# Chapter 14 Determinants of the Money Supply

Document Sample

```					          Chapter 14
The Money Supply Process: Part 2

Kazu Matsuda
IBEC 352
Money & Banking
The Money Supply Model
Review: Ch.13 Simple Multiple Deposit Creation Model

Assumptions:

Ch.14
Deriving the Money Multiplier
•   Assume that:
•   Desired level of currency C
•   Desired level of excess reserves ER
•   Grow proportionally with checkable deposits D.
Intuition Behind the Money Multiplier
Numerical Example:
• r = required reserve ratio = 0.10
• C = currency in circulation = \$400 billion
• D = checkable deposits = \$800 billion
• ER = excess reserves = \$0.8 billion
• M = money supply (M1) = C + D = \$1,200 billion
Factors that Determine the Money Multiplier
• Changes in the required reserve ratio r
– The money multiplier and the money supply are   ?
related to r
– International r

• Changes in the currency ratio c
– The money multiplier and the money supply are   ?
related to c
Factors that Determine the Money Multiplier
• Changes in the excess reserves ratio e
– The money multiplier and the money supply are   ?
related to the excess reserves ratio e

• market interest rate

• expected deposit outflows

• Expected writedowns
Additional Factors That Determine the Money
Supply
• Open market operations are controlled by the Fed.
• The Fed cannot determine the amount of borrowing by banks
from the Fed.
• Split the monetary base into two components:
[A] Changes in the Non-borrowed Monetary Base
• An open market purchase that ? the MBn          ?    the
amount of monetary base. So the money supply will
?.
• An open market sale that     ?    the MBn    ?        the
amount of monetary base. So the money supply will ?    .

[B] Changes in Discount Loans DL from the Fed
• An increase in BR provides additional reserves and higher
MB. So the money supply will     ?     .
• A decrease in BR causes reserves to decline and lower MB.
So the money supply will    ?     .
Application: Explaining Movements in the
Money Supply, 1980 – 2005
• Over long periods, the primary determinant of movements in
the money supply is the           ?             , which is
controlled by the Federal Reserve open market operations.

• For shorter time periods, the link between the growth rates of
the non-borrowed monetary base and the money supply is
not always close, primarily because the money multiplier m
experiences substantial short-run swings that have a major
impact on the growth rate of the money supply.
(% )

0
5
10
15
20
25

1   9   8   0
1   9   8   1
1   9   8   2
1   9   8   3
1   9   8   4
1   9   8   5
1   9   8   7
1   9   8   8
1   9   8   9
1   9   9   0
1   9   9   1
1   9   9   2
1   9   9   4
1   9   9   5
Plot of Federal Funds Rate

1   9   9   6
1   9   9   7
1   9   9   8
1   9   9   9
2   0   0   1
2   0   0   2
2   0   0   3
2   0   0   4
2   0   0   5
(%)

0
5
10
15
20
25
1980
1981
1982
1983
1984
1985
1987
1988
1989
1990
1991
1992
1994
1995
1996
Plot of Federal Funds Rate

1997
1998
1999
2001
2002
2003
2004
2005

```
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
 views: 6 posted: 8/22/2011 language: English pages: 14