Monetary policy and trends in the money supply .. An alternative vision

07/26/2012 0:00

D. The appearance of Mohammed Saleh

If the money Central Bank of Iraq issued and traded a cash basis of base money, which is considered as the liabilities of the central bank capable of generating or creating money by doubling bank credit to form an essential component of money supply, which originates or creates usually by a multiplier bank credit affected by the cash basis (no the impact of the balance sheet of the Central Bank to double credit through open market operations) which confirms that the banks are traditionally creative criticism through the multiplier, but the impact and control of the cash basis of it ..

If Masaht this hypothesis, the money supply is an external variable exogenous variable.

In other words, will be subject to double credit to the direct effects of the cash basis of the reference interest rate and balance sheet of the Central Bank, which both represent the goals of operational short-term monetary policy operational target which depends indirect means of operations of the open market and facilities-based deposit and lending.

But as is typical because of the unilateral and experienced by the Iraqi economy and its dependence on oil revenues, government which amount to about 97 percent of inflows to the country's foreign currency of such proceeds shall be approximately 90 percent of the budget revenues at the federal exception of loans and debt different.

As about 60 percent or less of Gross Domestic Product (GDP). In the absence of other flows, especially the private sector in foreign currency which does not pose any importance, it has become the country co-exist really on the resource state the first of the oil revenues, the mechanism that created the interlinked strong influence between the components of View Cash and undergoing factors of the demand for cash, as it has become the components of money supply and in particular the currency in circulation outside the central bank and currency reserves in the banks of the internal variables endogenous variable affected by macroeconomic variables fundamental, in particular GDP and the oil from it in particular to make the money supply variable internally as we noted that the liquidity of the economy they have to create a growing and release cash through direct trade-off after central bank money as liabilities in foreign currency purchased from the government as assets within the balance sheet of the Central Bank.

a so-positive feedback feeding him positive feedback-

And the creation of money through multiple credit has become today in the weakest point in the history of the country's monetary and credit multiplier that is currently only at best (one) only slightly, which indicates a match with the cash money supply basis.

Also, the monetary system in Iraq, particularly the system the exchange rate which represents the rate of exchange in which the external value of money, and because of the correlation between oil revenues in foreign currency and monetary issuance (after he turned those returns in large part to the foreign reserves of the monetary authority), the system of exchange rates may change gradually over the floating exchange rate system to the drainage system is very persistent ..

Stating again that the double bank credit equal to one and issued currency which is similar to the money supply eventually become covered with foreign currency by 100 percent or more, according to the exchange rate and change throughout the last term.

And despite the fact that open market operations through the auction of foreign currency to influence the levels of liquidity and stability across the mechanism of sterilization is very high, but it can not have happen vacuum cash in Iraqi dinars are in any case all Matzhbh of liquidity Iraqi dinar remains less than the size of monetary issuance, although the severity of the intervention of the central bank in the money market no central market for buying and selling foreign currency, which is one of the largest markets, leading to the money market, because the government continues to fuel purchases of the dinar traded through the foreign currency at its disposal to meet the needs of the public budget.

So to be the source of the criticism that continues to trade internally regardless of the auction sales in foreign currency and sterilization processes and absorption of liquidity.

Thus, the currency in circulation outside banks, which along with cash in the coffers of banks important part of the cash basis remains weak in the generation and creation of money (money supply) through a double credit, especially if Malahzna surplus high in the coffers of the banks or current accounts with the Central Bank, which confirmed conservative nature of banks in credit expansion in the monetary conditions of the country because of the current and the potential for quick profit secured from risk by participating in an auction of foreign currency..

Taking into account that the local currency in circulation outside the banks is the other leak externally weakens the ability to create money amounting to rate nearly 70 percent of the money supply tight (consisting of currency in circulation outside banks and current deposits of public banks) and in any case all of the cash deposits in banks various forms is the excess liquidity in their vaults and Atkarz only in a narrow range, although it is really lent to credit Atold doubly significant in creating much money or generate money supply.

