MONETARY POLICY Lecture 2 Contemporary monetary system Marijana Ivanov, Ph.D.

MONETARY INSTITUTIONS – institutions with ability to create the money. The category of monetary institutions includes the central bank and banks (commercial banks). In some countries … also… credit union, saving and loan associations, building societies and similar institutions but only if non-monetary agents hold with them a money on the transactional (checking) accounts. Non-monetary agents: households, firms, government and non-monetary financial institutions like insurance companies, pension funds, … (what means financial institutions without abilities to create money because they don’t hold deposit as a form of their liabilities to public)

In today economy the definition of money includes: - currency (cash) in circulation - and deposit money on current account, giro account and similar transactional accounts (Europe) / on checking accounts (the.U.S.) checkable deposits (deposits on transactional accounts) - deposits on which checks (cheques) can be written Deposit money (on current/ giro accounts of the non-monetary agents) is not always accepted for payments. There are shops and other places where checks and/or debit bank cards are not accepted.

Money supply = monetary aggregate M1 = Money: There are different form of deposits that don't represent the money (for example: time deposit and saving deposit at banks, time deposit at building societies ... – they can not be used for payments and as a medium of exchange) Money supply includes instruments that can be used for payments and as medium of exchange. Money supply = monetary aggregate M1 = Money: 1. cash (currency) in circulation 2. deposit money = checkable deposits (deposits on checking accounts)/ transactional deposits/ overnight deposits (Euro area – ECB)/ demand deposits and other checkable deposits (the U.S. - Fed)

Cash (banknotes in circulation) are issued by the central bank. Additional explanations Cash (banknotes in circulation) are issued by the central bank. Cash as a part of monetary aggregate M1 include banknotes and coins in the circulation (what means in the hands of non-monetary agents like households, firms, non-monetary financial institutions, government …). Banknotes and coins are liabilities for the central bank in spite of fact that coins are usually issued by government, while the banknotes are really issued by central banks. Deposit money is issued by banks (commercial banks). It includes the deposits of non-monetary agents on current, giro and similar transactional accounts opened at banks or other monetary institutions.

Additional explanations Forms of BANKS ACCOUNTS in Croatia: deposit account: savings accounts and banks’ accounts connected with time deposits transactional accounts: current accounts and giro accounts - including deposits in domestic currency and deposits in foreign currencies However, money supply M1 (in one country or single currency area) includes only deposits on transactional account in domestic currency. Foreign currency deposits are not part of national monetary aggregate M1 (money supply) because they (usually) can not be used as money in the national monetary system. (But they represent money in some other monetary systems in abroad.) All form of deposits represent the liabilities for banks (or other credit institutions). Saving deposits are form of the near money (quasy money) because they can be easily converted into currency or demand deposits without much loss of value, but they can’t be used as a medium of exchange.

E – Money Additional explanations Electronic money (or e-money) is the money that exist only in electronic form. The first form of e-money was the debit card. A debit card is a plastic payment card that provides the cardholder electronic access to his or her bank transactional account. The debit cards enable consumers to purchase goods and services by electronically transferring funds (deposit money) directly from their bank accounts to a merchant’s account. Cover to carry out debit cards is available positive balance of deposits in transaction accounts (deposit money) and (possibly) approved overdrafts. A more advanced forms of e-money are the stored-value cards and prepaid cards. “You initially load the card (or the specific account) with some value (cash or deposit money) you think you need, then use up that value for payments.” In contrast to debit cards, there are no possibilities of overdrafts. In the case of a stored-value card, the funds (the data) are stored on the card, in the form of binary-coded data. In the case of prepaid cards, the data is maintained on computers affiliated with the card issuer.

MONEY SUBSTITUTES Credit cards and charge cards are not money. They are the money substitutes. A credit card (revolving card) allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the consumer (cardholder) from which he or she can borrow money for payment to a merchant. A revolving credit card is different from a charge card. A charge card requires the balance to be paid in full each month. In contrast, revolving credit cards allow the consumers a continuing balance of debt, subject to interest being charged.

The central bank A central bank, reserve bank, or monetary authority is an institution that manages a state's currency, money supply, and interest rates in some countries (such as Croatia) central bank also manages the exchange rate Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base (primary money, M0) in the state, and usually also prints the national currency, which usually serves as the state's legal tender.

The primary function of a central bank is to control the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank iliquidity or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference.

The Croatian National Bank is the central bank of the Republic of Croatia. The Croatian National Bank is autonomous and independent in its work. The Council of the Croatian National Bank is the highest body of the Croatian central bank and it is responsible for the achievement of the objective and for carrying out the tasks of the CNB.

Source: https://www.hnb.hr/en/about-us/functions-and-structure/role The Croatian National Bank is in the exclusive ownership of the Republic of Croatia. (The Act on the Croatian National Bank)

Core functions of the CNB As a central bank of the Republic of Croatia, the Croatian National Bank operates in six core areas of responsibility: monetary and foreign exchange policy, international reserves management, financial stability, supervision, resolution of credit institutions and the payment system.

Are all central banks state-owned banks? The capital of the ECB comes from the national central banks (NCBs) of all EU Member States. The NCBs’ shares in this capital are calculated using a key which reflects the respective country’s share in the total population and gross domestic product of the EU. Source: http://www.snb.ch/en/ifor/shares

Source: http://www.snb.ch/en/

Source: http://www. snb