After reading in this module is expected that readers can understand:
1 purpose and role of government in the financial markets.
2 The function of money in a system of the State economy and financial system.
3 The role of central banks in the financial markets.
4 The factors that determine the supply of money in a country's economy.
5 The risks arising in the financial market system.
As we know that the role of government in an economy in a country is very dominant. Similarly, in any form of economic subsystem, the power of government as an authorized institution looks for real. Authority as a regulator (leg ... .. lator body) and also as executor (executive) can affect the operation of each form of the economy. Thus, the financial markets as one of the economic subsystem. Thus, the financial markets as one of the country perekonomiam subsystem will not loose (free) from the government's role. The problem is how much government intervention in every sector of the economy, depending on the political system that is treated in a country. Countries that have established such as the USA, such intervention of the financial market mechanism is not so dihendaki community. Conversely in a growing economy such as Indonesia, it is expected the government's involvement. Thus, how much government intervention in the financial sector in each country will not be the same. The reason, the government has a greater interest on the welfare of society as a whole rather than just the interests of the financial markets alone.
From another perspective, the financial markets of capital markets can be viewed as a mechanism of public savings into investments. Increasing investment and public savings will open up new industrial operations and also open new jobs. On the contrary result, the investment community will increase community living standards. If the community living standards and higher, will increase piula new demand and this will stimulate the emergence of a new innovation which will increase the need for new investment which is expected to improve the economy of a country and the world community.
Financial market system is a source of public borrowing in an economy. In addition, the financial markets is a place where the public funds in various forms of financial instruments. For example, in the form of stocks, bonds, option, future, and other securities. Given that financial instruments lauas perngaruh the country's economy, the political power of state governments set defined in the laws passed by legislative bodies in a country.
In order to regulate the economic system in general and economic sectors, especially government has two policies, namely: (1) (tax policy (fiscal policy) and (2) monetary policy (monetary policy). Operations and authority in implementing tax policy is held directly by finance minister. In conducting monetary policy, government power represented by the central bank (Bank Indonesia). Thus, the central bank oversees the supply of money in a country's economy. Therefore, the central bank has a direct relationship with financial markets in order to carry out policy country. As a political policy, a lot of problems that must be reviewed and considered by the clerks authority.
In this chapter, how the role of central banks as the government authorities in the financial markets will be discussed in more detail. Readers will get a brief so wide aspect should be considered in formulating monetary policy.
MONEY AND THE ROLE OF CENTRAL BANKS IN FINANCIAL MARKETS
Masterpiece of human creation is so large role but not understood by most people in this world is money. As a cultural product, the money was known only as instruments of exchange in the public life of the transaction. And money has such a big role in engineering the process of world economic system in modern life, which is not limited to a mere instrument of exchange. Although initially, the money created by the ancient culture as instruments of exchange, but now many engineering systems based on use-value instrument called money. So large a role in our lives, so before discussing the role of central banks in the financial markets need to understand first, what is meant by money.
In the discourse of human cultural history, the traders collectively denominated instruments need to replace the exchange process by way of barter. Gold and some other selected metals (at least the most easy to find the time), was chosen as the most adequate instrument. Based on the value of the precious metal content is created signs that called money exchange and exchanging instruments developed into a grateful public. However, gold and other metals are also elected barnag rare, and certainly will not be able mengjangkau needs more and more transactions are. These needs in turn encourage new engineering Menganti sheets of gold with the promise of equal value with gold. Then was born the era of paper money guaranteed by the state, which is basically a notepad (note debt / promise) of a country to its people. Governance in a country promising that the notes are worth the same as stated in nominal money, and can be exchanged at any time by pengunjukan money. In other words, money as a bearer notes, which apply to a country, though often times the circulation of these notes beyond the boundaries of the territory of a country (eg U.S. dollars, pounds, etc.).
The discussion above leads to the next question what is called the money. Does the definition of money in the ancient community life is still relevant to modern life today. Money is something that is generally acceptable for the settlement of a debt or obligation. In general, money is defined as something that can be a media exchange goods or services in trade transaction system.
