Reading # 17: Brazilian central bank reduced bank reserves, resulting in a lower money supply.
–> I dont get it. Why would the monetary policy result to a lower money supply? Isnt the policy more of expansionary rather than contractionary? Why would this reduce consumption and business investment spending? I also dont get the impact of the policy on fixed income and equity securities. Thanks.
I cannot look at the reading to see what it is exactly referring, but maybe you’re thinking of REQUIRED reserves instead of normal bank reserves?
Reducing required reserves will expand the money supply, since banks will take existing reserves and lend them out. So I don’t think that’s what it is.
I think they’re saying is that the central bank reduced its OWN assets held in reserves. Central bank reserves are special, because they relate to the money supply differently than other banks.
When the central bank reduces its reserves, it sells “stuff” (gold, domestic and foreign bonds, etc.) that is currently in reserve and receives money/currency in return. That money then effectively disappears from the money supply because it is not available for anyone to use.
At some point in the future, the central bank may reverse this and expand the money supply by going out and buying “stuff” (usually the safest assets it can think of) and creating money to pay for it. That money is then available to circulate and be used by the rest of the economy.