PART M: THE GAMES OF BANKING AND MONETARY POLICY Topic 25: THE ROLE OF CHARTERED BANKS IN MONETARY POLICY Reading: LR: Chapter 27 Concept List: money as a store of wealth and money as a medium for exchange Canadian branch banking system and the chartered banks “near” banks – trust companies, loan companies, financial co-operatives etc. balance sheet of chartered/commercial banks and balance sheet of Bank of Canada demand versus time deposits cash reserves of chartered banks [accounts receivable from the Bank of Canada and Canadian currency held by banks – Canadian coin and Bank of Canada notes] cash reserve ratio [no longer required by the Canadian Bank Act] M1 money supply [demand deposits of chartered banks plus currency in circulation– CIC] currency in circulation = Bank of Canada notes and Canadian coin held by Canadian nonchartered bank businesses and individuals [government holdings are excluded] multiple generation/contraction of the M1 money supply the generation banking sequence and deposit creation and contraction the banking multiplier five shocks on cash reserves, M1 money supply, currency in circulation and bank deposits - transactions between Canadian businesses or individuals which do not affect cash reserves - the Bank of Canada’s open market transactions [OMO] - individual/business deposits/withdrawals from chartered banks - Government of Canada uses its account at the Bank of Canada to pay bills or to receive funds - international transactions which involve a business, a chartered bank and the Bank of Canada Topic 26: ANALYSIS OF MONETARY POLICY AND CENTRAL BANKING Reading: LR: Chapters 28 and 29 Concept List: the role of the central bank [achieving price stability and full employment] “easy” money policy/”tight” money policy price of a bond in simple circumstances: coupon interest divided by effective interest rate demand for money: the sum of the transaction demand and the speculative demand liquidity preference curve [speculative demand for money] marginal efficiency of investment curve [reflects the expected/normal rate of return on net investment projects] the transmission mechanism elasticity conditions for effectiveness of monetary policy through the transmission mechanism effectiveness of an “easy” monetary policy effectiveness of a “tight” monetary policy the Keynesian liquidity trap monetary policy under a fixed foreign exchange rate regime with a balance-of-payments deficit monetary policy under a fixed foreign exchange rate regime with a balance-of-payments surplus Bank of Canada policy with respect to allowable inflation levels [‘core’ inflation targeting] demand for money as a function of changes in the nominal level of GDP – an increase in nominal GDP will cause an increase in the demand for money the quantity theory of money: MV = PQ where M = money supply; V = velocity of circulation of money supply and PQ equals GDP