All countries around the world have currency backed by government regulations or laws applicable in the country. So, money is an official bid accepted by creditors to debtors who are limited by law in conducting an obligation on all countries in the world. Besides the media exchange transaction, the money has several other functions. The functions are explained as follows:
Money is a standardØ measure of value. Means that the relative value of goods or services is determined by the media, called money. Understanding the relative value in the context of the standard size is the value of the public justification of the goods or services that are generally acceptable. Justifying the community formed by a mechanism applicable bargaining freely in the market. For example, a financier would buy shares of capital markets, obtain information that the stock price of Rp. 1000, - meaning the value of those shares that have been measured by the market is Rp. 1000.
money is a medium ofØ exchange. Money is used as a determinant of the amount and value of goods or services exchanged, based on the agreement of both parties. As a unit of measurement of value, money is a business transaction facility, a trusted and guaranteed to be reused in transactions with other parties. In a barter system, namely the exchange of goods with the goods, require face to face contacts between business communities. Barter Apda required meetings between people who buy and sell to each other and handed the goods received. As a result, barter trade has brought some difficulties including, transactions, storage, shipping goods from one to another. This becomes a problem when an item that can not be divided or the goods can not be taken. For example, the investors want to buy shares of capital markets, investors can only trade with money handed over. However, if the barter trade investors should look for sellers who want to have a stock of goods owned. It is very difficult for both the buyer and seller in barter trade. Thus creating easy money for all those who wants to exchange his wealth.
Money as a commodity.Ø Besides the money serves as a medium of exchange and the measurement value, at today's act also as a traded commodity to meet the needs of foreign currencies. However there is no state that is economically dependent willingly monetasi financial system to foreign countries. In addition, no single state monetary power can meet the needs of money in the world. This fact has led to difficult to form a denominational system that applies globally. Though the mechanism and operation of international trade membuthkan foreign currency needed for imports within a country. The need for foreign currency raises the demand to make money as a commodity world.
Various theories of money demand has been developed by the state how many experts / scientists, among others, Milton Friedmond and the classical economists. Although, there are various theories that were born, but the theory is a theory that Keynessians has banyk and discussed by a number of economists of the world. According mazab Keynessians, demand for money is not equal to the demand for goods and services. Money has a specific role or function as a medium of economic exchange. Demand for money is determined by the particular motive that is, the transaction motive, motive case, motive speculation, and investment motives.
1 purpose and role of government in the financial markets.
2 The function of money in a system of the State economy and financial system.
3 The role of central banks in the financial markets.
4 The factors that determine the supply of money in a country's economy.
5 The risks arising in the financial market system.
As we know that the role of government in an economy in a country is very dominant. Similarly, in any form of economic subsystem, the power of government as an authorized institution looks for real. Authority as a regulator (leg ... .. lator body) and also as executor (executive) can affect the operation of each form of the economy. Thus, the financial markets as one of the economic subsystem. Thus, the financial markets as one of the country perekonomiam subsystem will not loose (free) from the government's role. The problem is how much government intervention in every sector of the economy, depending on the political system that is treated in a country. Countries that have established such as the USA, such intervention of the financial market mechanism is not so dihendaki community. Conversely in a growing economy such as Indonesia, it is expected the government's involvement. Thus, how much government intervention in the financial sector in each country will not be the same. The reason, the government has a greater interest on the welfare of society as a whole rather than just the interests of the financial markets alone.
From another perspective, the financial markets of capital markets can be viewed as a mechanism of public savings into investments. Increasing investment and public savings will open up new industrial operations and also open new jobs. On the contrary result, the investment community will increase community living standards. If the community living standards and higher, will increase piula new demand and this will stimulate the emergence of a new innovation which will increase the need for new investment which is expected to improve the economy of a country and the world community.
