fakir-money and monetary policy

7/29/2019 Fakir-money and Monetary Policy

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Money andmonetary policy


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Learning objectives:

Consider the nature of money and itsfunctions in the economy.

Learn about the central bank system

Examine how the banking system helpsdetermine the supply of money.

Examine the tools used by the centralbank to alter the supply of money.


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1-The meaning of money:

2-The supply of money:

3-The demand of money:

4-The monetary policy:

Out line:

5-The finacial system inMorocco:


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Introduction:

The key aim of monetary policy for most centralbanks is to keep inflation low and steady. Howeverin a market-oriented economy, central banks

cannot control inflation directly. They have to useinstruments.

Some central banks use money growth or theexchange rate as intermediate targets to guidepolicy decisions. Others take a more eclectic

approach and consider a range of factors. Monetarypolicy has occupied much time of the worlds mostdistinguished economists over the years.


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Clarifying a misunderstanding:

In our everyday lives, we often refer tomoney as one of three things:

coins and paper money (currency).

a person's wealth.

a person's income.


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The meaning of money

When economists refer to money they havea different connotation in mind:

"money is anything that is generally accepted inpayments of goods and services or in the repayment of

debts"

Mishkin, F. The Economics of Money, Banking and Financial Markets, p. 44


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Three functions of money:

Three principle uses

Medium of exchange :we can use to buy stuff

Unit of account: a way of expressing value,allows us to compare different goods andservices

Store of value: a way of holding wealth (not theonly way, can hold assets)


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The kinds of money

Commodity money

Fiat money


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Measuring Money

Measuring money

M1 Narrowest definition and

measure of money supply Assets used primarily for

transactions

Measuring moneyM2 Broader measure of money

stock Includes items used as store of

value M1 +

Measuring moneyM3 Even Broader definition of

money supply Includes items that serve as a

unit of account M2 +

Currency(coins & paper money)

Checkable accountsTravelers Checks

M1 plus

Savings deposits,including MoneyMarket depositaccounts

Small time depositsMoney Market Mutual

FundsM2 plusLarge Time Deposits

}} M1

The Money Supply

M2

M3


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The supply of money

The largest element of money supply is bankdeposits.

Banks are able to create additional money byincreasing the amount of bank deposits. They dothis by lending to people: granting people overdraftsor loans.

The process of the creation of credit . The effect of the bank multiplier.

Banks and the creation of money


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The supply of moneyWhat causes the money supply to rise?

Increased demand for credit.

government borrowing from abroad.


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The demand of money

The demand for money refers to the desire tohold money

why should people want to hold on money?There are two main reasons:

1. The 1st is that people receive money only atintervals and not continuously. They thus

require to hold balances of money in cash.2. The 2nd: is as a form of saving.


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The monetary policy

The meaning of monetary policy

Macroeconomic stability

How monetary policy works?

Tools of monetary policy

Problems in controlling money supply The impact of monetary policy on business


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The meaning of monetary policy

Monetary policy consists of those actionsundertaken by a central bank in pursuit

of macroeconomic stability.


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macroeconomic stability

Macroeconomic stability implies:

1. Economic growth

2. Low inflation

3. Exchange rate stability

4.

Financial sector stability.


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Monetary policy and economic

growthMonetary policy affects economic

growth through influencing aggregate

supply and aggregate demand.


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Monetary Policy: AD

PriceLevel

AD

Y (GDP)

P2

P1

Y1 New Y1

New AD

Y2


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ASMonetary Policy:

PriceLevel

Y (GDP)

AS New

AS

Y1 Y2

P


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EquilibriumMonetary Policy:

PriceLevel

Y

AD

AS

Aggregate Demand and Supply togetherdetermine the level of prices and output in the economy

P0

Y0

New AD

P1

Y1


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Monetary policy and inflation

Inflation means sustained increase in prices.

High inflation is a problem, since it

Discourages saving;

Encourages speculation, dollarization, capital flight;

Hurts the poor, and

Raises uncertainty.


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How monetary policy works?

Monetary policy pursues its objectives by Managing level of money, Influencing interest rates, and Affecting volume of lending.

The central bank achieves its objectives byinfluencing

Reserve money, The money multiplier, and Broad money.


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Tools of monetary policy

There are four ways in which the centralbank affect the money supply; these are:

1. open-market operations.

2. reserve requirement.

3. discount rate

4. selective credit control.


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1. open-market operations.

The Process of buying and sellinggovernment bonds in the financial market

is called Open market operations. Thisprocess can be divided into to cases:

A. Open Market Purchase.

B. Open Market Sale.


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Open Market Purchase.

The central bank buys government bonds from firms orhouseholds.

The central bank pays for these bonds with check drawn

on itself and payable to the seller. The seller deposits the check in a commercial bank.

The commercial bank present the check to the centralbank for payment.

The central bank make a book entry increasing thedeposit of the commercial bank at the central bank andadds to the commercial banks reserves.


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Open Market Sale.

The central bank sells government bonds andreceive a check drawn on commercial banks.

The value of the check will be deducted from thedeposit of the commercial bank.

This decreases the reserves available tocommercial banks which will decrease the loans

made by commercial banks.


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2. reserve requirement.

