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Money and monetary policy

Learning objectives:
Consider the nature of money and its functions in the economy. Learn about the central bank system Examine how the banking system helps determine the supply of money. Examine the tools used by the central bank to alter the supply of money.

Out line:
1-The meaning of money: 2-The supply of money: 3-The demand of money: 4-The monetary policy:

5-The finacial system in Morocco:

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Introduction:

The key aim of monetary policy for most central banks is to keep inflation low and steady. However in a market-oriented economy, central banks cannot control inflation directly. They have to use instruments. Some central banks use money growth or the exchange rate as intermediate targets to guide policy decisions. Others take a more eclectic approach and consider a range of factors. Monetary policy has occupied much time of the worlds most distinguished economists over the years.

Clarifying a misunderstanding:
In our everyday lives, we often refer to money as one of three things: coins and paper money (currency). a person's wealth. a person's income.

The meaning of money

When economists refer to money they have a different connotation in mind: "money is anything that is generally accepted in payments of goods and services or in the repayment of debts"
Mishkin, F. The Economics of Money, Banking and Financial Markets, p. 44

Three functions of money:

Three principle uses Medium of exchange :we can use to buy stuff Unit of account: a way of expressing value, allows us to compare different goods and services Store of value: a way of holding wealth (not the only way, can hold assets)

The kinds of money

Commodity money Fiat money

Measuring MoneyMoney Supply The

Measuring money M1

Narrowest definition and measure of money supply Assets used primarily for transactions

Currency (coins & paper money) Checkable accounts Travelers Checks M1 plus Savings deposits, including Money Market deposit accounts Small time deposits Money Market Mutual Funds

Measuring money M2

Broader measure of money stock Includes items used as store of value M1 +

}
} M1
M2
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M3

Measuring money M3

Even Broader definition of money supply Includes items that serve as a unit of account M2 +

M2 plus Large Time Deposits

The supply of money

Banks and the creation of money

The largest element of money supply is bank deposits. Banks are able to create additional money by increasing the amount of bank deposits. They do this by lending to people: granting people overdrafts or loans. The process of the creation of credit . The effect of the bank multiplier.

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The supply of money

What causes the money supply to rise?

Increased demand for credit. government borrowing from abroad.

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The demand of money

The demand for money refers to the desire to hold money why should people want to hold on money? There are two main reasons: 1. The 1st is that people receive money only at intervals and not continuously. They thus require to hold balances of money in cash. 2. The 2nd: is as a form of saving.

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The monetary policy

The meaning of monetary policy Macroeconomic stability How monetary policy works? Tools of monetary policy Problems in controlling money supply The impact of monetary policy on business

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The meaning of monetary policy

Monetary policy consists of those actions undertaken by a central bank in pursuit of macroeconomic stability.

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macroeconomic stability
Macroeconomic stability implies: 1. Economic growth 2. Low inflation 3. Exchange rate stability 4. Financial sector stability.

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Monetary policy and economic growth

Monetary policy affects economic growth through influencing aggregate supply and aggregate demand.

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Monetary Policy: AD
Price Level AD
P1 P2

New AD

Y1

Y2

New Y1

Y (GDP)
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Monetary Policy: AS
Price Level
AS New AS

Y1

Y2

Y (GDP)
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Monetary Policy: Equilibrium

Aggregate Demand and Supply together determine the level of prices and output in the economy

Price Level
P1

New AD AD

AS

P0

Y0

Y1

Y
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Monetary policy and inflation

Inflation means sustained increase in prices.
High inflation is a problem, since it

Discourages saving; Encourages speculation, dollarization, capital flight; Hurts the poor, and

Raises uncertainty.

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How monetary policy works?

Monetary policy pursues its objectives by Managing level of money, Influencing interest rates, and Affecting volume of lending.
The central bank achieves its objectives by influencing Reserve money, The money multiplier, and Broad money.
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Tools of monetary policy

There are four ways in which the central bank affect the money supply; these are: 1. open-market operations. 2. reserve requirement. 3. discount rate 4. selective credit control.

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1. open-market operations.
The Process of buying and selling government bonds in the financial market is called Open market operations. This process can be divided into to cases: A. Open Market Purchase. B. Open Market Sale.

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Open Market Purchase.

The central bank buys government bonds from firms or households. The central bank pays for these bonds with check drawn on itself and payable to the seller. The seller deposits the check in a commercial bank. The commercial bank present the check to the central bank for payment. The central bank make a book entry increasing the deposit of the commercial bank at the central bank and adds to the commercial banks reserves.

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Open Market Sale.

The central bank sells government bonds and receive a check drawn on commercial banks. The value of the check will be deducted from the deposit of the commercial bank. This decreases the reserves available to commercial banks which will decrease the loans made by commercial banks.

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2. reserve requirement.
An increase in the required reserve ratio forces the banks with no excess reserves to decrease its loans, which in turn, decreases the deposits and that will decrease the money supply.

