Financial Intermediation and Macroeconomic Analysis Michael Woodford
Submitted by:
Muhammad Shahzad (73537) Sahampathi Weerasuriya (73416)
Submitted to:
Prof. Dr. Georg Stadtmann
February 28, 2017
Europa Universität Viadrina
Frankfurt (Oder) Table of Contents
Introduction 2
Housing prices and aggregate demand 3
Banking and money supply 4
Model of bank landing channels 5
Credit and economic activity: A market based approach 8
Determination of the Supply of intermediation 11
The IS-MP model with Credit Frictions 12
Consequences of the shift of supply intermediation 13
Implication of Monitory Policy 13
Liquidity Trap and Unconventional monetary policy 14
Role of Unconventional Monetary policy 15
Monetary Policy and
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The role of financial intermediary is changing with time. The recent financial crisis of 2007-2009 shed the light on changing role of financial intermediaries and rising demand of non-bank financial intermediaries, which grew out of the securitization of assets and the integration of banking with capital market development. The recent financial crisis not only effected the economy like US but it also left profound influence on the global market as a whole. Banking sector and financial market are inseparable when we talk about market based financial system. In conventional bank lending channel, reserve was the legal binding for many banks but due to sizeable reduction in …show more content…
The significance of the role of the banks for the transmission of monetary policy prior to the financial crisis has been ignored. Central banks didn’t include the banking sector during the formation of macroeconomic models before the crisis of 2007-2010. Per different economic analysts, there were couple of reasons to not pay attention on the significance role of commercial banks for the transmission of monetary policy before the crisis. Firstly, it was technically difficult to model the role of financial intermediaries in macroeconomic model. Second, under most economic conditions, the role of financial intermediaries was not relevant. Moving Further, in the traditional credit channels, due to imperfect situation between bank’s lending and bonds, monetary policy may have a stronger impact on economic activity via bank loan supply restrictions. Bernanke and Gertler (1995), in their article of the credit channel of monetary policy transmission, conventional bank lending channel of monetary policy has been divided into two main branches, narrow and broad respectively. The narrow channel focuses on the financial frictions deriving from the balance-sheet situation of banks. Banks are forced to reduce their loan portfolio due to a decline in total reserve able bank deposits, if the monetary policy is tightened. On the other hand, the broad credit channel also considers
The risk of full employment and rise in interest rates are correlated. The fed also monitors bank fraud, as of late corruption between lenders has increased. This presentation helped me understand the feds roll in monitoring the real estate market and how it forecasts and adjusts to changes in business practices, and trends within the economy. The main focus of this presentation was the dissolution of traditional retail stores and the impact of disruptive
Now that there are more funds available to lend, the interest typically will drop. With lower interest rates, more people are likely to borrow, both personal loans and business loans. With the increase in expenditures, the economy is stimulated. Consumer confidence in the economy equates to spending. Spending creates jobs and more confidence in the
The Federal Reserve bank is the central bank of all American banks. Its main job is to make sure the America economy is safe and sound. It is known as nicknames such as the “Fed” and ‘The Banks’ Bank.” For many years this “banks’ bank,” is met with animosity. In an article on the BBC by Zoe Thomas, titled “Why do many Americans mistrust the Federal Reserve?”
What happened to all the banks then? Well first off people had complete trust in them, that is until the stock market crashed. Banks had invested a lot of money in the stock market also. But when it crashed they lost it all and
Beginning with bank reform, the New Dealers were able to maintain oversight in the banking industry, which had previously been an unregulated and unpredictable source of capital. The Glass-Steagal Act and the Emergency Banking Act signaled a shift from a lassiez faire approach to the banking industry to one that ensured banks were making responsible loans and not gambling with depositor’s savings in the stock market. By not allowing banks who were considered “irresponsible’ to reopen and separating the savings and investment functions of the banks, a more secure system began to emerge. The impact of this legislation was immediate, as bank failures dropped dramatically. Additionally, major breakdowns in the banking industry were avoided until fairly recently, which came as a result of the repeal of Glass-Steagal.
2. Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices. Expansionary activities conducted by the Federal Reserve impact the credit availability because the interest rates are lower, which promotes small business to expand as well as to making it easy for consumers to take on credit loans. The money supply would be incremented by the Federal Reserve while assuming expansionary activities, in order to promote higher consumption in the economy, which is related and will affect the interest rates by lowering them. By incrementing the levels of consumption the security prices will also change, due the higher demand, factor that will ultimately promote and better the
Along the same line of thinking for protecting the freedoms of the people, the government creates and enforces the law of the market but should not directly participate in the game (Friedman, 1975). Intervention as a discrepancy from Friedman’s theory is understood as the Federal Reserve keeping interest rates low prior to the crisis. This will be discussed later in the
Also the Federal Reserve Bank began to put money into the banking system letting money flow through the economy and the credit was loosened making the investments
The Federal Reserve adjust the banking system
Banking system is essential in our economics to maintain an effective circulation of money. The bank has functions for regulation of currency to aid strong economy. Distribution of the money is crucial to promote construction of the nation and prevention of bankruptcies. In our modern economic structure is supported and developed by the banking system. However, there was a period that the national bank was shut down by the government the consequence of the bank war.
Over the decade leading up to the financial crisis, securitisation was a rapidly growing segment of the financial sector globally and in Australia (Debelle, 30 November, 2010). Authorised Deposit Taking Institutions (ADI) uses securitisation as a medium to raise funds, as it accepts deposit and then make loans through indirect financing. Securitisation has been very popular financing option as banks use it to raise funds for finance. According to Reserve Bank, ADI uses securitisation for various reasons. The process of selling the loans to a third party, rather than retaining them on their balance sheet, enables them to manage their credit risk while continuing to maintain relationship with the borrower and also it frees up regulatory capital
If the Federal Reserve Bank lend money to the local banks and tried to balance the flow of money I think this would never happen that much. And by 1932 due to stock market crashed
The Great Recession—which formally kept going from December 2007 to June 2009—started with the blasting of a 8 trillion dollar lodging air bubble. The subsequent loss of resources prompted sharp reductions in purchaser spending. This loss of utilization, consolidated with the monetary business sector tumult activated by the blasting of the air bubble, additionally prompted a breakdown in business speculation. As buyer spending and business speculation became scarce, huge job misfortune took after. In 2008 and 2009, the U.S. work business sector lost 8.4 million occupations, or 6.1% of all finance livelihood.
With the recent complicated economic financial environments, there may be some abnormal relationships comparing with the theories. We cannot examine them in the project. 3.
2.0 SITUATION ANALYSIS Below are Malaysian banking industry’s external environment assessment using Porter’s 5 Forces Analysis. For the purpose of this assessment, 3 top-in-the-league existing domestic banking groups in terms of asset size have been chosen i.e. Maybank, CIMB, and PublicBank. All 8 domestic banking groups have operations in all the 3 segments of banking businesses namely Commercial, Islamic, and Investment bank. Upon analyzing and assessing their immediate surroundings, the banking groups recognize the following important factors that would impact on their competitiveness. THREAT OF RIVALRY AMONG EXISTING BANKS • Too many players in the industry; Each banking group has to contend with 7 other domestic banking groups and 30 other banking intermediaries both local and foreign, comprising 19 Commercial, 8 Islamic, and 3 Investment banks.