How Central Banks Control the Money Supply With Interest Rates
HTML-код
- Опубликовано: 14 май 2024
- Want to help me do more research? Consider supporting via: / moneymacro or ko-fi.com/moneymacro
WANT TO HELP ME PRODUCE MORE CONTENT LIKE THIS?
△ For some extra benefits consider supporting me longer term on: / moneymacro
△ Liked the in-depth research and want to help me do more? Consider buying me a coffee at ko-fi.com/moneymacro
△ Finally, for other one-time donations: www.paypal.com/donate?hosted_...
△ Want to know more about central banking? Check out the playlist: • Central Banking
△ Check out how I use these principles to study country economies: • Country Economics
5 BOOKS THAT INSPIRED THIS CHANNEL
The Narrow Corridor: States, Societies, and the Fate of Liberty: amzn.to/3gr6pSV
Money Changes Everything: How Finance Made Civilization Possible: amzn.to/3mt3xbY
Adaptive Markets: Financial Evolution at the Speed of Thought: amzn.to/3sCkS3a
House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again: amzn.to/3gqXNeZ
The Third Pillar: How Markets and the State Leave the Community Behind: amzn.to/382Agwo
Many people think that the central bank primarily controls the money supply (M1, M2, M3). That used to be true. However, since the bulk of money creation is done by private banks, the central bank mainly controls their money creation by setting the short term interest rate (rbi policy rate, rbi repo rate, ecb deposit rate, fed funds rate, Bank of England base rate) on bank loans and on central bank reserves. This video builds on knowledge of how private banks create money. Check that out in my other video here: • How Commercial Banks R...
In most cases, monetary policy boils down to the following. Central bank set the interest rate on which all other rates are based. By doing so they try to control the amount of money circulating in the economy indirectly by making it more or less attractive for commercial banks to lend. Most central bankers change the interest rate as they try to control inflation. They will increase the interest if they believe the economy is overheating. This will lower inflation. They decrease the interest rate to spur the economy to grow faster which will lead to increased inflation.
Monetary policy via interest rates is part of the monetary policy toolkit of central banks. In addition to that central banks can engage in money printing, monetary finance, and quantitative easing. I have separate videos on each of these topics.
Narrated and produced by Dr. Joeri Schasfoort (University of Cape Town)
/ joerischasfoort
/ joeri-schasfoort
Timestamps:
0:00 - introduction
0:47 - the price of money
5:23 - the quantity of money
8:50 - the goal of monetary policy
12:04 - monetary policy in practice
If this topic has peaked your interest and you would like to know more about it. I've suggested some excellent readings below:
* Big Debt Crises by Ray Dalio, great book on money and debt by one of the most well known macro hedge fund managers.
* How Global Currencies Work: Past, Present, and Future by Barry Eichengreen, Arnaud Mehl, and Livia Chitu,, awesome book for a more international view.
* Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems by L. Randall Wray, the go to introduction on modern monetary theory.
* Monetary Policy Transmission in a Macroeconomic Agent-Based Model by Schasfoort, Joeri; Bezemer, Dirk; Godin, Antoine; Kinsella, Stephen; Caiani, Alessandro (paper:www.rug.nl/research/portal/fi..., provides an overview of the different channels of monetary policy transmission.
Attribution:
- OneWorld Trade Center cc Videvo
- BNP Paribas cc Waran3
- City at night cc Videvo
- Osijek, Empty street cc ddevcic1
- ECB videos cc European Central Bank
- DB videos cc Deutsche Bundesbank
- Tokyo footagage cc ANTi
I just uploaded the next video in this series, which is about quantitative easing: ruclips.net/video/ZbqtpKk6iC8/видео.html
Well explained. Thank you
Just came across your channel, for someone who wants to learn about macroeconomics and how does various factors effect money flow this is simply too good, please continue the good work and thank you.
Thanks Sukrit, it means a lot!! I'm in this for the long term. So, more content is definitely coming.
