Monetary Statistics M

Jan Gottschalk
TAOLAM
This training material is the property of the IMF – Singapore Regional Training Institute (STI) and is intended for the use in STI
courses. Any reuse requires the permission of the STI.
Central Bank of Myanmar - TAOLAM
“Introduction to Financial Programming”
December 16-20, 2013 Yangon, Myanmar
I. Monetary S
M Statistics
i i
II. Money
y Creation
III. Summary
• Scope of Financial
Statistics
• Central Bank Accounts
• Commercial Bank
Accounts
• Monetary Survey
Monetary statistics accounts

are critical for analysis of
monetary conditions and
f
formulation
l i as well
ll as
implementation of monetary
p
policy
y
Understanding links between

monetary y policy
p y and inflation,,
real economic activity, external
account and foreign exchange
rate will require going beyond
monetary accounts
Financial system
Banking system Other financial

(Monetary institutions
survey)
Central bank Commercial

(CBM) banks
 Central bank = CBM

 Commercial banks =
 State-owned
State owned commercial banks
(MEB, MFTB, MICB, MADB)
 Private commercial banks
 Other financial institutions =
 Microfinance institutions
 Financial leasing companies
(Oriental Leasing Co. Ltd.)
p
 Insurance companies (Myanmar
y Insurance)
7
RM = NFA + NDA
Assets Liabilities
Net foreign assets (NFA) Reserve money (RM)
Net domestic assets (NDA) Currency issued
Net claims
N l i on the
h
Held in banks
government (NCG)
Claims on commercial banks Held outside banks
Deposits (reserves) of
Claims on other resident
commercial banks with
sectors
central bank
Other items net Other deposits

Assets
 Net foreign assets
 holding the country’s foreign reserves (exchange

rate
t policy)
li )
 Net claims on government
 acting as banker of the government

 Claims on commercial banks
 regulating the money supply

(monetary policy)
Liabilities
 Currency issued
 Issuing of currency
 Deposits off commerciall banks

b k with
h centrall b
bank
k
regulating the money supply
((monetaryyp
policy)
y)
As we will see below when we consider the endogenous money

creation pprocess,, some components
p of reserve money y have an
important influence over the creation of bank credit to the rest of
the economy
 Bank credit is important for aggregate demand conditions, and
it is a key part of broad money
 Hence, in a monetary targeting regime control over reserve
money gives the central bank an instrument to steer broad
money iinto the
h d i d di
desired i
direction (i di
(intermediate target)) and
d
influence demand, which matters for inflation (ultimate target)
Exercise 1:
 Use monetary table in Article IV report to portray the
CBM balance sheet for 2011/12 in the form depicted
in the previous slide
 Analyze the relative importance of the individual
asset and liability components by expressing them in
percent of reserve money
 How does the composition of the CBM balance sheet
compare with that of the Bank of Thailand?
Composition of Reserve Money - CBM Assets Composition of Reserve Money -

(in % of RM) CBM Liabilities (in % of RM)
120%
120%
Net foreign
100% assets
100%
Claims on Deposits of
80% 80%
central commercial
governmentt (net)
( t) banks with
60% 60%
Claims on
CBM
commercial
40% Currency in
banks 40%
Other circulation
20% 20%
Other items net

0% 0%
in % of RM in % of RM
-20% -20%
Composition of Reserve Money - Composition of Reserve Money

BoT Assets (in % of RM) - BoT Liabilities (in % of RM)
400% 400%
300% 300%
200% 200%
100% 100%
0% 0%
-100% in % of RM -100% in % of RM
-200% -200%
-300% -300%
Net foreign assets Currency in circulation
Net domestic assets Deposits of commercial banks with CBM

 Example: On the first day of its operations,

operations central bank decides
to issue the currency (Kyat 100) in exchange for foreign currency.
Assets Liabilities
CB’s Net Foreign Assets 100 Base money 100
Foreign exchange 100
CB’s Net Domestic Assets
 Example: Central bank sells gov’t securities (worth Kyat 30).

