Money and Banking
Ch. 3
Measures of Money
Central Bank balance Sheet
Prof. Anwar M. El Nakeeb
Learning Objectives
 Measures of Money (M0, M1 and M2)
 Egypt, Case Study
 The Central Bank’s Balance Sheet/Assets
 The Central Bank’s Balance Sheet/liabilities
 Balance Sheet of the Federal Reserve/USA- case
Study
 Balance Sheet, Central Bank Of Egypt-case Study
Measures of Money
Measuring Money
 The total quantity of money in the economy at any one time is called the
money supply.
 The money supply measures reflect the different degrees of liquidity—or
spendability—that different types of money have.
 Economists measure the money supply because it affects economic
activity. What should be included in the money supply? We want to
include as part of the money supply those things that serve as media of
exchange. However, the items that provide this function have varied
over time.
 Money IS:
-
M0, M1, M2, and M3
M 0: currency (notes and coins) in circulation and in bank vaults.
M0: is usually called the monetary base - the base from which other forms of
money are created - and is traditionally the most liquid measure of the money
supply
Measures of Money
 M1 is the narrowest and most liquid measure of the money supply.
 It includes financial assets that are immediately available for
spending on goods and services.
 M1 includes:
 Currency: Minted coins and paper currency not deposited in
financial institutions
 Travelers’ Checks: Financial instruments purchased from a bank or
a nonbanking organization and signed during purchase that can be
used as cash upon a second signature by the purchaser
 Demand Deposits (checking accounts): Deposits are also money
because they can be converted into currency and are used to settle
debts. Any deposits in a thrift institution or a commercial bank on
which a check may be written or debit card used
 Other Checkable Deposits (interest-bearing checking)
 Demand Deposits and Checkable Deposits are called transactions
accounts—these are checking accounts that can be drawn upon to make
payments.
Measures of Money/ Defining Money
 M2/Near Moneys
The liquidity approach: M2 is equal to M1 plus
 Time Deposit: A deposit in a financial institution that requires
notice of intent to withdraw or must be left for an agreed period.
Early withdrawal may result in a penalty
 CD (Certificate of Deposit): Time deposit with fixed maturity
 Money Market Deposit Accounts (MMDAs): Accounts issued by
banks yielding a market rate of interest with a minimum balance
requirement and a limit on transactions, They have no minimum
maturity
 Money Market Mutual Funds: Funds obtained from the public that
investment companies hold in common-Funds used to acquire
short-maturity credit instruments - CD’s, U.S. government
securities
Example
Egypt, Case Study
June
2013
Reserve Money (M0)
Currency in circulation
260,849
outside the CBE
Banks' deposits in local
57,095
currency with the CBE
Reserve Money (M0)
317,944
Domestic Liquidity (1+2) (M2)
Money Supply (1) (M1) 344,100
Currency in circulation
outside the banking
241,011
system
Demand deposits in local
103,089
currency
Quasi-Money (2)
951,986
Local currency time &
saving deposits
Foreign currency
demand deposits
Foreign currency time
& saving deposits++
Domestic Liquidity
(1+2) (M2)
2014
2015
2016
2017
2018
288,651
313,468
368,459
439,366
485,235
75,822
172,408
109,617
206,987
233,768
364,473
485,876
478,076
646,353
719,003
410,554
499,065
572,935
737,469
823,268
270,856
292,699
346,853
407,802
441,551
139,698
206,366
226,082
329,667
381,717
1,106,047
1,266,427
1,521,565
2,465,188
2,633,747
727,778
869,976
1,003,432
1,197,746
1,786,179
1,916,789
55,152
62,214
68,631
75,910
135,790
149,769
169,056
173,857
194,364
247,909
543,219
567,189
1,765,492
2,094,500
3,202,657
3,457,015
1,296,086 1,516,601
 There are numerous financial transactions leading to changes in the central bank’s balance sheet.
 The structure of the balance sheet gives us a window through which we can study how the
institution operates.
• Figure 1 shows the major assets and liabilities that appear in every central bank’s balance sheet
in one form or another.
• We divide the these assets and liabilities up between the role the central bank plays: the
government’s bank or the banker’s bank.
Figure 1
1.
Securities are the primary asset of most central banks.
– Traditionally, the Fed exclusively held Treasury securities, which are virtually free
of default risk.
– The quantity of securities it holds is controlled through purchases and sales known as
open market operations.
2.
Foreign exchange reserves: are the central bank’s and government’s balances of foreign
currency.
– These are held in the form of bonds issued by foreign governments.
– These reserves are used in foreign exchange interventions, when officials attempt to
change the market values of various currencies.
3.
Loans are usually extended to commercial banks.
•
Central bank can provide reserve to the banking system by making loans to banks.
The loans are refereed to as “Discount loans” .
•
Discount loans are the loans the Fed makes when commercial banks need short-term
cash.
1.
Currency. Nearly all central banks have a monopoly on the issuance of the currency used in
everyday transactions.
 Currency circulating in the hands of the nonbank public is the central bank’s principal
liability.
2.
Government’s account. Governments need a bank account like the rest of us.
– The central bank provides the government with an account into which the government
deposits funds (mostly tax revenue) and from which the government makes payments.
3.
Commercial Bank accounts (reserves).
 Commercial bank reserves are the sum of two parts:
•
Deposits at the central bank, plus
•
The cash in the bank’s own vault.
• Vault cash is part of reserves.
 There are two types of reserves.
• Required reserves that banks must hold, and
• Excess reserves, which banks hold voluntarily.
Assets
Liabilities and Equity
Gold and foreign exchange
SDR certificates
Treasury currency
Federal Reserve Float
FR loans to domestic banks
Security repurchase agreements
U.S. Treasury securities
U.S. government securities
Miscellaneous assets
$ 25.5
2.2
33.2
0.0
0.0
50.3
551..7
0.0
20.3
Depository institution reserves
$ 17.5
Vault cash of commercial banks
47.3
Deposits due to federal government
7.1
Deposits due to rest of the world
0.1
Currency outside banks
596.2
Miscellaneous liabilities
7.8
FR Bank stock
7.2
Total assets
$683.2
Total liabilities and equity
$683.2
A successful central bank must be:
1. Independent of political pressure: A successful central
bank needs to be independent from politics, policy makers
and outside influence, Central bank independence refers to
the freedom of monetary policymakers from direct
political or governmental influence in the conduct of policy.
2. Accountable to the public: A central bank has to be
accountable for its policies and decisions,
3. Transparent in its policy actions: It has to be transparent
with its policies to maintain credibility.,
4. Clear in its communications with financial markets and the
public: A central bank has to be clear in communicating
with financial markets & the public. This helps build trust
with the public..
13
Questions
Discussion