Upload
others
View
7
Download
0
Embed Size (px)
Citation preview
School Lecture Series (SLS) School Lecture Series (SLS) School Lecture Series (SLS) School Lecture Series (SLS) Lecture. 1. 2013Lecture. 1. 2013
F b 21 2013
1SLS/Vol. 1/ 2013
February 21, 2013
Money, Monetary Policy and the Central Money, Monetary Policy and the Central B k f T i id d d T bB k f T i id d d T bBank of Trinidad and Tobago.Bank of Trinidad and Tobago.
SLS/Vol. 1/ 2013 2
© Copyright 2013 Central Bank of Trinidad and Tobago
ThisThis lecturelecture seriesseries isis aa collaborativecollaborative efforteffort betweenbetweenThisThis lecturelecture seriesseries isis aa collaborativecollaborative efforteffort betweenbetweenthethe CentralCentral BankBank ofof TrinidadTrinidad andand TobagoTobago andand thetheDepartmentDepartment ofof Economics,Economics, UWI,UWI, StSt.. AugustineAugustine..pp ,, ,, gg
TheseThese sessionssessions areare structuredstructured toto aidaid studentsstudents pursuingpursuinglifi ilifi i ii E iE i ifi llifi ll hh C ibbC ibbqualificationsqualifications inin Economics,Economics, specificallyspecifically thethe CaribbeanCaribbean
ProficiencyProficiency ExaminationsExaminations.. PresentationsPresentations useuse thethe syllabussyllabusasas aa guideguide butbut alsoalso aimaim toto showshow thethe practicalpracticalasas aa guideguide butbut alsoalso aimaim toto showshow thethe practicalpracticalapplicationsapplications ofof thethe relevantrelevant topicstopics..
3SLS/Vol. 1/ 2013
LecturesLectures forfor thethe SchoolSchool LectureLecture SeriesSeries areare preparedprepared bybyCentralCentral BankBank ofof TrinidadTrinidad andand TobagoTobago researchresearcheconomistseconomists andand lecturerslecturers inin thethe DepartmentDepartment ofofeconomistseconomists andand lecturerslecturers inin thethe DepartmentDepartment ofofEconomicsEconomics.. TheThe viewsviews expressedexpressed areare thosethose ofof thetheauthorsauthors andand notnot necessarilynecessarily ofof thethe CentralCentral BankBank oror thetheyyUniversityUniversity ofof thethe WestWest Indies,Indies, StSt.. AugustineAugustine..
4SLS/Vol. 1/ 2013
O tline f Presentati nO tline f Presentati nOutline of PresentationOutline of Presentation
f1. History of Money.
2 Functions of Money2. Functions of Money.
3 Money Supply, Demand and Interest Rates.3. Money Supply, Demand and Interest Rates.
4. Central Bank and Monetary Policy.y y
5SLS/Vol. 1/ 2013
History of MoneyHistory of Moneyy yy y(Money Never Grew on Trees)(Money Never Grew on Trees)
Picture 1
C di 1. Barter 2. Commodity Money
3.Representative Money 4.Fiat Money
6SLS/Vol. 1/ 2013
Functions of MoneyFunctions of Money
The four main functions of money are :
A di f h 1. A medium of exchange .
2. A unit of account.2. A unit of account.
3. A store of value.
4. A standard of deferred payment.
7SLS/Vol. 1/ 2013
M ne S lM ne S lMoney SupplyMoney SupplyMoney Supply – This is a measure of how much money is y pp y yin circulation in an economy.
The money supply can be measured using various methods or principles.
In Trinidad and Tobago, the main measures of the money supply are M-1A and M-2.
Other measures of the money supply include M-2*, M-3, and M-3*.
8SLS/Vol. 1/ 2013
The Domestic Monetary AggregatesThe Domestic Monetary Aggregates100
80
100
60
80
ions
40
TT
$ B
illi
20
T
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
9
Currency In Active Circulation M-1A M-2 M-2*SLS/Vol. 1/ 2013
Demand f r M neDemand f r M neDemand for MoneyDemand for Money
Lord John Maynard Keynes identified 3 motives forLord John Maynard Keynes identified 3 motives for
holding money:
1. Transactions motive – day to day transactions.
2. Precautionary motive – unforeseen situations.y
3. Speculative motive – to guard against possible
capital losscapital loss.
10SLS/Vol. 1/ 2013
Money Supply and Interest RatesMoney Supply and Interest Rates
MDMS
Graph 1: Equilibrium Interest Rate
i2 E2
E00i0
Ei1
E1
11
M2 M1M0 Quantity of Money
SLS/Vol. 1/ 2013
Graph 2: Interest rate and Investment Spending
MS1 MS
0
E1i1i1
B
i0E0
i0
A
IDMD
0 i0
ΔI
QuantityM0M1
0
Investment expenditure
I0 I10
ΔI
The investment demand function
p
The investment demand function
12SLS/Vol. 1/ 2013
Graph 2: Interest Rates and Aggregate Demand and Expenditure
AE = Y
Expe
nditure
AE0E0
AE1
Desired
E ΔI
Real GDP 0
45o
Y0 Y1
AD1
P0
E0
13
Real GDP
Y0 Y1
SLS/Vol. 1/ 2013
Central Bank Central Bank of of
T d d T d d d T bd T bTrinidad Trinidad and Tobagoand Tobago
14SLS/Vol. 1/ 2013
Mission StatementMission Statement
"The Bank shall have as its purpose the promotion
of such monetary, credit and exchange policies as
would foster monetary and financial stability and
public confidence and be favourable to the
economy of Trinidad and Tobago."
