Corporate Fin Mgt NDLM.PDF

(Nora) #1

German Commercial Banks: Euro-dollar deposits have been created. The assets
associated with these deposits can now be used to make loans.


Money supply in U.S. remains constant.


Money supply in Germany has increased by the size of the Euro-dollar deposit except if it
was in exchange for DM’s in which case the money supply remains constant.


Balance of payments of the U.S. on the liability basis has canceling entries. On the
official basis there is an improvement as claims of official institutions on the U.S. are
reduced.


Balance of payments of Germany deteriorates on an official transaction basis as official
institutions’ claims on foreigners decrease.


Transaction No. 3.


Chase: There is only a transfer of deposit ownership from the German Commercial bank
to the French importer.


German Commercial Banks: Claims on Chase decrease by $ 90 while Euro-dollars.


Money supply in the U.S. remains constant.


Money supply in Germany remains constant.


Balance of payments of the U.S. is unaffected.


Balance of payments of Germany has a capital outflow in the form of loans to foreigners
(French) and an inflow as deposits at Chase decrease-no net effect.


The French balance of payments has a capital inflow as resident has increased its debts
and an outflow as the foreign assets have increased – no net effect.


Transaction No. 4.


Chase: There is only a transfer in ownership of deposits from the French importer to the
German exporter.


Importer and Exporter: Have their debt cancelled by the acquisition of the German
exporter of dollar balances.


Money supply in U.S. and Germany remain constant.


Balance of payments of U.S. is unaffected.

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