1、 CHAPTER 4CHAPTER4 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier BlanchardFinancial MarketsFinancial MarketsPrepared by:Fernando Quijano and Yvonn QuijanoChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard2 of 36The Demand for M
2、oneyThe Fed(short for Federal Reserve Bank)is the U.S.central bank.Money,which can be used for transactions,pays no interest.There are two types of money:currency and checkable deposits.Bonds,pay a positive interest rate,i,but they cannot be used for transactions.4-1Chapter 4:Financial Markets 2006
3、Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard3 of 36The Demand for MoneyThe proportions of money and bonds you wish to hold depend mainly on two variables:Your level of transactions The interest rate on bondsMoney market funds pool together the funds of many people and use t
4、hese funds to buy bonds typically,government bonds.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard4 of 36Income is what you earn from working plus what you receive in interest and dividends.It is a flowthat is,it is expressed per unit of time.S
5、aving is that part of after-tax income that is not spent.It is also a flow.Savings is sometimes used as a synonym for wealth(a term we will not use in this course).Semantic Traps:Money,Semantic Traps:Money,Income,and WealthIncome,and WealthChapter 4:Financial Markets 2006 Prentice Hall Business Publ
6、ishing Macroeconomics,4/e Olivier Blanchard5 of 36Your financial wealth,or simply wealth,is the value of all your financial assets minus all your financial liabilities.Wealth is a stock variablemeasured at a given point in time.Investment is a term economists reserve for the purchase of new capital
7、goods,such as machines,plants,or office buildings.The purchase of shares of stock or other financial assets is financial investment.Semantic Traps:Money,Semantic Traps:Money,Income,and WealthIncome,and WealthChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivie
8、r Blanchard6 of 36The demand for money:increases in proportion to nominal income($Y),anddepends negatively on the interest rate(through L(i),note the negative sign underneath L(i).MYL id$()Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard7 of 36D
9、eriving the Demand for MoneyThe Demand for MoneyFigure 4-1For a given level of nominal income,a lower interest rate increases the demand for money.At a given interest rate,an increase in nominal income shifts the demand for money to the right.Chapter 4:Financial Markets 2006 Prentice Hall Business P
10、ublishing Macroeconomics,4/e Olivier Blanchard8 of 36The Demand for Money and the The Demand for Money and the Interest Rate:The EvidenceInterest Rate:The EvidenceUsing this equation,you can find out how much the demand for money responds to changes in the interest rate(through L(i).Because L(i)is a
11、 decreasing function of the interest rate i,this equation says:When the interest rate is low,then L(i)is high,so the ratio of money demand to nominal income should be high.When the interest rate is high,then L(i)is low,so the ratio of money demand to nominal income should be low.=L(i)Md$YChapter 4:F
12、inancial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard9 of 36Figure 4-1The Ratio of Money Demand to Nominal Income and the Interest Rate since 1960The ratio of money to nominal income has decreased over time.Leaving aside this trend,the interest rate and the rat
13、io of money to nominal income typically move in opposite directions.The Demand for Money and the The Demand for Money and the Interest Rate:The EvidenceInterest Rate:The EvidenceChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard10 of 36Figure 4-1
14、suggests two main conclusions:The first is that there has been a large decline in the ratio of money demand to nominal income since 1960.Economists sometimes refer to the inverse of the ratio of money demand to nominal income($Y/Md)as the velocity of money.The second conclusion is that there is a ne
15、gative relation between year-to-year movements in the ratio of money demand to nominal income and year-to-year movements in the interest rate.The Demand for Money and the The Demand for Money and the Interest Rate:The EvidenceInterest Rate:The EvidenceChapter 4:Financial Markets 2006 Prentice Hall B
16、usiness Publishing Macroeconomics,4/e Olivier Blanchard11 of 36Figure 4-2Changes in the Interest Rate Versus Changes in the Ratio of Money Demand to Nominal Income since 1960Increases in the interest rate have typically been associated with a decrease in the ratio of money to nominal income,decrease
17、s in the interest rate with an increase in that ratio.A scatter diagram is a figure in which one variable is plotted against another.Each point in the figure shows the values of these two variables at a point in time.The Demand for Money and the The Demand for Money and the Interest Rate:The Evidenc
18、eInterest Rate:The EvidenceChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard12 of 36The Determination ofthe Interest Rate.iIn this section,we assume that checkable deposits do not exist that the only money in the economy is currency.The role of b
19、anks as suppliers of money(and checkable deposits)is introduced in the next section.4-2Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard13 of 36Money Demand,Money Supply,and the Equilibrium Interest RateMs=Md.Then using this equation,the equilibr
20、ium condition is:Money Supply=Money demandThis equilibrium relation is called the LM relation.MYL i$()Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard14 of 36Money Demand,Money Supply,and the Equilibrium Interest RateThe interest rate must be su
21、ch that the supply of money(which is independent of the interest rate)be equal to the demand for money(which does depend on the interest rate).The Determination of the Interest RateFigure 4-2Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard15 of
22、36Money Demand,Money Supply,and the Equilibrium Interest RateAn increase in nominal income leads to an increase in the interest rate.The Effects of an Increase inNominal Income on the Interest RateFigure 4-3Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier
23、 Blanchard16 of 36Money Demand,Money Supply,and the Equilibrium Interest RateFigure 4-4An increase in the supply of money leads to a decrease in the interest rate.The Effects of an Increase in the Money Supply on the Interest RateChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Mac
24、roeconomics,4/e Olivier Blanchard17 of 36Open Market OperationsIn modern economies,the way central banks change the supply of money is by buying or selling bonds in the bonds market,these actions are called Open-market operations,because they take place in the“open market”for bonds,it is the standar
25、d method central banks use to change the money stock in modern economies.If the central bank buys bonds,this operation is called an expansionary open market operation because the central bank increases(expands)the supply of money.If the central bank sells bonds,this operation is called a contraction
