Presentation Assignment Economics Of Money And Banking Topic The Process Of Money Supply In Vietnam.pdf

Control monetary base The monetary base, also known as the money base or reserve money, refers to the total amount of currency in circulation within an economy and the commercial bank r

UNIVERSITY OF ECONOMICS AND BUSINESS VNU –

FACULTY OF FINANCE AND BANKING

-     -

PRESENTATION ASSIGNMENT ECONOMICS OF MONEY AND BANKING

TOPIC: THE PROCESS OF MONEY SUPPLY IN VIETNAM

Dao Ngoc Minh Khue – 21050452

Ha Noi, June 2023

TABLE OF CONTENTS

PART 1: OVERVIEW ABOUT THEORY’S THE PROCESS OF

MONEY SUPPLY 1

1 Money supply 1

2 Factors affect the money supply 2

2.1 The central bank 2

2.1.1 Definition 2

2.1.2 Role 2

2.1.3 The method of central bank to affect the money supply in economic 3

2.1.3.1 Control monetary base 3

2.1.3.2 Affects to money supply through commercial bank 4

2.2 The commercial bank 5

2.2.1 Overview of commercial bank 5

2.2.2 How to the commercial bank affects to the supply money? 5

2.2.2.1 Deposit creation: the single bank 6

2.2.2.2 Deposit creation: The banking system 7

2.2.3 The money multiplier and money supply 8

2.2.4 The factors affect to money creation’s commercial bank 9

2.3 The depositors 11

PART 2: THE PROCESS OF MONEY SUPPLY IN VIETNAM 12

1 The money supply of Vietnam 12

2 The players affect the money supply in Vietnam 12

2.1 State Bank of Vietnam (SBV) 12

2.2 Commercial bank 13

3 The process of money supply in Vietnam in covid 19 14

3.1 Overview of Vietnam’s economic in Covid 19 14

3.2 The SBV’s adjustment of money supply in Covid 19 15

3.3 The commercial bank’s action in covid 19 16

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PART 1: OVERVIEW ABOUT THEORY’S THE PROCESS OF

MONEY SUPPLY

1 Money supply

1.1 Definition

The money supply is the sum total of all of the currency and other liquid assets in a country's economy on the date measured The money supply includes

all cash in circulation and all bank deposits that the account holder can easily convert

to cash There are different measures of money supply, such as M0, M1, M2, and M3, depending on the type and liquidity of the money

measure of money supply and includes only banknotes and coins in the hands of the public and in banks

businesses have in commercial banks It represents the total amount of cash and short-term deposits that people can easily use in their daily transactions

It includes cash and withdrawable or term deposits account

with longer terms and financial instruments such as bonds, securities

1.2 Role

Money supply affects many aspects of the economy, such as prices, inflation, exchange rates and business cycles An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money

in the hands of consumers, thereby stimulating spending Businesses respond by ordering more raw materials and increasing production The increased business

or when its growth rate declines Banks lend less, businesses put off new projects,

and consumer demand for home mortgages and car loans declines Change in the

money supply has long been considered to be a key factor in driving economic performance and business cycles

1.3 Equation’s money supply

Beside estimate the money supply by sụm of M0, M1, M2, M3, it can be calculated by money base (MB) multiply by money multipliers (m)

MS = MB.m

2 Factors affect the money supply

Change in the money supply has long been considered to be a key factor in driving economic performance and business cycles What factors can control and affect money supply in economic? There are 3 main players: Central bank, Commercial bank, depositors Of these, the central bank is the most important

2.1 The central bank

2.1.1 Definition

A central bank can generally be defined as a financial institution responsible for overseeing the monetary system for a nation, or a group of nations, with the goal

of fostering economic growth without inflation

There are 2 type of central bank

2.1.2 Role

implementing national monetary policy: formulating and operating Monetary policy

is the focus of a central bank's operations The content of monetary policy is shown through the design of the target system of monetary policy in each period, including policy objectives and operating target system

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2.1.3 The method of central bank to affect the money supply in economic

2.1.3.1 Control monetary base

The monetary base, also known as the money base or reserve money, refers

to the total amount of currency in circulation within an economy and the commercial bank reserves held at the central bank It represents the foundation of a country's money supply and serves as a key component in the implementation

of monetary policy Monetary base (MB) equals currency in circulation (C) plus

the total reserves in the banking system (R)

