New Economic Perspectives

By Eric Tymoigne

(A quick note: I noticed that the M&B posts get posted on other blogs. If you want me to respond to you, you should comment at NEP.)

MONETARY BASE AND THE BALANCE SHEET OF THE FED.

Post 2 examined the balance sheet of the central bank:

Now that we have an understanding of how the balance sheet of the Fed works, it is possible to go into the details of how the Fed operates in the economy in terms of monetary policy.

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By Eric Tymoigne

[Revised 1/18/16 – updated t-account images]

Post 1 reviewed basic balance-sheet mechanics. This post begins to apply them to the Federal Reserve System (Fed).

Balance Sheet of the Federal Reserve System

For analytical purpose, the balance sheet of the Fed can be presented as follows:

Figure 1. A Simplified Balance Sheet of the Federal Reserve System

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By Eric Tymoigne

I struggled a few years to get an M&B course together. It lacked coherency and students had difficulty to link the different parts of the course. A good part of the problem comes from the M&B textbooks that, besides having outdated presentations, are a disparate collection of chapters without a coherent core. So I gave up with textbooks and went my own way, and comprehension dramatically increased among my students.

The core of the financial system consists of financial documents and among them are balance sheets. Balance sheets provide the foundation upon which most of an M&B course can be taught: monetary creation by banks and the central bank, nature of money, financial crises, securitization, financial interdependencies, you name it, it has to do with one or several balance sheet(s). As Hyman P. Minsky used to note, if you cannot put your reasoning in terms of a balance sheet there is a problem in your logic.

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