CHAPTER 4
THE U.S. FEDERAL RESERVE
AND THE CREATION OF MONEY
CENTRAL BANKS AND THEIR PURPOSE
The primary role of a central bank is to maintain the stability of the currency and money supply for a country or a group of countries. The role of central banks can be categorized as: (1) risk asssment, (2) risk reduction, (3) oversight of payment systems, (4) crisis management.
One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, central banks are sometimes called monetary authorityhl7. In implementing monetary policy, central banks, acting as a rerve bank, require private banks to maintain and deposit the required rerves with the central bank. In times of financial crisis, central banks perform the role of lender of last resort for the banking system. Countries throughout
the world may have central banks. Additionally, the European Central Bank is responsible for implementing monetary policy for the member countries of the European Union.
There is widespread agreement that central banks should be independent of the government so that decisions of the central bank will not be influenced for short-term political purpos such as pursuing a monetary policy to expand the economy but at the expen of inflation.
In implementing monetary and economic policies, the United States is a member of an informal network of nations. This group started in 1976 as the Group of 6, or G6: US, France, Germany, UK, Italy, and Japan. Thereafter, Canada joined to for the G7. In 1998, Russia joined to form the G8.
THE CENTRAL BANK OF THE UNITED STATES: THE FEDERAL RESERVE SYSTEM
The Federal Rerve System consists of 12 banking districts covering the entire country.
Created in 1913, the Federal Rerve is the government agency responsible for the management of the US monetary and banking systems. It is independent of the political branches of government. The Fed is managed by a ven-member Board of Governors, who are appointed by the President and approved by Congress.
The Fed’s tools for monetary management have been made more difficult by financial innovations. The public’s increasing acceptance of money market mutual funds has funneled a large amount of money into what are esntially interest-bearing checking accounts. Securitization permits commercial banks to change what once were illiquid consumer loans of veral varieties into curities. Selling the curities gives the banks a source of funding that is outside the Fed’s influence.
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INSTRUMENT OF MONETARY POLICY: HOW THE FED INFLUENCES THE SUPPLY OF MONEY
The Fed has three instruments at its disposal to affect the level of rerves.
Rerve Requirements
Under our fractional rerve banking system have to maintain specified fractional amounts of rerves against their deposits. The Fed can rai or lower the required rerve ratios, thereby permitting banks to decrea or increa their lending and investment portfolios. A bank’s total rerves equal its required rerves plus any excess rerves.
Open Market Operations
The Fed’s most powerful instrument is its authority to conduct open market operation. It buys and lls in open debt markets government curities for its own accounts. The Fed prefers to u Treasury bills becau it can make its substantial transactions without riously disrupting the prices or yields of bills.
The Federal Open Market Committee, or FOMC, is the unit that decides on the general issues of changing the rate of growth in the money supply, by open market sales or purchas of curities. The implementation of policy through open market operations is the responsibility of the big my crettrading desk of the Federal Rerve Bank of New York.
Open Market Repurcha Agreements
The Fed often employs variants of simple open market purchas and sales, the are called the repurcha agreement (or repo) and the rever repo. In a repo, the Fed buys a particular amount of curities from a ller that agrees to repurcha the same number of curities for a higher price at some future time. In a rever repo, the Fed lls curities and makes a commitment to buy them back at a higher price later.
veral的用法Discount Rate
A bank borrowing from the Fed is said to u the discount window. The 开家长会学生发言稿discount rate is the rate charged to banks borrowing directly from the Fed. Raising the rate is designed to discourage such borrowing, while lowering should have the opposite effect.
DIFFERENT KINDS OF MONEY
Money is that item which rves as a numeraire. In a basic n money can be defined as anything that rves as a unit of account and medium of exchange. We measure price
s in dollars and exchange dollars for goods. Hence coins, currency, and any items readily exchanged into dollars (checking deposits or NOW accounts) constitute our money supply.
MONEY AND MONETARY AGGREGATES
Monetary aggregates measure the amount of money available to the economy at any time. The monetary ba is defined as currency in circulation (coins and federal rerve notes) and rerves in the banking system. The instruments that rve as a medium of exchange can be narrowly defined as M1, which is currency and demand deposits. M2日语词典 is M1 plus time and savings accounts, and money market mutual funds. Finally, M3 is Mgei学习经验演讲稿2pvc是什么意思 plus short-term Treasury liabilities. While all three aggregates are watched and monitored, M1 is the most common form of the money supply, with its trait as being the most liquid. The ratio of the money supply to the economy’s income is known as the velocity of money白马王子英语.
