© 2009 South-Western, a part of Cengage Learning, all rights reserved C H A P T E R The Monetary System E conomics P R I N C I P L E S O F N. Gregory Mankiw 29

In this chapter, look for the answers to these questions:  What assets are considered “money”? What are the functions of money? The types of money?  What is the Federal Reserve?  What role do banks play in the monetary system? How do banks “create money”?  How does the Federal Reserve control the money supply? 1

THE MONETARY SYSTEM 2 What Money Is and Why It’s Important  Without money, trade would require barter, the exchange of one good or service for another.  Every transaction would require a double coincidence of wants – the unlikely occurrence that two people each have a good the other wants.  Most people would have to spend time searching for others to trade with – a huge waste of resources.  This searching is unnecessary with money, the set of assets that people regularly use to buy g&s from other people.

THE MONETARY SYSTEM 3 The 3 Functions of Money  Medium of exchange: an item buyers give to sellers when they want to purchase g&s  Unit of account: the yardstick people use to post prices and record debts  Store of value: an item people can use to transfer purchasing power from the present to the future

THE MONETARY SYSTEM 4 The 2 Kinds of Money Commodity money: takes the form of a commodity with intrinsic value Examples: gold coins, cigarettes in POW camps Fiat money: money without intrinsic value, used as money because of govt decree Example: the U.S. dollar

THE MONETARY SYSTEM 5 The Money Supply  The money supply (or money stock): the quantity of money available in the economy  What assets should be considered part of the money supply? Two candidates:  Currency: the paper bills and coins in the hands of the (non-bank) public  Demand deposits: balances in bank accounts that depositors can access on demand by writing a check

THE MONETARY SYSTEM 6 Measures of the U.S. Money Supply  M1: currency, demand deposits, traveler’s checks, and other checkable deposits. M1 = $1.4 trillion (June 2008)  M2: everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories. M2 = $7.7 trillion (June 2008) The distinction between M1 and M2 will usually not matter when we talk about “the money supply” in this course.

7 통화지표와 유동성지표

Lf (M3) ( 금융기관유동성 ) (1,845.2) M2 ( 광의통화 ) 예금은행 및 비은행 금 (1425.9) 융기관 기타 예수금등 (419.3) 준결제성예금 2) M1 ( 협의통화 ) (1095.3) ( 좌동 ) (330.6) 결제성예금 1) (307.2) ( 좌동 ) 현금통화 (23.4) ( 좌동 ) 주 : 1) 요구불예금 + 수시입출식저축성예금 2) MMF + 정기예적금 + 수익증권 + 시장성상품 + 금전신탁 + 기타 통화지표별 구성내역 (2008 년 12 월말, 단위 : 조원 )

통화 지표별 구성 내역의 변화  1999 년 1 월 현재 vs 2008 년 12 월말 현재 화폐 발행액 : 15 조원 31 조원 M1 : 32 조원 331 조원 M2 : 262 조원 1,426 조원 Lf : 812 조원 1,845 조원

한국의 금융시장 ?  통화금융기관 - 신용창조 가능 - 신용창조 가능  비통화 금융기관 - 신용창조 불가 - 신용창조 불가

한국의 통화금융기관  한국은행  예금은행 - 일반은행 * 시중은행, 지방은행, 외국은행 지점 - 특수은행 * 농협, 수협

한국의 비통화금융기관  개발기관  투자기관  저축기관  보험기관  기타

한국의 비통화금융기관  개발기관 - 장기거액의 자금이 소요되는 특정부문을 중점적으로 지원하기 위해 설립된 기관 - 소요자금의 대부분을 정부출자, 채권발행, 해외로부터의 차입금 등으로 조달 * 한국산업은행, 수출입은행

한국의 비통화금융기관  투자기관 - 단기금융시장이나 자본시장에서 자금중개기능을 담당하는 금융기관 * 종합금융회사, 투자신탁회사, 한국증권금융  한국증권금융 증권의 발행과 유통을 촉진하기 위하여 증권회사나 일반투자자를 대상으로 증권의 인수나 매매에 필요 자금이나 증권을 빌려주는 기능을 담당하는 기관

한국의 비통화금융기관  저축기관 - 은행과 비슷하나 가계를 대상으로 소규모 장기자금 - 신용창조 기능이 없음. * 상호신용금고, 새마을금고, 신용협동조합 체신예금

한국의 비통화금융기관  보험기관 - 다수인의 위험을 집적 (pooling) 함으로써 개개인의 위험을 분산하여 감소시키는 위험인수 기능  기타 - 증권, 리스, 신용카드, 선물회사

THE MONETARY SYSTEM 17 Central Banks & Monetary Policy  Central bank: an institution that oversees the banking system and regulates the money supply  Monetary policy: the setting of the money supply by policymakers in the central bank  Federal Reserve (Fed): the central bank of the U.S.

