SU Ch5 M.Sc Acfn551 FMI 2022

1. M.SC.,ACCOUNTING AND FINANCE-2022
FINANCIAL MARKETS AND INSTITUTIONS
COURSE CODE-ACFN551-CREDIT-2HR
CHAPTER-FIVE
CENTRAL BANKING AND THE CONDUCT OF
MONETARY POLICY
PROF. DR. CHINNIAH ANBALAGAN
PROFESSOR OF M.SC., ACCOUNTING & FINANCE
COLLEGE OF BUSINESS AND ECONOMICS
SAMARA UNIVERSITY, ETHIOPIA, EAST AFRICA
EMAIL ID: DR.CHINLAKSHANBU@GMAIL.COM

2. Central Banking and the Conduct of Monetary Policy
• Structure of Central Banks
–Multiple Deposit Creation and the Money
Supply Process
–Determinants of the Money Supply
–Tools and conduct of Monetary Policy.
• Monetary Policy Goals and Targets.

3. Introduction
• Central banks conduct monetary policy by
adjusting the supply of money, generally through
open market operations.
• For instance, a central bank may purchase
government debt from commercial banks and
thereby increase the money supply (a technique
called “monetary easing”).

4. Conti…
• Sweden created the world's first central bank, the
Riksbank, in 1668.
• The Bank of England came next in 1694.
• Napoleon created the Banquet de France in 1800.
• Congress established the Federal Reserve in 1913.
• The Bank of Canada began in 1935, and
• the German Bundesbank was reestablished after
World War II.
• In 1998, the European Central Bank replaced all the
eurozone's central banks.

5. Where is the central bank of the United States located?
The Federal Reserve's Board of Governors is based in
Washington, D.C., but its banks are spread around the
country, representing 12 different regions. These banks
are located in:
• Atlanta
• Boston
• Chicago
• Cleveland
• Dallas
• Kansas City, Missouri
• Minneapolis
• New York
• Philadelphia
• Richmond, Virginia
• St. Louis
• San Francisco

6. Major Functions of Central Bank
• Eight major functions of central bank in an
economy are as follows:
• (1) Bank of Issue,
• (2) Banker, Agent and Advisor to Government, (3)
Custodian of Cash Reserves,
• (4) Custodian of Foreign Balances,
• (5) Lender of Last Resort,
• (6) Clearing House,
• (7) Controller of Credit, and
• (8) Protection of Depositor’s Interest.

7. The Structure of the Federal Reserve System
• The Federal Reserve System is the central bank of
the United States. It was founded by Congress in
1913 to provide the nation with a safer, more
flexible, and more stable monetary and financial
system. Over the years, its role in banking and the
economy has expanded.
a. Board of Governors
Federal Reserve Banks
b. Member Banks
c. Other Depository Institutions
d. Federal Open Market Committee
e. Advisory Councils

8. a. Board of Governors
• The Board of Governors, located in Washington,
D.C., provides the leadership for the System.
The Board of Governors, also known as the
Federal Reserve Board, is the national component
of the Federal Reserve System.
• The board consists of the seven governors,
appointed by the president and confirmed by the
Senate.
• Governors serve 14-year, staggered terms to
ensure stability and continuity over time.
• The chairman and vice-chairman are appointed to
four-year terms and may be reappointed subject
to term limitations.

9. b.Federal Reserve Banks
• A network of 12 Federal Reserve Banks and 24
branches make up the Federal Reserve System under
the general oversight of the Board of Governors.
Reserve Banks are the operating arms of the central
bank.
• Each of the 12 Reserve Banks serves its region of the
country, and all but three have other offices within
their Districts to help provide services to depository
institutions and the public.
• The Banks are named after the locations of their
headquarters - Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas and San Francisco.

10. c. Member Banks
• Approximately 38 percent of the 8,039 commercial
banks in the United States are members of the
Federal Reserve System.
• National banks must be members; state-chartered
banks may join if they meet certain requirements.
• The member banks are stockholders of the
Reserve Bank in their District and as such, are
required to hold 3 percent of their capital as stock
in their Reserve Banks.

11. d. Other Depository Institutions
• In addition to the approximately 3,000 member
banks, about 17,000 other depository institutions
provide the American people checkable deposits
and other banking services.
• These depository institutions include nonmember
commercial banks, savings banks, savings and loan
associations, and credit unions.
• Although not formally part of the Federal Reserve
System, these institutions are subject to System
regulations, including reserve requirements, and
have access to System payments services.

