contemporary economic issues

Maastricht convergence criteria

public deficit should not be more than 3% of GDP

stabilisers

There are downturns (inc public spending, decrease in revenues), so we need stabilisers - Progressive income tax systems,, social welfare

They are automatic changes in fiscal policy to increase aggregate demand

FISCAL POLICY boost

EXPANSIONARY

1)Increase g-t spending

2)decrease tax
G and t and Tr

REVIVES the economy , - > deficit

monetary policy

действуем на предложение денег

1) ценные бумаги (BONDS, SECURITIES) (цб покупает, у банка больше денег, больше кредитов выдает )

2) норма обязательных резервов (понижается)

3)учетная ставка (понижается )

when does g-t issue bonds?

when it needs to finance the deficit

discretionary ?

активно проводимая монтажная политика в зависимости от цикла
недисреционная - автоматическая
темп роста денежной массы соответствует росту ввп

CROWDING OUT/IN

the effect of government spending on INVESTMENT
1) gt borrows-less money-less investment

2)gt spends- more money - more investment

public debt

all the debt of gt ,he public authorities and the organizations that depend directly on them.

the deficit is

the sum of past deficits

Government's Budget Balance

revenues-expenditure

the formula for deficit

DEBTt-1 - budget balance t

PUBLIC DEBT INSTRUMENTS

откуда деньгииии
1) Долг банка bank loan
2) облигации (MAIN)

3)казначейский депозит (ово дерут деньги компании у себя ) treasury deposit

bonds are repaid

in fine - at the end

interest rate of a bond is called

a sovereign rate

so, a sovereign rate for a sovereign bond

the yield curve

connection between sovereign rate and maturity
1 year 2% interest
30 years 5% interest
because money is locked for longer , higher risks

theri’s explaining the yield curve

1) expectation theory - if they expect rates to rise in the future, they'll demand higher rates for longer-term bonds today.

2) segmentation theory (what you prefer : banks prefer short-term bonds while insurance companies prefer long-term bonds
3)normal offset theory (we need (higher interest)premium if we go for longer maturity )
nvestors therefore demand to receive a liquidity premium (term spread) for holding bonds with

long maturities.

why sovereign rates not the same for countries?
which country benchmark?
what do others pay in regards to the bench mark

risk of default is different
we need lowest risk of default - germant
they pay risk premium

we ask rating agencies

A sovereign debt

when no faith in country

To stem the crisis, the States of the euro zone have notably tried to reduce their public deficit...

• ...but it was ultimately the European Central Bank that made it possible to avoid the bankruptcy of several States within the euro zone by stopping the market mechanisms that were then at work, mainly through the purchase of sovereign bonds

functions of money

1)store of value
2) trade
3) unit of account

money aggregates

• M1 = fiat currency (coins and notes) + demand deposits (DAV)

• M2 = M1+ passbook accounts + term deposits with a term < 2 years

• M3 = M2+ repos delivered + money market Collective Investment Undertakings (CIUs) securities + Negotiable Debt Securities (TCN in French) issued by credit institutions with a duration < 2 years

miner

• A miner is a person who makes the computing power of his computers available to the computer network used by the cryptocurrency to certify the authenticity of the tokens trades

advantages of crypto

• Autonomy: there is no central control authority, cryptocurrencies were also designed to free themselves from central banks and state control

• Security: the cryptographic keys that manage the operation of cryptocurrencies are supposed to be inviolable

• Transparency: operations recorded in the blockchain are visible to everyone

• Transaction costs: they are low because there is only one intermediary, only the minors of the transaction are paid

crypto and money functions

1)store of value - no, too volatile

2)trade - no

3)unit of account no, nly a few online sales sites have denominated their prices in cryptocurrencies

_типа плохо

stablecoin

• are crypto-assets whose value is attached or linked to that of another currency or a raw material

• The company which manages a stablecoin must therefore have currency reserves fiat to cover all of the tokens issued

Fiat money is government-issued currency that isn't backed by a physical commodity

two types of cb digital currencies

• итербанк и ритейл

• An interbank digital euro: it would be used exclusively by central banks and commercial banks for the

  settlement of transactions on assets “tokenized” between them.