This guy actually is really great and much better than Economics Explained Channel
This was very nice. I like how you said "central bankers _believe_ " as opposed to stating it like it was a fact. You then counterbalance that with real world examples... Looking forward to watching the next part!
It’s nice to see more and more economists taking the engineering approach to economics. I’ve always liked the work of people like Anwar Shaikh and Stephen Keen. They look at how the economy works in the real world, not how it “should” work.
This channel does a great job explaining these complex topics in an entertaining and easy to digest way. Keep up the great work!
you mean steve keen?
Awesome vid. Looking forward to the those on Quantitative Easing & Helicopter Money.
This channel is UNBEATABLE!!! Thank you so much for your hard work!
That is exactly the explanation I was looking for. Thanks!!
Very good research! No open questions. Its all explained in a full circle and i do understand it, at least in theory. I really appreciate it, thanks.
Thanks Brandon! I'm very glad the video was of help.
Perhaps the reality is that the low interest rates and high lending are resulting in money pooling in those areas of the economy where consumption is primarily funded with debt such as housing and increasingly, cars.
It takes a long time to pay back the loans and mortgages used to buy capital in these debt-heavy markets, so the general rise in inflation is slowed immensely.
thank you so much for this video! I'm struggling in econ class but this really helped
Brilliant summary. Hope more people view these, as there is a lack of understanding of macroeconomics.
Clear, concise and straight to the point What else can you ask for?
Thanks! Super content, super ilustrative. take my like dear sir!
Hi, great video, just wanted to add that there is no empirical evidence that low interest rates leads to economic growth, an alternative explanation proposes by richard werner and a few other notable people such as aswath damodar is that the rates set by central bank is following the market rather then dictating the market.
It has been argued that the idea that low interest rates means high growth(more spending ,etc) and high interest rates leads to less growth is a myth and what actually happens is low interest rates is an indicator of low real economic growth and high interest rates is an indicator of high economic growth
Very clear and insightful explanation!
Thanks!
thank you so much, this video helped me to do my take home exam
Your channel's contents are so good
I've able to understand economics easy❤❤
superb video.. very very clearly explained !!
Awesome video content, keep up the good work!
Mooooooooij
Well explained. Thank you.
Amazing content 👍👍
I love it very clean on Monetary Policy
So governments have to decide between:
Raising Interest Rates: which will increase unemployment, thus annoying the local citizens (who vote for the government) but will attract foreign investors
OR
Decreasing Interest Rates: Stimulating economy, decreasing unemployment but scare off foreign investors (due to risk that inflation will erode value of currency)
I think that is very often true indeed. One counterargument is that by decreasing interest rates the government might spur economic growth which will then also attract foreign investors. This is why academic economists often talk about 'transmission channels.' The point you raise is a well known channel. But, I think it is important to keep in mind that there might be other channels that can work in the opposite direction (like the one I just mentioned).
Governments can also directly spend new money in the economy without relying on bank lending.
@@MoneyMacro little late to the party but MMTers will commonly argue interest rates should be raised, even at premium during a recession, assuming the federal government is taxing and spending enough through the budget to fund important redistributive policies.
Does this mean that countries with very high inflation, no or negative economic growth, high interest rates and rather high unemployment are bizarre case studies (or failed economies)? I don't really expect a full answer here, although I do hope you do a video about Argentina. It's more of a comment to boost the algorithm and let you know I appreciate your work, in depth analysis of a topic, almost full lectures, not short and only entertaining videos. Good job! I hope the channel grows!
Thanks Luca! It's an interesting point you touch on... are countries with high inflation bizarre case studies... more and more so because global inflation is much more rare (not sure how much longer though). But, these case studies used to be quite common in te 70s.
Think about civil conflict, natural disasters causing economic disruption leading to high inflation and loss in employment.
very informative. Thanks.
Thank you 🙏🏻
Thanks for the video
It’s amazing that you made a video on a topic and didn’t explain it
Very informative and well explained Content! Greetings from Germany!