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3. discount rate.
It is the interest rate at which the central bank will lend funds to commercial banks whose reserves are temporarily below the required level.

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4. Selective credit control.

Examples: margin requirements, mortgage controls, and maximum interest rates.

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Problems in controlling money supply

The central bank must wrestle with two problems:

The 1st problem is in controling the amount of money that households choose to hold as deposits in banks. The 2nd problem with monetary control is that the central bank does not control the amount that bankers choose to lend.

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Morocco:
Population: 34,343,220 (July 2008 est.) GDP: 137.4 billion (2008 est.) Macroeconomic Data Inflation rate (consumer prices): 4.6% (2008 est.) Labor force: 11.5 million (2008 est.) Unemployment rate: 9.1% Budget: Revenues: $26.09 billion; Expenditures: $28.41 billion (2008 est.) Public debt: 60.2% of GDP (2008 est.) Banking System 16 commercial banks with $60.2 billion in Assets.

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Moroccos economy

The Moroccan economy has been characterized by macroeconomic stability, with generally low inflation and sustained, moderately high growth rates over the past several years. Morocco's primary economic challenge is to accelerate growth and sustain that improved performance in order to reduce high levels of unemployment and underemployment. While overall unemployment stands at 8.6% (2010 est.), this figure masks significantly higher urban unemployment, as high as 31% among young urban males.
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The Moroccan financial systeme

The macroeconomic stability:

Capital account restrictions apply to residents, but transactions for nonresidents are mostly free

There is an absence of benchmarks International agreements are transforming the formerly closed nature of the economy Macroeconomic conditions were strong in 2001-2002
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S.W.O.T Analysis Of the financial system

strenghts:

Weeknesses:
Precarious solvency and liquidity situation of two large state-owned specialized banks. The level of nonbank financial institutions and sectors.

Robust health of the large commercial banks

Opportunities:

Threats:

The financial system could contribute to economic growth. Increased openess would bring benefits and opportunities to Moroccos financial institutions and other economic agents.

Fiscal problems. The inefficiency of the legal and judicial systems remains an impediment to the development of the financial sector.
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The banking system

Morocco's banking sector is fairly well developed and modern. The banking system is made up of the Central Bank, Bank al-Maghreb, 16 commercial banks (partially owned by or working in partnership with European banks such as BNP Paribas), several development banks, and 36 financing companies. Seven banks control the market and the principal actor is the Banque Populaires network, followed by Attijariwafa, the BNPE and banks controlled mainly by foreign shareholders, including the BMCI (a subsidiary of BNP-Paribas) and the Credit du Maroc (a subsidiary of the Crdit Lyonnais-Crdit Agricole Group). The Caisse des Dpts is extremely active in real estate and tourism, funding public interest projects as well as more modest initiatives.
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The banking system

The Big 3 share $38.4 billion in Assets and account for 63.8% of the market. Attijariwafa Bank ($16.3 billion in Assets) 27.1% share Banque Centrale Populaire (BCP) ($14.1 billion in Assets) 23.4% share Banque Marocaine du Commerce Extrieur (BMCE) ($8.0 billion in Assets) 13.3% Share 13 small to mid-sized players with $19.3 billion in Assets garner 36.2% market share Credit Populaire du Maroc (CPM) Bank Al Amal Crdit Agricole du Maroc (CAM) Fonds dEquipement Communal Crdit Immobilier et Hotelier (CIH) Union Marocaine de Banques MdiaFinance Crdit Foncier du Maroc (CFM) Socit Gnrale Marocaine de Banques (SG) Crdit du Maroc (CDM) Citibank Maroc Arab Bank Maroc

Conclusion:

Monetary policies are demand macro economic policies. They work by stimulating or discouraging spending on goods/ services . Monetary policies tries to eliminate those fluctuations. Central bank have no handle on productivity and real economic growth.

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References
Mishkin, F. The Economics of Money, Banking and Financial Markets, p. 44 Economic - Principles of Macroeconomics Slomar,J. The economic envoronment of business ,p.227-258 Morocco: finacial system stability assessment. 2003 Morocco Final: M,El Hajoui-A,Marrache-R,Rosenberg-K,Spriggs R,Christiansen, IMF Resident Representative in Georgia.ppt, July 2005 IB Economics, 3.4 Addison,wesley losman, chapter 29 IMF,Morocco Financial Stability Assessment (2008).pdf, and The Report: Emerging Morocco 2007 Borrowing Rates,1983-2009.pdf http://web.worldbank.org/WBSITE/EXTERNAL/ACCUEILEXTN/PAYSEXTN/ MENAINFRENC HEXT/MOROCCOINFRENCHEXTN/0,,contentMDK:20149674~pagePK:14113 7~piPK:1411 27~theSitePK:468145,00.html http://ocw.mit.edu www.investopedia.com www.BKAM.ma

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