Scarica Monetary Policy: Understanding Money, Financial Systems, and Central Banks e più Appunti in PDF di Economia Monetaria solo su Docsity! Monetary policy Introduction to Monetary Policy (today): what is money? What is the financial system? The system is structured on three levels, and it is composed of 6 elements At the bottom >> tools of financial system which are money (to make purchases and produce wealth) and financial instruments (used to transfer resources from savers to investrs but also to transfer risk from agents that are more risk adverse to those who are risk lovers) these tools allow financial markets to work (physical or virtual places where financial instruments are exchanged). So financial markets allow households, banks, corporations to exchange these instruments with the help of financial institutions (provide access to fin. Markets) Regulatory agencies = public institutions that oversee the functioning of financial markets and institutions and that make sure that work properly both national (ex. SEC in US or CONSOB in Italy) and supranational (EBA in Europe) financial markets are global so we needs to talk about regulatory agencies and international cooperation FATF (Financial Action Task Force) = international body that oversee rules concerning anti-money laundering and terrorist financing where countries try to converge in their regulatory action concerning AML/CTF Central Banks important role in world economy because they ensure that financial resources flow in the economy national institutions (generally Public institutions but independent from the government) role of overseeing the flow of fin resources in the economy and guarantying the economic stability (prices and economic growth) >> conduct their activities in the most independent way Central role of CBs They issue money = the decisions of CBs make changes in the money supply of the economy They guarantee the value of the money they issue (no intrinsic value >> the value come from the trust of people >> important for CB is the credibility >> people have confidence in national currency) They are in charge of supervision of private banks (Euro area we have the ECB as CB for 19 countries >> but in terms of supervision of private banks the ECB supervises the largest European banks >> those considered to have a systemic role in the financial system beyond the national borders while national CB are in charge of supervision of smaller banks) They act as a lender of last resort (no private solution for banks insolvency when private banks are in trouble because no other banks want to lend money to the bank through interbank market >> so CB is the last opportunity for the bank in trouble has) reduces the risk of bankruptcy in the past, when people loose trust in the banking system they start to withdraw their money from banks >> domino effect on the system >> LOR function is needed to avoid this situation of massive withdrawal of deposits so the public can intervene in liquidity problems of the banks Money Used to make transactions and to raise wealth Not only bills and coins any instrument to make economic transactions (Payment instruments) 3 characteristics: 1) Means of payment (paper currency and coins vs electronic payment) 2) Store of value (need for durability >> when we talk about cryptocurrencies = so volatile that it is in doubt their ability to be store of value while CB currency must be sufficiently durable durable means physically but also that retains its value) 3) Unit of account (fiat currency >> facilitate the economic transactions opposed to barter where the relative price have to be calculated) The payment system Before the intro of fiat money >> commodity money = intrinsic value (gold, silver, etc.) and that had most desirable characteristics (durable, divisible, etc.) problem = limited supply (extraction of goals cannot keep up with the increase in demand >> so shift to fiat money) Fiat money = paper money whose value comes from a gov decree >> no intrinsic value (comes from the people’s belief that it will be accepted by others from a legal obligation to use it and accept it) >> risk is that since it is the gov or the CB declare that the money is valuable , they might issue more money to finance their activities = HIGH INFOLATION and LOSS OF VALUE of the money (relationship between supply of money and inflation excess in supply of money brings hyperinflation) >> traditionally to reduce this risk = CB needs to be independent from the GOV The role of money in the economy Supply of money affects inflation >> high supply of money compared to the demand of money so the value will be lower (HIGH inflation LOW value of money) CBs have to monitor money supply to keep inflation under control Definition of money supply Monetary aggregate M1 = narrowest of monetary aggregate >> MOST LIQUID means of payment bills and coins (so currency), travelers’ checks (can be used when you travel and allow to make payments without exchanges of your currency in the national currency in the country of destination), demand deposits (standard checking accounts >> bank accounts pay no interest on the credit card), other checkable deposits (anytime withdraw from this account without need to wait to be available or advance notice to the bank)
