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Chapter 30 Central banks: the "nerve centers" of the financial system (5)
Now a gentleman A deposits 100 yuan in the bank, and the bank lends 80 yuan of it to B. If B deposits all the 80 yuan borrowed in the bank, the bank lends 64 yuan of it to C. C deposits 64 yuan in the bank, and the bank lends 51.2 yuan to D... and so on, the central bank puts 100 yuan into the market first, and the last currency in the market will be 100+80+64+51.2+... …

解这个数列的值是500，其实就是100×（1/0.2）=500
This is the actual amount of money injected.1/0.2 here is the money multiplier, which is 1 divided by the statutory reserve ratio.

The money multiplier is actually the multiple of the expansion of the money supply.There is an effect or reaction of several times expansion (or contraction) between the initial money supply of the central bank and the final formation of social money, that is, the multiplier effect.

The formula for calculating the complete monetary (policy) multiplier is: k=(Rc+1)/(Rd+Re+Rc).Among them, Rd, Re, and Rc respectively represent the statutory reserve ratio, excess reserve ratio and the ratio of cash in deposits.The basic formula for calculating the monetary (policy) multiplier is: money supply/base money.The money supply is equal to the sum of currency (that is, cash in circulation) and demand deposits; while the base money is equal to the sum of currency and reserves.

The money multiplier is the quantitative expression of the relationship between the base money and the money supply expansion, that is, the multiple of the increase or decrease of the base money supply created or reduced by the central bank.The currency and loans provided by the bank will generate several times its deposits through several deposits, loans and other activities, which are commonly referred to as derived deposits.The size of the money multiplier determines the size of the money supply expansion capacity.The size of the money multiplier is determined by the following four factors:

1. Statutory reserve ratio.The statutory reserve ratios for time deposits and demand deposits are directly determined by the central bank.Generally, the higher the required reserve ratio, the smaller the money multiplier; conversely, the larger the money multiplier.

2. Excess reserve ratio.The ratio of the reserves held by commercial banks exceeding the statutory reserves to the total deposits is called the excess reserve ratio.Obviously, the existence of excess reserves correspondingly reduces the bank's ability to create derivative deposits. Therefore, the relationship between the excess reserve ratio and the money multiplier also changes in the opposite direction. The higher the excess reserve ratio, the smaller the money multiplier; , the greater the money multiplier.

3. Cash ratio.The cash ratio refers to the ratio of cash in circulation to demand deposits in commercial banks.The level of the cash ratio is positively related to the size of the money demand.Therefore, whatever affects the demand for money can affect the cash ratio.For example, the interest rate on bank deposits falls, resulting in a decrease in the income of interest-earning assets, and people will reduce their deposits in the bank and prefer to hold more cash, thus increasing the cash ratio.The cash ratio is negatively correlated with the money multiplier. The higher the cash ratio, the more cash exits the expansion process of deposit money and flows into daily circulation, thus directly reducing the amount of loanable funds of the bank and restricting the ability to derive deposits. The money multiplier The smaller the number.

4. The ratio between time deposits and demand deposits.Since the derivation ability of time deposits is lower than that of demand deposits, the central banks of various countries stipulate different statutory reserve ratios for different types of commercial bank deposits. Usually, the statutory reserve ratios of time deposits are lower than those of demand deposits.In this way, even if the statutory reserve ratio remains unchanged, changes in the ratio between time deposits and demand deposits will cause changes in the actual average statutory deposit reserve ratio, which will ultimately affect the size of the money multiplier.Generally speaking, when other factors remain unchanged, the money multiplier will increase if the ratio of time deposits to demand deposits increases; otherwise, the money multiplier will decrease.

Generally speaking, it is the above four factors that determine the money multiplier.There are other factors that affect the money multiplier across countries.In my country, there are two special factors affecting the money multiplier: financial deposits and credit plan management.But overall, the role of other special factors is relatively small.

The Taylor Rule: The Secret of the Fed

In 1993, John Taylor, then the governor of the Federal Reserve, proposed that he found that since 1987, the monetary policy of the United States has followed a simple rule: the federal funds rate in the United States fluctuates with the inflation rate and the fluctuation of output deviation from the natural rate .Because this rule is in line with the fluctuation of the US federal funds rate from 1987 to 2006, it is also called the "Taylor rule".

Since 1987, the Fed has followed a fairly predictable methodology. The "Taylor Rule" provided a good general guideline for monetary policy in the Greenspan era. The "Taylor rule" was proposed by John Taylor of Stanford University in the early 90s and developed by other economists.This rule proposes an equation that describes the Fed's monetary policy as a response to economic growth and inflation, taking into account the extent to which that economic growth deviates from potential growth and the deviation of inflation from an assumed inflation target.But there have been periods when there has been a big discrepancy between what the Fed makes and what it would have done under the rule."Normally, Greenspan plays by the rules," said Larry Meyer, founder of the consulting firm Macroeconomic Advisors and a former Fed governor from 1996 to 2002. You know it, you can't say it, but Taylor's rules are very applicable most of the time. When Greenspan has to deviate from the rules, he just shows his brilliance."

Like the interest rate that was once called Greenspan's "magic wand", the Taylor rule was once hailed as the mystery of the Federal Reserve.The Taylor rule is one of the commonly used simple monetary policy rules, a short-term interest rate adjustment rule determined by John Taylor of Stanford University in 1993 based on the actual experience of US monetary policy.Taylor believes that to keep the real short-term interest rate stable and the neutral policy stance, when the output gap is positive (negative) and the inflation gap exceeds (below) the target value, the real interest rate should be raised (lowered).