MB = C + R

The central bank can increase the money base by issuing the amount of new

currency But it isn’t a method that central bank usually use cause it can lead to increase inflation, which means the money decreases its value, exchange rate crisis, public debt crisis

− Federal Reserve Open Market Operations

The primary way in which the central bank causes changes in the monetary

base is through its open market operations A purchase of bonds by the Fed is called

an open market purchase, and a sale of bonds by the Fed is called an open market sale Federal Reserve purchases and sales of bonds are always done through primary

dealers, government securities dealers who operate out of private banking institutions

Other Factors That Affect the Monetary Base are Float and Treasury deposits at the central bank When the Fed clears checks for banks, it often credits

the amount of the check to a bank that has deposited it (increases the bank’s reserves) before it debits (decreases the reserves of) the bank on which the check is drawn The resulting temporary net increase in the total amount of reserves in the banking system (and hence in the monetary base) caused by the Fed’s check-clearing process

is called float

When the U.S Treasury moves deposits from commercial banks to its account

at the Fed, leading to an increase in Treasury deposits at the Fed, it causes a deposit outflow at these banks and thus causes reserves in the banking system and the

monetary base to decrease Thus float (affected by random events such as the weather, which influences how quickly checks are presented for payment) and Treasury deposits at the Fed (determined by the U.S Treasury’s actions) both affect the monetary base but are not controlled by the Fed at all Decisions by the U.S Treasury to have the Fed intervene in the foreign exchange market also affects the monetary base

2.1.3.2 Affects to money supply through commercial bank

− Reserve Requirements

One way the central bank can influence the reserve ratio is by altering reserve requirements, the regulations that set the minimum amount of reserves that

banks must hold against their deposits Reserve requirements influence how much money the banking system can create with each dollar of reserves An increase in reserve requirements means that banks must hold more reserves and, therefore, can

loan out less of each dollar that is deposited As a result, an increase in reserve requirements raises the reserve ratio, lowers the money multiplier, and decreases the money supply

− The Discount Rate

The central bank can also increase the quantity of reserves in the economy

by lending reserves to banks Banks borrow from the central bank when they feel

they do not have enough reserves on hand, either to satisfy bank regulators, meet depositor withdrawals, make new loans, or for some other business reason

The discount rate is the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short-term basis-transactions known as borrowing at the “discount window.” A higher discount rate discourages banks from borrowing reserves from the central bank, thus the money supply will decrease

− Interest on Reserves

The interest rate paid on excess reserves acts like a floor beneath the federal funds rate That is, when a bank holds reserves on deposit at the central bank, they

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now pay the bank interest on those deposits The higher the interest rate on reserves, the more reserves banks will choose to hold Thus it led to lower money supply

2.2 The commercial bank

2.2.1 Overview of commercial bank

According to Law on Credit Institutions 2010, Commercial bank means a type

of bank which may conduct all banking operations and other business activities

individuals and institutions and make loans: commercial banks, savings and loan associations, mutual savings banks, and credit union

Functions of commercial bank

Role

and individuals, which helps to stimulate economic growth

2.2.2 How the commercial bank affects to the supply money?

When commercial banks lend money, they expand the amount of bank deposits The banking system can expand the money supply of a country beyond the amount created or targeted by the central bank, creating most of the broad money in

a process called the multiplier effect It is the creating money process.

Money creation is the process by which the money supply in an economy changes It involves a money multiplier, where every unit of new base money will multiply

The process of money creation:

Focus on 2 banks in the system: Bank A, Bank B Assume that all banks are required to hold reserves equal to 10% of their checkable deposits The quantity of

reserves banks are required to hold is called required reserves Banks may hold reserves in excess of the required level Because banks earn relatively little interest

on their reserves held on deposit with the central bank reserves, we shall assume that they seek to hold no excess reserves so it is loaned up To simplify the analysis further, we shall suppose that banks have no net worth; their assets are equal to their liabilities

Let us suppose that every bank in our imaginary system begins with $1,000

in reserves, $9,000 in loans outstanding, and $10,000 in checkable deposit balances held by customers The balance sheet of all banks would be like below

