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Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
FINC 402: MONETARY THEORY Dr. Edward Asiedu University of Ghana Business School,Department of Finance
O ce Hours: Fridays 11:00am - 12:00 noon (UGBS Main Campus, S13)
Email: [email protected]
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Financial intermediaries:
institutions that borrow funds from
people and give loans to others.
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Financial intermediaries:
institutions that borrow funds from
people and give loans to others.
Banks:
institutions that accept deposits and make loans.
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Financial intermediaries:
institutions that borrow funds from
people and give loans to others.
Banks:
institutions that accept deposits and make loans.
And therefore it is important to understand how nancial institutions work.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy. Money, also referred to as the money supply, is de ned as anything that is generally accepted in payment for goods or services or in the repayment of debts.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy. Money, also referred to as the money supply, is de ned as anything that is generally accepted in payment for goods or services or in the repayment of debts. Money plays a key role in generating business Cycles (recessions and booms).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy. Money, also referred to as the money supply, is de ned as anything that is generally accepted in payment for goods or services or in the repayment of debts. Money plays a key role in generating business Cycles (recessions and booms). Business Cycles are upward and downward movement of aggregate output produced in the economy Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Business cycles aect all of us in immediate and important ways. When output is rising, for example, it is easier to nd a good job; when output is falling, nding a good job might be di cult.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Business cycles aect all of us in immediate and important ways. When output is rising, for example, it is easier to nd a good job; when output is falling, nding a good job might be di cult. Thus, recession (unemployment) and economic booms aect all of us.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Business cycles aect all of us in immediate and important ways. When output is rising, for example, it is easier to nd a good job; when output is falling, nding a good job might be di cult. Thus, recession (unemployment) and economic booms aect all of us. Changes in the money supply impacts changes in aggregate economic activity and in ation.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money. To enhance students understanding of the monetary and nancial system.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money. To enhance students understanding of the monetary and nancial system. To equip students with the knowledge to understand the impact of monetary policy on an economy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money. To enhance students understanding of the monetary and nancial system. To equip students with the knowledge to understand the impact of monetary policy on an economy Students should be able at the end to evaluate alternative monetary policy rules.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System Bank Reserves and the Money Supply
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System Bank Reserves and the Money Supply Determinants of the Money Supply
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System Bank Reserves and the Money Supply Determinants of the Money Supply Tools of Monetary Policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary,
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates Monetary and Targeting and Money Control
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates Monetary and Targeting and Money Control In ation and Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates Monetary and Targeting and Money Control In ation and Money Financial Crisis and the role of the central bank Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Background readings
Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 7th or 9th edition (Addison Wesley: New York).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Background readings
Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 7th or 9th edition (Addison Wesley: New York). Walsh, Carl E. Monetary theory and policy. MIT press, 2010
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money? Money has been dierent things at dierent times; however, it has always been important to people and to the economy.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money? Money has been dierent things at dierent times; however, it has always been important to people and to the economy. To understand the eects of money on the economy, we must understand exactly what money is.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money? Money has been dierent things at dierent times; however, it has always been important to people and to the economy. To understand the eects of money on the economy, we must understand exactly what money is. We will explore the functions of money, looking at why and how it promotes economic e ciency.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very speci c meaning.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very speci c meaning. Economists de ne money (also referred to as the money supply) as anything that is generally accepted in payment for goods or services or in the repayment of debts.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very speci c meaning. Economists de ne money (also referred to as the money supply) as anything that is generally accepted in payment for goods or services or in the repayment of debts. Currency, consisting of cedi bills, euro bills, dollar bills and coins, clearly ts this de nition and is one type of money. When most people talk about money, they're talking about currency (paper money and coins). Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To de ne money merely as currency is much too narrow for economists.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To de ne money merely as currency is much too narrow for economists. Because cheques are also accepted as payment for purchases, checking/current account deposits are considered money as well.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To de ne money merely as currency is much too narrow for economists. Because cheques are also accepted as payment for purchases, checking/current account deposits are considered money as well. An even broader de nition of money is often needed, because other items such as savings deposits can in eect function as money if they can be quickly and easily converted into currency or checking/current account deposits.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To complicate matters further, the word money is frequently used synonymously with wealth. When people say, Mike is richhe has an awful lot of money, they probably mean that Mike has not only a lot of currency and a high balance in his checking account but has also stocks, bonds, four cars, three houses, and a yacht.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To complicate matters further, the word money is frequently used synonymously with wealth. When people say, Mike is richhe has an awful lot of money, they probably mean that Mike has not only a lot of currency and a high balance in his checking account but has also stocks, bonds, four cars, three houses, and a yacht. Thus while currency is too narrow a de nition of money, this other popular usage is much too broad.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money Whether money is kola or shells or rocks or gold or paper, it has three primary functions in any economy: Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money Whether money is kola or shells or rocks or gold or paper, it has three primary functions in any economy: Medium of Exchange Unit of account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money Whether money is kola or shells or rocks or gold or paper, it has three primary functions in any economy: Medium of Exchange Unit of account Store of value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. The use of money as a medium of exchange promotes economic e ciency by minimizing the time spent in exchanging goods and services.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. The use of money as a medium of exchange promotes economic e ciency by minimizing the time spent in exchanging goods and services. HOW??
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. The use of money as a medium of exchange promotes economic e ciency by minimizing the time spent in exchanging goods and services. HOW?? Use the scenario of a Finance/Economics Professor, who can do just one thing well: give brilliant monetary theory lectures. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In a barter economy, if the Professor wants to eat, she must nd a farmer who not only produces the food he likes but also wants to learn economics. As you might expect, this search will be di cult and time-consuming, and Ellen might spend more time looking for such an economics-hungry farmer than she will be teaching.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In a barter economy, if the Professor wants to eat, she must nd a farmer who not only produces the food he likes but also wants to learn economics. As you might expect, this search will be di cult and time-consuming, and Ellen might spend more time looking for such an economics-hungry farmer than she will be teaching. It is even possible that she will have to quit lecturing and go into farming herself. Even so, she may still starve to death.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange The time spent trying to exchange goods or services is called a transaction cost.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange The time spent trying to exchange goods or services is called a transaction cost. In a barter economy, transaction costs are high because people have to satisfy a double coincidence of wantsthey have to nd someone who has a good or service they want and who also wants the good or service they have to oer.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange The time spent trying to exchange goods or services is called a transaction cost. In a barter economy, transaction costs are high because people have to satisfy a double coincidence of wantsthey have to nd someone who has a good or service they want and who also wants the good or service they have to oer. The use of money as a medium of exchange there promotes economic e ciency by minimizing the time spent in exchanging goods and services.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change; It must be easy to carry; and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change; It must be easy to carry; and It must not deteriorate quickly.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change; It must be easy to carry; and It must not deteriorate quickly.
Examples of money (in history): Tobacco, whiskey, cigarettes used in prisoner-of-war camps, beads etc. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account The second role of money is to provide a unit of account; that is, it is used to measure value in the economy. We measure the value of goods and services in terms of money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account The second role of money is to provide a unit of account; that is, it is used to measure value in the economy. We measure the value of goods and services in terms of money. Just as we measure weight in terms of kilograms or distance in terms of kilometers.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account The second role of money is to provide a unit of account; that is, it is used to measure value in the economy. We measure the value of goods and services in terms of money. Just as we measure weight in terms of kilograms or distance in terms of kilometers. To see why this function is important, let's look again at a barter economy where money does not perform this function.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account If the economy has only three goodssay, Plantain, books, and pensthen we need to know the price (value) of a kilo of plantain in terms of books or pens. In other words, how many kilos of plantain you have to pay for a book or penor how many books (exercise book, textbook etc.) you have to pay for a pen.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account If the economy has only three goodssay, Plantain, books, and pensthen we need to know the price (value) of a kilo of plantain in terms of books or pens. In other words, how many kilos of plantain you have to pay for a book or penor how many books (exercise book, textbook etc.) you have to pay for a pen. This will indeed become more complicated with more than three goods.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account If the economy has only three goodssay, Plantain, books, and pensthen we need to know the price (value) of a kilo of plantain in terms of books or pens. In other words, how many kilos of plantain you have to pay for a book or penor how many books (exercise book, textbook etc.) you have to pay for a pen. This will indeed become more complicated with more than three goods. The solution to the problem is to introduce money into the economy and have all prices quoted in terms of units of that money Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money
Unit of Account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money
Unit of Account We can see that using money as a unit of account reduces transaction cost
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money
Unit of Account We can see that using money as a unit of account reduces transaction cost The bene ts of this function of money grow as the economy becomes more complex.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money also functions as a store of value; it is a repository of purchasing power over time.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money also functions as a store of value; it is a repository of purchasing power over time. A store of value is used to save purchasing power from the time income is received until the time it is spent.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money also functions as a store of value; it is a repository of purchasing power over time. A store of value is used to save purchasing power from the time income is received until the time it is spent. This function of money is useful, because most of us do not want to spend our income immediately upon receiving it, but rather prefer to wait until we have the time or the desire to shop.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money is not unique as a store of value; any assetwhether money, stocks, bonds, land, houses, art, or jewelrycan be used to store wealth.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money is not unique as a store of value; any assetwhether money, stocks, bonds, land, houses, art, or jewelrycan be used to store wealth. Many such assets have advantages over money as a store of value: They often pay the owner a higher interest rate than money, experience price appreciation, and deliver services such as providing a roof over one's head.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money is not unique as a store of value; any assetwhether money, stocks, bonds, land, houses, art, or jewelrycan be used to store wealth. Many such assets have advantages over money as a store of value: They often pay the owner a higher interest rate than money, experience price appreciation, and deliver services such as providing a roof over one's head. Question: If these assets are a more desirable store of value than money, why do people hold money at all?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value The answer to this question relates to the important economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value The answer to this question relates to the important economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange. Liquidity is highly desirable. Money is the most liquid asset of all because it is the medium of exchange; it does not have to be converted into anything else in order to make purchases. Other assets involve transaction costs when they are converted into money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value The answer to this question relates to the important economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange. Liquidity is highly desirable. Money is the most liquid asset of all because it is the medium of exchange; it does not have to be converted into anything else in order to make purchases. Other assets involve transaction costs when they are converted into money. Examples?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System We can obtain a good picture of the functions of money and the forms it has taken over time by looking at the evolution of the payments system, the method of conducting transactions in the economy.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System We can obtain a good picture of the functions of money and the forms it has taken over time by looking at the evolution of the payments system, the method of conducting transactions in the economy.
