Economics: How do non-monetary intermediary activities affect the demand for money?

2022-04-29 0 By

Introduction ‍ the monetary supply of intermediary institutions for creditor’s wishes, in the actual quantity depends on the rate of primary securities they buy, indirect debt depends on their sale of currency deposit rates, depending on their operating assets and liabilities of the variable cost, also depends on them to get the type of primary securities.Raising the interest rate on primary securities increases their desire to supply non-monetary indirect assets.Conversely, higher deposit rates or other variable fees would reduce their desire.They also reduce the supply of claims against themselves when the composition of primary securities is adverse to their activities.With these conditions unchanged, their real supply of debt remains constant at any price level of current output.In the short run, at a given interest rate, an increase in real demand for non-monetary indirect assets will lower the equilibrium deposit rate, because the supply of these assets is not completely elastic.But in the long run, existing firms expand and new ones join the industry, increasing supply enough to restore earlier deposit rates.It assumes that the industry’s real returns are constant in the long run;This assumption is used for convenience.This supply function is aggregate and refers to all non-monetary intermediaries.Because intermediary institutions are specialized in different types of primary securities, the interest rate does not move in the same form in the supply function of various intermediary institutions.Therefore, changes in relative interest rates may produce relative changes in profitability among intermediaries.Changes in the relative efficiency of obtaining net income from total income will also change the relative size of output that different intermediaries can provide at various deposit rates.It can be seen that, with the adjustment of interest rate structure and operating efficiency, competitive advantage changes more or less frequently among intermediary agencies.It must also be noted that the aggregate supply function can also include claims made by non-monetary intermediaries of the government.If so, consideration must be given to the possibility that factors other than those governing the supply of private indirect claims influence the supply of those claims.Noncompetitive Factors In a highly competitive environment, the deposit rate of nonmonetary intermediaries rises and falls rapidly to eliminate excess stock and excess demand for nonmonetary indirect assets.In a less competitive environment, deposit rates will be slower to respond.Intermediaries will initially try to eliminate excess stock by increasing advertising, offering bonuses and incentives to new depositors and shareholders.They may also initially try to eliminate excess demand by reducing advertising spending, limiting the amount of money each spending unit can deposit, or pushing away customers.But when excess demand and excess stock are large and persistent, deposit rates will eventually respond.Time deposits in the monetary System Up to now, we have recognized that government monetary systems issue only money, which includes demand deposits and currency.Non-monetary indirect assets are created by other financial intermediaries.Now consider an intermediate case where the money system creates time deposits.Time deposits do not belong to the stock of money because they are not a means of payment.It is also clear that they are not junior securities issued by non-financial sectors of the economy.They happen to be classified as non-monetary indirect assets, “non-monetary” because they are not money and “indirect” because they are issued by financial intermediaries.First examine the factors that create time deposits and then analyze the market for time deposits.Elements of time deposit creation Assume that the policy Bureau instructs the Banking Bureau to sell time deposits to payers at a positive external deposit rate specified by the policy Bureau.A payer buys time deposits from a banking office in currency, usually with checks drawn on their demand deposits.Suppose someone buys a $100 time deposit this way.The result was a decrease of $100 in the money system’s demand deposit liabilities and an increase of the same amount in the money system’s time deposit liabilities.There’s no change in the total liabilities or total assets of the monetary system.However, the nominal amount of money went down by $100.The result is the same when time deposits are purchased with currency, the time deposits increase by $100 and the currency liabilities in the monetary system decrease by the same amount.Similarly, the total liabilities and total assets of the monetary system did not change, and the amount of nominal money went down by $100.It is instructive to compare the purchase of time deposits with the purchase of claims against non-monetary intermediaries.When spending units buy the latter, the amount of nominal money in the economy, the assets held by spending units and non-money intermediaries, eventually stays constant, while the indirect assets of non-money increase.Thus, such purchases increase the total amount of indirect securities in the economy.The purchase of time deposits, however, increases one indirect security and decreases another, leaving the total indirect security unchanged.Of course, these are only the initial changes before the policy bureau issues further instructions.Time deposit market The actual demand of payers for money and (other) non-commodity indirect assets when time deposits are offered by a banking bureau depends not only on the factors already discussed, but also on the external deposit rate paid by a banking bureau for its time deposits and the amount of these