In 1956, Phillip Cagan wrote a classic article in which he developed a simple model for money demand. While the aim of Cagan’s article was to develop a theory for hyper-inflation, his model has been used far beyond this original application. Cagan-type money demand functions have become the standard base from which many monetary discussions begin. One such instance of its broader applications is seigniorage. The same year Cagan published his model, Martin Bailey, while at the University of Chicago with Cagan, expanded the Cagan money demand function to assess seigniorage, developing the well-known Bailey Curve (Bailey 1956). From White’s (1999) representation of a Cagan-type money demand function, we see that seigniorage is dependent on a base money demand scalar and the inflation sensitivity of money holders.2 Additionally, we see that raising the required reserve ratio increases both base money demand and inflation sensitivity, shifting the Bailey curve. …show more content…
To the extent that they are allowed, they will hold money in the market as long as the marginal benefit of an additional dollar in the market is greater than the marginal benefit of an additional dollar in reserves (or the binding legal minimum). That is, I assume banks optimize following the equi-marginal principle. This elementary economic insight highlights the fatal assumption of White’s extension of the Bailey Curve. The assumption is: the interest rate paid on deposits is less than the nominal market interest rate (or, at least, the risk-free rate). If this assumption holds, then White’s (1999) analysis holds. And, for most of the Federal Reserve’s history, interest on reserves was fixed at zero while the nominal, risk-free interest rate was above zero. Since 2008, however, the Federal Reserve has begun paying interest on reserves while at the same time pursuing a market rate at or near
The Poole Model extends the IS-LM model where it takes shocks into account. The monetary authority can either decide to set interest rates which would allow money supply to be determined by demand; or it could directly set the money supply, which would allow the interest rate to be determined by supply and demand for money. The aim of both of these is to minimize output volatility. Under these two methods, the level of output volatility is dependent on specific characteristics of the economy.
In 1913, the Federal Reserve System was enacted, it has three primary objectives; eradicating the “pyramiding” of reserves in New York City and substitute it with a polycentric system of twelve reserve banks, which will help the banks with a more seasonal elastic supply of credit and minimize the tendency for banking panics (Calomiris, 1993). The discount rate that is set by the Federal Reserve System is used for interest rates charged to the commercial banks and other banks for overnight loans (discount window) borrowed from the Federal Reserve (Board of Governors of the Federal Reserve System, 2013). By discounting the loan rate, the banks would have lower liquidity problems because banks are able to borrow at a lower rate, which then reduces the pressure in the reserve markets and keeping the financial markets constant. To help the depository institutions, primary credit, the Federal Reserve Bank developed three rates of discount window, namely primary credit, secondary credit and seasonal credit.
We feel that the latter is on the radical side of thinking, and that overall the Federal Reserve has the best interest of the nation and international economy in all their decisions regarding the increases in interest rates, etc. Since the onset of the Federal Reserve, we have not gone into a major depression, and over the course of time there will be times when our economy will peak and boom and the Fed will feel that it is time to slow the economy by raising the rates. Bibliography FED 101 Hosted by the Federal Reserve Bank of Kansas City. http://www.kc.frb.org/fed101 Friedman, Milton and Jacobson Schwartz, Anna. A Monetary History of the United States, 1867-1960.
Money and the Corruption of American Society The American dream Sweet as a new millionaire The American dream Pre-packed, ready-to-wear. The American dream Fat, like a chocolate eclair. As you suck out the cream Luck by the tail How can you fail at this?
In an excerpt from the essay “On the Want of Money” (1827), author William Hazlitt depicts the burden of the necessity of money to have any form of pleasure in life. While developing an extended sentence, Hazlitt employs negative word choice and parallelism to juxtapose life in need of money alongside being wealthy. He adopts these tactics to evoke anger and pity for those who are thrust into life lacking money to promote societal change. Hazlitt addresses the wealthy in a direct manner to humanize and describe what life is like without money.
A traditional analysis gives a mistakenly high value to dollars in the future, money in the future is given the same value as money today; but in reality, money in the fu...
Christians should be content with the home, clothing, and food they have in life. People who love money are greedy and always ask for more but are never happy. Desire for money will cause people to find themselves in misery in this life, and it will cause them to get lost from the faith in Jesus Christ and end up in eternal destruction in hell.
The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
Another problem prior to the establishment of the Federal Reserve System was the inelasticity of bank credit and the supply of money. Small banks placed their excess reserves in large central reserve banks. Whenever a bank’s depositors wanted their funds, the smaller banks would be covered by the central banks. The system worked well during normal conditions. Some banks would draw down on their reserves as other banks would be building up their reserves. In times of excessive demand, however, the problem became quite serious. When the public wanted large amounts of currency, the
The world revolves around the idea that a piece of flimsy paper holds value. Those of us who deny that it has any true value, still must face the fact that in order to survive, without resorting to means of stealing and violence, we must learn how to use money. In today 's world people must be able to spend and save smartly in order to develop financial stability. Prices have risen and expenses for college have risen dramatically. In 1990 the minimum wage was $3.80 and college tuition for a four year public institution is $20,972. Meaning that if someone worked twenty-seven hours a week for a year, you could pay your yearly tuition. Today the minimum wage is $7.25 while the college tuition for a four year public institution is $65,928. To pay yearly tuition a person would have to work
Money has evolved with the times and is a reflection of the progress of man. Early money was a physical commodity, grain, gold or silver. During the vital stage, more symbolic forms of money such as certificates of deposit, bank notes, checks, letters of credit, bonds and other forms of negotiable securities came into prominence. Social development transformed money into a trust, “In God We Trust' it says on the back of the ten-dollar bill.” (The Ascent of Money, 27)
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.