Commodity Money An object that clearly has value to everyone is a likely candidate to serve as money, and a natural choice is a precious metal such as gold or silver. Money made up of precious metals or another valuable commodity is called commodity money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Fiat money: paper money decreed by governments as legal tender.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Fiat money: paper money decreed by governments as legal tender. Major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because of their bulk.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Fiat money: paper money decreed by governments as legal tender. Major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because of their bulk. To combat this problem, another step in the evolution of the payments system occurred with the development of modern banking: the invention of cheques.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques an instruction to your bank to transfer money from your account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques an instruction to your bank to transfer money from your account Cheques allow transactions to take place without the need to carry around large amounts of currency. The introduction of cheques was a major innovation that improved the e ciency of the payments system.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques an instruction to your bank to transfer money from your account Cheques allow transactions to take place without the need to carry around large amounts of currency. The introduction of cheques was a major innovation that improved the e ciency of the payments system. There are, however, two problems with a payments system based on cheques. First, it takes time to get cheques from one place to another, a particularly serious problem if you are paying someone in a dierent location who needs to be paid quickly.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Electronic Payment
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Electronic Payment e.g. online bill pay
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Electronic Payment e.g. online bill pay Necessitated by the development of inexpensive computers and the spread of the Internet.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System E-Money (electronic money): Electronic money (or e-money), is money that exists only in electronic form. The rst form of e-money was the debit card or bank card as usually called in Ghana.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System E-Money (electronic money): Electronic money (or e-money), is money that exists only in electronic form. The rst form of e-money was the debit card or bank card as usually called in Ghana. Debit cards or bank cards enable consumers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchant's account.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System E-Money (electronic money): Electronic money (or e-money), is money that exists only in electronic form. The rst form of e-money was the debit card or bank card as usually called in Ghana. Debit cards or bank cards enable consumers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchant's account. At most supermarkets, for example, you can swipe your debit card through the card reader at the checkout station, press a button, and the amount of your purchases is deducted from your bank account. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money):
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money): Debit or bank card
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money): Debit or bank card Stored-value card (smart card)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money): Debit or bank card Stored-value card (smart card) E-cash
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Are We Headed for a Cashless Economy?
Predictions of a cashless society have been around for decades, but they have not come to fruition
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Are We Headed for a Cashless Economy?
Predictions of a cashless society have been around for decades, but they have not come to fruition Although e-money might be more convenient and e cient than a payments system based on paper, several factors work against the disappearance of the paper system
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Are We Headed for a Cashless Economy?
Predictions of a cashless society have been around for decades, but they have not come to fruition Although e-money might be more convenient and e cient than a payments system based on paper, several factors work against the disappearance of the paper system Still, the use of e-money will likely still increase in the future.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money How do we measure money? Which particular assets can be called money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money How do we measure money? Which particular assets can be called money? Central banking authority responsible for monetary policy has conducted many studies on how to measure money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money How do we measure money? Which particular assets can be called money? Central banking authority responsible for monetary policy has conducted many studies on how to measure money. The problem of measuring money has recently become especially crucial because extensive nancial innovation has produced new types of assets that might properly belong in a measure of money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Central banks in many countries have modi ed their measures of money several times and has settled on the following measures of the money supply, which are also referred to as
monetary aggregates.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Central banks in many countries have modi ed their measures of money several times and has settled on the following measures of the money supply, which are also referred to as
monetary aggregates.
Construct monetary aggregates using the concept of liquidity:.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Central banks in many countries have modi ed their measures of money several times and has settled on the following measures of the money supply, which are also referred to as
monetary aggregates.
Construct monetary aggregates using the concept of liquidity:.
M1
or Narrow money (most liquid assets) = currency +
traveler's checks + demand deposits + other checkable deposits.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
M2
or broad money (adds to M1 other assets that are not so
liquid) =
M1
+ small denomination time deposits + savings
deposits and money market deposit accounts + money market mutual fund shares.
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
M2
or broad money (adds to M1 other assets that are not so
liquid) =
M1
+ small denomination time deposits + savings
deposits and money market deposit accounts + money market mutual fund shares. In Ghana there is also
M2+
which is
M2
deposits
Dr. Edward Asiedu
Monetary Theory
plus foreign currency
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Table 1 Measures of the Monetary Aggregates.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Table 1 Measures of the Monetary Aggregates.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2 Does it matter which measure of money is considered?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2 Does it matter which measure of money is considered?
M1
and
M2
can move in dierent directions in the short run
(see gure).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2 Does it matter which measure of money is considered?
M1
and
M2
can move in dierent directions in the short run
(see gure). Conclusion: the choice of monetary aggregate is important for policymakers.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the Cedi and who is holding them?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the Cedi and who is holding them? Criminals
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the Cedi and who is holding them? Criminals Foreigners
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 1 Growth Rates of the M1 and M2 Aggregates, 19602011.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 1 Growth Rates of the M1 and M2 Aggregates, 19602011.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 2: Broad Money for Ghana, 20052016.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 2: Broad Money for Ghana, 20052016.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Q1:
There are three goods produced in an econmy by three
indivduals:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Q1:
There are three goods produced in an econmy by three
indivduals: Goods
Producer
Apples
Orchard Owner
Bananas
Banana grower
Chocolate
Chocolatier
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Q1:
There are three goods produced in an econmy by three
indivduals: Goods
Producer
Apples
Orchard Owner
Bananas
Banana grower
Chocolate
Chocolatier
If the orachard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples will any trade between these three persons take place in the barter economy? How will the introducing money into the economy bene t these three producers? Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the money and who is holding them Criminals
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the money and who is holding them Criminals Foreigners
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Bond Market and Interest Rates
A
security
( nancial instrument) is a claim on the issuer's
future income or assets.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Bond Market and Interest Rates
A
security
( nancial instrument) is a claim on the issuer's
future income or assets. A
bond
is a debt security that promises to make payments
periodically for a speci ed period of time.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Bond Market and Interest Rates
A
security
( nancial instrument) is a claim on the issuer's
future income or assets. A
bond
is a debt security that promises to make payments
periodically for a speci ed period of time. An
interest rate
is the cost of borrowing or the price paid for
the rental of funds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Stock Market
Common stock represents a share of ownership in a corporation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Stock Market
Common stock represents a share of ownership in a corporation A share of stock is a claim on the residual earnings and assets of the corporation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money, Business Cycles and In ation
The aggregate price level is the average price of goods and services in an economy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money, Business Cycles and In ation
The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (in ation) aects all economic players
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money, Business Cycles and In ation
The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (in ation) aects all economic players Data shows a connection between the money supply and the price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Figure 5 Average In ation Rate Versus Average Rate of Money Growth for Selected Countries, 2000-2010
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money and Interest Rates
Interest rates are the price of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money and Interest Rates
Interest rates are the price of money Prior to1980,the rate of money growth and the interest rate on long-term Treasury bonds were closely tied
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money and Interest Rates
Interest rates are the price of money Prior to1980,the rate of money growth and the interest rate on long-term Treasury bonds were closely tied Since then,the relationship is less clear but the rate of money growth is still an important determinant of interest rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another The foreign exchange rate is the price of one currency in terms of another currency
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another The foreign exchange rate is the price of one currency in terms of another currency The foreign exchange market determines the foreign exchange rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Fiscal policy deals with government spending and taxation Budget de cit is the excess of expenditures over revenues for a particular year
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Fiscal policy deals with government spending and taxation Budget de cit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Fiscal policy deals with government spending and taxation Budget de cit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year Any de cit must be nanced by borrowing
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets
Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets
Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds
Direct nance:
borrowers borrow funds directly from lenders
in nancial markets by selling them securities
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets (cont'd)
Promotes economic e ciency by producing an e cient allocation of capital, which increases production
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets (cont'd)
Promotes economic e ciency by producing an e cient allocation of capital, which increases production Directly improve the well-being of consumers by allowing them to time purchases better
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Figure 1 Flows of Funds Through the Financial System
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity) Equities (dividends)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity) Equities (dividends)
Primary and Secondary Markets Investment Banks underwrite securities in primary markets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity) Equities (dividends)
Primary and Secondary Markets Investment Banks underwrite securities in primary markets Brokers and dealers work in secondary markets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade OTC Markets: Foreign exchange, Federal funds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade OTC Markets: Foreign exchange, Federal funds
Money and Capital Markets Money markets deal in short-term debt instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade OTC Markets: Foreign exchange, Federal funds
Money and Capital Markets Money markets deal in short-term debt instruments Capital markets deal in longer-term debt and equity instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 1 Principal Money Market Instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 2 Principal Capital Market Instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Eurobond:
bond denominated in a currency other than that
of the country in which it is sold
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Eurobond:
bond denominated in a currency other than that
of the country in which it is sold
Eurocurrencies:
foreign currencies deposited in banks outside
the home country Eurodollars: U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Eurobond:
bond denominated in a currency other than that
of the country in which it is sold
Eurocurrencies:
foreign currencies deposited in banks outside
the home country Eurodollars: U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks
World Stock Markets Also help nance the federal government
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale Liquidity services
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale Liquidity services
Reduce the exposure of investors to risk Risk Sharing (Asset Transformation)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale Liquidity services
Reduce the exposure of investors to risk Risk Sharing (Asset Transformation) Diversi cation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower Gather information about potential borrower.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower Gather information about potential borrower. (after the transaction)Moral Hazard:ensure borrower will not engage in activities that will prevent him/her to repay the loan.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower Gather information about potential borrower. (after the transaction)Moral Hazard:ensure borrower will not engage in activities that will prevent him/her to repay the loan. Sign a contract with restrictive covenants
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd)
Conclusion:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd)
Conclusion: Financial intermediaries allow smallsavers and borrowers to bene t from the existence of nancial markets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 3 Primary Assets and Liabilities of Financial Intermediaries
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 4 Principal Financial Intermediaries and Value of Their Assets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System
To increase the information available to investors: Reduce adverse selection and moral hazard problems
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System
To increase the information available to investors: Reduce adverse selection and moral hazard problems Reduce insider trading (SEC).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs). Limits on Competition (mostly in the past)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs). Limits on Competition (mostly in the past) Branching
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs). Limits on Competition (mostly in the past) Branching Restrictions on Interest Rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 5 Principal Regulatory Agencies of the U.S. Financial System