12. e. Federal Open Market Committee
• The Federal Open Market Committee, or FOMC, is
the Fed's monetary policymaking body. It is
responsible for formulation of a policy designed to
promote stable prices and economic growth.
Simply put, the FOMC manages the nation's money
supply.
• The voting members of the FOMC are the Board of
Governors, the president of the Federal Reserve
Bank of New York and presidents of four other
Reserve Banks, who serve on a rotating basis.
• All Reserve Bank presidents participate in FOMC
policy discussions. The chairman of the Board of
Governors chairs the FOMC.

13. f. Advisory Councils
• Three statutory advisory councils - the Federal
Advisory Council, the Consumer Advisory Council,
and the Thrift Institutions Advisory Council - advise
the Board on matters of current interest.
• These councils, whose members are drawn from
each of the 12 Federal Reserve Districts, meet two
to four times a year.
• The individual Reserve Banks have advisory
committees as well, including thrift institutions
advisory committees, small business and
agricultural advisory committees. Moreover,
officials from all Reserve Banks meet periodically in
various committees.

14. The Conducts Of Monetary Policy
• The primary focus of monetary policy during
the period was to strike a balance between
supporting the recovery of output growth,
while maintaining stable price development
across inflation, exchange rate and money
market interest rates.

15. In what ways can the national central banks
influence the conduct of monetary policy?
 Influencing interest rates, printing money, and
setting bank reserve requirements are all tools
central banks use to control the money supply.
 Other tactics central banks use include open
market operations and quantitative easing,
which involve selling or buying up government
bonds and securities.

16. Central Banks Control the Supply of Money
• If a nation’s economy were a human body, then its
heart would be the central bank.
• And just as the heart works to pump life-giving blood
throughout the body, the central bank pumps money
into the economy to keep it healthy and growing.
• Sometimes economies need less money, and
sometimes they need more.
• The methods central banks use to control the quantity
of money vary depending on the economic situation
and power of the central bank.
• In the United States, the central bank is the Federal
Reserve, often called the Fed.
• Other prominent central banks include the European
Central Bank, Swiss National Bank, Bank of England,
People’s Bank of China, and Bank of Japan.

17. 3 Main Tools Of Monetary Policy
• The Federal Reserve controls the three tools
of monetary policy-
–Open market operations,
–The discount rate, and
–Reserve requirements.

18. The Role Of Central Banks
• Central banks carry out a nation's monetary
policy and control its money supply, often
mandated with maintaining low inflation and
steady GDP growth.
• On a macro basis, central banks influence
interest rates and participate in open market
operations to control the cost of borrowing
and lending throughout an economy.

19. The Main Instruments Of Monetary Policy of
Central Bank
• The main instruments of the monetary policy
are
–Cash Reserve Ratio,
–Statutory Liquidity Ratio,
–Bank Rate,
–Repo Rate,
–Reverse Repo Rate, and
–Open Market Operations

20. The Multiple Deposit Creation Process
• Multiple deposit creation is the process whereby,
when the Fed supplies the banking system with
$1 of additional reserves, deposits increase by a
multiple of this amount.
• Every time a dollar is deposited into a bank
account, a bank's total reserves increases.
• The bank will keep some of it on hand as required
reserves, but it will loan the excess reserves out.
• When that loan is made, it increases the money
supply.
• This is how banks create money and increase the
money supply

21. Classification of Multiplier
• In economics, a multiplier broadly refers to an economic
factor that, when increased or changed, causes increases or
changes in many other related economic variables. In terms
of gross domestic product, the multiplier effect causes gains in
total output to be greater than the change in spending that
caused it.
• The term multiplier is usually used in reference to the
relationship between government spending and total national
income. Multipliers are also used in explaining fractional
reserve banking, known as the deposit multiplier.
– Explaining Multipliers
– The Fiscal Multiplier
– The Investment Multiplier
– The Earnings Multiplier
– The Equity Multiplier
– The Keynesian Multiplier
– The Fractional Reserve Money Multiplier

22. Determinants of Money Supply
• The Required Reserve Ratio
• The Level of Bank Reserves
• Public’s Desire to Hold Currency and Deposits
• High Powered Money and the Money Multiplier
• Other Factors

23. The Tools Used To Conduct Monetary Policy
• Central banks have four main monetary policy
tools:
• the reserve requirement,
• open market operations,
• the discount rate, and
• interest on reserves.
• Most central banks also have a lot more tools at
their disposal.

