Read the text and do the tasks
1. The central bank is the monopoly supplier of base money. At the same time, the central bank can, via imposing minimum reserve requirements, exert a (pre-dominant) influence on the demand for central bank money. That said, the central bank is in a (comfortable) position to manage the conditions in the market for central bank money (usually referred to as money market), that is determining the quantity of base money or the interest rate on base money balances.
2. Figure 1.25 shows a simple model of the inter-bank money market (for, say, 1-month money), where the interest rate is determined by the demand for and supply of base money. The demand is determined by minimum reserves, the cash drain and working balances. Supply is determined by the central bank’s regular operations and by autonomous factors (such as, for instance, deposits being shifted from central bank to commercial bank accounts and vice versa).
3. In their money market operations central banks aim to ensure an orderly functioning of the money market, helping credit institutions to meet their liquidity needs in a smooth manner. This is typically achieved by providing regular refinancing to banks and facilities that allow them to deal with end-of-day balances and to cushion transitory liquidity fluctuations. What is more, central banks tend to signal their monetary policy stance to the money market via changing the conditions under which the central bank is willing to enter into transactions with commercial banks.
(Ansgar Belke : Monetary economics in globalised financial markets / A. Belke, T. Polleit. – Springer, 2009. – P.325).
Choose the correct summary of the text.
The passage I’ve just read is from the monograph «Monetary economics in globalised financial markets» edited by Ansgar Belke and Thorsten Polleit. The passage examines two factors: the demand and the supply. They both depend on central bank’s activity. The extract gives us an outline about the aim of the central bank to ensure functioning of the money market. Credit institutions provide regular refinancing to banks to cushion transitory liquidity fluctuations. Central banks can also change their conditions in order to have deals with commercial banks.
The extract touches upon the issue of central bank’s position in the money market. It helps lots of credit institutions to meet their liquidity needs in a smooth manner. I’d like to note that there exist the demand, determined by minimum reserves and the cash drain and the supply, determined by the central bank regular operations. It stands to reason that the central bank’s aim is to ensure orderly functioning of the money market in order to help credit institutions to meet their liquidity needs smoothly. To do it, they provide regular refinancing to banks and facilities that allow them to deal with end-of-day balances and to cushion transitory liquidity fluctuations.
The title of the monograph the passage is taken from is «Monetary economics in globalised financial markets» edited by Ansgar Belke and Thorsten Polleit. The central bank is the main supplier of base money. It can exert an influence on the demand for central bank money. It’s in a good position to manage the conditions in the market for central bank money. There are two factors here: supply and demand. They are determined by different bank’s activities, for example, supply is determined by deposits that the central bank can shift to the commercial bank. I’d like to mention here that banks try to signal their monetary policy stance to the money market. So I think they do it to make deals with commercial banks.
The extract I would like to speak about is from the monograph «Monetary economics in globalised financial markets» edited by Ansgar Belke and Thorsten Polleit. The extract faces the problem of the central bank as the monopoly supplier of base money. The main idea of the passage is to define the demand and the supply, determined by different factors. The author considers the demand, determined by minimum reserves, the cash drain and working balances. As for the supply, it is indicated as a phenomenon, depending on regular operations of the central bank and other autonomous factors. It should be taken into account, that central banks can vary their terms in order to have deals with commercial banks.