Thanks! Greetings back from the Netherlands!
Well explained
Thank you.
Can you do a video on Tether? And stable coins in general.
Inflation has occurred. It's just in the prices of capital goods, instead of consumer goods. People should look at the S&P500, instead of the CPI. This way the economy can, in theory at least, grow forever, but at the cost of eventually making capital goods unaffordable.
All the while people move from productive jobs to asset flipping. Once unaffordable, the bubble pops and we have a mass correction period.
HELLO, thank you for your video!
DOES THE CENTRAL BANK ACTUALLY SET INTEREST RATES THOUGH? TO WHAT PRUPOSE DO THEY KEEP THEM SO LOW?
I’ve read a lot of financial articles on Real Clear Markets that point to the bond market actually keeping interest rates low because they are buying all of the safe and liquid collateral for repo = treasuries. It goes on by saying the central bank actually buys SOME bonds, and that even if they try to increase rates at the lower end, the yield curve flattens because the rest of the bond market does not raise rates. Is this true? You pointed out the central bank is trying to encourage banks to lend, to no avail.. but I feel like there might be more to that point.
I want to add inflation targeting does not work in most countries except some advanced countries (like US/UK) where they import goods. The reason is there are a lot of informal economies, supply-side constraints (esp agriculture is dependent on climate), asymmetric information, regulations, etc.
Do all central banks around the world seem to follow the same principles involving the relationship between unemployment and interest rates? Curious if there are 'experiments' in other countries testing the boundaries of this theory. I imagine that like so many other policy concerns there are going to be idiosyncracies that don't generalize well to all countries, however.
The Fed Funds Rate and the Discount Rate are pretty blunt tools in all honesty.
They may make credit cheaper by setting a lower floor for interest rates, but that won’t necessarily translate into a great demand for loans.
I love the way you teach
Thanks!
So how do Central Banks control or stimulate an economy if they no longer do it by regulating reserve requirements? Unless I misunderstood your video, if there is demand for credit, banks will create credit. The check or limitation to unlimited bank loans are the depositors to the banks fearing credit quality and bank runs?
The price of something is what you exchange for it. Inflation measures the rate of change of the price of money. Interest rates are the price of using (someone else’s) money. Interest rates are the rent from money. Just like rents are the price of using a house, not the house.
How does targeting 2% inflation encourage people to spend their money? Isn't the relevant metric for whether people want to spend their money the % inflation compared to the % interest they get on their investments? So it seems to me that monetary policy only encourages people to spend their money if it causes inflation to go up more than investments. So it seems to me that the current central bank policies have precisely the opposite effect: prices of ordinary things have not risen much, but investments like houses and stocks have risen massively. What am I missing?
Thanks for the great videos, Joeri. Good coverage, without too much focus on non-traditional ideologies regarding monetary policy. I'll be recommending some of your videos to my secondary/university econ students.
3:28 Banks have the ability to create money through loans (to some extent), so why increase lending to the general economy in the case of having excess reserves? I don't recall if it was said explicitly in these videos, but others that I've heard discuss this (and go against the MMM) indicate that banks don't lend from reserves. Without that being explicitly said, I would think that money creation for loans would imply this as well. What am I missing?
Watch this first: ruclips.net/video/cDNSNX48Kmo/видео.html
Banks don't lend from reserves, they just create money "out of the thin air".
In most places there are limits to how much they can lend (create) vs how big their reserves are. While this seems irrelevant, as even in places that have limits, banks can increase their reserves pretty much at will (central banks will let them), there's a cost to that, which will hurt their profits. On the other side - while lending out money is profitable, it has some risk attached.
