Chapter 13 Financial Policy.ppt

Chapter 13 Outline 1.The Function of a Financial System Money and the Money Supply Financial Intermediation Transformation and Distribution of Risk Stabilization 2.Inflation and Savings Mobilization Inflation Episodes Forced Mobilization of Savings Inflation as a Stimulus to Investment Inflation and Interest Rates 3.Interest Rates and Saving Decisions 4.Financial Development Shallow Finance and Deep Finance Shallow Financial Strategy Deep Financial Strategy Panic, Moral Hazard, and Financial Collapse Informal Credit Markets 5.Monetary Policy and Price Stability Monetary Policy and Exchange-Rate Regimes Sources of Inflation Controlling Inflation through? Monetary Policy Reserve Requirements Credit Ceilings Interest-Rate Regulation and Moral Suasion Financial Policy: Introduction Financial policy deals with all measures intended to affect growth, efficiency and use of diversified financial system to meet it objective. It is also called Monetary Policy There are 4 basic functions of a financial system: 1. medium of exchange, store of value, 2.Moblize savings from various sources and channel it to investment-financial intermediation. 3. Transfers and distributes risk across the across the economies 4. serves as policy instruments of stabilization Functions of Financial System 1. Medium of exchange: Money supply Transfer deposits, checking demand deposits, time deposits, Money Supply: M1= narrow money (C +D) Broad Money M2= includes time deposits (T) Broadest Money=M3 includes liabilites of specialized institutions Summary: M1=C+D, M2= M1 +T, M3 =M2+ O Concepts of Macro-finance Financial ratio= financial assets/GDP Financial Intermediation: Measure by flow of funds-accounts or liquid/Asset Ratio Risk Transformation and distribution: A perfectly working Financial system will reduce risk with exception of disasters. Stabilization function- to control inflation and recession Inflation and Saving Mobilization 1. Prevent severe inflation and