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Origins of the Central Bank( Bank of Ghana
The principal objects of the new central bank, as enshrined in the 1957 Ordinance,
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Origins of the Central Bank( Bank of Ghana
The principal objects of the new central bank, as enshrined in the 1957 Ordinance, Were "to issue and redeem bank notes and coins: to keep and use reserves and to in uence the credit situation with a view to maintaining monetary stability in Ghana and the external value of the Ghana pound; and to act as banker and nancial adviser to the Government.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank; Promote by monetary measure the stablisation of the value of the currency within and outside Ghana;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank; Promote by monetary measure the stablisation of the value of the currency within and outside Ghana; Institute measures which are likely to have a favourable eect on the balance of payments, the state of public nances and the general development of the national economy;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank; Promote by monetary measure the stablisation of the value of the currency within and outside Ghana; Institute measures which are likely to have a favourable eect on the balance of payments, the state of public nances and the general development of the national economy; Regulate, supervise and direct the banking and credit system and ensure the smooth operation of the nancial sector;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions; Act as banker and nancial adviser to the Government;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions; Act as banker and nancial adviser to the Government; Promote and maintain relations with international banking and nancial institutions and subject to the Constitution or any other relevant enactment, implement international monetary agreements to which Ghana is party; and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions; Act as banker and nancial adviser to the Government; Promote and maintain relations with international banking and nancial institutions and subject to the Constitution or any other relevant enactment, implement international monetary agreements to which Ghana is party; and Do all other things that are incidental or conducive to the e cient performance of its functions under this Act and any other enactment
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply
The supply of money in an economy is determined by the banking system Directly controlled by the central bank through monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply
The supply of money in an economy is determined by the banking system Directly controlled by the central bank through monetary policy Indirectly in uenced by commercial banks (and the public) through the deposit creation process
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply
The supply of money in an economy is determined by the banking system Directly controlled by the central bank through monetary policy Indirectly in uenced by commercial banks (and the public) through the deposit creation process
The Central Bank controls the supply of money through the conduct of monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy Recall that monetary policy refers to changes in a country's stock of money supply that seeks to stabilize the level of economic activity and price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy Recall that monetary policy refers to changes in a country's stock of money supply that seeks to stabilize the level of economic activity and price level In most advanced countries, stable prices means in ation rate very close to 2%
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy Recall that monetary policy refers to changes in a country's stock of money supply that seeks to stabilize the level of economic activity and price level In most advanced countries, stable prices means in ation rate very close to 2% And output as close as possible to the full employment level of output Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Supply of Money
We will take the supply of money as a policy variable
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Supply of Money
We will take the supply of money as a policy variable That is, the supply of money is the level determined by central bank
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy The main ones are: Open market operations (OMO)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy The main ones are: Open market operations (OMO) Reserve requirement policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy The main ones are: Open market operations (OMO) Reserve requirement policy Discount rate policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (1)
Open market operations (OMO) refer to the purchase or sale of government securities in the open market
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (1)
Open market operations (OMO) refer to the purchase or sale of government securities in the open market The open market here refers to dealers in government bonds and individuals government securities are government bonds/treasury bills
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (1)
Open market operations (OMO) refer to the purchase or sale of government securities in the open market The open market here refers to dealers in government bonds and individuals government securities are government bonds/treasury bills Open market purchases (sales) are meant to increase (reduce) the money supply
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m The central banks issues the initial a check worth GHC 100m which can be drawn as cash or deposited into an account with a commercial bank
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m The central banks issues the initial a check worth GHC 100m which can be drawn as cash or deposited into an account with a commercial bank Note that either of these actions will increase the money supply If the check is deposited in an account, the commercial bank can creat additional loans out of it, increasing the money supply further
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m The central banks issues the initial a check worth GHC 100m which can be drawn as cash or deposited into an account with a commercial bank Note that either of these actions will increase the money supply If the check is deposited in an account, the commercial bank can creat additional loans out of it, increasing the money supply further An open market sale will have the opposite eect on the money supply Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting In general the policy is announced as a target policy interest rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting In general the policy is announced as a target policy interest rate In Ghana, the monetary policy rate in the US,the federal funds rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting In general the policy is announced as a target policy interest rate In Ghana, the monetary policy rate in the US,the federal funds rate Open market activities are then carried out to meet the target policy rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume Flexible and precise
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume Flexible and precise Easily reversed
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume Flexible and precise Easily reversed Quickly implemented
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Discount Rate
Commercials banks can borrow from central banks when they are short of reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Discount Rate
Commercials banks can borrow from central banks when they are short of reserves The interest rate charged on commercial banks borrowing from the central bank is the discount rate (id )
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Discount Rate
Commercials banks can borrow from central banks when they are short of reserves The interest rate charged on commercial banks borrowing from the central bank is the discount rate (id ) Central banks raise (lower) the discount rate to signal tightening (loosening) of monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks) The required reserve ratio is the fraction of deposits required by banks to keep as reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks) The required reserve ratio is the fraction of deposits required by banks to keep as reserves Banks may in addition to the required reserves, keep additional excess reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks) The required reserve ratio is the fraction of deposits required by banks to keep as reserves Banks may in addition to the required reserves, keep additional excess reserves An increase in the required reserve ratio signals a tightening of monetary policy Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Disadvantages of Reserve Requirements
No longer binding for most banks
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Disadvantages of Reserve Requirements
No longer binding for most banks Can cause liquidity problems
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Disadvantages of Reserve Requirements
No longer binding for most banks Can cause liquidity problems Increases uncertainty for banks
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes. The amount of reserves can be split up into two components: (1)required reserves, which equal the required reserve ratio times the amount of deposits on which reserves are required, and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes. The amount of reserves can be split up into two components: (1)required reserves, which equal the required reserve ratio times the amount of deposits on which reserves are required, and (2) excess reserves, the additional reserves banks choose to hold.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes. The amount of reserves can be split up into two components: (1)required reserves, which equal the required reserve ratio times the amount of deposits on which reserves are required, and (2) excess reserves, the additional reserves banks choose to hold.
Therefore, the quantity of reserves demanded equals required reserves plus the quantity of excess reserves demanded.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Excess reserves are insurance against deposit out ows
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Excess reserves are insurance against deposit out ows The cost of holding these is the interest rate that could have been earned minus the interest rate that is paid on these reserves, (ier )
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Equilibrium in the Market for Reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Demand in the Market for Reserves
When the policy rate is above the rate paid on excess reserves,(ier ) as the policy rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Demand in the Market for Reserves
When the policy rate is above the rate paid on excess reserves,(ier ) as the policy rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises. Downward sloping demand curve that be comes at (in nitely elastic) at ier
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves
Commercials banks can borrow from central banks when they are short of reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves
Commercials banks can borrow from central banks when they are short of reserves (1) the amount of reserves that are supplied by the Central Bank's open market operations, called non-borrowed reserves(Rn ) and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves
Commercials banks can borrow from central banks when they are short of reserves (1) the amount of reserves that are supplied by the Central Bank's open market operations, called non-borrowed reserves(Rn ) and (2) the amount of reserves borrowed from the Central Bank, called discount loans (DL).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical As iff rises above id banks will borrow more and more at id and relend at iff
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical As iff rises above id banks will borrow more and more at id and relend at iff The supply curve is horizontal (perfectly elastic) at id Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Response to an Open Market Operation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate Eects of an open market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its at section.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate Eects of an open market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its at section. An open market purchase causes the policy rate to fall where as an open market sale causes the policy to rise (when intersection occurs at the downward sloped section).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate Eects of an open market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its at section. An open market purchase causes the policy rate to fall where as an open market sale causes the policy to rise (when intersection occurs at the downward sloped section). Open market operations have no eect on the policy rate when intersection occurs at the at section of the demand curve.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Responds to a change in the Discount Rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate If the intersection of supply and demand occurs on the vertical section of the supply curve, a change in the discount rate will have no eect on the policy rate.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate If the intersection of supply and demand occurs on the vertical section of the supply curve, a change in the discount rate will have no eect on the policy rate. If the intersection of supply and demand occurs on the horizontal section of the supply curve, a change in the discount rate shifts that portion of the supply curve and the policy rate may either rise or fall depending on the change in the discount rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Responds to a change in the Required Reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate
When the Central Bank raises reserve requirement, the discount rate rises and when the Central Bank decreases reserve requirement, the policy rate falls.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand The major determinants of demand for money are real interest rate, level of income and expected in ation rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand The major determinants of demand for money are real interest rate, level of income and expected in ation rate The quantity of money demanded falls when the interest rate rises
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand The major determinants of demand for money are real interest rate, level of income and expected in ation rate The quantity of money demanded falls when the interest rate rises When interest rate rises, there is a higher incentive to allocate more wealth to other interest-bearing assets and reduce the holding of money balances
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income) P * Y = Aggregate norminal income (nominal GDP) V = Velocity of money (average number of times per year that a cedi is spent)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income) P * Y = Aggregate norminal income (nominal GDP) V = Velocity of money (average number of times per year that a cedi is spent) V =
P∗Y M
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income) P * Y = Aggregate norminal income (nominal GDP) V = Velocity of money (average number of times per year that a cedi is spent) V =
P∗Y M
Equation of exchange M * V = P * Y
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level Movement in the price level results solely from change in the quantity of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . .
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V M =
1 V * PY
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
When the money market is in the equilibrium d
M Md
M = Let
= k * PY
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
When the money market is in the equilibrium d
M Md
M = Let
= k * PY
Because k is constant, the level of transactions generated by a xed level of PY determines the quantity of
Dr. Edward Asiedu
Monetary Theory
Md .
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
When the money market is in the equilibrium d
M Md
M = Let
= k * PY
Because k is constant, the level of transactions generated by a xed level of PY determines the quantity of
Md .
The demand for money is not aected by interest rates. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
From the equation of exchange to the quantity theory of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
From the equation of exchange to the quantity theory of money Fisher's view that velocity is fairly constant in the short run, so that , transforms the equation of exchange into the quantity theory of money, which states that nominal income (spending) is determined solely by movements in the quantity of money M.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
From the equation of exchange to the quantity theory of money Fisher's view that velocity is fairly constant in the short run, so that , transforms the equation of exchange into the quantity theory of money, which states that nominal income (spending) is determined solely by movements in the quantity of money M. P * Y = M *
V¯
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Because the classical economists (including Fisher) thought that wages and prices were completely exible, they believed that the level of aggregate output Y produced in the economy during normal times would remain at the full-employment level .