Banking is a highly competitive business so an equilibrium is reached in the end. Banks that lend too much overextend and go out of business due to bad loans. Banks that lend too little fall behind due to poor profits, which leads to downward spiral of not attracting best employees, not keeping up with innovations, underinvestment etc. This is of course somewhat idealized picture, as political considerations and such play a big role in the end (banks "too big to fail"). The point is - the process is a dynamic one. There are market forces in play and central banks / regulators are trying to influence them by changing some system parameters.
Where you leave that colateral (a.k.a. goverment money) tends to be more important than reserves, or what price of money or interest rates would do an economy when is oversterilized or runs dry on quality colaterales and nobody wants to let money each other, so Quantity of money and Availability of money>price of money.
In fact if increase interest encourage investment and lending more but if the people use loan to produce create jobs but if they only borrow small to spend daily needs the it destroy future because no one can pay back
So, reserves are basically in the form of currency notes, right? I am feeling a bit thrown off by the "money that only banks can use" expression and not sure how to interpret that.
very clear about the banking cartel
The bank are not problem mostly but some hidden power print more money of some small countries exchange for u.s. dollars and ride so the question is should a single currency help better for everyone
Is that Ed Begley Jr. at 8:12?
Great video but you lost me for showing Prague on "Underperforming economy". 😀
JESUS, I CAN'T BELEIVE I FOUND THIS CHANNEL! I HAVE TO SAY, I'VE RUclipsD SOME VERY SPECIFIC AND INTRICATE ECONOMIC CONCEPTS THAT SHOULD'VE PRODUCED YOUR CHANNEL ON THE OTHER END OF THE SEARCH, BUT IT NEVER DID. I LITERALLY FOUND THIS CHANNEL BY ACCIDENT AND THAT IS CONCERNING.
Happy you found it. The good news is that: the more popular it gets the easier it will be to find, I think :).
Inflation may also be affected by the availability of goods and services. So if the energy price increases, then inflation will increase, even though employment remains the same (at least momentarily)
Not all central banks influence monetary policies via interest rates. For example, countries like Singapore, control money supply managing exchange rates. That's as far as I know. Will you be able to examine deeper monetary policies via the exchange rate, how it works?
I would like to see this guy play Chair the Fed game, and explain the reasoning behind his choices. That should be interesting.
Chair the Fed is easy bro. Just always target inflation. Unemployment sorts itself out. If you target unemployment, inflation is hard to tackle. Trust me this strat works in the game and real-life.
@@fatpotatoe6039 Perhaps. The thing is the game has now been removed because the Fed changed it's approach or something... idk
good video but missed such an opportunity to talk about 'the interest rate fallacy'. Low interest rates are indicative of tight monetary conditions and high interest rates of loose monetary conditions. Interest rates are POSITIVELY correlated with economic growth.
Can you link me something about this?
Yes. Finally people can be quiet about the bogus quantity theory of money in your other videos.
If the economy is expanding rapidly and the labor market is tight, what might happen if the economy did not have any central planning? One simple answer is that consumers would continue to spend causing consumption inflation instead of more money supply inflation; however, in either case there would be inflation, but consumer based inflation may cause incomes to increase more and over time, in a free market economy would definitely weed out the inefficient producers as employees gravitate to higher paying jobs. No minimum wage increases needed just like what has been the case over the last several years. Banks would raise their interest rates to attract more capital as more opportunities continue to rise and the lowest paying jobs transferred to countries with low skills or a competitive advantage because low skilled labor will be demanded by companies that take the economic opportunities, for starters. The free market system is fair and when left alone, eventually cause a rising tide. Problem over the last 100 years is the growth of usurping, corruption, game playing at the defendant's expense, etc...in the USA anyway.
I don't understand how can banks hold too much reserves and why would they want to keep their reserves at the central bank.
when you say the central banks raise or lower interest rates - are you talking about the interest rate at which they lend out money, or the interest rate they offer for money to be stored with them, or both? Are the interest rates the same. This is confusing for me, as the flat term 'interest rate' is always used, but would they offer the same interest rate for borrowing and storing?
Great question! You are right there are two rates. But, they typically move at the same time or roughly at the same time.