• The digital euro would circulate directly on the blockchain for the settlement of these transactions

• Aretaildigitaleuro:thegeneralpubliccouldsendorreceivedigitaleuropaymentsanywhereinthe euro zone without having to use a banking service

digital euro

• A digital euro guaranteed by the European Central Bank would still have exactly the same value as a one- euro coi

info calculated

• InFrance,inflationiscalculatedeachmonthfromtheConsumerPriceIndex(CPI),byINSEE

cpi 2 options

1) CPI t - CPI t-1/ CPI t-1 = inflation rate
2) weighted cog in current year / weighted cog in base year

example
Given:

• Base year (2022): Total spending €8,000

• Current year (2023): Total spending €9,600

• Base year = 100

Calculation: CPI 2023 = (€9,600/€8,000) × 100 = 1.2 × 100 = 120

european target inflation

inflation rate around 2% per year

where is inflation from

• InFebruary2022,theRussianmilitaryinterventioninUkrainereinforcedtheriseinpricesofmany raw materials (oil, gas, cereals)

• TheredropinUkrainianexports,particularlyagriculturalproducts,accentuatedtheriseintheprice of food goods

• ThesanctionsagainstRussiahaveforcedmanycountriestoreorganizetheirsupplies,• Andthelackofalternativesleadingtocomplexandcostlysituations

• TheprimarycausesofinflationinEuropewerethereforeexternal:

  • facedwiththeincreaseinthepriceofenergyandrawmaterials,

  • thecostsofimportsincreasedforhouseholdsanddomesticbusinesseswereforcedtoincreasetheir selling price

MRO

main refinancing operation

• More like a weekly loan to banks

• Banks temporarily sell assets to ECB and agree to buy them back in one week

• The money is temporary and must be repaid

• Used for short-term liquidity management

refi repo

banks borrow at this rate from the central bank
REFI (ECB's rate):

• This is the rate at which the European Central Bank lends to commercial banks through the weekly MROs we just discussed

• It's the main policy rate in Europe

REPO (FED's rate):

• This is the equivalent rate in the US, where banks borrow from the Federal Reserve

• "REPO" stands for repurchase agreement (the same mechanism we discussed - temporary selling and buying back of assets)

euribor

interbank borrowing (benchmarks)
€STR (current European overnight rate):

• Shows what interest rate banks charge each other for 1-day loans

• Based on actual transactions from about 50 banks

• Replaced EONIA in 2019 as the main reference rate

EURIBOR:

• For longer loans between banks in Europe

• Different rates for different time periods (1 month to 12 months)

• Like €STR but for longer periods

standing facilities

1. Deposit Facility:

• Like a savings account at the central bank

• Banks can put extra money here overnight

• It's totally safe (no risk)

• Gets a low interest rate set by central bank

2. Marginal Lending Facility:

• Like an emergency overnight loan from central bank

• Banks use this when they need quick cash

• Usually at a higher interest rate

key

OntheECB’skeyratecalls:
• Theminimumsubmissionrateforrefinancingoperations(

• The deposit facility rate:3.75%
- REFI rate:4.25%(
• Marginal lending facility rate:4.50%(

interest rate corridor

Marginallendingrate>REFIrate>depositfacilitiesrate
• The difference between the marginal lendingf acilities rateandthedepositfacilitiesrateiscalled

interest rate corridor

bank intermediation and transformation function

Let me explain bank intermediation simply:

Banks act as a middleman (intermediary) between two groups:

1. People with extra money (savers/depositors)

2. People who need money (borrowers)

The "transformation activity" means banks convert:

• Short-term deposits (like savings accounts that can be withdrawn anytime)

• Into longer-term loans (like 30-year mortgages)

maturity transformation

Bank's Position:

• Gets money IN: Short-term deposits (people can withdraw anytime)

• Puts money OUT: Long-term loans (takes years to get back)

net interest margin

how banks make money
How Banks Make Money:

• Collects higher interest on loans (say 5%)

• Pays lower interest on deposits (say 1%)

• The difference (4%) is the "net interest margin"

intermediation rate

The intermediation rate is a percentage that shows how much of the economy's financing goes through financial intermediaries (like banks) versus direct market financing.

For example: If total financing in economy = $1000

• Narrow rate: If $600 is bank loans → 60% intermediation rate

• Broad rate: If $600 bank loans + $200 financial institution securities → 80% intermediation rate

core inflation

info MINUS the food and energy sectors

transmission channels

Interest Rate Channel: Central bank rates directly affect borrowing costs for households and businesses, influencing spending and investment.

Exchange Rate Channel: Interest rates affect currency strength, which impacts exports and imports.

Wealth Effect Channel: Interest rates affect asset prices (like stocks and houses), changing how wealthy people feel and thus their spending.

Expectations Channel: Central bank decisions shape how people and businesses expect the economy to perform, affecting their current decisions.

change in disposable income

: Δ Purchasing power ≈ Δ GDI - Δ CPI
income change - inflation change

When a central bank provides "forward guidance", it primarily aims to influence

Market expectation

which factor is NOT contributing to current inflation in Europe?

wage increases

What is the main limitation of the Preferred Habitat Theory? A) It cannot explain rising yield curves

can’t explain yield curve inversions

корщина

• InFrance,therepresentativeconsumerbasketincludes 110,000 good sand servicesdividedinto 1600 product families.

why targeting not 0%

scared of deflation

was most significantly impacted by monetary policy tightening

real estate

what happened to real estate after covid

cheaper