.
*
V Money Demand
* Transactions demand (liquidity for exchanges)
* The cost of holding money - interest forgone.
V Money Market Equilibrium
* The interest rate changes to convince people to hold the amount of money that exists.
* Diagram anyone?
*
MS/MD
V Nominal vs. Real GDP
* GDP vs. National Income
V GDP Deflator
* Base year
* How to calculate it.
* How to use it.
* It. www.research.stlouisfed.org—GDPDEF.txt
V Aggregate Supply & Aggregate Demand
V Aggregate Demand Is...
* A relationship between
V As the price level rises, agg Q demanded decreases because
* Reduces the real quantity of money in circulation
* Reduces the real liquidity and interest rates rise as people attempt to replenish liquidity - less spending with borrowed money.
* Reduces net exports - foreigners buy less, we import more.
V Aggregate Supply
* Short run
* Long run
* Equilibrium P level and real GDP
V Central Banks and Exchange Rates
* Net exports changes when interest rates fall and AD rises
* Changing (or influencing) the exchange rate directly.
V FX Market Interventions
* The Treasury orders them, the Fed implements them. (Must the Fed use its own funds?)
V The Mechanics
* Leaning with the wind
* Leaning against the wind
* Unsterilized interventions
* Sterilization
V Do interventions work?
* Portfolio effect
* Announcement effect
* They probably don't work any longer.