THE MONETARY SYSTEM 18 The Structure of the Fed The Federal Reserve System consists of:  Board of Governors (7 members), located in Washington, DC  12 regional Fed banks, located around the U.S.  Federal Open Market Committee (FOMC), includes the Bd of Govs and presidents of some of the regional Fed banks The FOMC decides monetary policy. Ben S. Bernanke Chair of FOMC, Feb 2006 – present

한국은행 ¬ 무자본 특수법인 ( 분류상으로는 민간기구 ) * ­ 은행의 은행으로서, 최후의 대부자 (lender of last resort) 의 기능 담당 ® 금융통화정책의 결정기관 ( 금융통화위원회 )

한국은행이 하는 일 n 화폐의 발행 ( 조폐공사 ) n 통화신용정책의 수립 및 집행 n 금융기관 대상 예금 및 대출 n 국고금수금 및 정부 대상 대출 n 대외지급준비자산의 보유운용 n 은행 경영분석 및 검사 n 경제조사 및 통계편제 등

THE MONETARY SYSTEM 21 Bank Reserves  In a fractional reserve banking system, banks keep a fraction of deposits as reserves and use the rest to make loans.  The Fed establishes reserve requirements, regulations on the minimum amount of reserves that banks must hold against deposits.  Banks may hold more than this minimum amount if they choose.  The reserve ratio, R =fraction of deposits that banks hold as reserves =total reserves as a percentage of total deposits

THE MONETARY SYSTEM 22 Bank T-account  T-account: a simplified accounting statement that shows a bank’s assets & liabilities.  Example: FIRST NATIONAL BANK AssetsLiabilities Reserves$ 10 Loans $ 90 Deposits$100  Banks’ liabilities include deposits, assets include loans & reserves.  In this example, notice that R = $10/$100 = 10%.

THE MONETARY SYSTEM 23 Banks and the Money Supply: An Example Suppose $100 of currency is in circulation. To determine banks’ impact on money supply, we calculate the money supply in 3 different cases: 1.No banking system 2.100% reserve banking system: banks hold 100% of deposits as reserves, make no loans 3.Fractional reserve banking system

THE MONETARY SYSTEM 24 Banks and the Money Supply: An Example CASE 1: No banking system Public holds the $100 as currency. Money supply = $100.

THE MONETARY SYSTEM 25 Banks and the Money Supply: An Example CASE 2: 100% reserve banking system Public deposits the $100 at First National Bank (FNB). FIRST NATIONAL BANK AssetsLiabilities Reserves$100 Loans $ 0 Deposits$100 FNB holds 100% of deposit as reserves: Money supply = currency + deposits = $0 + $100 = $100 In a 100% reserve banking system, banks do not affect size of money supply.

THE MONETARY SYSTEM 26 Banks and the Money Supply: An Example CASE 3: Fractional reserve banking system Money supply = $190 (!!!) Depositors have $100 in deposits, Borrowers have $90 in currency. FIRST NATIONAL BANK AssetsLiabilities Reserves$100 Loans $ 0 Deposits$100 Suppose R = 10%. FNB loans all but 10% of the deposit: 10 90

THE MONETARY SYSTEM 27 Banks and the Money Supply: An Example How did the money supply suddenly grow? When banks make loans, they create money. The borrower gets  $90 in currency (an asset counted in the money supply)  $90 in new debt (a liability) CASE 3: Fractional reserve banking system A fractional reserve banking system creates money, but not wealth.

THE MONETARY SYSTEM 28 Banks and the Money Supply: An Example CASE 3: Fractional reserve banking system If R = 10% for SNB, it will loan all but 10% of the deposit. SECOND NATIONAL BANK AssetsLiabilities Reserves$ 90 Loans $ 0 Deposits$ 90 Suppose borrower deposits the $90 at Second National Bank (SNB). Initially, SNB’s T-account looks like this: 9 81

THE MONETARY SYSTEM 29 Banks and the Money Supply: An Example CASE 3: Fractional reserve banking system If R = 10% for TNB, it will loan all but 10% of the deposit. THIRD NATIONAL BANK AssetsLiabilities Reserves$ 81 Loans $ 0 Deposits$ 81 The borrower deposits the $81 at Third National Bank (TNB). Initially, TNB’s T-account looks like this: $ 8.10 $72.90

THE MONETARY SYSTEM 30 Banks and the Money Supply: An Example CASE 3: Fractional reserve banking system The process continues, and money is created with each new loan. Original deposit = FNB lending = SNB lending = TNB lending =... $ $90.00 $81.00 $ Total money supply =$ In this example, $100 of reserves generates $1000 of money.

