Money, prices and exchange rates

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Money, prices and exchange rates Door Mind Map: Money, prices and exchange rates

1. Money supply and demand

1.1. The money supply

1.1.1. M1 - Money is the sum of Cash plus checking account deposits in banks

1.1.2. M2 - M1 + Savings deposits and CDT

1.1.3. M3 - M2 + Trust deposits and bonds

1.1.4. The monetary base or base money It is the sum of the liabilities of the central bank. Passives = Cash + Bank reserves

1.1.5. Lace Rate - Banks must keep a reserve at the central bank for each peso received from their clients in order to return the money as they require.

1.1.6. Rediscount rate - Rate charged by the bank of the republic to commercial banks for credits

1.2. The demand for money

1.2.1. Nominal demand for money - The amount of cash plus deposits people want, It depends positively on prices and Real GDP and negatively on the interest rate

1.3. Equilibrium in the money market

1.3.1. The interest rate or opportunity cost of money, prices and the product are the variables in charge of driving the demand for money towards equilibrium.

1.3.2. Quantitative theory - The greater the amount of money, the higher the prices

2. Exchange policy

2.1. Dollar offer

2.1.1. It is given by exports of goods and services, income from credits contracted with abroad, foreign investment and remittances from Colombians living abroad.

2.2. Demand for dollars

2.2.1. It is given by imports, payments related to the foreign debt, the investment of Colombians abroad and the profits that the multinational companies repatriate.

2.3. Optimal level of the exchange rate

2.3.1. Investors

2.3.2. Government

2.3.3. The trade balance

2.3.4. Devaluation and revaluation

2.4. Choice of exchange regime

2.4.1. Fixed exchange rate system Monetary unions: Countries sacrifice their own currency and adopt a common currency. Example, The Euro Zone Dollarization: The country that adopts the currency of another country renounces having its own currency and monetary policy Convertibility funds: The country maintains its own currency, but fully supports it with the currency of another country to give credibility to its monetary policy. Fixed but adjustable exchange rate: The central bank sets the currency's parity but does not promise not to change it Moving or sliding belts: It allows the exchange rate to fluctuate around a central parity. The width of the bands can be set from narrow levels to levels that leave plenty of room for you to move freely

3. Policy alternatives

3.1. Uncovered interest parity

3.1.1. Investors must yield the same regardless of the currency in which they are made

3.2. The Impossible Trinity - Aspects of Central Bank Interest

3.2.1. Control of monetary aggregates

3.2.2. Control of the exchange rate

3.2.3. Free mobility of capital

3.3. The target inflation model

3.3.1. It suggests that the authorities should not focus their attention on the control of aggregates and money supply, but rather set an inflation target.

4. Monetary policy in Colombia

4.1. Central banks emerged as instruments to exercise a monopoly on the issuance of money, manage international reserves and facilitate the payment system

4.2. One of the main functions of the central bank is the management of monetary policy, whose main objective is to preserve the value and confidence of the national currency.

4.3. Institutional aspects

4.3.1. The Minister of Finance, the manager of Banco de la Republica and five independent members are part of the Board that exercises the monetary and exchange authority in the country.

4.3.2. The objective of the Banco de la República is to control infaltation in an environment of economic growth and low unemployment.

4.3.3. With the 1991 constitution, the independence of the Banco de la Republica is achieved and, as an important point, that related to direct government financing, prohibiting this case from being presented

4.4. Political strategies in Colombia

4.4.1. Three different exchange regimes. Fixed exchange rate system adjusted daily (1967 - 1991) Hybrid system that essentially combined a fixed exchange rate with a band within which the exchange rate could fluctuate (1991 - 1999) The current regime of exchange rate floating that has allowed greater autonomy in the management of momentary policy

5. Results of monetary policy in Colombia

5.1. Inflation

5.1.1. The reduction of inflation to single digit levels. The exchange rate float and the change in the monetary policy strategy considerably increased the credibility of the infalction goal set by the Board of Directors of the Banco de la República.

5.1.2. In the short term, the quantity of money is not the only determinant of inflation

5.2. Stabilization of the economic cycle

5.2.1. Monetary policy in times of crisis should seek to stimulate the economy through an expansionary monetary policy, increasing real money balances, to recativate aggregate demand.

5.2.2. In Colombia, monetary policy has tended to be pro-cyclical