Financial market system is a source of public borrowing in an economy. In addition, the financial markets is a place where the public funds in various forms of financial instruments. For example, in the form of stocks, bonds, option, future, and other securities. Given that financial instruments lauas perngaruh the country's economy, the political power of state governments set defined in the laws passed by legislative bodies in a country.
In order to regulate the economic system in general and economic sectors, especially government has two policies, namely: (1) (tax policy (fiscal policy) and (2) monetary policy (monetary policy). Operations and authority in implementing tax policy is held directly by finance minister. In conducting monetary policy, government power represented by the central bank (Bank Indonesia). Thus, the central bank oversees the supply of money in a country's economy. Therefore, the central bank has a direct relationship with financial markets in order to carry out policy country. As a political policy, a lot of problems that must be reviewed and considered by the clerks authority.
In this chapter, how the role of central banks as the government authorities in the financial markets will be discussed in more detail. Readers will get a brief so wide aspect should be considered in formulating monetary policy.
MONEY AND THE ROLE OF CENTRAL BANKS IN FINANCIAL MARKETS
Masterpiece of human creation is so large role but not understood by most people in this world is money. As a cultural product, the money was known only as instruments of exchange in the public life of the transaction. And money has such a big role in engineering the process of world economic system in modern life, which is not limited to a mere instrument of exchange. Although initially, the money created by the ancient culture as instruments of exchange, but now many engineering systems based on use-value instrument called money. So large a role in our lives, so before discussing the role of central banks in the financial markets need to understand first, what is meant by money.
In the discourse of human cultural history, the traders collectively denominated instruments need to replace the exchange process by way of barter. Gold and some other selected metals (at least the most easy to find the time), was chosen as the most adequate instrument. Based on the value of the precious metal content is created signs that called money exchange and exchanging instruments developed into a grateful public. However, gold and other metals are also elected barnag rare, and certainly will not be able mengjangkau needs more and more transactions are. These needs in turn encourage new engineering Menganti sheets of gold with the promise of equal value with gold. Then was born the era of paper money guaranteed by the state, which is basically a notepad (note debt / promise) of a country to its people. Governance in a country promising that the notes are worth the same as stated in nominal money, and can be exchanged at any time by pengunjukan money. In other words, money as a bearer notes, which apply to a country, though often times the circulation of these notes beyond the boundaries of the territory of a country (eg U.S. dollars, pounds, etc.).
The discussion above leads to the next question what is called the money. Does the definition of money in the ancient community life is still relevant to modern life today. Money is something that is generally acceptable for the settlement of a debt or obligation. In general, money is defined as something that can be a media exchange goods or services in trade transaction system.
All countries around the world have currency backed by government regulations or laws applicable in the country. So, money is an official bid accepted by creditors to debtors who are limited by law in conducting an obligation on all countries in the world. Besides the media exchange transaction, the money has several other functions. The functions are explained as follows:
Money is a standardØ measure of value. Means that the relative value of goods or services is determined by the media, called money. Understanding the relative value in the context of the standard size is the value of the public justification of the goods or services that are generally acceptable. Justifying the community formed by a mechanism applicable bargaining freely in the market. For example, a financier would buy shares of capital markets, obtain information that the stock price of Rp. 1000, - meaning the value of those shares that have been measured by the market is Rp. 1000.
money is a medium ofØ exchange. Money is used as a determinant of the amount and value of goods or services exchanged, based on the agreement of both parties. As a unit of measurement of value, money is a business transaction facility, a trusted and guaranteed to be reused in transactions with other parties. In a barter system, namely the exchange of goods with the goods, require face to face contacts between business communities. Barter Apda required meetings between people who buy and sell to each other and handed the goods received. As a result, barter trade has brought some difficulties including, transactions, storage, shipping goods from one to another. This becomes a problem when an item that can not be divided or the goods can not be taken. For example, the investors want to buy shares of capital markets, investors can only trade with money handed over. However, if the barter trade investors should look for sellers who want to have a stock of goods owned. It is very difficult for both the buyer and seller in barter trade. Thus creating easy money for all those who wants to exchange his wealth.
