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1、Chapter 16,Multiple deposit Creation and the Money Supply Process,Players in the Money Supply Process,Central bank (Federal Reserve System)Banks (depository institutions; financial intermediaries)Depositors (individuals and institutions)Borrowers from banks (individuals and institutions that borrow
2、and institutions that issue bonds),Feds Balance Sheet,Monetary LiabilitiesCurrency in circulation: in the hands of the publicReserves: bank deposits at the Fed and vault cashReserves= required reserves + excess reservesAssetsGovernment securities: holdings by the Fed that affect money supply and ear
3、n interestDiscount loans: provide reserves to banks and earn the discount rateVery importantChanges in the asset items lead to changes in reserves and consequently to changes in the money supply.These assets earn interest while the liabilities do not.,Monetary Base,Open Market Purchase from a Bank,N
4、et result is that reserves have increased by $100No change in currencyMonetary base has risen by $100,Open Market Purchase from Nonbank Public I,Person selling bonds to the Fed deposits the Feds check in the bankIdentical result as the purchase from a bank,Open Market Purchase from Nonbank Public II
5、,The person selling the bonds cashes the Feds checkReserves are unchangedCurrency in circulation increases by the amount of the open market purchaseMonetary base increases by the amount of the open market purchase,Open Market Purchase: Summary,The effect of an open market purchase on reserves depend
6、s on whether the seller of the bonds keeps the proceeds from the sale in currency or in depositsThe effect of an open market purchase on the monetary base always increases the monetary base by the amount of the purchase,Open Market Sale,Reduces the monetary base by the amount of the saleReserves rem
7、ain unchangedThe effect of open market operations on the monetary base is much more certain than the effect on reserves,Shifts from Deposits into Currency,Making a Discount Loan to a Bank,Monetary liabilities of the Fed have increased by $100Monetary base also increases by this amount,Paying Off a D
8、iscount Loan from the Fed,Net effect on monetary base is a reductionMonetary base changes one-for-one with a change in the borrowings from the Federal Reserve System,Other Factors Affecting the Monetary Base,FloatTreasury deposits at the Federal ReserveInterventions in the foreign exchange marketThe
9、y are not fully controlled by the central bank.,Although float and Treasury deposits with the Fed undergo substantial short-run fluctuations, they do not prevent the Fed from accurately controlling it.Open market operations are controlled by the FedThe Fed cannot determine the amount of borrowing by
10、 banks from the FedSplit the monetary base into two components MBn= MB - BR The money supply is positively related to both the non-borrowed monetary base MBn and to the level of borrowed reserves, BR, from the Fed,Feds Ability to Control the Monetary Base,Multiple Deposit Creation: A Simple Model,Mu
11、ltiple deposit creation:When the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount.,Deposit Creation: Single Bank,Deposit Creation: The Banking System,Table 1 Creation of Deposits (assuming 10% reserve requirement and a $100 increase in re
12、serves),The Formula for Multiple Deposit Creation,Critique of the Simple Model,Holding cash stops the processCurrency has no multiple deposit expansionBanks may not use all of their excess reserves to buy securities or make loans.Depositors decisions (how much currency to hold) and banks decisions (amount of excess reserves to hold) also cause the money supply to change.,