Reserves $1000

Loan $9000

Checkable deposit $10000

2.2.2.1 Deposit creation: the single bank

Bank A, like every other bank in our hypothetical system, initially holds reserves equal to the level of required reserves Now suppose one of A Bank’s customers deposits $1,000 in cash in a checking account The money goes into the bank’s vault and thus adds to reserves The customer now has an additional $1,000

in his or her account The A Bank’s balance sheet is given here Reserves now equal

$2,000 and checkable deposits equal $11,000 With checkable deposits of $11,000 and a 10% reserve requirement, A is required to hold reserves of $1,100 With reserves equaling $2,000, A has $900 in excess reserves

Reserves $2000

Loan $9000

Checkable deposits $11000

At this stage, there has been no change in the money supply When the

customer brought in the $1,000 and A put the money in the vault, currency in

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circulation fell by $1,000 At the same time, the $1,000 was added to the customer’s checking account Because A earns only a low interest rate on its excess reserves,

we assume it will try to loan them out Suppose A lends the $900 to one of its customers It will make the loan by crediting the customer’s checking account with

$900 Bank A’s outstanding loans and checkable deposits rise by $900 The $900 in checkable deposits is new money; Bank A created it when issuing the $900 loan The bank A’s balance sheet look like

Reserves $2000

Loan $9900

Checkable deposits $11900

2.2.2.2 Deposit creation: The banking system

The customer borrowing the $900 spend it, he will write a check to someone else, who is likely to bank at some other bank Suppose that A’s borrower writes a

check to a firm with an account at B Bank

Reserves $1100

Loan $9900

Checkable deposits

$11000

Reserves $1900 Loan $9000

Checkable deposits

$10900

With required reserve ratio 10%, Bank B finds itself with a $90 increase in required reserves, leaving it $810 of excess reserves Because bank B doesn’t want

to hold on excess reserves, it will make loans for the entỉre amount ($810) Its loans and checkable deposits will then increase by $810, but when the borrower spends the $810 of checkable deposits, they and the reserves at Bank B will fall back down

by this same amount Bank B’s balance sheet

Assets Liabilities

Reserves $1090

Loan $9810

Checkable deposits $10900

The $810 spent by the borrower from Bank B will be deposited in another bank (BankC) Consequently, from the initial $1000 increase of reserves in the banking system, the total increase of checkable deposits in the system so far is $2710

(= $1000 + $900 + $810) Following the same reasoning, if all banks make loans for the full amount of their excess reserves, further increments in checkable deposits will continue (at Banks C, D, E, and so on)

If the banks choose to invest their excess reserves in securities, the result is the same If Bank A had taken its excess reserves and purchased securities instead

of making loans, its T-account would have looked like this

Reserves $1100

Security $9900

Checkable deposits $11000

When the bank buys $9900 of securities, it writes a $9900 check to the seller

of the securities, who in turn deposits the $9900 at a bank such as Bank B Bank B’s checkable deposits increase by $990, and the deposit expansion process is the same

as before

2.2.3 The money multiplier and money supply

The multiple increase in deposits generated from an increase in the banking

10% required reserve ratio, the simple deposit multiplier is 10 More generally, the simple deposit multiplier equals the reciprocal of the required reserve ratio

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1

r

 = 

Where ΔD: change in total checkable deposits in the banking system

r: required reserve ratio

R: change in reserves for the banking systems△

Money multipliers: It is denoted by m, tell us how much the money supply changes for given change in the monetary base

not to use currency, then they deposits all their currency in banks

So money multipliers is calculated by below equation

1 m r

=

reserves ER so we can calculate Money multipliers

1 c m

+

= + + Where c: currency ratio ( c=C/D )

r: required reserve ratio

e: excess reserve ratio (e=ER/D)

2.2.4 The factors affect to money creation’s commercial bank

− Currency holdings

Checkable deposits undergo multiple expansions while currency does not Hence, when the customer tends to used more currency it also means the checkable deposits will decrease Therefore the reserve will go down and the ability of creating

money of commercial bank will decrease The money supply is negatively related

to currency holdings.

− Required reserve ratio