Money as a commodity.Ø Besides the money serves as a medium of exchange and the measurement value, at today's act also as a traded commodity to meet the needs of foreign currencies. However there is no state that is economically dependent willingly monetasi financial system to foreign countries. In addition, no single state monetary power can meet the needs of money in the world. This fact has led to difficult to form a denominational system that applies globally. Though the mechanism and operation of international trade membuthkan foreign currency needed for imports within a country. The need for foreign currency raises the demand to make money as a commodity world.
Various theories of money demand has been developed by the state how many experts / scientists, among others, Milton Friedmond and the classical economists. Although, there are various theories that were born, but the theory is a theory that Keynessians has banyk and discussed by a number of economists of the world. According mazab Keynessians, demand for money is not equal to the demand for goods and services. Money has a specific role or function as a medium of economic exchange. Demand for money is determined by the particular motive that is, the transaction motive, motive case, motive speculation, and investment motives.
- Transaction motive. Transactions motive is determined by the needs of people in everyday life. An amount of cash demanded is a function of the price index and the current price level. Some amount of money demanded is determined by the needs of individuals to meet the shopping needs of daily life. For example, to buy food and clothes.
- Motives in case. Precaution motive is to meet the specific needs that can not be predicted. One also as a precaution when there is a decline in income or the expected results (return). For example, the investors realized that the bond price is continuously declining, he would not choose an investment bond. The investors will only invest if the price of bonds is not too much decreased.
- Motive speculation. Prospective investors use the market expectations that will come good in the capital market and money markets before memb ... .. decision to perform a variety of investments. According to Keynes's speculative motive done in order to gain advantage by wearing oengetahuan good about the market future. Motive speculation also performed as the belief that prospective investors do not have a capital loss on the capital market and money markets. Capital markets will invest when the price of a bond or other securities, but will sell the low price of bonds or other securities at the time of increase. The amount of funds for speculative motives will depend on stock prices or bond interest rates. Meanwhile, in the case of a motive of precaution perbahan direction of interest rates is known, according to the motive Keyness speculative funds or financial investment. Depending on the expected outcome of an investment. So, for the motives that prompted speculation money is a function of the interest rate.
- Worth of storage function. A sometimes things do not have the function as stored value, because value and physical qualities of a good will with force menyesut time. Even the most barnag not be saved, and besides that, the security level of storing an item is not necessarily guaranteed. In spite of the awareness, that the value of money in the long run tends to fall in the case of structural inflation conditions.
- The function of money as a standard of deferred payment. The role of money as a standard storage value is closely linked to the standard form of deferred payment. Mislanya, investors borrow a tool of production (eg: Dumptruck) to its business operations. At pengemablian car, more money may represent the value of the borrowed car is than a few times a car that has been used. Use of Dumptruck some time, will not reflect the same conditions as the transfer back, because the process of shrinkage, usage, and justification of different market values. However the value of equipment that has been used will be different from the previously used, although at the time of delivery did not look back a bit flawed.
CAPITAL MARKET STABILITY
The stability of capital markets play a vital role in supporting the role of central banks in an economy. As has been learned in Chapter 1, explained that the capital market is the meeting point between supply with demand for securities, where the individuals or entities that have excess funds (surplus funds) invested in companies (entities) that requires funding. However, to realize this, the public must have confidence in financial institutions, so that they are interested in investing. From the other side, if the interest rate fluctuates and the price is too securities followed, akn community lost confidence in the financial institutions. As a result, financial institutions can be destroyed and an economy in recession can strktural. In the end ... .. the source of capital funding will be lost and ultimately economic growth will decline.
To avoid this problem the central bank provides funds to the merchant (issuer) if experiencing financial difficulties. It helps the traders to purchase and sale of securities in a market. For example, if the price level increases or decreases are drastic, it is a bad thing in an economy. The central bank has the intervention (intervention) to create stability in interest rates. Banks take action (create policy) is a way to change the interest rate to the traders or institutional borrowers. Central bank intervention will result, capital markets become stable. Although in practice, found a stable economic conditions in realtif.
