Monetary policy & financial market
Money & Money Market
Concept
as anything that is generally accepted in payment for goods/services or in the repayment of debts
When completing payment, the responsibility of stakeholders will terminate
Function
Unit of account
Medium of exchange
Store of value
Classification
Commodity money
Fiat money
E-money/check
Cryptocurrency
Money regimes
Bimetallic Standard: gold & silver
Gold Standard
Fiat money: paper money issued by gov
Measure (all interset rate)
open market operations
required reserve
discounted interest rate
Factors affecting money supply
Central Bank increase money base -> MS increase
Increase required reserve -> MS decrease
Commercial banks increase over reserved ratio -> MS decrease
Non-banking sector increase cash -> MS decease
When the non-banking sector (not involved in creating money or credit) increases its cash holdings, it reduces the amount of money available for lending and spending in the economy
Factors affecting money demand
Demand for investment
Demand for transaction
Nominal Income increase
MD increase
Low interest rates
MD increase
Price level increase
MD increase
Lack of payment methods
MD increase
Property increase
MD increase
Income of substitute property decrease
MD increase
Expected interest rate increase
MD increase
Risk of substitute property increase
MD increase
Liquidity of substitute property decrease
MD increase
Fisher equation
MV= PY
money supply x velocity of money = price level x real output.
%∆M + %∆V = %∆P + %∆Y
the growth rate of money supply + the growth rate of its velocity = the inflation rate (growth rate of price level) + the growth rate of real output
MD = MD(P,Y) = MD/Y = (1/V)Y = kY: money demand function
demand for real balances (MD/P) is proportional to real income (Y), where k is the proportionality constant
i = r + π
i nominal interest rate, r real interest rate, π inflation rate
if V and Y are constant
M increase -> P increase -> inflation rate
The velocity of money is the rate at which money is exchanged in an economy, consumers and businesses collectively spend money.
i the rate of return that makes lenders indifferent between current and future consumption, considering the expected inflation
lenders demand higher i to compensate for the loss of purchasing power as inflation erodes the real value of money over time
M1 narrow money
The most liquid forms of money, easily converted to cash
M2 near money
M1 + other less liquid assets
Monetary policy
Definition
central bank's manipulation of MS and i to achieve macro targets
Goals
Price stability, inflation control
reduction of unemployment
promotion of economic growth
stability of financial system and institutions
exchange rate stability and national financial security
money demand and nominal interest rate
(M/P)D = L(Y, i)
money demand is a function of real income and the nominal interest rate
demand for money depends on income level and cost of holding money
(M/P)D = L(Y, r + π)
demand for money also depends on real cost of holding money and expected inflation
Target selections
It is too difficult for central banks to achieve multiple targets at the same time (targeted interest rates and MS)
M, Friedman: CB should control money supply, as the increase of annual MS (%) = the growth of GDPr in long term
The Ministry of Finance in Vietnam is involved in managing inflation and ensuring price stability. They also work on controlling market liquidity and flexibly combining fiscal policies
The Ministry of Labour, Invalids, and Social Affairs (MOLISA) administers labor, employment, occupational safety, social insurance, and vocational training. They aim to reduce poverty, enhance social inclusion and ensure social protection.
The Ministry of Planning and Investment provides strategic advice for socio-economic development. It also programs and plans economic management mechanisms for investments.
Influence of monetary policy on AD (increase interst rate)
C: households save rather than consume
I: investment reduce, I and r have diverse rela
G: constant
NX: reduction in imports