Financial Systems Generalizations

The Four Institutions  The Ministry of Finance (MOF)  The Central Bank (CENT BANK)  The Commercial Banks (COMMBANK)  The General Public (Public)

Ministry of Finance  Manages government budget (B = G – T)  Collects taxes  Sells bonds to the central bank, commercial banks, general public (borrows)

Central Bank  Issues currency  Regulates commercial banks  Manages reserve deposits (R) and enforces reserve/deposit ratio (R/D)  Lends to government (purchases MOF bonds)

Commercial Banks  Lend to general public  Lend to the government (purchase bonds)  Manage general public deposits (D)  Manage reserve to deposit ratio (R/D)

General Public: businesses households, individuals  Hold the money supply (M = C + D)  Manage financial portfolios  Lend to government  Manage currency/deposit ratio (C/D)  Create & produce the GDP

What is Money?  Monetary base: H = C + R  Stock of money: M = C + D  Stock of money vs. flow of income

R/D  Required by the central bank  Desired by the commercial banks  Liquid backing for deposits  Fractional: R/D = 0.2 (My assumption)

C/D  Desired by the general public  Dependent on ratio of expenditures normally financed with currency & those financed with check/electronic transfer funds.

Bottom Line  A nation’s money supply depends on H, R/D & C/D  The central bank determines H  The central bank & commercial banks determine R/D  The general public determines C/D