ECO 285 – Spring 2014 – Dr. D. Foster ECO 285 Money & Banking Basics II

Measurement How? - Liquidity of financial assets. M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC M2 = M1 + (time deposits) S + MMMF Individual M3 = M2 + TD L + MMMF Institutional + Euro$ + RP Liquidity – How fast, at full market value an asset can be converted into a means of payment. Cash – perfectly liquid Diamond ring – not liquid Money – only interested in financial assets

What Banks Look Like Reserves (Cash in vault) T-Bills (Liquid assets) Loans (Earning assets) Demand Deposits (Checking Accounts) Equity AssetsLiabilities & Equity Accounting Identity: A  L + E M1

The Monetary Base Monetary Base (MB) = C + bank reserves (R) Federal Reserve has perfect control over MB: –Prints currency. –All reserves are currency or deposits at the Fed. The Federal Reserve has less control over M1, M2. MB plays a role in the government’s budget: G = T +  Bonds +  MB

Monetary Data – Travelers Checks

Monetary Data - Currency

Monetary Data - Checking

Monetary Data – Other Accts.

Monetary Data – M1, M2, MZM

Monetary Data - %  in M’s

Monetary Data - MB

Monetary Data – Excess Res.

Need a National Currency? Dollarization Dollarization - Use another country’s currency as your medium of exchange. $ - Ecuador, El Salvador, Timor, British Virgin Islands, Panama € - Vatican City, Monaco, Andorra Currency board Currency board - the national currency is backed by an equal amount of a foreign currency. $ - Hong Kong, Bermuda, East Caribbean $ € - Bulgaria, Estonia, Lithuania Currency union Currency union - A group of countries adopt a common currency. Euro/West Africa/Caribbean

ECO 285 – Spring 2014 – Dr. D. Foster ECO 285 Money & Banking Basics II