THE MONETARY SYSTEM 31 The Money Multiplier  Money multiplier: the amount of money the banking system generates with each dollar of reserves  The money multiplier equals 1/R.  In our example, R = 10% money multiplier = 1/R = 10 $100 of reserves creates $1000 of money

A C T I V E L E A R N I N G 1 Banks and the money supply 32 While cleaning your apartment, you look under the sofa cushion find a $50 bill (and a half-eaten taco). You deposit the bill in your checking account. The Fed’s reserve requirement is 20% of deposits. A. What is the maximum amount that the money supply could increase? B. What is the minimum amount that the money supply could increase?

A C T I V E L E A R N I N G 1 Answers 33 If banks hold no excess reserves, then money multiplier = 1/R = 1/0.2 = 5 The maximum possible increase in deposits is 5 x $50 = $250 But money supply also includes currency, which falls by $50. Hence, max increase in money supply = $200. You deposit $50 in your checking account. A. What is the maximum amount that the money supply could increase?

A C T I V E L E A R N I N G 1 Answers 34 Answer: $0 If your bank makes no loans from your deposit, currency falls by $50, deposits increase by $50, money supply does not change. You deposit $50 in your checking account. A. What is the maximum amount that the money supply could increase? Answer: $200 B. What is the minimum amount that the money supply could increase?

THE MONETARY SYSTEM 35 The Fed’s 3 Tools of Monetary Control 1. Open-Market Operations (OMOs): the purchase and sale of U.S. government bonds by the Fed.  To increase money supply, Fed buys govt bonds, paying with new dollars. …which are deposited in banks, increasing reserves …which banks use to make loans, causing the money supply to expand.  To reduce money supply, Fed sells govt bonds, taking dollars out of circulation, and the process works in reverse.

THE MONETARY SYSTEM 36 The Fed’s 3 Tools of Monetary Control 1. Open-Market Operations (OMOs): the purchase and sale of U.S. government bonds by the Fed.  OMOs are easy to conduct, and are the Fed’s monetary policy tool of choice.

공개시장조작 운용수단 조작방법대상증권 환수환수 증권 단순매각 한은보유 국공채 장기물 통화안정증권 발행 공급공급 증권 단순매입 거래기관보유 국공채 잔존만기가 장기인 통화안정증 권 환매 환수환수 RP ( 환매조건부채권 ) 매각 한은보유 국공채 단기물 통화안정증권 발행 공급공급 RP 매입 거래기관보유 국공채 잔존만기가 단기인 통화안정증 권 환매

월중 통화정책 방향 및 금리운용 방향 수립  실물경제는 … …  물가는 ……  금융시장에서는 ……  이와 같은 경기 및 물가 전망과 금융시장 상황을 반영하여 … 2009 년 4 월 9 일 금융통화위원회는 다음 통화정책방향 결정시까지 한국은행 기준금리를 현 수준 (2.00%) 에서 유지하여 통화정책을 운용하기로 하였음 집행부 ( 금융시장국 ) 공개시장조작을 통해 한국은행 기준금리를 목표수준 유지 관리 주 ) 한국은행 기준금리 : RP 매매, 대기성 여수신 등 對금융기관 거래의 기준이 되는 금리

한국은행 기준금리 추이

THE MONETARY SYSTEM 40 The Fed’s 3 Tools of Monetary Control 2. Reserve Requirements (RR): affect how much money banks can create by making loans.  To increase money supply, Fed reduces RR. Banks make more loans from each dollar of reserves, which increases money multiplier and money supply.  To reduce money supply, Fed raises RR, and the process works in reverse.  Fed rarely uses reserve requirements to control money supply: Frequent changes would disrupt banking.

우리나라의 지급준비제도  지준의무 부과대상 : 예금은행 및 산업은행의 예금채무  법정 최저 지급준비율 : 예금종별로 1 ∼ 5% 이며, 평균지준율은 3.0% 내외  실제 지급준비금 = 한은예치금 + 시재금 ( 필요지준금의 35% 한도 )

법정 최저 지급준비율 부과대상예금지급준비율 근로자재산형성저축, 근로자장기저축, 근 로자주택마련저축, 장기주택마련저축, 가 계장기저축, 근로자우대저축 1% 정기예금, 정기적금, 상호부금, 주택부금, 양도성예금증서 2% 기타예금 5%

THE MONETARY SYSTEM 43 The Fed’s 3 Tools of Monetary Control 3. The Discount Rate: the interest rate on loans the Fed makes to banks  When banks are running low on reserves, they may borrow reserves from the Fed.  To increase money supply, Fed can lower discount rate, which encourages banks to borrow more reserves from Fed.  Banks can then make more loans, which increases the money supply.  To reduce money supply, Fed can raise discount rate.