Assets Liabilities
CB’s NFA 100 Base money 70
Foreign exchange 100
CB’s NDA -30
N t ddomestic
Net ti credit
dit -30
30
15
Exercise 2:
 Use the 2011/12 CBM balance sheet to look at the
effect of a purchase of 800 million kyats in foreign
currency in exchange for domestic currency
 Next, look at the effect of a sale of 700 million kyats
in government securities
 Calculate by how much the individual components of
the CBM balance sheet changed between 2011/12
and 2012/13
 Can the above transactions explain part of the actual
changes? What likely happened?
Difference CBM Balance Sheet 2012/13 - 2011/12

Assets 1,261.4 Liabilities 1,260.0
Net foreign assets 850 4

850.4 Reserve money 1 260 0
1,260.0
Foreign assets 2,390.0 Currency in circulation 899.0
Foreign liabilities 1,539.6 Deposits of commercial banks with CBM 361.0
Net domestic assets 411.0

Domestic credit -174.0
Claims on central government (net) -713.0
Claims on commercial banks 539.0
Other 0.0
Other items net 585.0
18
Assets Liabilities
Net foreign assets (NFA) Deposits
Net domestic assets ((NDA)) Demand deposits

p
Claims on the central bank Time and saving deposits
o Currency held in vaults Foreign currency deposits

o Deposits at the central bank Liabilities to the central bank
Domestic credit
o Net credit to the government
o Credit to private sector
Other items net

Commercial Bank Balance Sheet Example

Central bank sells Kyat 100 in treasury bills to commercial banks:
Commercial Bank Balance Sheet

Assets Liabilities
Liabilities
Net Foreign Assets …
… Deposits
Deposits …
Net Domestic Assets …
0 Demand
Demanddeposits
deposits …
Claims on central bank …
-100
100 Time
Timeand
andsaving
savingdeposits
deposits …
Currency held in vaults Foreign
Foreigncurrency
currencydeposits
deposits …
Reserves …
-100 Liabilities
Liabilitiesto
tothe
thecentral
centralbank
bank …
Domestic credit …
+100
To the government …
+100
To other resident sector …
…
Other items net …
…
Commercial Bank Balance Sheet Example (cont.)

Central
Ce t a ba
bank se
sellss Kyat
yat 100
00 in ttreasury
easu y b
billss to O
ODCs:
Cs
Central Bank Balance Sheet
Assets Liabilities
Net Foreign Assets … Reserve money (RM) -100
Net Domestic Assets -100 Currency issued …
Net claims on the gov. -100 Held in banks …
Claims on commercial … Held outside banks …

banks
Claims on other res. … Deposits of -100
sector commercial banks
Other items net … Other deposits
p …
Exercises for Commercial Bank Balance Sheet

Exercise 3:
 Replicate this example in the provided Excel
spreadsheet
E
Exercise
i 4 4: what
h t other
th options
ti does
d th central
the t l bank
b k
have to reduce reserve money?
 Consider foreign g exchange g sales
Exercise 5:
 Work through the balance sheet implications of the
di
directt provision
i i off credit
dit bby th t lb
the central k tto
bank
commercial banks
Central Bank
Assets Liabilities
Net Foreign Assets Reserve money (RM)
Net Domestic Assets Currency issued
Net claims on the government Held in banks
Claims on commercial banks Held outside banks
Claims on other resident sector Deposits of commercial banks
Commercial Banks
Assets Liabilities
Net Foreign Assets Deposits
Net Domestic Assets Demand deposits
Currency held in vaults Foreign currency deposits
Deposits at the central bank Liabilities to the central bank
Domestic credit
Other items net
Central Bank
Assets Liabilities
Net Foreign Assets Reserve money (RM)
Net Domestic Assets Currency issued
Monetary survey
Net claims on the government Held in banks
Assets Liabilities
Claims
Cl i on commercial
i l banks
b k Held
H ld outside
t id bbanks
k
Net Foreign Assets Broad money (M2)
Claims on other residential sector Deposits of commercial banks
Of the central bank Narrow money (M1)
Of the commercial banks Currency in circulation
Net Domestic Assets Demand deposits
Commercial Banks
Net credit to the government Quasi money
Assets Liabilities
Credit
Net on the
Foreign other resident sector
Assets Time and saving deposits
Deposits
Other
Net items Assets
Domestic net Foreigndeposits
Demand currency deposits

