P. 35. Central banking and monetary policy, p. 515.
Functions of central banks
1. government's banker
2. Bankers bank
3. Lender of last resort to LDMA
4. banking supervision
Controls that the banks
don't operate against the Bank policy (creates inflation)
Liquidity supervision
Bad debts management
5. Note issue
6. Operating monetary policy
7. Foreign exchange transactions (Exchange
equalisation account)
8. Sells stock
9. Advisory services and statistical
information
10. manages national debt
Balance sheet
Issue department (£16m)
Liabilities Assets
|
Notes in circulation and in banking dept.
|
Government and other securities
|
Banking department (£4.5m)
|
Capital, deposits and reserves
|
notes, advances, govn securities,
premises
|
Monetary policy - direction of the economy through
supply & price of money.
Early changes
It was believed until Keynes that low interest rates stimulate economy. Thus
they varied a bit. UK was in gold standard - no change in money supply. 1930
interest + investment low, Keynes said liquidity trap. After war his policies
where used, but interest still low, because large savings and govn borrowing,
socialist govn thinking fiscal policy is fairer and didn't like to punish govn
security buyers.
In 1950s and 1960s
Increasing interest
would decrease security price making institutions unwilling to sell them and
choking off investment. Liquidity control was top priority. Main policy fiscal,
monetary for fine tuning.
After 1970 rise of monetarist
Liquidity ration
lowered - resulted in inflation. Interest left for market forces. 1979
conservatives started to strict money supply. Main policy was and is now monetary. Too much is expected from it.
The stages of monetary policy
1. Instruments or
weapons of policy
a. The issue of notes and coins
b. Liquidity ratios - multiplier effect on
credit creation. Excess liquidity exists.
c. Interest rates (decreasing might not
increase investment whereas raising locks up funds, because most investment
decisions are non-marginal. Time also varies. Government pays interest on
national debt. Also the hot money flows in)
d. Open-market operations (sale of govn
securities). The general public must buy them because banks regard them as
liquid assets.
e. Funding (converting short-term debt into
long-term), expensive.
f. Special directives and deposits (damage
relationships between the Bank and commercial banks, very effective)
g. Moral suasion (in USA)
2. Operating
policy targets (e.g. liquidity of banks)
3. Intermediate
targets (money stock (if raises the velocity can fall!), volume of credit,
interest rates, exchange rate, expenditure in the economy)
4. Aggregate
demand changes , that will directly lead to
5. Overall policy
options - inflation economic growth etc.