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MONETARY ECONOMICSLECTURE #1:INTRODUCTION 1REFERENCE:
Mishkin, Frederic S, Ch. 1&3Miller, Roger Leroy dan David D.
Van Hoose, Ch.3www.bi.go.id
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Lecturer #1: Introduction*Money, Banking & Financial
MarketWhy study Money, Banking, and Financial Market?What is money
and what are its functions?Is money related to economic activity?
What properties are necessary for something to be considered
money?What are the various types of monetary and non-monetary
economies? 1@wisnu2015
Lecturer #1: Introduction
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Lecturer #1: Introduction*Why Study Money? Money- money supply
-, is linked to changes in economic variables that effect all of us
and are important to the health of the economy: Evidence suggests
that money plays an important role in generating business cycles.A
continuing increase in money supply might be an important factor in
causing the continuing increase in the price level (inflation)
Money plays an important role in interest-rate fluctuations, which
are of great concern to businesses and consumers
1@wisnu2015
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Why Study Financial Institutions and BankingBank and other
financial institutions are what make financial market work. Bank
and FIs play a crucial role in the economy, they make financial
market would be able to move funds form people who save to people
who have productive investment.
Lecturer #1: Introduction*1@wisnu2015
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Fact #1: Money Growth and Business Cycles in US
1950-2011Lecturer #1: Introduction*Although money growth has
declined before every recession, not every decline in the rate of
money growth is followed by a recession Shaded areas represent
recessions@wisnu2015
Lecturer #1: Introduction
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Fact #2: Average Inflation Rate Versus Average Rate of Money
Growth for Selected Countries, 2000-2010Lecturer #1:
Introduction*Inflation may be tied to continuing increases in the
money supply. The countries with highest inflation rates are also
the ones with the highest money growth rate@wisnu2015
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Lecturer #1: Introduction*Fact #3: Money Growth (M2 Annual Rate)
and Interest Rates (Long-Term U.S. Treasury Bonds), 19502011Prior
to 1980, the rate of money growth and the interest rate on
long-term Treasury bonds were closely tied.Since then, the
relationship is less clear but the rate of money growth is still an
important determinant of interest rates.@wisnu2015
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Fiscal Policy and Monetary PolicyMonetary policy is the
management of the money supply and interest ratesConducted in the
U.S. by the Federal Reserve System (Fed)Fiscal policy deals with
government spending and taxationBudget deficit is the excess of
expenditures over revenues for a particular yearBudget surplus is
the excess of revenues over expenditures for a particular yearAny
deficit must be financed by borrowing
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Government Budget Surplus or Deficit as a Percentage of Gross
Domestic Product, 19502010Source:
www.gpoaccess.gov/usbudget/fy06/sheets/hist01z2.xls.US Debt
Clock.orgWhy deficits budget might lead to higher rate of money
growth, a higher rate of inflation, and higher rate interest rate ?
*Lecturer #1: Introduction@wisnu2015
Lecturer #1: Introduction*
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Lecturer #1: IntroductionWhat is money?
Anything that people generally accept in exchange for goods and
servicesbut,the concepts of money today is normally more
inclusive*@wisnu2015
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Lecturer #1: Introduction*Types of Money@wisnu2015
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Lecturer #1: Introduction*The Functions of MoneyThe functions of
money are:1) Medium of exchange - Any asset that sellers will
accept as payment2) Unit of accounting - A measure by which prices
are expressed3) Store of value (purchasing power)- The ability to
hold value over time 4) Standard of deferred payment - use as a
means of settling debts maturing in the future@wisnu2015
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Lecturer #1: Introduction*The Functions of MoneyLiquidityThe
degree to which an asset can be acquired or disposed of without
much danger of any intervening loss in nominal value and with small
transaction costsMoney is the most liquid asset.