Currency held in vaults Foreign currency deposits
Reserve d
R deposits
it att th
the central
t l Li biliti to
Liabilities t the
th central
t l bank
b k
bank
Domestic credit
Other items net
E
Exercise
i 6
Consolidate the central bank and commercial bank
balance sheets in exercise 2 and create the
corresponding monetary survey!
Monetary Survey
Assets 590.0 Liabilities 590.0
Net foreign assets 370.0 Broad money (M2) 590.0

Foreign assets 370.0
Foreign liabilities 0.0 Narrow money (M1) 430.0
C
Currency iin circulation
i l ti 180 0
180.0
Net domestic assets 220.0 Demand deposits 250.0
Domestic credit 220.0 Quasi money 160.0
Claims on central government
(net) 20.0
0.0 Time and saving deposits 110.0
0.0
Credit to private sector 200.0 Foreign currency deposits 50.0
Other items net 0.0
Assets=Liabilities
Assets 590.0
Liabilities 590.0
Should be the same
Monetary Survey in Myanmar

Why is M2 “money”?
money ?
Because it is what the economy
can use to make payments and
e
economic
mi transactions:
t ti
• Currency in circulation:
“cash”
• deposits constitute a means
of payment, as one can write
h k ((nott so common iin
checks
Myanmar), or make
transfers, or withdraw cash
against
i d
deposits
i ((almost)
l )
upon demand
No!
N !
 Monetary survey does not
exist
i t iin a vacuum
 Link to other sectors
 In our exercises, private
sector deposits and credit to
private sector was completely
unaffected by any changes to
central bank balance sheet
This is not right!
 Endogenous
Endogeno s money
mone creation
II.A Impact of Other Sectors on Monetary Survey

External Sector
Monetary survey
Assets Liabilities
Net foreign assets
Currency in
Accumulation of foreign circulation
reserves in BOP
“money flowing in from Deposits

abroad”
NFA
M1 & M2
Fiscal Sector
Monetary survey
Assets Liabilities
Net domestic assets
Currency in
E.g., increase n fiscal spending circulation
that is bank-financed
“government injects Deposits

liquidity into economy by
buying goods and services”
M1 & M2
Net credit to government increases
NDA
II.B Endogenous Money Creation

Example for boundless endogenous money creation: a bank extends
credit of Kyat 100, which fuels further deposit and credit creation …
Increase in Increase in
Deposits Deposits
Bank 1 Bank 2 Bank 3 $200
$100
Deposit
Credit Deposit
$100 Credit
d Credit
C dit
$100 $100
$100 $100
$100
$ $100
$
Private Private Private Private
sector sector sector sector
1 2 3 4
33
Assets Liabilities
Net foreign
f assets (NFA)
( ) Reserve money (RM)
( )
Net domestic assets (NDA) Currency issued
Reserves of commercial
Net claims on the
banks with central bank
government (NCG)
(deposits with CB)
Claims on commercial banks Required reserves
Claims on other resident

Excess reserves
sectors

Now: a bank extends credit of Kyat 100 with 10% reserve

requirements and currency-to-deposit ratio of 15 %
Hold reserves Hold
Bank 1 Bank 2 $8.7 Bank 3 reserves
$6.8
Deposit
Credit Deposit
$87 Credit
d Credit
C dit
$100 $68.1
$78.3 $61.3
$100
$ $78.3
$
Private Private Private Private
sector sector sector sector
1 2 3 4
Hold currency Hold currency

$13 $10.2
35
End-result: increase in reserve money by Kyat 100 leads to

increase in broad money by Kyat 460 (deposits 400 +
currency 60). That is, increase in broad money
exceeds increase in reserve money by factor of 4 6!
4.6!
Central Bank Increase Reserve money

