Prof. Dr. John JA Burke

Use for transactionsPays no interestDiffers from

Income Wealth Investment

Monetary Aggregates

M1 Currency and checkable deposits (except

deposits on demand) M2

M1 + savings accounts, time deposits, retail money market funds

M3 M2 + large time deposits+ Repos +

Eurodollars + institutional money market funds

Md

Level of transactions Interest rates▪ Higher rates take money out of system

Demand as whole is sum of all individual demands for money by people in economy Md = $Y* L(i) (Demand for money is equal to

nominal income times a function of the interest rate)

Sum of Individual transactions Interest rate effects Measure transactions by nominal income

Money Supply = Money Demand

Given a specific interest rate and given income, people hold money equal to the money supply

Money is central bank money

Shows how the quantity of money is related to the monetary base

Role of what banks do The monetary base is what the central bank

CAN control

High powered money is central bank money High because it leads to money multiplier

Government wants money

Government sells debt to central bank

Central bank intermediates the debt between the market and the government (prints the money)

The central bank owns the debt Debt monetisation

Increases in the supply of money causes inflation May lead to chronic recession

Consequences People spend more, save less Decreases economy’s capital stock Declines in Long run GDP growth

Relationship between inflation and employment

High unemployment correlates to low inflation

Introduces difficult issue for macroeconomics Low inflation High employment

Offshore finance Provision of financial services by banks and

other agents to non-residents for favourable tax regime

Services are broad Lending/borrowing between non-residents Take deposits and invest proceeds in

financial market elsewhere Mutual funds and trusts

Any financial centre where offshore activity takes place

Definition includes all major financial centres

Characteristics: Large number of financial institutions doing

business with non-residents Financial systems with external assets and

liabilities out of proportion to domestic intermediation

Low or zero taxation Light financial regulation Bank secrecy

International Financial Centres NY London Tokyo

Regional Financial Centres Hong Kong Singapore Luxembourg

Small Financial Centres Cayman Islands Channel Islands

Offshore banking increases cross-border intermediation

Difficulties in collection of information Regulation is minimal Many transactions are off-balance sheet IMF lacks a complete picture of all off-

shore activity

IBFs Set of asset and liability accounts

segregated from the balance sheet of the establishing office

IBFs receive deposits from and extend credit of non-residents or other IBFs

IBF deposits Exempt from reserve requirements No deposit insurance fees

Domestic credit creation Offshore credit creation Cross-border transactions

Assets Liabilities

Inferences drawn Off-shore credit creation enters and affects

domestic credit creation Regulators cannot know exactly the amount of

credit creation produced by the banks Regulators lack authority to control off-shore

activity

Absence of being able to control money supply has adverse economic effects