ECON 2200 Lecture Notes - Lecture 35: Bank Reserves, Procyclical And Countercyclical, Federal Reserve System
14 May 2018
School
Department
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Professor
ECON 2200
Lecture 35
• Country banks would hold their reserves at the big “City” banks
o This was a positive thing for “City” banks. They could use these
reserves for loans that they otherwise could not make. The loans
that they made with the “County” bank reserves would be call-
loans.
1. Call-Loan: amount loaned can be called-in for repayment at
any time.
2. So, “Country” banks supported the call-loan market.
o However, this made bigger banks susceptible to bank panics at
small seemly insignificant “Country” banks. Panics tended to
spread from “Country” banks to “City” bank and on to individuals
and firms who had taken out call-loans.
1. ie. People in small town panic about some money problem
and run to get their money out of their “Country” bank
“Country” bank runs to “City” bank to get their reserve money
to cover themselves “City” banks have to call in their “call-
loans” to cover themselves.
Therefore, local problem becomes a systemic problem.
• Macroeconomic policy countercyclical policy
o Commercial banks Care about their profits only
o Commercial banks tend to “feed booms & starve recessions.”
1. Commercial banks tend to “feed booms”
Boom period = Increase in output (Y)
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Document Summary
Lecture 35: country banks would hold their reserves at the big city banks, this was a positive thing for city banks. They could use these reserves for loans that they otherwise could not make. Country bank runs to city bank to get their reserve money to cover themselves city banks have to call in their call- loans to cover themselves. Therefore, local problem becomes a systemic problem: macroeconomic policy countercyclical policy, commercial banks care about their profits only, commercial banks tend to feed booms & starve recessions. , commercial banks tend to feed booms . Boom period = increase in output (y) Banks feed boom, by increase money supply (m) Federal reserve worries about bank feeding boom, because if you expand too rapidly, you can get inflation (which would increase p) Countercyclical policy: reduce the rate of growth in m, in order to avoid inflation (not reduce m, but slow the rate of growth of m).