24. The Quantitative Tools Of Monetary Policy
• The list of quantitative instruments includes
• Open Market Operations,
• Bank Rate,
• Repo Rate,
• Reverse Repo Rate,
• Cash Reserve Ratio,
• Statutory Liquidity Ratio,
• Marginal standing facility, and
• Liquidity Adjustment Facility (LAF).

25. Monetary Policy
• Monetary policy is an economic policy that
manages the size and growth rate of the money
supply in an economy. It is a powerful tool to
regulate macroeconomic variables such
as inflation and unemployment.
• These policies are implemented through different
tools, including the adjustment of the interest
rates, purchase or sale of government securities,
and changing the amount of cash circulating in the
economy.
• The central bank or a similar regulatory
organization is responsible for formulating these
policies.

26. Meaning of Monetary Policy
• Monetary policy is concerned with the changes in
the supply of money and credit.
• It refers to the policy measures undertaken by the
government or the central bank to influence the
availability, cost and use of money and credit with
the help of monetary techniques to achieve
specific objectives.
• Monetary policy aims at influencing the economic
activity in the economy mainly through two major
variables, i.e., (a) money or credit supply, and (b)
the rate of interest.

27. According to A. J. Shapiro,
• Monetary Policy is the exercise of the central
bank’s control over the money supply as an
instrument for achieving the objectives of
economic policy.
• In the words of D.C. Rowan, The monetary policy
is defined as discretionary action undertaken by
the authorities designed to influence (a) the
supply of money, (b) cost of money or rate of
interest and (c) the availability of money.”

28. Objectives of Monetary Policy
• The primary objectives of monetary policies are
the management of inflation or unemployment,
and maintenance of currency exchange rates.
– Inflation
– Unemployment
– Currency exchange rates
• The goals of monetary policy refer to its
objectives such as reasonable price stability, high
employment and faster rate of economic growth.
• The targets of monetary policy refer to such
variables as the supply of bank credit, interest
rate and the supply of money.

29. Tools of Monetary Policy
• Central banks use various tools to implement
monetary policies. The widely utilized policy
tools include:
• Interest rate adjustment
• Change reserve requirements
• Open market operations

30. Role of Monetary Policy in Developing Countries
• Monetary policy can serve the following developmental
requirements of developing economies:
• 1. Developmental Role
• 2. Creation and Expansion of Financial Institutions
• 3. Effective Central Banking
• 4. Integration of Organised and Un-organised Money Market
• 5. Developing Banking Habits
• 6. Monetisation of Economy
• 7. Integrated Interest Rate Structure
• 8. Debt Management
• 9. Maintaining Equilibrium in Balance of Payments
• 10. Controlling Inflationary Pressures
• 11. Long-Term Loans for Industrial Development
• 12. Reforming Rural Credit System

31. The Role of Monetary Policy in Promoting
Faster Economic Growth:
• 1. Increasing the Rate of Saving
• 2. Monetary Policy and Investment
• (a) Monetary Policy and Public Investment
• (b) Monetary Policy and Private
Investment
• (c) Allocation of Investment Funds

32. Targets for Monetary Policy:
Conditions of a Good Target
• In order to become a good target for
monetary policy a variable should satisfy the
following conditions:
• 1. Measurability:
• 2. Attainability
• 3. Relatedness to Goal Variables

33. The Range of money supply target
• The range of money supply target should be
determined on the basis of three considerations:
• (a) Anticipated rise in the real output;
• (b) Observed income elasticity of demand for
money; and
• (c) Acceptable rise in prices.

34. The Goals Of Monetary Policy In Nigeria
• In the Nigeria the major objectives of policy
are the attainment of price stability and
sustainable economic growth.
• Associated objectives are those full
employment and stable long-term interest
rates and real exchange rates.

35. Is GDP a monetary policy?
• Expansionary monetary policy increases the
money supply in an economy.
• The increase in the money supply is mirrored by
an equal increase in nominal output, or Gross
Domestic Product (GDP).
• In addition, the increase in the money supply
will lead to an increase in consumer spending.

37. THANKS