Embed Size (px)
DESCRIPTION
Money and Banking. Professor Chris Adam Australian Graduate School of Management University of Sydney and University of New South Wales. INTRODUCTION. What is money? What are the forms of money? How does banking work? How does the government influence money?. MEANING OF MONEY. - PowerPoint PPT Presentation
Citation preview
1
Money and Banking
Professor Chris AdamAustralian Graduate School of ManagementUniversity of Sydney and University of New
South Wales
2
INTRODUCTION
• What is money?
• What are the forms of money?
• How does banking work?
• How does the government influence
money?
3
MEANING OF MONEY
• Money is set of assets used in economy to
buy goods and services from people
• Three functions of money:
1. Medium of exchange• Universally accepted for exchange
• Can be used to pay taxes
4
MEANING OF MONEY
• Three functions of money:
2. Unit of account• Yardstick of measuring value
3. Store of value• Transfer purchasing power from present to
future
• Concept of liquidity: ease of converting
asset into medium of exchange
5
KINDS OF MONEY
• Commodity money has intrinsic value– Gold standard
– Cigarettes
• Fiat money has value established by
decree
• Economic conditions can induce people to
substitute first for second
6
MONEY IN ECONOMY
• Money supply as circulating volume of
purchasing power
• Basic type as currency: notes and coins in
hands of public– Includes EFTPOS (“debit” cards)
– Also called money base or high powered money
7
MONEY IN ECONOMY
• Broader definitions (M1, M2, etc.,) include – cheque accounts
– savings accounts
– time deposits (Certificates of Deposit)
– deposits in non-bank financial intermediaries
• Credit cards are means of deferring
payment: not part of current money supply
8
AUSTRALIAN MONETARY AGGREGATES CHANGES
9
AUSTRALIAN MONEY AND CREDIT CHANGES
10
RESERVE BANK OF AUSTRALIA
• RBA is Australian central bank– Created in 1959 from Commonwealth Bank
– Established to manage financial system stability
for good of economy
– Policy maker for banking system and money
supply functions
– RBA Board as guide to RBA Governor
11
RESERVE BANK OF AUSTRALIA
• RBA functions:
1. Originally to monitor bank financial conditions
and recommend actions to keep solvent –
prudential supervision
• Now with APRA
2. Guarantor of banking system stability but not
lender of last resort
• Operates cheque clearance process
12
RESERVE BANK OF AUSTRALIA
• RBA functions:
3. Monetary policy design and implementation, to
influence growth rate of economy and inflation
• Through open-market operations
13
BANKS AND MONEY SUPPLY
• Bank balance sheet model to demonstrate
credit creation with 100% reserves– no credit creation!
• Bank balance sheet model to demonstrate
credit creation with frational reserves– Allows creation of credit
– Money multiplier
14
AUSTRALIAN BANK INTEREST SPREADS
15
AUSTRALIAN BANK FEE INCOME
16
AUSTRALIAN BANK EQUITY RETURNS
17
AUSTRALIAN MONETARY POLICY
• RBA uses changes to cash rate to adjust
level of interest rates in economy– overnight loans among intermediaries
– shifts base of yield curve
• Open-market operations to adjust to excess
supply or demand of overnight funds– buying and selling government securities from
own portfolio
18
AUSTRALIAN CASH RATE
19
AUSTRALIAN INTEREST RATES
20
AUSTRALIAN MONETARY POLICY
• RBA also oversees reserve requirements
for banks– Basel Agreement: Tier 1 and Tier 2 reserves held
against assets with appropriate risk classes
• Problems for RBA in monetary policy:– Household deposits at banks are discretionary
– Bank lending as decisions of banks
– Confidence in banks: role of bank runs
21
AUSTRALIAN CREDIT AND GDP CHANGES
