Monetary Policy

See me with queries

What is money?
Trust.
1. Money is a medium of exchange. I.e.
acceptable.
2. Money as a unit of account; we can value
different products.
3. Money is a store of value for the future.

Money now is fiat; let it be done. Trust.
M
Personally, I think this is hopelessly outdated.

M1 = currency, demand deposits (current
accounts), other checkable deposits. Often near
money.
M2 = M1 + savings and time deposits.

When the Central Bank (in NZ, the Reserve Bank
of New Zealand) increases Money Supply, they
increase M1 and M2.
Central Bank
In NZ the Reserve Bank of New Zealand.

Monetary Policy = manipulation of money
supply (M1 and M2) for economic growth,
employment and price stability.

RBNZ, ECB and Federal Reserve Bank;
independent but appointed by politicians
Money supply
Manipulating interest rates.
People, companies and the government borrow and
so pay interest on loans.
Interest is the price on a loan.
Higher interest rates mean that borrowing is
more expensive, while lower rates mean
borrowing is cheaper.
Higher interest rates also mean existing loans are
expensive/ lower interest rates make existing
loans cheaper.
Variation in interest rates
Credit card rates are higher because of the risk
of defaults.
Personal loans for, e.g., cars or holidays are
also high.
Mortgages are lower.
Established firms get better rates than new
ones.
And banks lending to each other is usually the
lowest rate (lol!)
Demand for money
Demand for Transactions (eg consumer
confidence in buying).
Higher incomes and higher price levels increase
transaction demand why?
Demand for money as Asset/Speculative.
Related to interest rates; as they rise, cash (M1)
gets turned into interest earning M2.
Mechanisms
M1 and M2 can be increased by changing the
discount rate.
There is the OCR, the Libor, and several other
rates that are between commercial banks.
But the discount rate is a rate offered by the
Central Bank in its role as lender of last
resort.
Dropping this will increase loans, while raising
it will decrease loans.
Mechanism II: Bonds
Governments sell bonds to have money for
spending.
When commercial banks lend to the govt,
they buy bonds.
The government can buy bonds from
commercial banks.

The amount held by a bank as an asset defines
the multiple that they lend.
Government bonds
Bought by people and financial institutions.

Government bonds
Bank bonds
Bought by Government (and people, and
other financial institutions).

Bank bonds
Bond buying
When the government buys bonds from the
commercial banks, this provides them with
money.
Which they can lend.
When banks sell bonds, then the banks lose cash
and so are restricted in their lending.
So expansionary; Govt buys bonds from banks.
Contractionary; Govt sells bank bonds that the
Govt holds.
Reserve Asset Ratio
Banks keep some of their money in real assets.
They lend a multiple of their assets.

Held as cash or deposits in the Central Bank.
US RAR is 10% of near money.
UK 3%.
NZ has no official RAR.
Global banking regulators are suggesting a return
to higher RARs.