Lecture_5_IR_and_transmission_mechanism

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1、PrinciplesofMacroeconomicsLecture5InterestRatesandtheTransmissionMechanismOutline•Introductiontocentralbanks•Moneymarketequilibrium–Howisequilibriumachieved–Howisequilibriumchanged•Monetarypolicy–Monetarycontrol:means,provisos–Targetsandinstrumentsofmonetarypolicy•Transmissionmechanismofmoneta

2、rypolicy–Consumptionandinterestrate–Investmentandinterestrate–Limitationsofthetransmissionmechanism2Thecentralbank•Actsasbankertothecommercialbanksinacountry•Responsibleforsettinginterestrates.•IntheUK,theBankofEnglandfulfilstheseroles.InChina,People’sBankofChina.•Twokeytasks:–toissuecoinsandb

3、ank-notes–toactasbankertothebankingsystemandthegovernment3Otherfunctionsofthecentralbank•Lenderoflastresort–Thebankstandsreadytolendtobanksandotherfinancialinstitutionswhenfinancialpanicthreatens.•Bankertothegovernment–Thebankensuresthatthegovernmentcanmeetitspaymentswhenrunningabudgetdeficit.

4、•Settingmonetarypolicytocontrolinflation–moreofthislater4Prudentialregulation•Itmayalsobethejobofthecentralbankto‘policethefinancialsystem’.Ifnotthensomeotherfinancialagencyshoulddothis.•Capitaladequacyratiosareonewayofdoingthis.Acapitaladequacyratioisarequiredminimumvalueofbankcapitalrelative

5、toitsoutstandingloansandinvestments.5Prudentialregulation(2)•Thereshouldalsobeanelementofself-regulation.•Ifabankmakeslargelossesitmaygobankrupt.Typically,governmentsthencompensatedepositorsbutnotshareholders.•Theknowledgethatdepositorsareunlikelytosufferhelpspreventunjustifiedfinancialpanics.

6、•Theknowledgethatshareholdersarelikelytosufferhelpskeepmanagementonitstoes.6TheMoneyMarket-Bondpricesandinterestrates•Bondshave–Afacevalue–Bondscarryafixed“coupon”,apaymenttowhichthebondholderisentitled,normallydeterminedbythefacevalue–Interestrate=(Moneypayment/Priceofbond)100–Theprice(PV)of

7、abondfluctuatesdaytodayaccordingtosupplyanddemandonthebondmarket–Thehigherthepriceofbond,theloweristheinterestrate.7Moneymarketsandinterestrates•Assumeforconvenienceonlytwofinancialinstruments,bondsandmoney–bondsinfixedsupply–agentshold