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Lecturer #1: Introduction*The Desirable Propertiesof Money
Minimum
Properties:PortabilityDurabilityDivisibilityStandardizabilityRecognizability@wisnu20151
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Lecturer #1: Introduction*Types of Monetary and Non- Monetary
EconomiesBarter Economies (Non-Monetary economies):Pure Barter
EconomiesTrading-Post Economies/systems of organized barterMonetary
EconomiesCommodity Money EconomiesCommodity Standards:Full-bodied
money Face value=market valueRepresentative-full bodied moneyFiat
Money
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Lecturer #1: Introduction*Commodity Standards :If people widely
use tokens, rather than actual physical commodities, in exchange
for goods and services.Individuals use tokens whose values are
fully or partially related to, or backed by, the value of a
physical commodity (gold, silver)People may use alternative token
other than coin (pieces of paper) Representative full-bodied
money
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Lecturer #1: Introduction*Fiat Money :Paper currency decreed as
legal tender but not convertible to gold or precious metal. (Less
in value than its commodity )Can be broken down into 2 major
sub-classification:(1). Fiat money issued by governments and
Central Bank(2). Fiat money issued by depository
institutions@wisnu2015
Lecturer #1: Introduction
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DEFINE AND MEASURE MONEY(Miller, Ch. 3)Why it is important to
define and measure money?What are the transaction and liquidity
approaches to measuring money?What is the best definition of
money?Does money have a future? 1*Lecturer #1:
Introduction@wisnu2015
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Importance to define and measure money
Money as Store of Value MoneyQuantity of MoneyInflationInterest
rateEmploymentExchange rateNat. incomeNat.outputEc.
GrowthDefinition of MoneyTheoriticalEmphiricalHow to
measure?TransactionApproach LiquidityApproachMoney asMedium of
Exchange*Lecturer #1: Introduction@wisnu20151
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Approaches to Defining and Measuring Money1. The transaction
approach:Emphasizes moneys function as medium of exchange We should
only include assets that serve as media of exchange in the
empirical measurement of money (coins and paper currency, checkable
accounts) Transaction motive for holding moneyIf total money supply
rise spending rise, so: national income, national input, employment
and price level rise too.*Lecturer #1: Introduction@wisnu20151
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Money as a store of valueMoney is the most liquid of all assets.
An individual does not need to convert money into something before
purchasing a good and serviceMoney: All assets that people can
convert into money quickly without loss of nominal dollar value and
without much cost
2. Liquidity Approach:*Lecturer #1: Introduction@wisnu2015
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Measuring Money-1 (in US):1. The Narrowest Measure of Money
(Monetary Base or MB): MB = Currency +Total Reserves of Depository
Institutions
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2. M1 = The Transactions Approach
M1 = Currency + Transaction deposits (Demand deposits + Other
checkable deposits) + Travellers checks
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3. M2 = The Liquidity Approach
M2 = M1 + Saving deposits and money market deposits +
Small-denomination time deposits +Overnight RPs and Eurodollar +
Money Market mutual funds
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4. M3 : An Even Broader Definition of MoneyM3 = M2 + Large
denomination time deposits at all depository institutions + Term
repurchase agreement at commercial banks and savings and loan
associations + Term eurodollars + Institutions-only money market
mutual funds balance*Lecturer #1: Introduction@wisnu2015
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Measuring Money (in Indonesia):Uang Inti/Uang Primer (M0):
M0 = C + Rdimana: C = uang kartal (kertas dan koin)R = saldo
giro bank umum di Bank Sentral (BI)*Lecturer #1:
Introduction@wisnu2015
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2. Uang beredar dalam arti sempit (M1):
M1 = C + Ddimana: C = uang kartal (kertas dan koin)D = uang
giralCont.*Lecturer #1: Introduction@wisnu2015
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3. Uang Beredar dalam arti luas (Likuiditas Perekonomian)/
M2
M2 = M1 + T
dimana:T = Uang Kuasi (uang yang disimpan dalam rekening
tabungan dan deposito berjangka)
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Why the definition of money differ among countries?Definisi uang
beredar di berbagai negara bervariasi, sesuai kondisi sektor
keuangan dan perbankan serta kebutuhan otoritas moneter negara
bersangkutanContoh:US: M1,M2,M3Inggris: M1, M2, M4Kanada:
M1,M2,M2+, Adjusted M2+, M3*Lecturer #1: Introduction@wisnu2015
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What is the Best Definition of Money?
The criterions of Monetary Policy
A close correspondence must exist between the theoretical
definition of money and the emphirical (measurable) definition of
moneyAn ability on the part of the monetary authorities to control
empirically defined money supply A close and predictable
relationship between changes in the empirically defined money
supply and ultimate national economic goals *Lecturer #1:
Introduction@wisnu20151
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The Future of Money:(The Evolution of Money : An empirically
view)
BarterCommodity Money (gold & silver)Paper
money(certificate)Bank money(demand deposit)Intangible money
Electronic money(e-money)*Lecturer #1:
Introduction@wisnu2015
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Lecturer #1: Introduction*TUGAS #1 :Dengan data yang diakses
dari website Bank Indonesia di: www.bi.go.idGambarkan (dalam bentuk
grafis) hubungan antara jumlah uang beredar dengan output, price
level dan suku bungaBerikan ulasan singkat terhadap masing-masing
hubungan variabel di atas
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Lecturer #1: Introduction
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