Week 4 Flashcards
Is money a public good?
No. Money is excludable because someone else’s money isn’t yours and money is rivalrous because if you spend money nobody can spend it (at the same time)
Network properties of money
The more users a certain money has, the more benefits conveyed to those users.
Internalized benefit
Think of a corollary in social networks (social media)
Most common ways of government revenue generation
taxes, borrowing, and seigniorage
Seigniorage under fiat money
Contemporary way:
-Central bank expands the monetary base by creating money and using it to buy bonds (QE). The money (reserves) is a CB liability and exchange for bonds held by banks.
-Seigniorage equals the value of acquired assets
Inflationary finance:
-Create (print) money, then government spends it into the economy
-Used to bolster fiscal expenditures
-Problem: To continue earning seigniorage, the growth rate of money must continually increase
Is inflation a tax?
inflation is a tax on money holders. Government generates revenue at the expense of citizens. In a modern fully-monetized economy, that tax applies to everyone.
Government Role in Banking Regulation
Five Roles of a Central Bank:
1) Banker’s bank
2) Monopoly of note issue
3) Regulator of commercial banks
4) Lender of last resort
5) Monetary policy
What is banker’s bank
-Interbank clearing and settlement
-Banks settle with one another
-Deposit transfers (checks)
-Note redemption
-May offer accounts to banks
What is a clearinghouse?
Private entities that historically regulated commercial banks
Membership requirements induced good behavior among member banks
Banks wanted the reputation that membership provided
Clearinghouse functions
1) require solvency assurances from member banks
2) minimum capital requirements
3) random bank examinations
4) expulsion for banks that don’t meet requirements
Lender of Last Resort
Role taken by modern central banks, previously conducted by private institutions (CHA’s)
Role: Provide liquidity to the banking sector during panics and recessions/depressions
-Rescue illiquid but solvent banks
-Problem of fire sale losses
-Contagion
Bagehot’s Rules
1) Lend freely to all banks that qualify
- to save banks that are worth saving (Potentially illiquid but not insolvent)
2) Announce (1) in advance
- to allay fearful demands for reserves
3) To qualify, a bank needs good collateral
- to avoid supporting insolvent banks
4) Lend at a penalty interest rate
- to reduce moral hazard
Open Market Operations (OMO)
- Inject new reserves to the banking system via bond purchases
- No lending to any particular banks (LOLR is a misnomer in this context)
Why did central banking win politically?
1) In some places free banking was never tried
- Due to rent-seeking by privileged banks
2) Central banks were mostly created from fiscal legislation
- Seigniorage from money creation
- Cheap credit (loans) to their respective governments
- Created to remedy weaknesses caused by earlier banking restrictions
