ECN 8200Handout 4Ricciardi

The Banking System and Its Regulation: The MoneySupply Process

Midas, Transmuting all into GOLD PAPER.By James Gillray.Published 1797.

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Practice Simulation: In preparation our Exam, please read the following article. We will conduct our Money Market -Goods Market Class Simulations on the basis of information provied in this article. Given an initial equilibrium in bothmarkets, how would Kuwait's employment, output, prices, and interest rates, be affected by the policies discussed in thearticle?

Kuwait again cuts repo rate14 May 2007(c) 2007 Misr Information Serivices and Trading. All Rights Reserved.

Kuwait cut its repurchase rate for the second time in six weeks yesterday in what appeared to be its latestmove to deter speculators betting on an appreciation of the oil exporter''s dollar-pegged dinar currency.Thecentral bank cut the repo rate by 25 basis points to 5.50 per cent, making it cheaper for Kuwaiti banks toborrow money for one week from the central bank, which could put more dinars on the market and reduceany upward pressure on the exchange rate.The central bank''s last repo rate cut was by 12.5 basis points onApril 1, four days after it warned currency speculators against betting on an appreciation of the dinar."Peoplehave called off the revaluation bet.

This move is trying to reinforce that by making it less desirable to buy the dinar," said Steve Brice, regionalhead of research at Standard Chartered in Dubai.Central bank officials were not immediately available forcomment.The bank made no statement on the move and left the benchmark discount rate unchanged at 6.25per cent.The bank usually tracks policy moves by the U.S. Federal Reserve to maintain the relative yield ofdinar assets. The Fed kept its benchmark rate steady at 5.25 per cent after a meeting of policymakers on May9.Kuwait and five other Gulf Arab oil producers have pegged their currencies to the dollar to prepare formonetary union in 2010.With the monetary union timetable in doubt after Oman, one of the six, opted lastyear not to meet the deadline, speculation has grown that some Gulf states would revalue their currencies.TheInternational Monetary Fund urged Kuwait on Sunday to resist market pressure to revalue, saying any changeto its dollar-peg risked undermining confidence in a stable exchange rate."The gains from revaluation will bevery small. The cost you incur is that you lose the perception of currency stability," Mohsin Khan, director ofthe IMF''s Middle East and Central Asia department, said.Deutsche Bank said in a report last week itexpected Kuwait to allow the dinar to appreciate by 3 per cent in the next six months to check inflation andsoak up cash pouring into the economy.The dinar, which was allowed to appreciate around 1 per cent againstthe dollar in May last year, is trading at the strong end of the central bank''s 3.5 per cent band at $0.28914.

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