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Because the classical economists (including Fisher) thought that wages and prices were completely exible, they believed that the level of aggregate output Y produced in the economy during normal times would remain at the full-employment level . Dividing both sides by
Y¯ ,
we can then write the price level as
follows:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Because the classical economists (including Fisher) thought that wages and prices were completely exible, they believed that the level of aggregate output Y produced in the economy during normal times would remain at the full-employment level . Dividing both sides by
Y¯ ,
we can then write the price level as
follows: P =
M∗V¯ Y¯
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level Movement in the price level results solely from change in the quantity of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
Dr. Edward Asiedu
y) = (Percentage Change in x) +
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts
Money Demand Theories of Money Demand
Tools of Monetary Policy Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
y) = (Percentage Change in x) +
Using this mathematical fact, we can rewrite the equation of exchange as follows:
%4M
+
%4V
=
%4P
Dr. Edward Asiedu
+
%4Y
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts
Money Demand Theories of Money Demand
Tools of Monetary Policy Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
y) = (Percentage Change in x) +
Using this mathematical fact, we can rewrite the equation of exchange as follows:
%4M
+
%4V
=
%4P
+
%4Y
Subtracting from both sides of the preceding equation, and recognizing that the in ation rate, is the growth rate of the price level,
π = %4P
=
%4M
+
%4V
Dr. Edward Asiedu
-
%4Y
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts
Money Demand Theories of Money Demand
Tools of Monetary Policy Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
y) = (Percentage Change in x) +
Using this mathematical fact, we can rewrite the equation of exchange as follows:
%4M
+
%4V
=
%4P
+
%4Y
Subtracting from both sides of the preceding equation, and recognizing that the in ation rate, is the growth rate of the price level,
π = %4P
=
%4M
+
%4V
-
%4Y
Since we assume velocity is constant, its growth rate is zero, so the quantity theory of money is also a theory of in ation:
π = %4M
-
%4Y
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Relationship Between In ation and Money Growth
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
There are two ways the government can pay for spending: raise revenue or borrow
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
There are two ways the government can pay for spending: raise revenue or borrow Raise revenue by levying taxes or go into debt by issuing government bonds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
There are two ways the government can pay for spending: raise revenue or borrow Raise revenue by levying taxes or go into debt by issuing government bonds The government can also create money and use it to pay for the goods and services it buys
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
The government budget constraint thus reveals two important facts:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
The government budget constraint thus reveals two important facts: If the government de cit is nanced by an increase in bond holdings by the public, there is no eect on the monetary base and hence on the money supply.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
The government budget constraint thus reveals two important facts: If the government de cit is nanced by an increase in bond holdings by the public, there is no eect on the monetary base and hence on the money supply. But, if the de cit is not nanced by increased bond holdings by the public, the monetary base and the money supply increase.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Hyperin ation Hyperin ations
are periods of extremely high in ation of
more than 50% per month.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Hyperin ation Hyperin ations
are periods of extremely high in ation of
more than 50% per month. Many economiesboth poor and developedhave experienced hyperin ation over the last century, but the United States has been spared such turmoil.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Hyperin ation Hyperin ations
are periods of extremely high in ation of
more than 50% per month. Many economiesboth poor and developedhave experienced hyperin ation over the last century, but the United States has been spared such turmoil. One of the most extreme examples of hyperin ation throughout world history occurred recently in Zimbabwe in the 2000s.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Keynesian Theories of Money Demand
Keynes's liquidity preference theory
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Keynesian Theories of Money Demand
Keynes's liquidity preference theory Why do individuals hold money? Three motives: Transactions motive Precautionary motive Speculative motive
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Keynesian Theories of Money Demand
Keynes's liquidity preference theory Why do individuals hold money? Three motives: Transactions motive Precautionary motive Speculative motive
Distinguishes between real and nominal quantities of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Transaction Motive
Keynes initially accepted the quantity theory view that the transactions component is proportional to income.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Transaction Motive
Keynes initially accepted the quantity theory view that the transactions component is proportional to income. Later, he and other economists recognized that new methods for payment, referred to as payment technology, could also aect the demand for money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Precautionary Motive
Keynes also recognized that people hold money as a cushion against unexpected wants.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Precautionary Motive
Keynes also recognized that people hold money as a cushion against unexpected wants. Keynes argued that the precautionary money balances people want to hold would also be proportional to income.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Speculative Motive
Keynes also believed people choose to hold money as a store of wealth, which he called the speculative motive
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together Md P = f(i,Y) where the demand for real money balances is negatively related to the interest rate i, and positively related to real income
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together Md P = f(i,Y) where the demand for real money balances is negatively related to the interest rate i, and positively related to real income
Rewritting P 1 = f (i,Y ) Md
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together Md P = f(i,Y) where the demand for real money balances is negatively related to the interest rate i, and positively related to real income
Rewritting P 1 = f (i,Y ) Md Multiply both sides by Y and replacing PY Y V = M = f (i,Y )
Dr. Edward Asiedu
Md
Monetary Theory
with M
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together
Velocity is not constant:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together
Velocity is not constant: The procyclical movement of interest rates should induce procyclical movements in velocity.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together
Velocity is not constant: The procyclical movement of interest rates should induce procyclical movements in velocity. Velocity will change as expectations about future normal levels of interest rates change
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Portfolio Theories of Money Demand Theory of portfolio choice and Keynesian liquidity preference
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Portfolio Theories of Money Demand Theory of portfolio choice and Keynesian liquidity preference The theory of portfolio choice can justify the conclusion from the Keynesian liquidity preference function that the demand for real money balances is positively related to income and negatively related to the nominal interest rate.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Portfolio Theories of Money Demand Theory of portfolio choice and Keynesian liquidity preference The theory of portfolio choice can justify the conclusion from the Keynesian liquidity preference function that the demand for real money balances is positively related to income and negatively related to the nominal interest rate. Other factors that aect the demand for money: Wealth Risk Liquidity of other assets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Factors that Determine the Demand for Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Empirical Evidence on the Demand for Money
Precautionary demand: Similar to transactions demand
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Empirical Evidence on the Demand for Money
Precautionary demand: Similar to transactions demand As interest rates rise, the opportunity cost of holding precautionary balances rises
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Empirical Evidence on the Demand for Money
Precautionary demand: Similar to transactions demand As interest rates rise, the opportunity cost of holding precautionary balances rises The precautionary demand for money is negatively related to interest rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Interest Rate and Money Demand We have established that if interest rates do not aect the demand for money, velocity is more likely to be constantor at least predictableso that the quantity theory view that aggregate spending is determined by the quantity of money is more likely to be true.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Interest Rate and Money Demand We have established that if interest rates do not aect the demand for money, velocity is more likely to be constantor at least predictableso that the quantity theory view that aggregate spending is determined by the quantity of money is more likely to be true. However, the more sensitive the demand for money is to interest rates, the more unpredictable velocity will be, and the less clear the link between the money supply and aggregate spending will be.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Stability of Money Demand
If the money demand function is unstable and undergoes substantial, unpredictable shifts as Keynes believed, then velocity is unpredictable, and the quantity of money may not be tightly linked to aggregate spending, as it is in the quantity theory.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Stability of Money Demand
If the money demand function is unstable and undergoes substantial, unpredictable shifts as Keynes believed, then velocity is unpredictable, and the quantity of money may not be tightly linked to aggregate spending, as it is in the quantity theory. The stability of the money demand function is also crucial to whether the Bank of Ghana (BOG) should target interest rates or the money supply.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Stability of Money Demand
If the money demand function is unstable and so the money supply is not closely linked to aggregate spending, then the level of interest rates the BOG sets will provide more information about the stance of monetary policy than will the money supply.
Dr. Edward Asiedu
Monetary Theory
FINC 402: MONETARY THEORY Dr. Edward Asiedu University of Ghana Business School,Department of Finance
O ce Hours: Fridays 11:00am - 12:00 noon (UGBS Main Campus, S13)
Email: [email protected]
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Financial intermediaries:
institutions that borrow funds from
people and give loans to others.
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Financial intermediaries:
institutions that borrow funds from
people and give loans to others.
Banks:
institutions that accept deposits and make loans.
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Majority of us are going to be working with nancial institutions (Financial intermediaries, banks, insurance companies, pension funds, mutual funds etc.).
Financial intermediaries:
institutions that borrow funds from
people and give loans to others.
Banks:
institutions that accept deposits and make loans.