An increase in the required reserve ratio

forces the banks with no excess reserves todecrease its loans, which in turn, decreasesthe deposits and that will decrease themoney supply.


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3. discount rate.

It is the interest rate at which the central bank

will lend funds to commercial banks whosereserves are temporarily below the requiredlevel.


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4. Selective credit control.

Examples: margin requirements, mortgage

controls, and maximum interest rates.


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Problems in controlling money

supply

The central bank must wrestle with two problems:

The 1st problem is in controling the amount of moneythat households choose to hold as deposits in banks.

The 2nd problem with monetary control is that the centralbank does not control the amount that bankers choose tolend.


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Morocco:

Population: 34,343,220 (July 2008est.)

GDP: 137.4 billion (2008 est.)

Macroeconomic Data

Inflation rate (consumer prices): 4.6%(2008 est.)

Labor force: 11.5 million (2008 est.)

Unemployment rate: 9.1%

Budget: Revenues: $26.09 billion;Expenditures: $28.41 billion (2008est.)

Public debt: 60.2% of GDP (2008est.)

Banking System

16 commercial banks with $60.2billion in Assets.


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Moroccos economy

The Moroccan economy has been characterizedby macroeconomic stability, with generally lowinflation and sustained, moderately high growth

rates over the past several years. Morocco'sprimary economic challenge is to accelerategrowth and sustain that improved performance inorder to reduce high levels of unemployment andunderemployment. While overall unemployment

stands at 8.6% (2010 est.), this figure maskssignificantly higher urban unemployment, as highas 31% among young urban males.


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The Moroccan financial systemeThe macroeconomic

stability:

Capital account restrictions apply to residents, buttransactions for nonresidents are mostly free

There is an absence of benchmarks

International agreements are transformingthe formerly closed nature of the economy

Macroeconomic conditions were strong in2001-2002

S W O T A l i


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strenghts:

Robust health of the largecommercial banks

Weeknesses: Precarious solvency and

liquidity situation of two largestate-owned specialized banks.

The level of nonbank financial

institutions and sectors.

Opportunities: The financial system could

contribute to economic growth. Increased openess would bring

benefits and opportunities toMoroccos financial institutionsand other economic agents.

Threats: Fiscal problems.

The inefficiency of the legaland judicial systems remainsan impediment to thedevelopment of the financialsector.

S.W.O.T AnalysisOf the financial system


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The banking system Morocco's banking sector is fairly well developed and

modern. The banking system is made up of the CentralBank, Bank al-Maghreb, 16 commercial banks (partiallyowned by or working in partnership with European bankssuch as BNP Paribas), several development banks, and 36financing companies. Seven banks control the market andthe principal actor is the Banque Populaires network,followed by Attijariwafa, the BNPE and banks controlledmainly by foreign shareholders, including the BMCI (a

subsidiary of BNP-Paribas) and the Credit du Maroc (asubsidiary of the Crdit Lyonnais-Crdit Agricole Group).The Caisse des Dpts is extremely active in real estateand tourism, funding public interest projects as well asmore modest initiatives.


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The Big 3 share $38.4 billion in Assets and account for 63.8% of themarket.

Attijariwafa Bank ($16.3 billion in Assets)27.1% share Banque Centrale Populaire (BCP) ($14.1 billion in Assets)23.4% share Banque Marocaine du Commerce Extrieur (BMCE) ($8.0 billion in Assets)

13.3% Share13 small to mid-sized players with $19.3 billion in Assets garner 36.2%

market share Credit Populaire du Maroc (CPM) Bank Al Amal Crdit Agricole du Maroc (CAM) Fonds dEquipement Communal Crdit Immobilier et Hotelier (CIH)

Union Marocaine de Banques MdiaFinance Crdit Foncier du Maroc (CFM) Socit Gnrale Marocaine de Banques (SG) Crdit du Maroc (CDM) Citibank Maroc

Arab Bank Maroc

The banking system


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Conclusion:

Monetary policies are demand macroeconomic policies. They work by stimulatingor discouraging spending on goods/

services . Monetary policies tries to eliminate those

fluctuations.

Central bank have no handle onproductivity and real economic growth.


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References Mishkin, F. The Economics of Money, Banking and Financial Markets, p.

44 Economic - Principles of Macroeconomics Slomar,J. The economic envoronment of business ,p.227-258 Morocco: finacial system stability assessment. 2003 Morocco Final: M,El Hajoui-A,Marrache-R,Rosenberg-K,Spriggs R,Christiansen, IMF Resident Representative in Georgia.ppt, July 2005

IB Economics, 3.4 Addison,wesley losman, chapter 29IMF,Morocco Financial Stability Assessment (2008).pdf, and The Report:

Emerging Morocco 2007 Borrowing Rates,1983-2009.pdf http://web.worldbank.org/WBSITE/EXTERNAL/ACCUEILEXTN/PAYSEXTN/

MENAINFRENCHEXT/MOROCCOINFRENCHEXTN/0,,contentMDK:20149674~pagePK:141137~piPK:1411

27~theSitePK:468145,00.htmlhttp://ocw.mit.eduwww.investopedia.com

www.BKAM.ma
http://ocw.mit.edu/http://www.investopedia.com/http://www.bkam.ma/http://www.bkam.ma/http://www.investopedia.com/http://ocw.mit.edu/


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