1203AFE Lecture Notes - Lecture 3: Australian Dollar, Risk Aversion, Eurozone
30 May 2018
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Week 3 Money, Bank and Finance Lecture Notes
Topic 3: Monetary Policy
The ‘BAs Measureet of the Moe suppl
• LO1
• The RBA can control the liquidity in the financial system
• It does so through managing the ESF held by banks at the RBA in exchange
settlement accounts (ESAs)
• ESF are the funds used to settle obligations among institutions and between
institutions and the RBA
• By controlling ESF, the RBA is able to control the money supply
Measure of the Money Supply
• The ‘BA a easure oe suppl aordig to three defiitios:
o M1: Currency + current accounts at depository institutions
o M3: M1 + all other bank deposits of the private non-bank sector
o Broad money: M3 + Borrowings from the private sector by non-bank financial
institutions (NBFIs), LESS currency and bank deposits of NBFIs
Australias Moe Suppl 19-2016
Money Supply Changes
• The money supply can also change as a result of:
o Government taxes and spending
o Government transactions in CGS and foreign exchange (undertaken by the
RBA on behalf of the government)
Bloomberg→ slides 9 and 10
find more resources at oneclass.com
find more resources at oneclass.com
The ‘BAs Ifluee oer Iterest ‘ates
• LO2
• The RBA influences the whole interest rate structure of the economy by controlling
the cash rate
• The cash rate is the unsecured overnight interbank lending rate
The Cash Rate
• The cash rate is important because:
o It measures the return on the most liquid of financial assets (bank reserves)
o It is integral to monetary policy
o It directly reflects the available reserves in the banking system, which
ifluees aks deisios o akig loas
Market Equilibrium Interest Rate
• The RBA decides a level for the cash rate that is appropriate
• However, it is not just a matter of decreeing a particular rate
• The cash rate is determined by supply and demand
• The RBA manipulates the supply side to ensure that the actual cash rate corresponds
to the level it has decided is appropriate
How does this happen?
• ESA balances change continuously each day
• The RBA manages the supply of ESA funds in order to maintain equilibrium at its
target cash rate
• If the RBA wants the cash rate to fall, it increases supply of ESA funds (and vice
versa)
What happens when you increase money supply?
Managing ESA Funds through Open Market Operations
• Each day RBA staff estimate the likely net settlement obligations between ESA
holders and the RBA
• The RBA decideds what supply adjustment is necessary to maintain the cash rate at
the targeted level
find more resources at oneclass.com
find more resources at oneclass.com
• The RBA announces whether it intends to buy or sell securities
o Withdrawing cash= selling securities or repos
o Injecting cash= buying securities or reverse repos
• Dealers have 15 minutes to communicate their bids or offers to the RBA
• These bids or offers are ranked and the best deals are accepted to supply the
required ESA funds or soak up any excess
Bloomberg on Slides→ 17-19
Australian Cash Rate (1993- Feb 2017)
Objectives of Monetary Policy
• LO3
• There are three main objectives that the RBA tries to achieve with its monetary
policy:
o i. The stability of the currency of Australia
o ii. The maintenance of full employment in Australia
o iii. The economic prosperity and welfare of the people of Australia
Price Stability
• Price stability is the stability of the average price of all goods and services in the
economy
• Inflation- the continuous rise in the average price level- affects the economic welfare
of individuals
• Inflation can result in unintended transfers of purchasing power
• Since 1993, monetary policy has been focused on keeping the inflation rate between
2 and 3 per cent per annum
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Week 3 money, bank and finance lecture notes. The ba(cid:859)s measure(cid:373)e(cid:374)t of the mo(cid:374)e(cid:455) suppl(cid:455: lo1, the rba can control the liquidity in the financial system. Money supply changes: the money supply can also change as a result of, government taxes and spending, government transactions in cgs and foreign exchange (undertaken by the. The ba(cid:859)s i(cid:374)flue(cid:374)(cid:272)e o(cid:448)er i(cid:374)terest ates: lo2, the rba influences the whole interest rate structure of the economy by controlling the cash rate, the cash rate is the unsecured overnight interbank lending rate. The cash rate: the cash rate is important because: It measures the return on the most liquid of financial assets (bank reserves) It directly reflects the available reserves in the banking system, which i(cid:374)flue(cid:374)(cid:272)es (cid:271)a(cid:374)ks(cid:859) de(cid:272)isio(cid:374)s o(cid:374) (cid:373)aki(cid:374)g loa(cid:374)s. How does this happen: esa balances change continuously each day, the rba manages the supply of esa funds in order to maintain equilibrium at its target cash rate.
