Unit 27

MONETARY POLICY (КРЕДИТНО-ДЕНЕЖНАЯ ПОЛИТИКА)

Monetary policy is one of the main instruments of macroeconomics. It is based on the ability of the Central bank to control the money supply, which leads to changes in interest rates and the exchange rate, and therefore in the amount of investment, which influences directly the national output. This method of controlling the economy centres on adjusting the amount of money in circulation in the economy and so the level of spending and economic activity. Monetary policy was first employed as a means of control in the 1950s, but has been more widely used since the 1970s. The Central Bank plays a major role in the implementation of a nation's monetary policy. In some countries (for example, Germany) the Central Bank operates monetary policy independent of government policy. However, the UK's Central Bank, the Bank of England, implements monetary policy on behalf of the government. Monetary policy has three main aspects:

* Controlling the money supply

* Controlling interest rates

* Managing the exchange rate

In this section we study the ways in which a central bank can control the supply of money in the economy. The aim of the authorities when controlling the money supply is to limit the amount borrowed, and hence spent, by businesses and individuals during an inflationary period. It is hoped in this way to limit the level of overall demand in the economy and thus to remove or reduce inflationary pressure. During a recession monetary policy is aimed at increasing the money supply to encourage spendings. We now describe the three most important instruments available to affect the money supply: open market operations, reserve requirements and the discount rate.

Open Market Operations. Операции на открытом рынке

Open market operations are the most important way of controlling the money supply. It refers to the Bank trading government bonds in the open market - that is when they are bought from and sold to commercial banks and individuals.

When the Bank sells government bonds in the open market, the Bank withdraws the money from population and reduces the money supply. When the Bank buys government bonds in the open market, it increases the amount of money in circulation and hence the money supply.

Reserve Requirements. Резервные требования

To understand the way a central bank can influence the money supply we should consider the creation of money by commercial banks and in this connection introduce the money multiplier.

Banks have to hold a proportion of their assets as a reserve in case customers demand repayment of their deposits. This required reserve has to be in a liquid form, that is easily convertible into cash. Many banks indeed hold a significant proportion of this reserve as notes and coin either in their vaults or at the central bank. A required resen'e ratio (%) is a minimum ratio of cash reserves to deposits that the central bank requires commercial banks to hold. Commercial banks can hold more than the required cash reserves (this amount of money is called excess reserves and is used to create new money), but they cannot hold less. If their cash falls below the required amount, they must immediately borrow cash, usually from the central bank, to restore their required reserve ratio.

Commercial banks can make loans, i.e. they can create money and increase their excess reserves. Suppose somebody deposited $100 with bank A. II a required reserve ratio is 20%, the bank has $20 as required reserves and $80 as excess reserves, which can be lended. If a borrower draws a cheque for this whole sum and deposits it with bank B, then bank В gets $80 as its assets. Bank В is to hold 20% of this sum (that is $16) as required reserves. It means it has $64 of excess reserves, which it can lend to somebody. Tab! S illustrates the process with banks C, D, E, etc. being involved.

Tabl. 8. The expansion of the money supply by a system

of commercial banks

Bank	Reserves and Loans, $	Required Reserves, $	Excess Reserves, $	Created Money (the amount of money to lend), $
Bank A	100,00	20,00	80,00	80,00
Bank В	80,00	16,00	64,00	64,00
Bank С	64,00	12,80	51,20	51,20
Bank D	51,20	10,24	40,96	40,96
Other banks	204,80	40,96	163,84	163,84
The total amount of the money created	400,00

The money multiplier (m) shows the maximum amount of money, which can be created by one dollar of excess reserves, the required reserve ratio given. The money multiplier is inversely proportional to the required reserve ratio, or

m = 1 / R, where

m - a money multiplier

R - a required reserve ratio

So we can see that the larger the required reserve ratio is the smaller the money multiplier is; the less money can be created and the less the money supply is.

Now suppose the commercial banking system has $1 million in cash and for strictly commercial purposes would normally maintain cash reserves equal to 5% of sight deposits. Since sight deposits will be 20 times cash reserves, the banking system will create $20 million of sight deposits against its $1 million cash reserves:

cash reserves $1 mln - 5%

sight deposits x - 100%

x = $1 mln x 100%: 5% = $20 mln.

Suppose the Bank now imposes a reserve requirement that banks must hold cash reserves of at least 10% of sight deposits. Now banks can create only $10 million sight deposits against their cash reserves of $1 million. Thus a reserve requirement acts like a tax on banks by forcing them to hold a higher fraction of their total assets as bank reserves and a lower fraction as loans earning high interest rates.

Thus, when the central bank imposes a reserve requirement in excess of the reserve ratio that prudent banks would nnywav have maintained, the effect is to reduce the creation of bank deposits, reduce the value of the money multiplier, and reduce the money supply. Similarly, when a particular reserve requirement is already in force, any increase in the reserve requirement will reduce the money supply.