And therefore it is important to understand how nancial institutions work.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy. Money, also referred to as the money supply, is de ned as anything that is generally accepted in payment for goods or services or in the repayment of debts.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy. Money, also referred to as the money supply, is de ned as anything that is generally accepted in payment for goods or services or in the repayment of debts. Money plays a key role in generating business Cycles (recessions and booms).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Also, importantly, to understand the role of money in the economy. Money, also referred to as the money supply, is de ned as anything that is generally accepted in payment for goods or services or in the repayment of debts. Money plays a key role in generating business Cycles (recessions and booms). Business Cycles are upward and downward movement of aggregate output produced in the economy Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Business cycles aect all of us in immediate and important ways. When output is rising, for example, it is easier to nd a good job; when output is falling, nding a good job might be di cult.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Business cycles aect all of us in immediate and important ways. When output is rising, for example, it is easier to nd a good job; when output is falling, nding a good job might be di cult. Thus, recession (unemployment) and economic booms aect all of us.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Why should Accountants and Financial Analysts be interested in Monetary Theory Business cycles aect all of us in immediate and important ways. When output is rising, for example, it is easier to nd a good job; when output is falling, nding a good job might be di cult. Thus, recession (unemployment) and economic booms aect all of us. Changes in the money supply impacts changes in aggregate economic activity and in ation.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money. To enhance students understanding of the monetary and nancial system.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money. To enhance students understanding of the monetary and nancial system. To equip students with the knowledge to understand the impact of monetary policy on an economy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Aims of the course The three main aims of the course are: To enhance students understanding of the role and nature of money. To enhance students understanding of the monetary and nancial system. To equip students with the knowledge to understand the impact of monetary policy on an economy Students should be able at the end to evaluate alternative monetary policy rules.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System Bank Reserves and the Money Supply
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System Bank Reserves and the Money Supply Determinants of the Money Supply
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Introduction: Barter and Early Exchange Systems De nition and Nature, Functions and Value of Money Introduction of Financial Institutions in Ghana
Central Banking and the Conduct of Monetary Policy Structure of Central Banks and the Reserve System Bank Reserves and the Money Supply Determinants of the Money Supply Tools of Monetary Policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary,
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates Monetary and Targeting and Money Control
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates Monetary and Targeting and Money Control In ation and Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline of the course Demand for Money Keynesian Theories Precautionary, Transaction and Speculative Demand Income Velocity and the Quantity Theory of Money Monetarism
Supply of Money Monetary and Fiscal policy in the Macroeconomy Interest Rates Monetary and Targeting and Money Control In ation and Money Financial Crisis and the role of the central bank Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Background readings
Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 7th or 9th edition (Addison Wesley: New York).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Background readings
Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 7th or 9th edition (Addison Wesley: New York). Walsh, Carl E. Monetary theory and policy. MIT press, 2010
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money? Money has been dierent things at dierent times; however, it has always been important to people and to the economy.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money? Money has been dierent things at dierent times; however, it has always been important to people and to the economy. To understand the eects of money on the economy, we must understand exactly what money is.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money What Is Money? Money has been dierent things at dierent times; however, it has always been important to people and to the economy. To understand the eects of money on the economy, we must understand exactly what money is. We will explore the functions of money, looking at why and how it promotes economic e ciency.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very speci c meaning.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very speci c meaning. Economists de ne money (also referred to as the money supply) as anything that is generally accepted in payment for goods or services or in the repayment of debts.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? As the word money is used in everyday conversation, it can mean many things, but to economists, it has a very speci c meaning. Economists de ne money (also referred to as the money supply) as anything that is generally accepted in payment for goods or services or in the repayment of debts. Currency, consisting of cedi bills, euro bills, dollar bills and coins, clearly ts this de nition and is one type of money. When most people talk about money, they're talking about currency (paper money and coins). Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To de ne money merely as currency is much too narrow for economists.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To de ne money merely as currency is much too narrow for economists. Because cheques are also accepted as payment for purchases, checking/current account deposits are considered money as well.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To de ne money merely as currency is much too narrow for economists. Because cheques are also accepted as payment for purchases, checking/current account deposits are considered money as well. An even broader de nition of money is often needed, because other items such as savings deposits can in eect function as money if they can be quickly and easily converted into currency or checking/current account deposits.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To complicate matters further, the word money is frequently used synonymously with wealth. When people say, Mike is richhe has an awful lot of money, they probably mean that Mike has not only a lot of currency and a high balance in his checking account but has also stocks, bonds, four cars, three houses, and a yacht.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money Meaning of Money? To complicate matters further, the word money is frequently used synonymously with wealth. When people say, Mike is richhe has an awful lot of money, they probably mean that Mike has not only a lot of currency and a high balance in his checking account but has also stocks, bonds, four cars, three houses, and a yacht. Thus while currency is too narrow a de nition of money, this other popular usage is much too broad.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money Whether money is kola or shells or rocks or gold or paper, it has three primary functions in any economy: Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money Whether money is kola or shells or rocks or gold or paper, it has three primary functions in any economy: Medium of Exchange Unit of account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Role and Nature of Money
Functions of Money Whether money is kola or shells or rocks or gold or paper, it has three primary functions in any economy: Medium of Exchange Unit of account Store of value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. The use of money as a medium of exchange promotes economic e ciency by minimizing the time spent in exchanging goods and services.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. The use of money as a medium of exchange promotes economic e ciency by minimizing the time spent in exchanging goods and services. HOW??
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In almost all market transactions in our economy, money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. The use of money as a medium of exchange promotes economic e ciency by minimizing the time spent in exchanging goods and services. HOW?? Use the scenario of a Finance/Economics Professor, who can do just one thing well: give brilliant monetary theory lectures. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In a barter economy, if the Professor wants to eat, she must nd a farmer who not only produces the food he likes but also wants to learn economics. As you might expect, this search will be di cult and time-consuming, and Ellen might spend more time looking for such an economics-hungry farmer than she will be teaching.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange In a barter economy, if the Professor wants to eat, she must nd a farmer who not only produces the food he likes but also wants to learn economics. As you might expect, this search will be di cult and time-consuming, and Ellen might spend more time looking for such an economics-hungry farmer than she will be teaching. It is even possible that she will have to quit lecturing and go into farming herself. Even so, she may still starve to death.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange The time spent trying to exchange goods or services is called a transaction cost.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange The time spent trying to exchange goods or services is called a transaction cost. In a barter economy, transaction costs are high because people have to satisfy a double coincidence of wantsthey have to nd someone who has a good or service they want and who also wants the good or service they have to oer.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange The time spent trying to exchange goods or services is called a transaction cost. In a barter economy, transaction costs are high because people have to satisfy a double coincidence of wantsthey have to nd someone who has a good or service they want and who also wants the good or service they have to oer. The use of money as a medium of exchange there promotes economic e ciency by minimizing the time spent in exchanging goods and services.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change; It must be easy to carry; and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change; It must be easy to carry; and It must not deteriorate quickly.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Medium of Exchange For a commodity to function eectively as money, it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value; It must be widely accepted; It must be divisible, so that it is easy to make change; It must be easy to carry; and It must not deteriorate quickly.
Examples of money (in history): Tobacco, whiskey, cigarettes used in prisoner-of-war camps, beads etc. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account The second role of money is to provide a unit of account; that is, it is used to measure value in the economy. We measure the value of goods and services in terms of money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account The second role of money is to provide a unit of account; that is, it is used to measure value in the economy. We measure the value of goods and services in terms of money. Just as we measure weight in terms of kilograms or distance in terms of kilometers.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account The second role of money is to provide a unit of account; that is, it is used to measure value in the economy. We measure the value of goods and services in terms of money. Just as we measure weight in terms of kilograms or distance in terms of kilometers. To see why this function is important, let's look again at a barter economy where money does not perform this function.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account If the economy has only three goodssay, Plantain, books, and pensthen we need to know the price (value) of a kilo of plantain in terms of books or pens. In other words, how many kilos of plantain you have to pay for a book or penor how many books (exercise book, textbook etc.) you have to pay for a pen.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account If the economy has only three goodssay, Plantain, books, and pensthen we need to know the price (value) of a kilo of plantain in terms of books or pens. In other words, how many kilos of plantain you have to pay for a book or penor how many books (exercise book, textbook etc.) you have to pay for a pen. This will indeed become more complicated with more than three goods.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Unit of Account If the economy has only three goodssay, Plantain, books, and pensthen we need to know the price (value) of a kilo of plantain in terms of books or pens. In other words, how many kilos of plantain you have to pay for a book or penor how many books (exercise book, textbook etc.) you have to pay for a pen. This will indeed become more complicated with more than three goods. The solution to the problem is to introduce money into the economy and have all prices quoted in terms of units of that money Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money
Unit of Account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money
Unit of Account We can see that using money as a unit of account reduces transaction cost
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money
Unit of Account We can see that using money as a unit of account reduces transaction cost The bene ts of this function of money grow as the economy becomes more complex.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money also functions as a store of value; it is a repository of purchasing power over time.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money also functions as a store of value; it is a repository of purchasing power over time. A store of value is used to save purchasing power from the time income is received until the time it is spent.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money also functions as a store of value; it is a repository of purchasing power over time. A store of value is used to save purchasing power from the time income is received until the time it is spent. This function of money is useful, because most of us do not want to spend our income immediately upon receiving it, but rather prefer to wait until we have the time or the desire to shop.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money is not unique as a store of value; any assetwhether money, stocks, bonds, land, houses, art, or jewelrycan be used to store wealth.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money is not unique as a store of value; any assetwhether money, stocks, bonds, land, houses, art, or jewelrycan be used to store wealth. Many such assets have advantages over money as a store of value: They often pay the owner a higher interest rate than money, experience price appreciation, and deliver services such as providing a roof over one's head.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value Money is not unique as a store of value; any assetwhether money, stocks, bonds, land, houses, art, or jewelrycan be used to store wealth. Many such assets have advantages over money as a store of value: They often pay the owner a higher interest rate than money, experience price appreciation, and deliver services such as providing a roof over one's head. Question: If these assets are a more desirable store of value than money, why do people hold money at all?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value The answer to this question relates to the important economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value The answer to this question relates to the important economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange. Liquidity is highly desirable. Money is the most liquid asset of all because it is the medium of exchange; it does not have to be converted into anything else in order to make purchases. Other assets involve transaction costs when they are converted into money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Functions of Money Store of Value The answer to this question relates to the important economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange. Liquidity is highly desirable. Money is the most liquid asset of all because it is the medium of exchange; it does not have to be converted into anything else in order to make purchases. Other assets involve transaction costs when they are converted into money. Examples?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System We can obtain a good picture of the functions of money and the forms it has taken over time by looking at the evolution of the payments system, the method of conducting transactions in the economy.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System We can obtain a good picture of the functions of money and the forms it has taken over time by looking at the evolution of the payments system, the method of conducting transactions in the economy.
Commodity Money An object that clearly has value to everyone is a likely candidate to serve as money, and a natural choice is a precious metal such as gold or silver. Money made up of precious metals or another valuable commodity is called commodity money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Fiat money: paper money decreed by governments as legal tender.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Fiat money: paper money decreed by governments as legal tender. Major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because of their bulk.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Fiat Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Fiat money: paper money decreed by governments as legal tender. Major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because of their bulk. To combat this problem, another step in the evolution of the payments system occurred with the development of modern banking: the invention of cheques.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques an instruction to your bank to transfer money from your account
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques an instruction to your bank to transfer money from your account Cheques allow transactions to take place without the need to carry around large amounts of currency. The introduction of cheques was a major innovation that improved the e ciency of the payments system.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques an instruction to your bank to transfer money from your account Cheques allow transactions to take place without the need to carry around large amounts of currency. The introduction of cheques was a major innovation that improved the e ciency of the payments system. There are, however, two problems with a payments system based on cheques. First, it takes time to get cheques from one place to another, a particularly serious problem if you are paying someone in a dierent location who needs to be paid quickly.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Electronic Payment
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Electronic Payment e.g. online bill pay
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System Cheques In addition, if you have a current account, it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.
