The Federal Reserve’s Balance Sheet and Monetary Base Determination zBalance sheet of either one...
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Transcript of The Federal Reserve’s Balance Sheet and Monetary Base Determination zBalance sheet of either one...
The Federal Reserve’s Balance Sheet and Monetary Base Determination
Balance sheet of either one of the district banks, or the aggregate of all district banks (“The Federal Reserve Bank”)
The Federal Reserve’s Balance SheetSecurities Held Federal Reserve
Discount Loans Notes
Gold Certificates Bank Deposits
SDR Certificates US Treasury
Coin Held by Fed Deposits
Float Foreign and Other
Holdings of Deposits
Foreign Currency
Physical Capital Capital Account
Federal Reserve Assets
Securities Held -- mostly T-Bills, used for open market operations
Discount Loans -- loans advanced to banks at the discount rate
Gold Certificates -- Fed converts gold obtained by US Treasury
SDR Certificates -- Fed converts Special Drawing Rights obtained in international trade.
More Fed Assets
Coin Held by the FedFloat -- cash items in the process of
collection minus deferred availability cash items (check clearing)
Holdings of Foreign Currency -- used in exchange rate intervention
Physical Capital
Federal Reserve Liabilities and Equity
Federal Reserve Notes Outstanding -- currency held by the public (C) + vault cash inside banks
Bank Deposits at the Federal Reserve -- especially helpful in check clearing
The Monetary Base and the Fed’s Balance Sheet
Consider the sum of the first two components.
(Federal Reserve Notes Outstanding) + (Bank Deposits at the Fed)
= (C + Vault Cash Inside Banks) + (Bank Deposits at the Fed)
The Fed’s Balance Sheet: Another RepresentationSecurities Held Currency Held
Discount Loans by the Public (C)
Gold Certificates Bank Reserves (R)
SDR Certificates US Treasury
Coin Held by Fed Deposits
Float Foreign and Other
Holdings of Deposits
Foreign Currency
Physical Capital Capital Account
Still Another RepresentationSecurities Held Monetary Base (H)
Discount Loans US Treasury
Gold Certificates Deposits
SDR Certificates Foreign and Other
Coin Held by Fed Deposits
Float
Holdings of
Foreign Currency
Physical Capital Capital Account
Other Federal Reserve Liabilities + EquityUS Treasury DepositsForeign and Other Deposits -- deposits
of some foreign governments and central banks, world organizations.
Capital Accounts (Fed Equity) -- Federal Reserve is a profit maker, but not profit maximizer, allowed an equity-asset ratio of 3%.
The Federal Reserve as a Check Clearinghouse
Example -- Suppose you get a check of $100 from your parents, who bank at Citibank (within the NY district). You deposit it in your checking account (D) at your bank, Chase, in Syracuse.
Balance Sheet Description: The Federal Reserve
Federal Reserve Bank of New York
R -$100 (Citibank)
R +$100 (Chase)
Any change in Bank Reserves is noted on the liability side of the Federal Reserve
Monetary Base Determination
Identity -- Fed’s balance sheet.
Securities Held + Discount Loans + Gold Certificates + SDR Certificates + Coin Held by the Fed + Float + Holdings of Foreign Currency + Physical Capital
= H + US Treasury Deposits + Foreign and Other Deposits + Equity
The Monetary Base Equation
Solve equation for H.
(Securities Held + Discount Loans + Gold Certificates + SDR Certificates + Coin Held by the Fed + Float + Holdings of Foreign Currency + Physical Capital)
– (US Treasury Deposits + Foreign and
Other Deposits + Equity) = H
Monetary Base -- Sources
Sources of the Monetary Base -- Items whose increase increases the monetary base.
Example -- Securities Held H
The Balance Sheet Description
Fed buys a $100 bond from Chase.
Federal Reserve
Securities +$100 R + $100
Held
H = C + R = $0 + $100 = $100
Monetary Base -- Uses
Uses of the Monetary Base -- Items whose increase decreases the monetary base.
Example --
US Treasury Deposits H
The Balance Sheet Description
The Federal Government collects $100 in taxes (people paying from their checkable deposits at Chase).
Chase
R - $100 D - $100
The Federal Reserve’s Balance Sheet
Federal Reserve
US Treasury
Deposits + $100
R - $100 (Chase)
H = C + R = $0 + -$100
= -$100
Can the Fed Reasonably Control the Monetary Base?
(Securities Held + Discount Loans + Gold Certificates + SDR Certificates + Coin Held by the Fed + Float + Holdings of Foreign Currency + Physical Capital)
– (US Treasury Deposits + Foreign and
Other Deposits + Equity) = H
Yes -- They Can Reasonably Control the Monetary BaseThe monetary base has components
both controlled by the Fed and not controlled by the Fed.
But, Securities Held is the largest component within the equation.
And, while changes in the other components may be large, they tend to be isolated and fairly predictable.
Sterilization of Undesired Changes in H
The Federal Reserve can use open market operations to offset undesired changes in the monetary base -- sterilization
Sterilization -- An Example
Suppose that the Federal Reserve wishes to sterilize the decrease in H due to tax collection.
US Treasury Deposits + $100
H -$100,
Securities Held + $100
H +$100,
Net effect: H = $0.
Application -- Exchange Market Intervention
Suppose that the Federal Reserve is concerned about an excessive downward movement of the US exchange rate. It intervenes by using its holdings of foreign currency to buy dollars (then remove the dollars from the system).
Sterilized Versus Unsterilized Intervention
Holdings of Foreign Currency H Sterilized Intervention -- Fed performs
an open market operation to offset this effect, Securities Held H
Unsterilized Intervention -- Fed does nothing, allows H to decrease.