The Discount Rate. Учетная ставка

The second instrument of monetary control available to the central bank is the discount rate.

The discount rate is the interest rate that the Bank charges when the commercial banks want to borrow money.

Suppose banks tMnk the minimum safe ratio of cash to deposits is 10%. Say their cash reserves are 12% of deposits. How far dare they let their cash reserves fall towards the minimum level of 10%?

Banks have to balance the interest rate they will get on extra lending with the dangers and costs involved if there is a sudden flood of withdrawals, which push their cash reserves below the critical 10% figure. This is where the discount rate comes in. Suppose market interest rates are 8% and the central bank makes it known it is prepared to lend to commercial banks at 8%. Commercial banks may as well lend up to the hilt and drive their cash reserves down to the minimum 10% of deposits. The banks are lending at 8% and, if the worst comes to the worst andthey are short of cash, they can always borrow from the Bank at 8%. Banks cannot lose by lending as much as possible.

Suppose however that the Bank announces that, although market interest rates are 8%, it will lend to commercial banks only at the penalty rate of 10%. Now a bank with cash reserves of 12% may conclude that it is not worth making the extra loans at 8% interest that would drive its cash reserves down to the minimum of 10% of deposits. There is too high a risk that sudden withdrawals will then force the bank to borrow from the Bank at 10% interest. It will have lost money by making these extra loans. It makes more sense to hold some excess cash reserves against the possibility of a sudden withdrawal.

Thus, by setting the discount rate at a penalty level in excess of the general level of interest rates, the Bank can induce commercial banks voluntarily to hold additional cash reserves. Since banks have to hold more cash as reserves, the money multiplier is reduced, less money can be created and the money supply is lower.

VOCABULARY NOTE

instruments of macroeconomics макроэкономические инструменты

to control the money supply контролировать предложение денег

the exchange rate обменный (валютный) курс

the amount of investment размер капиталовложений

to adjust the amount of money in circulation корректировать количество денег в обращении

implementation of a nation's monetary policy осуществление, проведение в жизнь национальной денежно-кредитной политики

to implement выполнять, осуществлять, обеспечивать выполнение

the Bank of England Банк Англии (Английский банк). The Bank of England is the UK's central bank. Established in 1694, it plays a key part in im­plementing the government's monetary policy. It ensures that interest rates are at the level desired by the government of the day and oversees the printing of notes and coin. It has wider responsibilities in managing the nation's debt and holding its reserves offoreign currency and gold. Thus, it holds responsibility for the country's monetary policy and its financial relations with other countries.

on behalf of от имени

reserve requirements резервные требования

a discount rate учетная ставка

the money multiplier денежный мультипликатор

required reserves требуемые резервные фонды

easily convertible into cash легко обратимый в наличные (напр., депо­зиты, ценные бумаги)

a required reserve ratio требуемая резервная норма

cash reserves кассовые резервы

excess reserves избыточные резервы

to draw (syn. to write out, to make out, to issue) a cheque выписать чек

created money созданные деньги

inversely proportional (ant. directly proportional) обратно пропорцио­нальный

to maintain поддерживать

to impose a reserve requirement налагать (вводить) резервное требование

fraction часть, доля

in excess of smth сверх чего-либо

prudent расчетливый, предусмотрительный

in force в силе

to charge назначать, начислять

to lend up to the hilt продолжать предоставлять ссуды

up to the hilt полностью, целиком

drive their cash reserves down to... довести (снизить) свои кассовые резервы до...

if the worst comes to the worst если случится самое худшее

they are short of cash у них не хватит наличных денег

the penalty rate повышенная (штрафная) ставка

it is not worth making the extra loans не стоит предоставлять дополни­тельных займов

to induce smb to do smth (syn. to cause smb to do smth) заставить кого-то сделать что-то

voluntarily сознательно, осознанно

Assignments

I. Suggest the Russian equivalents

to restore their required reserve ratio; maintain cash reserves equal to 5% of sight deposits; create $20 million of sight deposits; a higher fraction of their total assets; a lower fraction as loans; the interest rate that the Bank charges; extra lending; impose a reserve requirement; the dangers and costs involved; prudent banks; lend up to the hilt; the miriimum safe ratio of cash to deposits; flood of withdrawals; the Bank can induce banks voluntarily to hold additional cash reserves; the required reserve ratio given

II. Replace the parts in italics by synonyms

implements monetary policy; plays a major role; operates monetary policy; extra lending, if the worst comes to the worst; they are short of cash; to affect the money supply; in excess of the reserve ratio

III. Fill in the gaps with the words and expressions from the text

1. Monetary policy is a method of controlling the economy that centres on the amount of money___ in the economy and so__ and.

2. In some countries the Central Bank operates monetary policy

government policy, but the UK's Central Bank implements monetary policy the government.

3. Monetary policy has three main aspects: controlling, controlling

__, managing.

4. The aim of the authorities when controlling the money supply is,

and hence, by businesses and individuals during.