THE MONETARY SYSTEM 44 The Fed’s 3 Tools of Monetary Control 3. The Discount Rate: the interest rate on loans the Fed makes to banks  The Fed uses discount lending to provide extra liquidity when financial institutions are in trouble, e.g. after the Oct stock market crash.  If no crisis, Fed rarely uses discount lending – Fed is a “lender of last resort.”

THE MONETARY SYSTEM 45 The Federal Funds Rate  On any given day, banks with insufficient reserves can borrow from banks with excess reserves.  The interest rate on these loans is the federal funds rate.  The FOMC uses OMOs to target the fed funds rate.  Many interest rates are highly correlated, so changes in the fed funds rate cause changes in other rates and have a big impact in the economy.

The Fed Funds Rate and Other Rates, (%) Fed funds prime 3-month Tbill mortgage

THE MONETARY SYSTEM 47 Monetary Policy and the Fed Funds Rate To raise fed funds rate, Fed sells govt bonds (OMO). This removes reserves from the banking system, reduces supply of federal funds, causes r f to rise. rfrf F D1D1 S2S2 3.75% F2F2 S1S1 F1F1 3.50% The Federal Funds market Federal funds rate Quantity of federal funds

콜시장과 공개시장조작  콜시장 : 금융기관들이 일시적 자금과부족을 조절하기 위해 초단기 ( 대부분 1 일물 ) 로 자금을 차입 또는 대여하는 금융기관 사이의 시장  콜시장은 한국은행이 공개시장조작을 통해 가장 직접적으로 영향력을 행사할 수 있는 금융시장  단기자금시장 : 예금은행들의 지준 과부족 조절을 위한 지준시장 + 증권사 등 제 2 금융권의 결제자금조절시장  그러나 제 2 금융권 등의 잉여자금이 거래은행으로 집중되므로 은행의 지준자금 과부족이 콜금리 변동에 가장 큰 영향을 미침  따라서 한국은행은 은행 지급준비금 조절을 통해 한국은행 기준금리 (2008 년 2 월까지 콜금리 ) 를 간접적으로 조절

THE MONETARY SYSTEM 49 Problems Controlling the Money Supply  If households hold more of their money as currency, banks have fewer reserves, make fewer loans, and money supply falls.  If banks hold more reserves than required, they make fewer loans, and money supply falls.  Yet, Fed can compensate for household and bank behavior to retain fairly precise control over the money supply.

현금통화, 지불준비금, 본원통화 본원통화 (65 조, 2008 년 기준 ) = 현금통화 (24 조 ) + 시재금 (7 조 ) + 지급준비예치금 (34 조 ) = 화폐발행액 (31 조 ) + 지급준비예치금 (34 조 ) = 현금통화 (24 조 ) + 지급준비금총액 (41 조 )  화폐발행액 (31 조 ) = 時在金 (7 조 ) + 현금통화 (24 조 )  지급준비금총액 (41 조 ) = 時在金 (7 조 ) + 지급준비예치금 (34 조 )

‘ 현실적 ’ 통화승수

THE MONETARY SYSTEM 52 Bank Runs and the Money Supply  A run on banks: When people suspect their banks are in trouble, they may “run” to the bank to withdraw their funds, holding more currency and less deposits.  Under fractional-reserve banking, banks don’t have enough reserves to pay off ALL depositors, hence banks may have to close.  Also, banks may make fewer loans and hold more reserves to satisfy depositors.  These events increase R, reverse the process of money creation, cause money supply to fall.

THE MONETARY SYSTEM 53 Bank Runs and the Money Supply  During , a wave of bank runs and bank closings caused money supply to fall 28%.  Many economists believe this contributed to the severity of the Great Depression.  Since then, federal deposit insurance has helped prevent bank runs in the U.S.  In the U.K., though, Northern Rock bank experienced a classic bank run in 2007 and was eventually taken over by the British government.

CHAPTER SUMMARY  Money includes currency and various types of bank deposits.  The Federal Reserve is the central bank of the U.S., is responsible for regulating the monetary system.  The Fed controls the money supply mainly through open-market operations. Purchasing govt bonds increases the money supply, selling govt bonds decreases it. 54

CHAPTER SUMMARY  In a fractional reserve banking system, banks create money when they make loans. Bank reserves have a multiplier effect on the money supply. 55