deposits in the financial asset mix.Other things being equal, as this deposit rate rises, real demand for money and other non-money indirect assets will fall.In addition to financial markets for money, primary securities and non-monetary indirect assets, there is now a market for time deposits.The actual demand for time deposits depends on the actual holding (both quantity and quality) of financial assets of the spending unit, the level of real income, the interest rate, and the three deposit rates, demand deposits, non-monetary indirect assets and time deposits.This real demand increases with the increase in the actual holdings of financial assets and the interest rate on time deposits of the expenditure unit.It goes down when the primary bond rate and the other two deposit rates go up.Finally, we assume that an increase in real income slightly reduces the real demand for time deposits, as spending units shift demand from time deposits to real money balances.The notional stock of time deposits has been specified in the policy bureau’s instructions to the banking Bureau.These instructions may authorize the Banking Bureau to supply any amount of time deposits required by the disbursing unit at the deposit rate set by the Bureau, or they may also grant other powers.When the demand for time deposits is equal to its stock, the time deposit market is in equilibrium.Non-monetary intermediaries and the demand for money now focus on how the activities of non-monetary intermediaries affect the demand for money or, more broadly, disrupt financial markets.The imbalance of the money market equilibrium here assumes that the equilibrium is established in the absence of non-monetary intermediaries, i.e. there is no demand for non-monetary indirect assets by expenditure units.Now these assets are brought in, but time deposits are outside the monetary system.This effectively means that the deposit rate on these assets rises from zero to a positive level.This increases the demand of expenditure units for non-monetary indirect assets and decreases the demand for money and primary securities.When the nominal money quantity and price level are given, a reduction in the demand for money by spending units lowers the interest rate on primary securities.Non-monetary intermediaries, on the other hand, increase their demand for money as their assets grow, which in turn raises the interest rate on primary securities.What happens in the short term depends on the relative weight of the two factors.It is worth examining the extreme case in which the expenditure unit increases its demand for non-monetary indirect assets and correspondingly reduces the demand for money by an equal amount, while non-monetary intermediaries do not increase their demand for money.Suppose the spending unit wants to reduce its monetary balance by $100 and increase its holdings of non-monetary indirect assets by the same amount.They write checks from demand deposits in the monetary system and pay checks to non-monetary intermediaries in return for corresponding amounts of claims on these institutions.These intermediaries use the money to buy $100 of primary securities.These securities can only be purchased from expenditure units.Because it is assumed that the monetary system maintains its primary securities in order to keep the nominal amount of money constant throughout the transaction.However, at current interest rates, expenditure units wish to reduce their money balances rather than primary securities holdings.They want less money, primary securities in the same amount, and more non-monetary indirect assets.Thus, in order to entice payers to abandon junior securities, intermediaries bid up the prices of these securities, which means that interest rates fall until payers are willing to hold the same amount of currency as they started with, fewer junior securities, and more non-monetary indirect assets.Of course this is a short-term result.This creates upward pressure on commodity prices and money wage rates, which in turn puts upward pressure on interest rates when the nominal amount of money is fixed.Generally speaking, after a long period of adjustment, the price level will be higher and interest rates will be lower.Creation and conversion of business At current levels of interest rates, commodity prices, and real incomes, the creation of indirect financial assets by non-monetary intermediaries may result in excess stock of money and excess demand for primary securities.By changing the composition of the primary securities held by the spending unit, these institutions can further influence the demand for money by the spending unit.Suppose, for example, that non-monetary intermediaries sell government bonds to payers and buy mortgage-backed securities.This “conversion business” eliminates the less liquid securities held by expenditure units and replaces them with highly liquid securities.Thus, spending units are able to reduce their money balances and thus their demand for money.When the money stock is given, there is excess money stock and excess demand for primary securities.If non-monetary intermediaries switch in the opposite direction, the liquidity of the unit of expenditure decreases, thus increasing the demand for money.Non-monetary intermediaries can reduce the demand for money by changing business or creating indirect debt, thus resulting in excess money stock.Conclusion ‍ Money system can also cause excess money stock through conversion and creation;In the first case, you reduce the demand for money, and in the second case, you increase the absolute stock of money.In fact, these conversions and creation operations by financial intermediaries are a dual method of driving one security out of the market and issuing another.In this respect, they are both instruments of government debt management.