2016/9/20 Central Bank Intermediation Central Bank Intermediation (Monetary Policy) BALANCE SHEET Instruments of Monetary policy Reserve Requirements In general, central banks adjusts the money supply equired reserve The amount of money that banks are required to that commercial banks can lend to the business keep on deposit at the central bank for the Usually measured in the percentage of a banks total deposit i.e. deposit reserve ratio Open Market Repurchase Agreements aising(or cutting) RRR means the total money that be lent (from the commercial banks )to the business sector is reduced (or enlarged Reserve Requirements Open Market Operations The buying and selling of government securities The amount of cash in hand or deposit in the in the open market in order to expand or contract central bank that is in excess to the required eserve The central bank reduces money supply by selling Deposit reserve rate bonds to primary dealers(security firms and commercial banks)and decreasing the balance The interest rate that the central bank pays on the that banks can lend required reserve and the excess reserve Purchase of government securities injects money into the banking system and stimulates growth2016/9/20 2 Central Bank Intermediation (Monetary Policy) 1‐7 Central Bank Intermediation (Monetary Policy) 1‐8 Instruments of Monetary Policy • In general, central banks adjusts the money supply by increasing or decreasing the amount of money that  commercial banks can lend to the business sector.   • Reserve Requirements • Open Market Operations • Open Market Repurchase Agreements • Discount Rate 1‐9 Reserve Requirements • Required reserve – The amount of money that banks are required to keep on deposit at the central bank for the liquidity purpose – Usually measured in the percentage of a bank’s total deposit, i.e., deposit reserve ratio – Raising (or cutting) RRR means the total money that be lent (from the commercial banks) to the business sector is reduced (or enlarged). 1‐10 Reserve Requirements • Excess reserve – The amount of cash in hand or deposit in the central bank that is in excess to the required reserve • Deposit reserve rate – The interest rate that the central bank pays on the required reserve and the excess reserve 1‐11 Open Market Operations • The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. • The central bank reduces money supply by selling bonds to primary dealers (security firms and commercial banks) and decreasing the balance that banks can lend. • Purchase of government securities injects money into the banking system and stimulates growth. 1‐12