Electronic Payment e.g. online bill pay Necessitated by the development of inexpensive computers and the spread of the Internet.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System E-Money (electronic money): Electronic money (or e-money), is money that exists only in electronic form. The rst form of e-money was the debit card or bank card as usually called in Ghana.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System E-Money (electronic money): Electronic money (or e-money), is money that exists only in electronic form. The rst form of e-money was the debit card or bank card as usually called in Ghana. Debit cards or bank cards enable consumers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchant's account.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System E-Money (electronic money): Electronic money (or e-money), is money that exists only in electronic form. The rst form of e-money was the debit card or bank card as usually called in Ghana. Debit cards or bank cards enable consumers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchant's account. At most supermarkets, for example, you can swipe your debit card through the card reader at the checkout station, press a button, and the amount of your purchases is deducted from your bank account. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money):
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money): Debit or bank card
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money): Debit or bank card Stored-value card (smart card)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Evolution of the Payments System
E-Money (electronic money): Debit or bank card Stored-value card (smart card) E-cash
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Are We Headed for a Cashless Economy?
Predictions of a cashless society have been around for decades, but they have not come to fruition
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Are We Headed for a Cashless Economy?
Predictions of a cashless society have been around for decades, but they have not come to fruition Although e-money might be more convenient and e cient than a payments system based on paper, several factors work against the disappearance of the paper system
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Are We Headed for a Cashless Economy?
Predictions of a cashless society have been around for decades, but they have not come to fruition Although e-money might be more convenient and e cient than a payments system based on paper, several factors work against the disappearance of the paper system Still, the use of e-money will likely still increase in the future.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money How do we measure money? Which particular assets can be called money?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money How do we measure money? Which particular assets can be called money? Central banking authority responsible for monetary policy has conducted many studies on how to measure money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money How do we measure money? Which particular assets can be called money? Central banking authority responsible for monetary policy has conducted many studies on how to measure money. The problem of measuring money has recently become especially crucial because extensive nancial innovation has produced new types of assets that might properly belong in a measure of money.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Central banks in many countries have modi ed their measures of money several times and has settled on the following measures of the money supply, which are also referred to as
monetary aggregates.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Central banks in many countries have modi ed their measures of money several times and has settled on the following measures of the money supply, which are also referred to as
monetary aggregates.
Construct monetary aggregates using the concept of liquidity:.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Central banks in many countries have modi ed their measures of money several times and has settled on the following measures of the money supply, which are also referred to as
monetary aggregates.
Construct monetary aggregates using the concept of liquidity:.
M1
or Narrow money (most liquid assets) = currency +
traveler's checks + demand deposits + other checkable deposits.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
M2
or broad money (adds to M1 other assets that are not so
liquid) =
M1
+ small denomination time deposits + savings
deposits and money market deposit accounts + money market mutual fund shares.
Dr. Edward Asiedu
Monetary Theory
Introduction
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
M2
or broad money (adds to M1 other assets that are not so
liquid) =
M1
+ small denomination time deposits + savings
deposits and money market deposit accounts + money market mutual fund shares. In Ghana there is also
M2+
which is
M2
deposits
Dr. Edward Asiedu
Monetary Theory
plus foreign currency
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Table 1 Measures of the Monetary Aggregates.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Table 1 Measures of the Monetary Aggregates.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2 Does it matter which measure of money is considered?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2 Does it matter which measure of money is considered?
M1
and
M2
can move in dierent directions in the short run
(see gure).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money M1 vs M2 Does it matter which measure of money is considered?
M1
and
M2
can move in dierent directions in the short run
(see gure). Conclusion: the choice of monetary aggregate is important for policymakers.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the Cedi and who is holding them?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the Cedi and who is holding them? Criminals
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the Cedi and who is holding them? Criminals Foreigners
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 1 Growth Rates of the M1 and M2 Aggregates, 19602011.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 1 Growth Rates of the M1 and M2 Aggregates, 19602011.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 2: Broad Money for Ghana, 20052016.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Figure 2: Broad Money for Ghana, 20052016.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Q1:
There are three goods produced in an econmy by three
indivduals:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Q1:
There are three goods produced in an econmy by three
indivduals: Goods
Producer
Apples
Orchard Owner
Bananas
Banana grower
Chocolate
Chocolatier
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money Q1:
There are three goods produced in an econmy by three
indivduals: Goods
Producer
Apples
Orchard Owner
Bananas
Banana grower
Chocolate
Chocolatier
If the orachard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples will any trade between these three persons take place in the barter economy? How will the introducing money into the economy bene t these three producers? Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the money and who is holding them Criminals
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
Measuring Money
Where are all the money and who is holding them Criminals Foreigners
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Bond Market and Interest Rates
A
security
( nancial instrument) is a claim on the issuer's
future income or assets.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Bond Market and Interest Rates
A
security
( nancial instrument) is a claim on the issuer's
future income or assets. A
bond
is a debt security that promises to make payments
periodically for a speci ed period of time.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Bond Market and Interest Rates
A
security
( nancial instrument) is a claim on the issuer's
future income or assets. A
bond
is a debt security that promises to make payments
periodically for a speci ed period of time. An
interest rate
is the cost of borrowing or the price paid for
the rental of funds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Stock Market
Common stock represents a share of ownership in a corporation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Stock Market
Common stock represents a share of ownership in a corporation A share of stock is a claim on the residual earnings and assets of the corporation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money, Business Cycles and In ation
The aggregate price level is the average price of goods and services in an economy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money, Business Cycles and In ation
The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (in ation) aects all economic players
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money, Business Cycles and In ation
The aggregate price level is the average price of goods and services in an economy A continual rise in the price level (in ation) aects all economic players Data shows a connection between the money supply and the price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Figure 5 Average In ation Rate Versus Average Rate of Money Growth for Selected Countries, 2000-2010
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money and Interest Rates
Interest rates are the price of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money and Interest Rates
Interest rates are the price of money Prior to1980,the rate of money growth and the interest rate on long-term Treasury bonds were closely tied
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money and Interest Rates
Interest rates are the price of money Prior to1980,the rate of money growth and the interest rate on long-term Treasury bonds were closely tied Since then,the relationship is less clear but the rate of money growth is still an important determinant of interest rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another The foreign exchange rate is the price of one currency in terms of another currency
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another The foreign exchange rate is the price of one currency in terms of another currency The foreign exchange market determines the foreign exchange rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Fiscal policy deals with government spending and taxation Budget de cit is the excess of expenditures over revenues for a particular year
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Fiscal policy deals with government spending and taxation Budget de cit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Fiscal Policy and Monetary Policy Monetary policy is the management of the money supply and interest rates Conducted by the Central Bank(Bank of Ghana)
Fiscal policy deals with government spending and taxation Budget de cit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year Any de cit must be nanced by borrowing
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets
Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets
Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds
Direct nance:
borrowers borrow funds directly from lenders
in nancial markets by selling them securities
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets (cont'd)
Promotes economic e ciency by producing an e cient allocation of capital, which increases production
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Markets (cont'd)
Promotes economic e ciency by producing an e cient allocation of capital, which increases production Directly improve the well-being of consumers by allowing them to time purchases better
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Figure 1 Flows of Funds Through the Financial System
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity) Equities (dividends)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity) Equities (dividends)
Primary and Secondary Markets Investment Banks underwrite securities in primary markets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets
Debt and Equity Markets Debt instruments (maturity) Equities (dividends)
Primary and Secondary Markets Investment Banks underwrite securities in primary markets Brokers and dealers work in secondary markets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade OTC Markets: Foreign exchange, Federal funds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade OTC Markets: Foreign exchange, Federal funds
Money and Capital Markets Money markets deal in short-term debt instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Structure of Financial Markets (cont'd)
Exchanges and Over-the-Counter (OTC) Markets Exchanges: NYSE, Chicago Board of Trade OTC Markets: Foreign exchange, Federal funds
Money and Capital Markets Money markets deal in short-term debt instruments Capital markets deal in longer-term debt and equity instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 1 Principal Money Market Instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 2 Principal Capital Market Instruments
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Eurobond:
bond denominated in a currency other than that
of the country in which it is sold
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Eurobond:
bond denominated in a currency other than that
of the country in which it is sold
Eurocurrencies:
foreign currencies deposited in banks outside
the home country Eurodollars: U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Internationalization of Financial Markets Foreign Bonds:
sold in a foreign country and denominated in
that country's currency
Eurobond:
bond denominated in a currency other than that
of the country in which it is sold
Eurocurrencies:
foreign currencies deposited in banks outside
the home country Eurodollars: U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks
World Stock Markets Also help nance the federal government
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale Liquidity services
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale Liquidity services
Reduce the exposure of investors to risk Risk Sharing (Asset Transformation)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance
Lower transaction costs (time and money spent in carrying out nancial transactions) Economies of scale Liquidity services
Reduce the exposure of investors to risk Risk Sharing (Asset Transformation) Diversi cation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower Gather information about potential borrower.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower Gather information about potential borrower. (after the transaction)Moral Hazard:ensure borrower will not engage in activities that will prevent him/her to repay the loan.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd) Deal with asymmetric information problems (before the transaction) Adverse Selection:try to avoid selecting the risky borrower Gather information about potential borrower. (after the transaction)Moral Hazard:ensure borrower will not engage in activities that will prevent him/her to repay the loan. Sign a contract with restrictive covenants
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd)
Conclusion:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Function of Financial Intermediaries: Indirect Finance (cont'd)
Conclusion: Financial intermediaries allow smallsavers and borrowers to bene t from the existence of nancial markets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 3 Primary Assets and Liabilities of Financial Intermediaries
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 4 Principal Financial Intermediaries and Value of Their Assets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System
To increase the information available to investors: Reduce adverse selection and moral hazard problems
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System
To increase the information available to investors: Reduce adverse selection and moral hazard problems Reduce insider trading (SEC).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs). Limits on Competition (mostly in the past)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs). Limits on Competition (mostly in the past) Branching
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Regulation of the Financial System (cont'd) To ensure the soundness of nancial intermediaries: Restrictions on entry (chartering process)
. Disclosure of information. Restrictions on Assets and Activities (control holding of risky assets). Deposit Insurance (avoid bank runs). Limits on Competition (mostly in the past) Branching Restrictions on Interest Rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Table 5 Principal Regulatory Agencies of the U.S. Financial System
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Origins of the Central Bank( Bank of Ghana
The principal objects of the new central bank, as enshrined in the 1957 Ordinance,
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Origins of the Central Bank( Bank of Ghana
