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Monetary policy and trends in the money supply .. An alternative vision
07/26/2012 0:00
D. The appearance of Mohammed
if the money the Iraqi Central Bank 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 multiple of bank credit affected by the cash basis (no balance sheet impact 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, and because of unilateral experienced by the Iraqi economy and its dependence on government oil revenues which amount to about 97 percent of inflows to the country's foreign currency of such proceeds shall be approximately 90 percent of the revenues of the federal budget at the 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 and magnified through the release in cash after the swap central bank money as liabilities in foreign currency purchased from the government as assets within the balance sheet of the Central Bank. a so-by the nutrition feedback positive 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 that this multiplier credit is currently only at best (one) only slightly, which indicates match money supply with the cash basis.
as the monetary system in Iraq, particularly the system of exchange rates, which represents the rate of exchange in which the external value of money, and because of the correlation between oil revenues and foreign currency monetary issuance (after those returns that turned in large part to foreign reserves, 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 criticized, the source 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 multiple credit, especially if Malahzna high surpluses in the coffers of the banks or current accounts with the Central Bank confirmed that the conservative nature of banks in credit expansion because of the monetary conditions of the country's current and 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 even loaned really they are Atold double credit significantly often in the creation of 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 system arrangements currency board currency board arrangements, a system that equalized the national currency in foreign currency increased by covering 100 percent with the disruption of multiple 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, the current which weakened from the work of 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 will signal interest has 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.
as the achievement of interest equilibrium in the economy will prepare an intermediate target or the installer's nominal forecasts inflationary nominal anchor to address the surplus of aggregate demand 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 to sell part of its assets to foreign central bank thus enhancing the bank's reserves, including, but would be affected by these trends, as we noted in advance the nature of monetary policy
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