The interest rate for money cannot, I repeat cannot, change the quantity of money. At the core, it is simple math. The interest rate is a dependent variable, it cannot be changed independently. The exchange of current money for future money dictates the rate of interest.
The purpose of the commercial banks is to try to lower the interest rate downwards because high interest rates only bring in risky borrowers ??
In an environment of lower interest rates is it convenient for commercial banks to lend according to what you say or have I misunderstood??
Thanks In Advance
The exact opposite. Higher interest rates make borrowing more costly, thereby incentivizing savings. Lower interest rates encourage borrowing. Discouraging savings.
@@austinbyrd1703
I misunderstood the video, thank you.
@@Erez.Levi.Stocks no prob, this stuff's understandably confusing.
this knowledge for trading forex. right ?
Why are the interventions of Central Banks not reduced to a computer algorithm?
i’m ready to buy a notebook and just take notes off of your videos dude lol
Haha awesome. Although you could just follow the links in the description to see the script with sources :)
This video is replete with the term reserves. Can you please clarify what does this term reserves mean? And the video is good.
Thanks! Reserves are digital central bank money that only banks can use. They are close to cash .... Can typically be traded for cash directly at the CB.
Why is the interest rate the price of money? The price of everything else is denominated in fiat. So the price of $1 is surely just $1 no? Or the price of $1 is €0.9? The interest rate maybe be the price you earn to rent your fiat for a year. But that’s rent not price right?
Ty
You are very welcome
Actually, money is a matter of trades. The central bank is the middle man who exchanges apples for lumber from the producer of apples to the producer of wood that doesnt need apples. The central bank exchanges his apples for money so that the producer of lumber can get a saw from the person who doesnt need apples or lumber. Not literally but the idea is right if you understand correctly. The central bank exchanges goods for money from in compatible sellers so they have a common currency. They make a profit for there service. As do the producers of apples, lumber & saws.
If that’s where things ended, most people would have no issues with central banks. But that’s not the only thing these banks do. They also are in control of the amount of money that comes into creation, they set the interest rates (and give favorable/unfavorable ones depending on the lendee), and siphon energy from a country’s citizenry by inflating their money supply and robbing purchasing power from savers. Plus every time they create more money out of thin air 24/7/365. They lend to individuals, businesses, and - most perniciously - governments, and in the case of the latter the results are especially deleterious for the everyman,
So, income disparity comes from the fact that some people (banks) are allowed to print and multiply virtual money (subject to rules) whereas other people (labourers) are not allowed to print money and do not get fair wages. Since inflation is a given in fractional reserve banking based economy, if the wage increase does not match the inflation rate, some people become poorer over time, just like that, out of no fault of theirs. Correct?
Secondly, people like doctors/consultants/lawyers/engineers who charge for services with no substantial costs/expenses can literally print money competing with banks. So also for example, software developers, or musicians, or artists, who directly sell unlimited copies of one product to millions, thereby accumulating virtual money with negligible input costs. Correct?
Effectively, today, money is not a zero-sum game as accounting might make you believe. Far from it, you can multiply money too, if you have a skill that people value. Correct?
Fun fact : that huge building looked like a PS5
I would say the Federal reserve in the United States is not controlled the money very well. 30 trillion dollars plus in debt?
Where does the central bank get the money to pay interest on the reserves deposited by commercial banks?
For example, from banks that pay it interest when borrowing reserves from the CB
@@MoneyMacro that makes lot of sense but what happens if there is more lending to CB instead of borrowing? So that CB needs to pay out more than it receives?
You know for a dutchman you sure do use a lot of Rands 🤔
Hehe, I work for the University of Cape Town and was living there at the time ;)
If a bank has too many reserves it makes sense that they can stash these at the CB or loan it to other banks. But I don’t understand how increasing their lending spends reserves? When they make a loan to a person or a firm it’s bank deposits they create, right? So where does the reserves fit in?