The principal objects of the new central bank, as enshrined in the 1957 Ordinance, Were "to issue and redeem bank notes and coins: to keep and use reserves and to in uence the credit situation with a view to maintaining monetary stability in Ghana and the external value of the Ghana pound; and to act as banker and nancial adviser to the Government.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank; Promote by monetary measure the stablisation of the value of the currency within and outside Ghana;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank; Promote by monetary measure the stablisation of the value of the currency within and outside Ghana; Institute measures which are likely to have a favourable eect on the balance of payments, the state of public nances and the general development of the national economy;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana Formulate and implement monetary policy aimed at achieving the objects of the Bank; Promote by monetary measure the stablisation of the value of the currency within and outside Ghana; Institute measures which are likely to have a favourable eect on the balance of payments, the state of public nances and the general development of the national economy; Regulate, supervise and direct the banking and credit system and ensure the smooth operation of the nancial sector;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions; Act as banker and nancial adviser to the Government;
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions; Act as banker and nancial adviser to the Government; Promote and maintain relations with international banking and nancial institutions and subject to the Constitution or any other relevant enactment, implement international monetary agreements to which Ghana is party; and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Functions of the Central Bank of Ghana License, regulate, promote and supervise non-banking nancial institutions; Act as banker and nancial adviser to the Government; Promote and maintain relations with international banking and nancial institutions and subject to the Constitution or any other relevant enactment, implement international monetary agreements to which Ghana is party; and Do all other things that are incidental or conducive to the e cient performance of its functions under this Act and any other enactment
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply
The supply of money in an economy is determined by the banking system Directly controlled by the central bank through monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply
The supply of money in an economy is determined by the banking system Directly controlled by the central bank through monetary policy Indirectly in uenced by commercial banks (and the public) through the deposit creation process
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply
The supply of money in an economy is determined by the banking system Directly controlled by the central bank through monetary policy Indirectly in uenced by commercial banks (and the public) through the deposit creation process
The Central Bank controls the supply of money through the conduct of monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy Recall that monetary policy refers to changes in a country's stock of money supply that seeks to stabilize the level of economic activity and price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy Recall that monetary policy refers to changes in a country's stock of money supply that seeks to stabilize the level of economic activity and price level In most advanced countries, stable prices means in ation rate very close to 2%
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Money Supply Central banks are responsible to conducting monetary policy In some countries, the central bank is independent of the central government to conduct monetary policy Recall that monetary policy refers to changes in a country's stock of money supply that seeks to stabilize the level of economic activity and price level In most advanced countries, stable prices means in ation rate very close to 2% And output as close as possible to the full employment level of output Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Supply of Money
We will take the supply of money as a policy variable
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy Demand for Money
Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
Supply of Money
We will take the supply of money as a policy variable That is, the supply of money is the level determined by central bank
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy The main ones are: Open market operations (OMO)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy The main ones are: Open market operations (OMO) Reserve requirement policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Tools of Monetary Policy
Central banks usually have an array instruments for conducting monetary policy The main ones are: Open market operations (OMO) Reserve requirement policy Discount rate policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (1)
Open market operations (OMO) refer to the purchase or sale of government securities in the open market
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (1)
Open market operations (OMO) refer to the purchase or sale of government securities in the open market The open market here refers to dealers in government bonds and individuals government securities are government bonds/treasury bills
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (1)
Open market operations (OMO) refer to the purchase or sale of government securities in the open market The open market here refers to dealers in government bonds and individuals government securities are government bonds/treasury bills Open market purchases (sales) are meant to increase (reduce) the money supply
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m The central banks issues the initial a check worth GHC 100m which can be drawn as cash or deposited into an account with a commercial bank
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m The central banks issues the initial a check worth GHC 100m which can be drawn as cash or deposited into an account with a commercial bank Note that either of these actions will increase the money supply If the check is deposited in an account, the commercial bank can creat additional loans out of it, increasing the money supply further
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (2) To see how OMO aects the money supply, consider open market purchase of government securities worth GHC 100m The central banks issues the initial a check worth GHC 100m which can be drawn as cash or deposited into an account with a commercial bank Note that either of these actions will increase the money supply If the check is deposited in an account, the commercial bank can creat additional loans out of it, increasing the money supply further An open market sale will have the opposite eect on the money supply Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting In general the policy is announced as a target policy interest rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting In general the policy is announced as a target policy interest rate In Ghana, the monetary policy rate in the US,the federal funds rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Open Market Operations (3) In Ghana the Bank of Ghana's Monetary Policy Committee announces the direction of monetary policy after its monthly meeting In general the policy is announced as a target policy interest rate In Ghana, the monetary policy rate in the US,the federal funds rate Open market activities are then carried out to meet the target policy rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume Flexible and precise
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume Flexible and precise Easily reversed
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Advantages of Open Market Operations
The Central Bank(Bank of Ghana) has complete control over the volume Flexible and precise Easily reversed Quickly implemented
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Discount Rate
Commercials banks can borrow from central banks when they are short of reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Discount Rate
Commercials banks can borrow from central banks when they are short of reserves The interest rate charged on commercial banks borrowing from the central bank is the discount rate (id )
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Discount Rate
Commercials banks can borrow from central banks when they are short of reserves The interest rate charged on commercial banks borrowing from the central bank is the discount rate (id ) Central banks raise (lower) the discount rate to signal tightening (loosening) of monetary policy
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks) The required reserve ratio is the fraction of deposits required by banks to keep as reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks) The required reserve ratio is the fraction of deposits required by banks to keep as reserves Banks may in addition to the required reserves, keep additional excess reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Reserve Requirements For the purposes of prudence commercial banks keep a small fraction of their deposits as cash or its close equivalent to pay depositors who desire to withdraw Part of these reserves are required by regulators (central banks) The required reserve ratio is the fraction of deposits required by banks to keep as reserves Banks may in addition to the required reserves, keep additional excess reserves An increase in the required reserve ratio signals a tightening of monetary policy Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Disadvantages of Reserve Requirements
No longer binding for most banks
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Disadvantages of Reserve Requirements
No longer binding for most banks Can cause liquidity problems
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Disadvantages of Reserve Requirements
No longer binding for most banks Can cause liquidity problems Increases uncertainty for banks
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes. The amount of reserves can be split up into two components: (1)required reserves, which equal the required reserve ratio times the amount of deposits on which reserves are required, and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes. The amount of reserves can be split up into two components: (1)required reserves, which equal the required reserve ratio times the amount of deposits on which reserves are required, and (2) excess reserves, the additional reserves banks choose to hold.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves To derive the demand curve for reserves, we need to ask what happens to the quantity of reserves demanded, holding every thing else constant, as the Policy rate changes. The amount of reserves can be split up into two components: (1)required reserves, which equal the required reserve ratio times the amount of deposits on which reserves are required, and (2) excess reserves, the additional reserves banks choose to hold.
Therefore, the quantity of reserves demanded equals required reserves plus the quantity of excess reserves demanded.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes?
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Excess reserves are insurance against deposit out ows
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
The Market for Reserves and Discount Rate Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Excess reserves are insurance against deposit out ows The cost of holding these is the interest rate that could have been earned minus the interest rate that is paid on these reserves, (ier )
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Equilibrium in the Market for Reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Demand in the Market for Reserves
When the policy rate is above the rate paid on excess reserves,(ier ) as the policy rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Demand in the Market for Reserves
When the policy rate is above the rate paid on excess reserves,(ier ) as the policy rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises. Downward sloping demand curve that be comes at (in nitely elastic) at ier
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves
Commercials banks can borrow from central banks when they are short of reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves
Commercials banks can borrow from central banks when they are short of reserves (1) the amount of reserves that are supplied by the Central Bank's open market operations, called non-borrowed reserves(Rn ) and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves
Commercials banks can borrow from central banks when they are short of reserves (1) the amount of reserves that are supplied by the Central Bank's open market operations, called non-borrowed reserves(Rn ) and (2) the amount of reserves borrowed from the Central Bank, called discount loans (DL).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical As iff rises above id banks will borrow more and more at id and relend at iff
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Supply in the Market for Reserves Cost of borrowing from the Central Bank is the discount rate Borrowing from the Central Bank is a substitute for borrowing from other banks (Rn ) and If iff < id then banks will not borrow from the Fed and borrowed reserves are zero The supply curve will be vertical As iff rises above id banks will borrow more and more at id and relend at iff The supply curve is horizontal (perfectly elastic) at id Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Response to an Open Market Operation
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate Eects of an open market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its at section.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate Eects of an open market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its at section. An open market purchase causes the policy rate to fall where as an open market sale causes the policy to rise (when intersection occurs at the downward sloped section).
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate Eects of an open market operation depends on whether the supply curve initially intersects the demand curve in its downward sloped section versus its at section. An open market purchase causes the policy rate to fall where as an open market sale causes the policy to rise (when intersection occurs at the downward sloped section). Open market operations have no eect on the policy rate when intersection occurs at the at section of the demand curve.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Responds to a change in the Discount Rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate If the intersection of supply and demand occurs on the vertical section of the supply curve, a change in the discount rate will have no eect on the policy rate.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate If the intersection of supply and demand occurs on the vertical section of the supply curve, a change in the discount rate will have no eect on the policy rate. If the intersection of supply and demand occurs on the horizontal section of the supply curve, a change in the discount rate shifts that portion of the supply curve and the policy rate may either rise or fall depending on the change in the discount rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
Responds to a change in the Required Reserves
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Tools of Monetary Policy
Demand for Money
How Changes in the Tools of Monetary Policy Aects the Policy Rate
When the Central Bank raises reserve requirement, the discount rate rises and when the Central Bank decreases reserve requirement, the policy rate falls.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand The major determinants of demand for money are real interest rate, level of income and expected in ation rate
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand The major determinants of demand for money are real interest rate, level of income and expected in ation rate The quantity of money demanded falls when the interest rate rises
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Demand for Money Recall the demand for money is made of transactions demand and asset demand The major determinants of demand for money are real interest rate, level of income and expected in ation rate The quantity of money demanded falls when the interest rate rises When interest rate rises, there is a higher incentive to allocate more wealth to other interest-bearing assets and reduce the holding of money balances
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income) P * Y = Aggregate norminal income (nominal GDP) V = Velocity of money (average number of times per year that a cedi is spent)
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income) P * Y = Aggregate norminal income (nominal GDP) V = Velocity of money (average number of times per year that a cedi is spent) V =
P∗Y M
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange M = the money supply P = Price Y = Aggregate output (income) P * Y = Aggregate norminal income (nominal GDP) V = Velocity of money (average number of times per year that a cedi is spent) V =
P∗Y M
Equation of exchange M * V = P * Y
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level Movement in the price level results solely from change in the quantity of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . .
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V M =
1 V * PY
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
When the money market is in the equilibrium d
M Md
M = Let
= k * PY
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
When the money market is in the equilibrium d
M Md
M = Let
= k * PY
Because k is constant, the level of transactions generated by a xed level of PY determines the quantity of
Dr. Edward Asiedu
Monetary Theory
Md .
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Demand for money: To interpret Fisher's quantity theory in terms of the demand for money. . . Divide both sides by V
1 V * PY 1 k = V M =
When the money market is in the equilibrium d
M Md
M = Let
= k * PY
Because k is constant, the level of transactions generated by a xed level of PY determines the quantity of
Md .
The demand for money is not aected by interest rates. Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
From the equation of exchange to the quantity theory of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
From the equation of exchange to the quantity theory of money Fisher's view that velocity is fairly constant in the short run, so that , transforms the equation of exchange into the quantity theory of money, which states that nominal income (spending) is determined solely by movements in the quantity of money M.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
From the equation of exchange to the quantity theory of money Fisher's view that velocity is fairly constant in the short run, so that , transforms the equation of exchange into the quantity theory of money, which states that nominal income (spending) is determined solely by movements in the quantity of money M. P * Y = M *
V¯
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Because the classical economists (including Fisher) thought that wages and prices were completely exible, they believed that the level of aggregate output Y produced in the economy during normal times would remain at the full-employment level .
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Because the classical economists (including Fisher) thought that wages and prices were completely exible, they believed that the level of aggregate output Y produced in the economy during normal times would remain at the full-employment level . Dividing both sides by
Y¯ ,
we can then write the price level as
follows:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Because the classical economists (including Fisher) thought that wages and prices were completely exible, they believed that the level of aggregate output Y produced in the economy during normal times would remain at the full-employment level . Dividing both sides by
Y¯ ,
we can then write the price level as
follows: P =
M∗V¯ Y¯
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange
Velocity fairly constant in short run Aggregate output at full-employment level Changes in money supply aect only the price level Movement in the price level results solely from change in the quantity of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
Dr. Edward Asiedu
y) = (Percentage Change in x) +
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts
Money Demand Theories of Money Demand
Tools of Monetary Policy Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
y) = (Percentage Change in x) +
Using this mathematical fact, we can rewrite the equation of exchange as follows:
%4M
+
%4V
=
%4P
Dr. Edward Asiedu
+
%4Y
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts
Money Demand Theories of Money Demand
Tools of Monetary Policy Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
y) = (Percentage Change in x) +
Using this mathematical fact, we can rewrite the equation of exchange as follows:
%4M
+
%4V
=
%4P
+
%4Y
Subtracting from both sides of the preceding equation, and recognizing that the in ation rate, is the growth rate of the price level,
π = %4P
=
%4M
+
%4V
Dr. Edward Asiedu
-
%4Y
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts
Money Demand Theories of Money Demand
Tools of Monetary Policy Demand for Money
Velocity of Money and the Equation of Exchange Percentage Change in (x (Percentage change in y)
#
y) = (Percentage Change in x) +
Using this mathematical fact, we can rewrite the equation of exchange as follows:
%4M
+
%4V
=
%4P
+
%4Y
Subtracting from both sides of the preceding equation, and recognizing that the in ation rate, is the growth rate of the price level,
π = %4P
=
%4M
+
%4V
-
%4Y
Since we assume velocity is constant, its growth rate is zero, so the quantity theory of money is also a theory of in ation:
π = %4M
-
%4Y
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Relationship Between In ation and Money Growth
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
There are two ways the government can pay for spending: raise revenue or borrow
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
There are two ways the government can pay for spending: raise revenue or borrow Raise revenue by levying taxes or go into debt by issuing government bonds
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
There are two ways the government can pay for spending: raise revenue or borrow Raise revenue by levying taxes or go into debt by issuing government bonds The government can also create money and use it to pay for the goods and services it buys
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
The government budget constraint thus reveals two important facts:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
The government budget constraint thus reveals two important facts: If the government de cit is nanced by an increase in bond holdings by the public, there is no eect on the monetary base and hence on the money supply.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Budget De cits and In ation
The government budget constraint thus reveals two important facts: If the government de cit is nanced by an increase in bond holdings by the public, there is no eect on the monetary base and hence on the money supply. But, if the de cit is not nanced by increased bond holdings by the public, the monetary base and the money supply increase.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Hyperin ation Hyperin ations
are periods of extremely high in ation of
more than 50% per month.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Hyperin ation Hyperin ations
are periods of extremely high in ation of
more than 50% per month. Many economiesboth poor and developedhave experienced hyperin ation over the last century, but the United States has been spared such turmoil.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Hyperin ation Hyperin ations
are periods of extremely high in ation of
more than 50% per month. Many economiesboth poor and developedhave experienced hyperin ation over the last century, but the United States has been spared such turmoil. One of the most extreme examples of hyperin ation throughout world history occurred recently in Zimbabwe in the 2000s.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Outline 1
Introduction: Overview of the Course Introduction Role and Nature of Money Functions of Money Evolution of Payment System Measuring Money
2
Overview of The Financial System and Some Basic Concepts Financial Market Central Banking and the Conduct of Monetary Policy Money Supply
3
Tools of Monetary Policy Tools of Monetary Policy
4
Demand for Money Money Demand Theories of Money Demand Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Keynesian Theories of Money Demand
Keynes's liquidity preference theory
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Keynesian Theories of Money Demand
Keynes's liquidity preference theory Why do individuals hold money? Three motives: Transactions motive Precautionary motive Speculative motive
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Keynesian Theories of Money Demand
Keynes's liquidity preference theory Why do individuals hold money? Three motives: Transactions motive Precautionary motive Speculative motive
Distinguishes between real and nominal quantities of money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Transaction Motive
Keynes initially accepted the quantity theory view that the transactions component is proportional to income.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Transaction Motive
Keynes initially accepted the quantity theory view that the transactions component is proportional to income. Later, he and other economists recognized that new methods for payment, referred to as payment technology, could also aect the demand for money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Precautionary Motive
Keynes also recognized that people hold money as a cushion against unexpected wants.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Precautionary Motive
Keynes also recognized that people hold money as a cushion against unexpected wants. Keynes argued that the precautionary money balances people want to hold would also be proportional to income.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Speculative Motive
Keynes also believed people choose to hold money as a store of wealth, which he called the speculative motive
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together Md P = f(i,Y) where the demand for real money balances is negatively related to the interest rate i, and positively related to real income
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together Md P = f(i,Y) where the demand for real money balances is negatively related to the interest rate i, and positively related to real income
Rewritting P 1 = f (i,Y ) Md
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together Md P = f(i,Y) where the demand for real money balances is negatively related to the interest rate i, and positively related to real income
Rewritting P 1 = f (i,Y ) Md Multiply both sides by Y and replacing PY Y V = M = f (i,Y )
Dr. Edward Asiedu
Md
Monetary Theory
with M
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together
Velocity is not constant:
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together
Velocity is not constant: The procyclical movement of interest rates should induce procyclical movements in velocity.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Putting the Three Motives Together
Velocity is not constant: The procyclical movement of interest rates should induce procyclical movements in velocity. Velocity will change as expectations about future normal levels of interest rates change
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Portfolio Theories of Money Demand Theory of portfolio choice and Keynesian liquidity preference
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Portfolio Theories of Money Demand Theory of portfolio choice and Keynesian liquidity preference The theory of portfolio choice can justify the conclusion from the Keynesian liquidity preference function that the demand for real money balances is positively related to income and negatively related to the nominal interest rate.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Portfolio Theories of Money Demand Theory of portfolio choice and Keynesian liquidity preference The theory of portfolio choice can justify the conclusion from the Keynesian liquidity preference function that the demand for real money balances is positively related to income and negatively related to the nominal interest rate. Other factors that aect the demand for money: Wealth Risk Liquidity of other assets
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Factors that Determine the Demand for Money
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Empirical Evidence on the Demand for Money
Precautionary demand: Similar to transactions demand
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Empirical Evidence on the Demand for Money
Precautionary demand: Similar to transactions demand As interest rates rise, the opportunity cost of holding precautionary balances rises
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Empirical Evidence on the Demand for Money
Precautionary demand: Similar to transactions demand As interest rates rise, the opportunity cost of holding precautionary balances rises The precautionary demand for money is negatively related to interest rates
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Interest Rate and Money Demand We have established that if interest rates do not aect the demand for money, velocity is more likely to be constantor at least predictableso that the quantity theory view that aggregate spending is determined by the quantity of money is more likely to be true.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Interest Rate and Money Demand We have established that if interest rates do not aect the demand for money, velocity is more likely to be constantor at least predictableso that the quantity theory view that aggregate spending is determined by the quantity of money is more likely to be true. However, the more sensitive the demand for money is to interest rates, the more unpredictable velocity will be, and the less clear the link between the money supply and aggregate spending will be.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Stability of Money Demand
If the money demand function is unstable and undergoes substantial, unpredictable shifts as Keynes believed, then velocity is unpredictable, and the quantity of money may not be tightly linked to aggregate spending, as it is in the quantity theory.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Stability of Money Demand
If the money demand function is unstable and undergoes substantial, unpredictable shifts as Keynes believed, then velocity is unpredictable, and the quantity of money may not be tightly linked to aggregate spending, as it is in the quantity theory. The stability of the money demand function is also crucial to whether the Bank of Ghana (BOG) should target interest rates or the money supply.
Dr. Edward Asiedu
Monetary Theory
Introduction: Overview of the Course Overview of The Financial System and Some Basic Concepts Tools of Monetary Policy
Money Demand Theories of Money Demand
Demand for Money
Stability of Money Demand
If the money demand function is unstable and so the money supply is not closely linked to aggregate spending, then the level of interest rates the BOG sets will provide more information about the stance of monetary policy than will the money supply.
Dr. Edward Asiedu
Monetary Theory
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