5. It is hoped to limit the level of in the economy and thus to remove or reduce.

6. During a recession monetary policy is aimed at to spendings.

7. The three most important instruments______ the money supply are, and.

8. Open market operations refer to the Bank trading government bonds
__, that is when they are bought from and sold to.

9. When the Bank sells______________ in the open market, the Bank the money from population and_ the money supply.

10. When the Bank buys government bonds in the open market, it the amount of money and hence_____________________________.

11. Banks have to hold a proportion of their assets in case customers

demand.

12. The required reserve has to be__, that is easily into cash.

13._______________ is a minimum ratio of to that the central bank requires

commercial banks to hold.

14. If cash of commercial banks the required amount, they must

immediately____________ cash, usually from, to restore their.

15. Commercial banks can make loans, i.e. they can and increase.

16. The money multiplier (m) shows, which can be created by one

collar of j the required reserve ratio.

17. The money multiplier is to the required reserve ratio, it means that the larger is the smaller___________ is; the less money __ and the less is.

18. Since sight deposits will be 20 times cash reserves, the banking system will create $20 million of_____. against its $1 million _.

19. A reserve requirement acts like _________ by forcing them to hold of their total assets as__________________ and______________ as loaas earning

20. When the central bank imposes a reserve requirement. the reserve ratio, the effect is to reduce____________________________, reduce, and reduce.

21. When a particular reserve requirement is already, any increase in will reduce.

22. The discount rate is____ that the Bank when the commercial banks want.

23. Banks have to balance ________________ they will get on extra lending with if there is_____________, which push their cash reserves.

24. Commercial banks may as well lend up and their cash reserves

__ to the minimum.

25. If the worst__________ and commercial banks, they can always the Bank.

26. The Bank announces that it will lend to commercial banks only at.

27. If the Bank imposes a penalty rate, a commercial bank may conclude that making the extra loans.

28. There is too high a risk that ___________ will then force the bank to the Bank at the penalty interest rate.

29. It makes more sense to hold________ against the possibility of.

30. By setting the discount rate at in excess of of interest rates, the

Bank can commercial banks_____ to hold.

31. Since banks have to hold more cash as reserves, is reduced, less money can and___________________________ is lower.

IV. Find in the text English equivalents for the following

от имени правительства; кредитно-денежная политика; для поощре­ния расходов; операции на открытом рынке; резервные требования; кас­совый резерв; избыточные резервы; требуемая резервная норма (уровень резервных требований); создавать деньга; денежный мультипликатор; обратно пропорциональный; сверх резервной нормы; дисконтная (учет­ная) ставка; повышенная ставка; изымать деньги

V. Explain in English

a money multiplier; required reserves; excess reserves; a required reserve ratio; a discount rate

VI. Answer the questions

1. What is the aim of monetary policy?

2. Why is it important to control the money supply?

3. Dwell on open market operations.

4. Explain the creation of money by commercial banks. What does a money multiplier show?

5. Why does the Bank impose a reserve requirement? What's the effect of the Bank imposing a reserve requirement?

6. Why does a reserve requirement act like a tax on banks?

7. What is a discount rate? How does it work?

VII. Translate into English using all the active possible

1. Основополагающей целью кредитно-денежной политики является помощь экономике в достижении общего уровня производства, характе­ризующегося полной занятостью и отсутствием инфляции. Кредитно-денежная политика состоит в изменении денежного предложения с це­лью стабилизации совокупного объема производства, занятости и уровня цен. Более конкретно: кредитно-денежная политика вызывает увеличе­ние денежного предложения во время спада для поощрения расходов, а во время инфляции, наоборот, ограничивает предложение денег для ог­раничения расходов.

2. Существуют три основных средства кредитно-денежного контроля: операции на открытом рынке, изменение резервной нормы и изменение учетной ставки.

3. Операции на открытом рынке - наиболее важное средство контроля денежного предложения. Этот термин относится к покупке и продаже госу­дарственных облигаций центральным банком на открытом рынке, то есть к покупке и продаже облигаций коммерческим банкам и населению в целом.

4. При изменении резервной нормы меняется величина денежного мультипликатора и, следовательно, денежное предложение. В основе де­нежного мультипликатора лежит тот факт, что резервы, потерянные од­ним банком, получает другой.

5. Подобно тому, как коммерческие банки взыскивают процентные платежи по своим ссудам, центральный банк взыскивает процентные платежи по ссудам, предоставленным коммерческим банкам. Такая став­ка процента называется учетной ставкой.

6. Снижение учетной ставки поощряет коммерческие банки к приоб­ретению дополнительных резервов путем заимствования у центрального банка.

7. Готовность банков давать ссуды на основе избыточных резервов периодически меняется, и в этом кроется причина государственного кон­троля за денежным предложением с целью обеспечить экономическую стабильность.

Appendix