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

Lecture 6 Money Market Analysis,Macroeconomics,I. Introduction,The objective of this chapter is to study how money and interest rate is determined in the money and financial market. The money and financial market is the market in which money and various financial assets (such as, bonds and stocks) are exchanged.,I. Introduction,The Functions of Money Medium of Exchange Store of Value Unit of Account,I. Introduction,Types of money in modern economy M1: Currency and Notes (issued by central bank), also called high powered money or monetary base. checkable deposit. M2: M1 + Non-checkable saving deposit etc. M3: M2 + Large time deposit Note: M1 is the most liquid money followed by M2 and M3.,II. The Demand for Money,Transaction Demand for Money: Money is a medium of transaction. The transaction demand for money is those money that is hold for transactional purpose. It is assumed that the transaction demand for money is related to nominal GDP.,II. The Demand for Money,Asset Demand for Money Money is also an asset. The asset demand for money is those money that is demanded (or hold) because of money as an asset. However, unlike the other assets, such as bonds, stocks, etc., money may (or even does not) generate interest rate. Comparing to other assets, its only advantage is the liquid. Therefore it can be expected that when interest rate of other assets increase, the demand for money will decline.,II. The Demand for Money,Asset Demand for Money (continued) interest rate of an asset (bond) (1) where P1 is the face value, P0 is the current market value of the bond, i is the rate of return which is also the interest rate. This indicates that interest rate is negatively related to the market price of bond, given the face value.,II. The Demand for Money,The Total Demand for Money The total demand for money is the sum of transaction demand for money and asset demand for money: Md = hPY－ ki (see the figure),II. The Demand for Money,The Total Demand for Money (continued),,,III. The Money Market Equilibrium,The Supply of Money In the standard textbooks, the supply of money is often regarded as being controlled by the central bank, and therefore it is often assumed to be exogenuous: (see the figure),III. The Money Market Equilibrium,,,i,Ms,0,,The Supply of Money (continued),M,,III. The Money Market Equilibrium,The Money Market Equilibrium The money market equilibrium is the condition at which which further indicates Given the money supply and nominal GDP, it is the interest variation that ensures the money market equilibrium (see the figure).,III. The Money Market Equilibrium,The Money Market Equilibrium (continued),III. The Money Market Equilibrium,How Does the Interest Rate Variation Ensure the Money Market Equilibrium (mechanism analysis) Suppose the interest rate to be lower than the equilibrium interest rate. In this case, there will be an excess demand for money indicating people will sell their bonds to exchange for money.,III. The Money Market Equilibrium,Mechanism Analysis (continued) Therefore in the bond market, there will be excess supply of bond. This will reduce the bond price and hence raise the rate of return on bond, which is a measure of interest rate.,III. The Money Market Equilibrium,The effect of money supply increase,III. The Money Market Equilibrium,The effect of money supply increase (continued) The impact of money supply increase is the decrease in interest rate What is transmission mechanism?,IV. How Does the Central Bank Create the Money Supply,The Structure of Modern Banking System,IV. How Does the Central Bank Create the Money Supply,The Working of Commercial Banks: The most important part of Federal Reserve System is the commercial bank. We thus need to discuss how commercial bank make their business: Attracting deposit from the public at no or very low interest rate; Using the public deposit to lend out at a higher interest rate (own the profit from the interest differential);,IV. How Does the Central Bank Create the Money Supply,The Working of Commercial Banks (continued): However, they can not use all the deposit from the public for lending. Some of them must be kept as reserve (denoted as R); The Reserve Ratio (denoted as r) r = R/D where D is the deposit from the public.,IV. How Does the Central Bank Create the Money Supply,The Working of Commercial Banks (continued) Apparently, the reserve ratio is a very important policy variable for a bank. Low reserve ratio may cause the danger that the bank can not meet a large deposit withdrawn from the public (causing bankruptcy). Yet a high reserve ratio may cause less loan and hence less profit.,IV. How Does the Central Bank Create the Money Supply,The Benefit and Responsibility of Commercial Banks in the Federal Reserve System Benefit: In the case of emergency needing cash, the commercial bank can borrow the money from the Federal Reserve Bank at its discount window. This will efficiently avoid the possib。