OBJECTIVES OF CENTRAL BANK (Government)
Point of view and interests as stipulated in the investor and the government's objectives in terms of operation of a very different capital markets. Investors aim to maximize profits and minimize risk, otherwise the government aims to improve people's welfare in particular and improve economic growth in general. Since the second world war developed countries recognize that the public will play a very important in a country's economy. Lately, the developing countries are also experiencing the same thing. Therefore, the government should intervene (intervention) in the forces of supply and demand to support the community desires. Governments are concerned that existing resources can be utilized as much as possible for the public interest. Therefore, the government's interest to develop the capital markets and also to the protection of society to the effect of capitalistic economies can be reduced.
To explain the role of central banks in an economy like the model depicted in Figure 4.1 next page. The central bank, monetary policy affects interest rates and securities prices. This directly affects the expectations of investors. Investors in making investment decisions to consider the interest rates and securities prices. Both affect the level of capital costs. The central bank as an institution of government authorities to supervise financial institutions monetary instruments. As a result, the growth of financial institutions controlled by the central bank. If the central bank makes monetary policy tight, so customers who want the funds from commercial banks experienced difficulties. From the other side, institutional investors, commercial banks used to perform various transactions.
If the central bank's policy does not benefit the investors will avoid the financial institution. As a result, decreases the money supply and have an influence on a country's economic objectives. For example the rate of inflation rises, decreasing the money supply and ultimately the level of exploitation of resources also fell.
The government has four very important goals in central bank operations, namely:
1. Overall utilization of resources (full employment of resources)
2. Stability of the normal rate of inflation
3. Stability of economic growth
4. A stable balance of payments
The stability of capital markets play a vital role in supporting the role of central banks in an economy. As has been learned in Chapter 1, explained that the capital market is the meeting point between supply with demand for securities, where the individuals or entities that have excess funds (surplus funds) invested in companies (entities) that requires funding. However, to realize this, the public must have confidence in financial institutions, so that they are interested in investing. From the other side, if the interest rate fluctuates and the price is too securities followed, akn community lost confidence in the financial institutions. As a result, financial institutions can be destroyed and an economy in recession can strktural. In the end ... .. the source of capital funding will be lost and ultimately economic growth will decline.
To avoid this problem the central bank provides funds to the merchant (issuer) if experiencing financial difficulties. It helps the traders to purchase and sale of securities in a market. For example, if the price level increases or decreases are drastic, it is a bad thing in an economy. The central bank has the intervention (intervention) to create stability in interest rates. Banks take action (create policy) is a way to change the interest rate to the traders or institutional borrowers. Central bank intervention will result, capital markets become stable. Although in practice, found a stable economic conditions in realtif.
OBJECTIVES OF CENTRAL BANK (Government)
Point of view and interests as stipulated in the investor and the government's objectives in terms of operation of a very different capital markets. Investors aim to maximize profits and minimize risk, otherwise the government aims to improve people's welfare in particular and improve economic growth in general. Since the second world war developed countries recognize that the public will play a very important in a country's economy. Lately, the developing countries are also experiencing the same thing. Therefore, the government should intervene (intervention) in the forces of supply and demand to support the community desires. Governments are concerned that existing resources can be utilized as much as possible for the public interest. Therefore, the government's interest to develop the capital markets and also to the protection of society to the effect of capitalistic economies can be reduced.
To explain the role of central banks in an economy like the model depicted in Figure 4.1 next page. The central bank, monetary policy affects interest rates and securities prices. This directly affects the expectations of investors. Investors in making investment decisions to consider the interest rates and securities prices. Both affect the level of capital costs. The central bank as an institution of government authorities to supervise financial institutions monetary instruments. As a result, the growth of financial institutions controlled by the central bank. If the central bank makes monetary policy tight, so customers who want the funds from commercial banks experienced difficulties. From the other side, institutional investors, commercial banks used to perform various transactions.
