Ngân hàng, tín dụng - Chapter 20: Understanding movements in bank reserves

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 20 Understanding Movements in Bank Reserves Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-2 Learning Objectives • Analyze the Federal Reserve balance sheet and how changes in its assets and liabilities impact the money supply • Explain how the U.S. Treasury Department’s spending decisions impact the money supply • Understand the bank reserve equation • Define the monetary base Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-3 Introduction • The balance sheet of the Fed shows the movements of reserves in the system • Very complicated since many things can impact the level of reserves – Open Market operations and Discounting – Other entries may offset movements in reserves – The Fed does not control many of these items – US Treasury can add or absorb bank reserves through fiscal spending or tax revenue 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-4 Introduction (Cont.) • Bank Reserve Equation – The expanded view of reserve movements – A summary sheet for sources and uses of reserves – Useful for monitoring trends in reserves— fundamental framework of monetary control. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-5 The Fed’s Balance Sheet • Table 20.1 is a simplified balance sheet of the Federal Reserve System in mid-2003 • Every item on the balance sheet (asset or liability) has an effect on reserves – Total assets = total liabilities – Fed’s total liabilities include reserves—“bank deposits” in the Fed plus cash in bank vaults – Therefore, bank reserves must equal total Federal Reserve assets minus all other Fed liabilities – Anything affecting a Fed’s asset or liability must alter reserves, unless it is offset somewhere else in the balance sheet Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-6 TABLE 20.1 The Federal Reserve’s Balance Sheet (March, 2008, in billions of dollars) 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-7 The Fed’s Balance Sheet (Cont.) • ASSETS – Gold certificates • Gold purchased from abroad or from domestic mines • US Treasury purchases gold with a check drawn on its deposit in the Fed • To replenish its checking account with Federal Reserve, Treasury issues a “gold certificate” and the Fed credits the Treasury’s deposit account by the same amount • Federal Reserve assets have risen, but reserves are not affected (by this transaction) since a liability other than reserves (Treasury deposits) has risen simultaneously • However, the net result of both the above transactions is an increase in bank reserves Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-8 The Fed’s Balance Sheet (Cont.) • ASSETS (Cont.) – Coins—Coins and bills issued by the Treasury that the Fed has in its vaults – Loans—Bank borrowings from the Fed through the discount window – Term Auction Facility (TAF)—Federal Reserve auctions short-term funds to banks who can then deliver a wide variety of assets as collateral – US government and agency securities • Securities acquired by the Fed through open market operations • Purchase of securities expands reserves • Sales of securities by the Fed lowers reserves Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-9 The Fed’s Balance Sheet (Cont.) • ASSETS (Cont.) – Items in process of collection • Arises in process of clearing checks • “Deferred credit items” on the liability side. • The difference between the two is the “float” • Occurs because many checks are not collected within the specified time period • Float can fluctuate considerably, either adding to or subtracting from reserves • Can cause serious short-term disruptions in bank reserves • As the use of electronic payment systems increases, float will diminish in size and importance 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-10 The Fed’s Balance Sheet (Cont.) • ASSETS (Cont.) – Other Federal Reserve Assets • Consists primarily of securities denominated in foreign currencies • Purchases and sales of foreign securities usually occur in connection with foreign exchange operations of the Fed Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-11 The Fed’s Balance Sheet (Cont.) • Liabilities – Federal Reserve Notes Outstanding • Liability to the Fed, but an asset to holder of the currency • The change in this account does not alter bank reserves—notes outstanding rises, bank deposits at Fed falls • Impacted by the decision of the public to hold more currency, which lowers bank reserves. – US Treasury Deposits—Represents the “working balance” of the Treasury reflected in spending and tax revenues Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-12 The U.S. Treasury’s Monetary Accounts • Purchase of gold – Treasury, not the Fed, that officially buys and sells gold for the government – After purchasing gold by depleting reserves on deposit, the Treasury issues an equal amount of gold certificates – The Fed purchases these gold certificates to replenish the Treasury’s deposit account – When the Treasury buys gold, bank reserves rise and when the Treasury sells gold, bank reserves fall 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-13 The U.S. Treasury’s Monetary Accounts (Cont.) • Changes in the Treasury’s deposits at the Federal Reserve banks will affect bank reserves • Currency issued by the Treasury – The Treasury also issues a small amount of currency, including all coins – There is no difference between currency issued by the Treasury or Fed, all coins and bills in bank vaults count as reserves. