Determinants of the Money Supply

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1 Determinants of the Money Supply
chapter 17 Determinants of the Money Supply

2 Money Multiplier M = m  MB Deriving Money Multiplier R = RR + ER RR = rD  D R = (rD  D) + ER Adding C to both sides R + C = MB = (rD  D) + ER + C

3 1 D =  MB rD + {ER/D} + {C/D} M = D + ({C/D} D ) = (1 + {C/D}) D 1 + {C/D} M =  MB m = m < 1/rD because no multiple expansion for currency and because as D  ER 

4 (1) r is negatively related with m
(2)c is also negatively related with m (3) e is negatively related with m market interest rates affect e expected deposit outflows affect e Full Model M = m  (MBn + DL)

5

6 Excess Reserves Ratio Determinants of {ER/D}
1. i , relative RETe on ER  (opportunity cost ), {ER/D}  2. Expected deposit outflows, ER insurance worth more, {ER/D} 

7 中央银行票据发行公告 [2009]第65号 为保持基础货币平稳增长和货币市场利率基本稳定，2009年12月17日（周四）中国人民银行将发行2009年第六十七期中央银行票据。 第六十七期中央银行票据期限3个月(91天)，发行量1100亿元，缴款日为2009年12月18日，起息日为2009年12月18日，到期日为2010年3月19日。本期中央银行票据以贴现方式发行，向全部公开市场业务一级交易商进行价格招标，到期按面值100元兑付，到期日遇节假日顺延。特别提示，第六十七期中央银行票据缴款要素如下，收款人户名：中央银行票据（ ），账号： ，支付行号： 。 中国人民银行公开市场业务操作室 二○○九年十二月十六日

8 Discount Loans and Interest Spread
Determinants of DL 1. i , i – id , DL  2. id , i – id , DL 

9 Factors Determining Money Supply

10 Money Supply

11 Determinants of the Money Supply

12 Deposits at Failed Banks: 1929–33

13 {ER/D}, {C/D}: 1929–33

14 Money Supply and Monetary Base: 1929–33

15 M2 Money Multiplier M2 = D + ({C/D}D) + ({T/D}D) + ({MMF/D}D)
= (1+{C/D}+{T/D}+{MMF/D})  D 1+{C/D}+{T/D}+{MMF/D} M2 =  MB rD + {ER/D} + {C/D} m2 =

16 Factors Determining M2

17 Example If we know required reserves rate =0.10, C=280 billion, D=800 billion, ER=40 billion, please calculate (1)c, e , m, RR, R and MB; (2) If central bank reduce the required reserve rate of the checkable deposit to 0.08, monetary base remain constantly, please calculate m, M, D, C, RR and ER.

18 Answer: (1) c=280/800= e=40/800=0.05 m=1.35/0.5= RR=r*D=0.1*800=80 b R=RR+ER=120b MB=C+R= =400b

19 (2)m=1.35/0.48= M=400/2.8125=1125b M=C+D=c*D+D=(1+c)*D=1.35D D=1125/1.35=833.33b C=c*D=0.35*833.33=291.67b RR=0.08*833.33=66.67b ER= =53.33b