If the central bank's policy does not benefit the investors will avoid the financial institution. As a result, decreases the money supply and have an influence on a country's economic objectives. For example the rate of inflation rises, decreasing the money supply and ultimately the level of exploitation of resources also fell.
The government has four very important goals in central bank operations, namely:
1. Overall utilization of resources (full employment of resources)
2. Stability of the normal rate of inflation
3. Stability of economic growth
4. A stable balance of payments
The fourth main objective is a basic problem that must be considered and described in the implementation of central bank functions. In order to achieve the four goals the central bank to interest rate policy. The central bank affects the amount of the interest rate prevailing in an economy. As it is complete will be discussed in other chapters of interest rates, money supply and its effect on interest rates. FACTORS THAT DETERMINE THE SUPPLY OF MONEY
How the central bank's role in influencing the money supply in an economy? This question underlies the descriptions in the following sections, with the aim to explain how a central bank to place the various forms of financial instruments and in order to establish a system engineering economy. There are several tools that are usually used as an instrument of monetary policy. State officials can use various financial instruments that, in formulating the country's financial policies. In general, the factors that affect the supply of money in an economy are as follows:
How the central bank's role in influencing the money supply in an economy? This question underlies the descriptions in the following sections, with the aim to explain how a central bank to place the various forms of financial instruments and in order to establish a system engineering economy. There are several tools that are usually used as an instrument of monetary policy. State officials can use various financial instruments that, in formulating the country's financial policies. In general, the factors that affect the supply of money in an economy are as follows:
- In a modern economy, the commercial banks play an important role in determining the money supply at an economic system. Typically commercial banks provide loans to discount facilities or individual institutions. The policy will be of interest to the institutions or individuals that may increase demand for loans in an economy. In conducting its operations as financial institutions, some of the needs of commercial banks borrow funds from the central bank. Funds with interest (cost of money) are cheap channeled back into society, as a commercial loan. If the central bank's discount to the commercial banks, the financial market mechanism will encourage the commercial banks will give discount to its customers as well. This will lead to demand money from commercial banks will also rise. Thus the interest rate can be used to encourage investment in the community. Interest rate loan given the central bank to commercial banks as described above is called the bank rate, so, if the bank rate rises, commercial banks would find it difficult to borrow funds from the central bank. In turn, the community also experienced difficulty borrowing funds from commercial banks. This has the impact of financial markets, especially the capital market.
- In addition to the above, the central bank also has other instruments that can be used to adjust the amount of money offered and circulation. Through the leader of last resort (the late leader) and the tools of monetary policy, such as moral suasion and legal central bank reserve requirements can actively draw the circulation of money or otherwise encourage the circulation of money. Can be likened to the central bank's position as the human heart that automatically push and suck blood circulation throughout the human body.
- Operation of government securities. Circulation and the supply of money can also be influenced by government securities (treasury bills). Typically, the commercial banks bought a lot of securities issued by central banks. If the commercial banks will enter into the central bank. Basically, the government purchases those securities is the process of withdrawing money from circulation in the community. Instead of commercial banks only bought a little paper, the circulation of money coming into the central bank also fell as well. commercial banks in such cases can be replaced with the role of capital market investors.
- Foreign exchange trading as a commodity. The circulation of money may be due to the visit / foreign tourist arrivals, exports of goods and services to other countries, and foreign investment. This causes the circulation of money increases. Considering foreign currency must be exchanged for local currency to pay for services and the cost of production. If trade between countries increases, the incoming foreign currency in a country the local currency should be exchanged. Although the exchange was not done immediately the central bank, but in the end of the transaction will be completed as well the central bank. Conditions will also occur on the other hand, if the outbound tourists, imports, and foreign investment increased. The need to suck the circulation of foreign currency local currency in a country's economy. Using financial market mechanism, the central bank can control the amount of money in circulation