On the basis of the above, the drainage system in Iraq, or the monetary system is rather closer to the currency board system arrangements currency board arrangements, a system that equalized the national currency in foreign currency increased by 100 percent coverage with a double disruption of bank credit to a large extent.

Thus, the cancellation of an auction of foreign currency and the transfer of the auction the central bank central to the government and the generation mechanism directly through the sale of the Ministry of Finance of foreign currency to the public through the mediation of banks (ie, generation of supermarket alternative outside the central bank) must lead to a fundamental change in monetary policy for Iraq : firstly, it will make the money supply more Milana to become a variable external exogenous controlled by monetary policy, rather than control the behavior of cash demand, current and which weaken the work of the central bank policy in achieving the ranks of more accurate and less expensive to achieve economic stability and financial stability together.

Second, and notwithstanding the above, if Macamt government introduced its assets reserve of foreign currency to local banks, the banks will face quite a difficulty in the organization of cash flows cash flows, which could turn the banks to borrow from the Central Bank of Iraq, and then change direction of the market Open to take another turn, a strong direct dealing in securities and domestic public debt instruments of monetary nature, which is quasi money, and money orders Khawwalat Treasury bonds and central bank in addition to discount commercial paper to provide liquidity.

And then interest rates would signal an important and eloquent in monetary policy may compensate for the same role played by the reference exchange rate under the central market of foreign currency now.

Also, interest rates reach equilibrium in the economy would be a target as a mediator or the installer of the nominal nominal anchor inflationary expectations to respond to excess aggregate demand in the economy in order to achieve the objectives of monetary policy to stabilize.

The third one present, and, as we noted, the money supply will increase through the creation of credit by a double credit for it (more than one lot) which makes the cash basis through open market operations more effective to double credit to adjust the levels of liquidity.

And enhancing the power of monetary policy in achieving the depth financial and indirect impact of credit activities to serve the stability and economic growth.

Finally, the government may face problems in irregular cash flows for the banks depending on the impact of monetary policy and direction, whether radical or is expansive responsive.

Which may have public finances between now and then for the sale of assets by foreign central bank to bank reserves, which enhances them, but will be affected by these trends, as we noted in advance the nature of monetary policy and its impact on money supply, whether responsive or militant.

Thus, central bank can be offered directly to the banks (market decentralized exchange) some reserves when he finds that the exchange rate has gone out of balances in order to achieve stability and does not prevent the central bank itself to buy foreign currency of that market (decentralization), particularly transfers and inflows of foreign exchange foreign flows away from the domain of government.


Conclusions

* The transformation of an auction the central bank as a market centralized and made him custody of the government and the conduct of its mechanisms through one of the commercial banks, will change the nature of the monetary system off and turn it from a fixed exchange or semi arrangements currency board system to a flexible exchange changed the exchange rate according to supply and demand in the money market .

Yet in spite of that would allow the monetary authority to intervene from time to time to adjust the exchange rate and ensure the stability of the solutions according to set them.

And daily intervention in the exchange market must be completed for the benefit of the emergency intervention of the Central Bank when needed to regulate the stability of the money market.

* Shift open market operations to adjust the levels of liquidity as a tool of operational objectives for monetary policy and the direction of the stock will lead to a deepening of the money market and build a strong foundation for financial intermediation outside the current mechanisms that linked brokerage banking intermediation in the sale and purchase of foreign currency to overcome its operations.

C - Finally, it is possible for monetary policy to influence the levels of liquidity through the role of a reference interest rate, and will affect cash basis in the nature of the multiplier cash generator for the money supply to achieve the objectives of monetary policy stable, and will be enhanced mechanical moving cash from the operational objectives to the goals, intermediate and influential in the surplus demand, but by generating interest rate equilibrium to take center stage in the stability of the internal value of money and achieve the objectives of monetary policy after it was changing a minor in light of monetary policy, the current which is the exchange rate equilibrium is the intermediate target to rein in inflationary expectations binoculars to spend overall and sustain inflation and then fold centers stability, something that the current monetary policy was able to succeed in meeting the objectives of stability.


http://www.alsabaah.com/ArticleShow.aspx?ID=32000