26、ary open market operation because the central bank decreases(contracts)the supply of money.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard18 of 36 Figure4-5 is the balance sheet of the cental bank.The asset of the cental bank are bonds it hold
27、in its portfolio(资产组合).Its liabilities are the stock of money in the economy.Open market operations lead to equal but contrary change in assets and liabilities.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard19 of 36Bond Prices and Bond YieldsTh
28、e Balance Sheet of the Central Bank and the Effects of an Expansionary Open Market OperationFigure 4-5(a)The assets of the central bank are the bonds it holds.The liabilities are the stock of money in the economy.(b)An open market operation in which the central bank buys bonds and issues money incre
29、ases both assets and liabilities by the same amount.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard20 of 36Bond Prices and Bond YieldsYou must understand the relation between the interest rate and bond prices:Treasury bills,or T-bills are issue
30、d by the U.S.government promising payment in a year or less.In fact,what is determined in bonds markets is not interest rates,but prices;the interest rate on a bond can be infered from the price of the bond.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier
31、 Blanchard21 of 36 If you buy the bond today and hold it for a year,the rate of return(or interest)on holding a$100 bond for a year is($100-$PB)/$PB.If we are given the interest rate,we can figure out the price of the bond using the same formula.iPPBB$100$100PiB1Chapter 4:Financial Markets 2006 Pren
32、tice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard22 of 36Choosing Money orChoosing the Interest Rate?A decision by the central bank to lower the interest rate from i to i is equivalent to increasing the money supply(through open market operations which purchase bonds and at same tim
33、e increase the amount of money in the economy.).Figure 4-4 Typically,the cental bank first thinks about the interest rate it want to achieve and then change the money supply in the economy so as to achieve it.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivi
34、er Blanchard23 of 36SUMMARIZATION:SUMMARIZATION:The interst rate is determined by the equality of supply of money and the demand for money.By changing the supply of money,the central bank can affect the interest rate.The central bank changes the supply of money through open-market operations in bond
35、s market,which are purchases or sales of bonds for money.open-market operations are the basic tools used by morden central bankes to affect rates.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard24 of 36 In bonds markets what is determined is not
36、 interest rates,but prices;the interest rate on a bond can be infered from the price of the bond.Open-market operations in which the central bank increases the money supply by buying bonds lead to an increase in the price of bonds equivalently,a decrease in the interest rate.Open-market operations i
37、n which the central bank decreases the money supply by selling bonds lead to an decrease in the price of bonds equivalently,an increase in the interest rate.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard25 of 36The Determination ofthe Interest
38、 Rate,IIFinancial intermediaries are institutions that receive funds from people and firms,and use these funds to buy bonds or stocks,or to make loans to other people and firms.The assets of these institutions consists of the stocks and bonds they own and loans they have made.Their liabilities are w
39、hat they owe to the people and firms from whom they have received funds.Banks receive funds from people and firms who either deposit funds directly or have funds sent to their checking accounts.The liabilities of the banks are equal to the value of these checkable deposits.(note:this is just a simpl
40、ied version,bank have other types of liabilities in addition to checkabe deposits.).Banks keep as reserves some of the funds they receive.They hold them partly in cash and partly in an account the banks have at the the central bank.4-3Chapter 4:Financial Markets 2006 Prentice Hall Business Publishin
41、g Macroeconomics,4/e Olivier Blanchard26 of 36What Banks DoBanks hold reserves for three reasons:1.On any given day,some depositors withdraw cash from their checking accounts,while others deposit cash into their accounts.2.In the same way,on any given day,people with accounts at the bank write check
42、s to people with accounts at other banks,and people with accounts at other banks write checks to people with accounts at the bank.3.Banks are subject to reserve requirements.The actual reserve ratio the ratio of bank reserves to bank checkable deposits is about 10%in the United States today.Chapter
43、4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard27 of 36The Balance Sheet of Banks and the Balance Sheet of the Central Bank RevisitedChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard28 of 36What Ban
44、ks Do Loans represent roughly 70%of banks nonreserve assets.Bonds account for the rest(30%).The assets of the central bank are the bonds it holds.The liabilities of the central bank are the money it has issued,central bank money.The new feature is that not all central bank money is held as currency
45、by the public.Some of its is held as reserves by banks(partly in cash and partly in cash and partly in their cenrtral bank accounts.)partly in their cenrtral bank accounts.)Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard29 of 36Rumors that a ba
46、nk is not doing well and some loans will not be repaid,will lead people to close their accounts at that bank.If enough people do so,the bank will run out of reservesa bank run.To avoid bank runs,the U.S.government provides federal deposit insurance.An alternative solution is narrow banking,which wou
47、ld restrict banks to holding liquid,safe,government bonds,such as T-bills.Bank RunsBank RunsChapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard30 of 36The Supply and the Demandfor Central Bank MoneyLets think in terms of the supply and the demand f
48、or central bank money.The demand for central bank money is equal to the demand for currency by people plus the demand for reserves by banks.The supply of central bank money is under the direct control of the central bank.The equilibrium interest rate is such that the demand and the supply for centra
49、l bank money are equal.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard31 of 36The Demand for MoneyDemand for currency:CUcMddDc Mdd()1When people can hold both currency and checkable deposits,and demand for money by people is for both checkable
50、deposits and currency.The demand for money involves two decisions.First,people must decide how much money to hold.Second,they must decide how much of this money to hold in currency and how much to hold in checkable deposits.Chapter 4:Financial Markets 2006 Prentice Hall Business Publishing Macroecon