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-14 The Bank Reserve Equation • Table 20.2 shown in the textbook • Record of sources and uses of bank reserves • Primary difference between Table 20.1 and 20.2 is the inclusion of Treasury currency in banks vaults which are counted as reserves • Consolidation of the Fed’s balance sheet with Treasury’s monetary accounts • Bank Reserves = bank deposits with Fed plus currency in bank vaults Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-15 TABLE 20.2 The Bank Reserve Equation (March, 2008; in billions of dollars) 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-16 Putting it all to Use • In Chapter 18 it was assumed that the Fed could control the volume of reserves by judicious use of open market operations • However, the reserve equation demonstrates that other influences outside control of the Fed can affect reserves • These outside influences need to be forecasted and monitored to assist the Fed in controlling the level of reserves Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-17 Putting it all to Use (Cont.) • Defensive Measure – Fed engages in open market operations aimed at defending a target level of reserves from “outside” influences. – Offset transitory changes in reserves which are trying to push level of reserves outside the range desired by the Fed – Extensive use of Repurchase Agreements as temporary injections or deletions of reserves Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-18 Putting it all to Use (Cont.) • Dynamic Measures—Open market operations aimed at either increasing or deceasing the overall level of bank lending capacity by changing the level of bank reserves 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-19 Focusing on the Monetary Base • What specific variable should the Fed attempt to control to regulate money supply? • Control variable (operating target) is the immediate objective of open market operations • It is suggested that the Fed should attempt to control the monetary base—total reserves plus currency held by the nonbank public. • Reserve equation depicted in Table 20.2 can be altered to focus on the monetary base. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Appendix MONETARY EFFECTS OF TREASURY FINANCING Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-21 Appendix—Monetary Effects of Treasury Financing • Budget Deficit—when government spends more than it receives in taxes • Financing the deficit is the responsibility of the Treasury Department • Could print money to pay the bills, but this responsibility falls under the Fed • Treasury prints and sells bonds and uses proceeds to meet its obligations • Debt financing/Treasury spending complicates Fed’s job of controlling money 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-22 Appendix—Monetary Effects of Treasury Financing (Cont.) • Taxation – When taxes are paid, demand deposits at commercial banks are transferred from private sector to Treasury’s account – Initially these funds are held in the Treasury’s accounts at commercial banks – Money supply falls since government deposits are not counted in the money supply Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-23 Appendix—Monetary Effects of Treasury Financing (Cont.) • Taxation (Cont.) – Total bank reserves fall when Treasury moves funds from commercial banks to the Fed – Money supply and bank reserves increase to original level when the Treasury spends the money Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-24 Appendix—Monetary Effects of Treasury Financing (Cont.) • Borrowing from Nonbank Public – Rather than raise taxes, Treasury engages in deficit spending— raising the money by selling bonds to the nonbank public. – Selling bonds reduces the money supply as funds are transferred from the private sector to Treasury accounts – Reserves also fall when the Treasury shifts funds from commercial banks to Fed 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-25 Appendix—Monetary Effects of Treasury Financing (Cont.) • Borrowing from Nonbank Public (Cont.) – When the Treasury spends the money, both money supply and reserves revert to their original level – Public winds up with government bonds rather than a receipt saying they have paid their taxes. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-26 Appendix—Monetary Effects of Treasury Financing (Cont.) • Borrowing from Commercial Banking System – Banks, rather than the public, purchases bonds – Two possibilities • Banks are fully loaned up – Must dispose of other assets – Reserves and money supply initially decrease, but are restored when Treasury spends the money • Banks have excess reserves – No need to dispose of other assets – Increases the money supply when the Treasury spends the money Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-27 Appendix—Monetary Effects of Treasury Financing (Cont.) • Borrowing from the Fed – This method of borrowing does not reduce either the money supply or bank reserves when the bonds are sold – The Treasury sells bonds to the Fed which deposits the proceeds from the sale in the Treasury’s account – When the Treasury spends the funds, both demand deposits and the money supply increase 10 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-28 Appendix—Monetary Effects of Treasury Financing (Cont.) • Printing Money – If the Treasury could print money, it could deposit the newly created currency with the Fed – When it spends the money, both bank reserves and the money supply could increase – This method is virtually identical to the case of borrowing from the Fed Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-29 Appendix—Monetary Effects of Treasury Financing (Cont.) • Financing the deficit – Deficit must be financed by one of the above options – Fed decides how much will come from new money and how much must come through the sale of bonds to the public Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-30 Appendix—Monetary Effects of Treasury Financing (Cont.) • Financing the deficit (Cont.) – Monetizing the Debt—Federal Reserve prints new money to purchase the new Treasury bonds • Could make the Treasury’s job easier by printing money—very inflationary • Congress created the Fed to keep the printing press from the Treasury and force the Treasury to pay interest on its debt. • When the Fed monetizes the debt by buying Treasury bonds, it lets the Treasury print money through the back door