$100
T-bills Currency
$100 $100
Hold reserves of
Banking sector
$40
Credit Deposits
$460 $400
Private sector
Hold currency for
$60
36
The extent of endogenous money creation is governed by the money

multiplier which links broad money (M2) to reserve money (RM):
M 2  m  RM
C D

M2 CD D D  c 1
m  
RM C  R C  R cr
D D
where C = currency in circulation, R = Reserves held at CB
(commercial bank deposits at CB) and D = deposits of private
sector with commercial banks)
banks).
The money multiplier is a function of
• c = currency-to-deposits ratio (behavioral variable)
• r = reserve
reserve-to-deposits
to deposits ratio (policy variable)
Fundamental determinants of the money

multiplier:
• reserve requirements decided by the central bank 
matters for reserve-to-deposits ratio
• Willingness of banks to hold excess reserves
(liquidity risks, credit risk, foregone interest
earnings)  matters for reserve-to-deposits ratio
• Willingness of households and firms to hold cash
instead of deposits (liquidity risks, foregone interest
earnings))  matters for
f currency-to-deposits
d ratio
E
Exercise
i 7
Replicate this process in the supplied Excel spreadsheet
in order to verify that the money multiplier indeed
summarizes the endogenous money creation process!
d = 0.10=10/87
Deposit req.
q reserves-to-deposits
p ratio Hold res.
$87 $8.7
Credit $100 to
households
c = 0.15=13/87 Credit
currency-to- $78.3
deposits
p ratio
Hold currency
$13
 Monetary
M accounts are critical
i i l for
f
analysis of monetary conditions and
formulation as well as implementation of
monetary policy
 Money creation
M i iis partly
l li
linked
k d to
developments in other sectors and partly
an endogenous process that can be
influenced by monetary policy
Thank You!
This presentation provides you

with a basic introduction to the
monetary accounts that
h we willill
put into practice soon!

Monetary Statistics M

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Jan Gottschalk

Monetary statistics accounts

Understanding links between

Banking system Other financial

Central bank Commercial

 Central bank = CBM

Net foreign assets (NFA) Reserve money (RM)

Net domestic assets (NDA) Currency issued

Claims on commercial banks Held outside banks

Other items net Other deposits

 holding the country’s foreign reserves (exchange

 acting as banker of the government

 regulating the money supply

 Deposits off commerciall banks

As we will see below when we consider the endogenous money

Composition of Reserve Money - CBM Assets Composition of Reserve Money -

Other items net

Composition of Reserve Money - Composition of Reserve Money

Net foreign assets Currency in circulation

Net domestic assets Deposits of commercial banks with CBM

 Example: On the first day of its operations,

 Example: Central bank sells gov’t securities (worth Kyat 30).

Difference CBM Balance Sheet 2012/13 - 2011/12

Net foreign assets 850 4

Net domestic assets 411.0

Net foreign assets (NFA) Deposits

Net domestic assets ((NDA)) Demand deposits

Claims on the central bank Time and saving deposits

o Currency held in vaults Foreign currency deposits

o Net credit to the government

o Credit to private sector

Other items net

Commercial Bank Balance Sheet Example

Commercial Bank Balance Sheet

Commercial Bank Balance Sheet Example (cont.)

Net Domestic Assets -100 Currency issued …

Net claims on the gov. -100 Held in banks …

Claims on commercial … Held outside banks …

Exercises for Commercial Bank Balance Sheet

Claims on the central bank Time and saving deposits

Net foreign assets 370.0 Broad money (M2) 590.0

Monetary Survey in Myanmar

II.A Impact of Other Sectors on Monetary Survey

“money flowing in from Deposits

“government injects Deposits

II.B Endogenous Money Creation

Net domestic assets (NDA) Currency issued

Claims on commercial banks Required reserves

Claims on other resident

Other items net Other deposits

Now: a bank extends credit of Kyat 100 with 10% reserve

Hold currency Hold currency

End-result: increase in reserve money by Kyat 100 leads to

Central Bank Increase Reserve money

The extent of endogenous money creation is governed by the money

Fundamental determinants of the money

This presentation provides you

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