"Taylor rule" consists of four elements: first, the Fed's long-term inflation target, Taylor thinks 2% is more appropriate.Second, the inflation-adjusted real federal funds rate, the natural real rate, which Taylor believes is also 2%.Third, the current inflation rate.Fourth, the degree to which the current growth rate of output deviates from the natural rate of output growth.In addition, Taylor argued that real interest rates must rise more than the rate of inflation in order to suppress inflation.For example, if inflation is 2% and output equals natural output, Taylor believes the Fed should raise the federal funds rate to at least 6.5%.Otherwise, the economy will fall into a vortex of inflation.

The Taylor rule describes how short-term interest rates adjust to changes in inflation and output. It looks very simple in form, but it has a profound impact on the later study of monetary policy rules.The Taylor rule inspires forward-looking monetary policy.If the central bank adopts the Taylor rule, the choice of monetary policy actually has a pre-commitment mechanism, which can solve the problem of time inconsistency in monetary policy decision-making.The Taylor rule is straightforward, easy to communicate, and is an outcome-based rule.But the predictive function is not strong, and its effect on implementation decision-making is limited.

Helpless "Lender of Last Resort"

When a banking crisis occurs, banks will also seek loans from each other to cope with the run.However, banks have limited reserves. Who is the lender of last resort when the bank is at the end of its rope?

In October 2008, as western countries fell into financial crisis, French President Nicolas Sarkozy called on China, India and other countries to participate in an "emergency global summit" on rebuilding the world's financial system to jointly cope with the current global financial crisis. The President of the World Bank Zoellick then made similar suggestions.As the financial crisis in the United States and Europe intensifies, more and more Western politicians regard China as a key force for global financial stability, because China's financial health and huge foreign exchange reserves have become the "international lender of last resort" in this crisis The best candidates are also given the ability to determine the future financial order.

However, the US$7000 billion bailout plan announced by the U.S. Congress cannot enhance market confidence at all, and has a limited role in solving liquidity, so it cannot prevent the recession of the real economy.This means that credit defaults will become more serious in the future, which will further hit the unprecedented derivatives market until the U.S. financial system collapses and falls into a debt crisis.Therefore, being the "international lender of last resort" in the course of the crisis is tantamount to "the last person buried with the crisis", and it will certainly harm itself.

China is deeply aware of this.Therefore, Premier Wen Jiabao said in a speech, "China's economic growth does not experience major ups and downs, and it is the greatest contribution to the world economy." The People's Bank of China also repeated this view.Affected by the financial crisis in the West, as the main force driving China's economic growth, exports have dropped significantly, and the real economy may decline rapidly. This will cause fluctuations in China's asset prices, especially in the real estate industry, which is closely related to finance. Therefore, maintaining economic growth and stabilizing asset prices has become the most important task at present.China has no intention of playing the role of "lender of last resort".

Usually, when a banking crisis occurs in a certain country, the central bank can provide refinancing for other commercial banks to meet the short-term funding needs of commercial banks, so as to prevent crises in the banking system. lender.Therefore, the concept of "lender of last resort" was originally a description of this behavior of the central bank.

The "lender of last resort" is considered to be the financial responsibility of the central bank in times of crisis, and it should meet the demand for high-powered money to prevent the contraction of the money stock caused by panic.When some commercial banks are solvent but temporarily illiquid, the central bank can issue emergency loans to these banks through the discount window or open market purchases, provided they have good collateral and pay punitive interest rates.Finally, if the lender announces that it will provide financing to commercial banks with insufficient liquidity, it can alleviate the public's fear of cash shortage to a certain extent, which is enough to stop the panic without taking action.

The idea of ​​lender of last resort was first proposed by Walter Bagehot.

Walter Bagehot was born in a banking family in 1826. His mother came from the Starkey family engaged in banking, and his father was the manager of the Starkey Bank headquarters. In 1848, 22-year-old Bagehot graduated from the University of London with a master's degree; after that, he specialized in law for three years and was qualified as a lawyer, but he did not work as a lawyer, but entered his father's banking industry. In 1858 he married the eldest daughter of James Wilson, who was Chancellor of the Exchequer and later the founder of the world-famous Economist magazine; two years later, when Wilson died, he took over the Economist , served as its third editor until his death in 1877.

Although Walter Bagehot did not have a degree in economics, his erudition, personal endowment and family knowledge in many aspects made Bagehot the key man who really made The Economist a household name.He has made achievements in many fields, and he is a jurist and financier who has influenced so far.

In Lombard Street, published in 1873, Bagehot elaborated his views on the central bank's lender of last resort: on the basis of good collateral, the Bank of England should be ready at any time to provide unlimited financing to commercial banks at high interest rates. amount of loans.In fact, Bagehot published this view in newspapers as early as September 1866.This argument ultimately had a major impact on the evolution of central banking functions.But at the time, a Bank of England director called his remarks "the worst dogma to come out of money and banking this century."

This is because, as mentioned in the material, the role of "lender of last resort" is not easy to grasp.

The central bank should not cut interest rates to commercial banks at low cost or even at no cost. After the outbreak of the financial crisis in 2008, the world's major central banks were committed to injecting liquidity into the banking system. In fact, they provided quantitative loans to commercial banks regardless of cost. Such a role of lender of last resort did not conform to Bagehot's original intention.Central banks need to bear enormous external pressure to stand by during financial market turmoil and resist the internal temptation to turn the tide.The task of the central bank is to prevent economic growth from turning into a recession. The role of the lender of last resort does not require the central bank to act as a "good old man". Whoever has no money must send the money to them.Bagehot once emphasized that high interest rates and collateral are additional punitive financing conditions, and at the same time, they can distinguish the quality of bank assets, and those who cannot meet the loan conditions have reasons for the central bank to reject them.Therefore, in playing the role of "lender of last resort", we need to carefully grasp the strength, otherwise it will not have a strong effect on improving the economic situation.

(End of this chapter)