15SLS/Vol. 1/ 2013
R ibiliti f th C t l B kR ibiliti f th C t l B kResponsibilities of the Central BankResponsibilities of the Central BankThe Central Bank Act of 1964 entrusts the Central Bank with a range of g
responsibilities, including:
1. Issuing and redeeming currency.
2. Developing and implementing monetary policy.
3. Acting as banker and advisor to the Government.
4. Acting as banker to the commercial banks.
5. Issuing securities on behalf of the Government.
16SLS/Vol. 1/ 2013
R ibiliti f th C t l B kR ibiliti f th C t l B kResponsibilities of the Central BankResponsibilities of the Central Bank
6. Managing the foreign exchange market and protecting the external
value of the currency.
7. Investing the country's external reserves.
8. Fostering and promoting financial stability.g p g y
9 Conducting intelligence-gathering and research9. Conducting intelligence-gathering and research.
R l i d i i h b ki 10. Regulating and supervising the banking system.
17SLS/Vol. 1/ 2013
Wh M P l ?Wh M P l ?What is Monetary Policy?What is Monetary Policy?Monetary Policy refers to those actions and decisions undertaken by the
monetary authority to create appropriate monetary conditions in line with the
economic objectives of the country.
These actions and decisions are designed to influence interest rates and theThese actions and decisions are designed to influence interest rates and the
money supply which impact on credit demand and investment, which in turn
ultimately affect the overall demand for goods and services.
The Central Bank of T&T conducts monetary policy geared towards the
promotion of low inflation and a stable foreign exchange market that is
conducive to sustained growth in output and employmentconducive to sustained growth in output and employment.
18SLS/Vol. 1/ 2013
Monetary Policy Instruments PreMonetary Policy Instruments PreMonetary Policy Instruments PreMonetary Policy Instruments Pre--Liberalization (1993)Liberalization (1993)
Direct Instruments/Less Market Based
1. Interest rate controls
2. Selective credit controls
S i3. Statutory reserve requirements
4. Rediscount (or discount) rate( )
5. Exchange rate controls
6. Moral Suasion 19SLS/Vol. 1/ 2013
Monetary Policy Instruments PostMonetary Policy Instruments Post--y yy yLiberalization Liberalization
Emphasis on more market based instruments.
Monetary policy tools now include:y p y
1. The ‘Repo’ rate
2. Open Market Operations (OMO)2. Open Market Operations (OMO)
3. Liquidity sterilization bonds
4 R di t ( di t) t4. Rediscount (or discount) rate
5. Statutory reserve requirements
6. Requested fixed deposit accounts
7. Moral Suasion
8. FX Interventions
20SLS/Vol. 1/ 2013
M P l F lM P l F lMonetary Policy FormulationMonetary Policy FormulationMonetary Policy Committee◦ Meets monthly to make decisions related toy
monetary policy.
◦ Responsible for setting the ‘Repo rate’, reserverequirement and other policy tools.q p y
◦ Articulates monetary policy through the ‘Repo’Articulates monetary policy through the Reporate announcement on a monthly basis andthrough the bi-annual Monetary Policy Report.g y y p
21SLS/Vol. 1/ 2013
Picture 2: Channels of Monetary Transmission Picture 2: Channels of Monetary Transmission
22Source: Boodoo and Cheong, 2010.
SLS/Vol. 1/ 2013
The Interest Rate ChannelThe Interest Rate ChannelThe Interest Rate ChannelThe Interest Rate Channel
23
Source: Boodoo and Cheong, 2010.SLS/Vol. 1/ 2013
The ‘Repo’ Rate 2002The ‘Repo’ Rate 2002--20122012
8.09.0
10.0
E i M
5.06.07.0
Cen
t
Easing Monetary Policy
2 03.04.0Pe
r Tightening Monetary Policy
?0.01.02.0 ?
The Repo rate announcement occurs monthly and can be obtained on
24SLS/Vol. 1/ 2013
p ythe Central Bank’s website or within the semi-annual Monetary Policy Report.
Trends in Interest Rates and Loan Growth Trends in Interest Rates and Loan Growth
1214
Selected Interest Rates
468
10
Per
cent
024
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012R R O i h I b k R B i P i L di RRepo Rate Overnight Interbank Rate Basic Prime Lending Rate
50Growth in Business and Consumer Loans
20
30
40
cent
Cha
nge
Business LoansConsumer Loans
0
10
20
on Y
ear
Per
c
-20
-10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
o
25SLS/Vol. 1/ 2013
SummarySummarySummarySummaryEconomic theory shows the relationship between the moneyEconomic theory shows the relationship between the moneysupply and interest rates; and the relationship between interestrates, investment and economic growth.
The Central Bank Act (1964) entrusts the Bank with several keyfunctions, including the design and implementation of monetary, g g p ypolicy.
h k l f l l h hThe Bank uses its arsenal of monetary policy tools such as the‘repo’ rate, OMOs and reserve requirements to fostermonetary, credit and exchange conditions that are favourable toy geconomic growth.
Th l h l f th t t i i OThere are several channels of the monetary transmission. Oneparticularly relevant channel to Trinidad and Tobago is theinterest rate channel. 26SLS/Vol. 1/ 2013