They do not spend reserves when lending to a firm or person. Reserves come in .. in two situations.
(1) they can be exchanged for cash at the CB. This is useful when many customers demand to exchange their deposits for cash.
(2) when bank customers transfer deposit money to another bank... Behind the scenes banks pay each other with reserves.
@@MoneyMacro Thank you for the response! To clarify, at 3:30 in the video you mean that banks with too many reserves will 1) lend them to other banks or 2) hold them at the central bank. Not, as I interpreted it, 1) make more loans 2) lend to other banks or 3) place it with the CB.
@@kvikende ah no.... Hehe your original interpretation is correct. But, making more loans doesn't happen with these excess reserves. It's just that of banks make more loans and create deposits in the process.... The reserves they still hold (nothing changed there) are a smaller fraction of their balance sheet and therefore no longer considered excess :p . Does that make sense?
So, s.g. they need to hold 10% of their balance sheets in reserves at the CB. They have 12%. the Cb considers 2% excess and they might need to pay a negative rate on that part. Next, they increase lending (and with it their balance sheet) so that the same reserves are now 10% of their balance sheet and no longer considered 'excess' by the CB.
The confusion I think comes from the fact that I didn't make clear what excess reserves are
@@MoneyMacro Ah! Think I understand. If a bank has 10 extra reserves and give someone a loan of 100, the reserves are now "used" to back up the 100 deposits they created.
No modern customer ever checks a bank's reserves. That's what people would do if banks had no backstop.
I do indeed think this is generally the case. Although, occasionally central banks let some banks run into liquidity trouble. For example, here in the Netherlands there was 'sort-of' a run on the DSB bank in 2009. Another example in the run on Northern Rock in the UK in 2007.
@@MoneyMacro most people don't understand the monetary system and never will
But why wouldn't the Commercial Bank set it's own interest rate, since when it makes a loan, it creates that money by typing it into the Lender's Account? I thought that the Commercial Bank does not borrow money from the Central Bank before it lends?
Interest rates are set by CBs
Time is Godly power that is why some watch is really powerful. But real and fake make difference
Let's get this straight: coronavirus has not 'ravaged economies'. It is a middle-ranking viral outbreak that never did have the potency to even mildly disrupt trade.
What has done the ravaging and continues to carry out its destruction, is the huge over-reaction of the lockdowns perpetrated, as if in perfect concert, by the governments of the Western economies.
This is not just a semantic minor detail. To keep on speaking of this as though some kind of health issue is to fuel the situation that has been created. Those who have any interest at all in repairing our economies and restoring the right to trade need to call things what they really are.
This is not a health crisis. This is a coup.
Hello Alex Jones 🤡
@@disser3849
Awww, bless.
Why don't the take money out of circulation that would Stop inflation.
Ive heard that as populations increases, wages drop dramatically. Is this true?
In what economy? One which consumes its own production or an exporting one? That's just one of a myriad of questions... Economies are not the static entities that models represent there are so many spontaneous arangements that develop from a given change, and not everything is captured by models, or wrongly so.
monetary policy is not effective
Hi Joeri. Great content! I understand you had to skip some things to make an approachable summary, but I think a follow-up video describing central bank Open Market Operations en.wikipedia.org/wiki/Open_market_operation is needed. Especially contrasting OMO versus central bank rates and versus QE.
Low unemployment leads to inflation?
High unemployment leads to deflation?
What else comes with it?
Workers will demand higher wages when there is low unemployment?
There is more to Cost than employee wages
A low interest rate will deflate the inflation of money?
Central banks do not “control” money supply. Central banks can influence money supply.
Interest rates are at zero
It may be a kinder gentler form of slavery but the borrower is always a slave to the lender. The important thing is to try and understand how the system works and try to live your life debt free.
Eeeee villllll
This guy looks like Elon Musk
Hehe, I get that a lot.
BANK OF AMERICAN.SHAR MIN AUNG.(C.E.O)