Post on 31-Dec-2015
description
ECON 304Money and Banking
Instructor: Bernard Malamud
–Office: BEH 502
Phone (702) 895 –3294
Fax: 895 – 1354
»Email: bernard.malamud@unlv.edu
Website: www.unlv.edu/faculty/bmalamud
Office hours: TR 12 - 1 pm; 2:30 - 3:30 pm; and by appointment
Money, Banking, and Financial Markets
The role of money and monetary policy in The role of money and monetary policy in the economythe economy
TRUSTTRUST
How financial markets such as bond, stock How financial markets such as bond, stock and foreign exchange markets workand foreign exchange markets work
TRUSTTRUST
How financial institutions such as banks and How financial institutions such as banks and insurance companies workinsurance companies work
TRUSTTRUST
A A securitysecurity (financial instrument) is a claim on (financial instrument) is a claim on the issuer’s future income or assetsthe issuer’s future income or assets
A A bondbond is a debt security that is a debt security that promisespromises to to make specified payments over timemake specified payments over time
– An An interest rateinterest rate is the cost of borrowing or the is the cost of borrowing or the price paid for the rental of fundsprice paid for the rental of funds
Common stockCommon stock represents a share of represents a share of ownership in a corporationownership in a corporation
– A share of stock is a claim on the earnings and A share of stock is a claim on the earnings and assets of the corporationassets of the corporation
Banking and Financial InstitutionsBanking and Financial Institutions
Financial Intermediaries—institutions that Financial Intermediaries—institutions that borrow funds from people who have saved and borrow funds from people who have saved and make loans to other people and businessesmake loans to other people and businesses
Banks—accept deposits and make loansBanks—accept deposits and make loans
Other Financial Institutions—insurance Other Financial Institutions—insurance companies, finance companies, pension funds, companies, finance companies, pension funds, mutual funds and investment banksmutual funds and investment banks
Financial InnovationFinancial Innovation– The information age and e-financeThe information age and e-finance
– DerivativesDerivatives
– SecuritizationSecuritization
Money and Business CyclesMoney and Business CyclesRecessions (unemployment) and booms (inflation) affect Recessions (unemployment) and booms (inflation) affect all of usall of us
Monetary Theory ties changes in the money supply to Monetary Theory ties changes in the money supply to changes in aggregate economic activity and the price levelchanges in aggregate economic activity and the price level
Money and InflationMoney and InflationThe aggregate price level is an average price The aggregate price level is an average price of goods and services in an economyof goods and services in an economy
A continual rise in the price level (inflation) A continual rise in the price level (inflation) affects all economic playersaffects all economic players
Monetary and Fiscal PoliciesMonetary and Fiscal Policies
Monetary policy is the management of the money Monetary policy is the management of the money supply and interest ratessupply and interest rates– Conducted by the Federal Reserve Bank (Fed)Conducted by the Federal Reserve Bank (Fed)
Fiscal policy is government spending and taxation Fiscal policy is government spending and taxation – Any deficit must be financed by borrowing … Any deficit must be financed by borrowing …
government borrowing affects interest ratesgovernment borrowing affects interest rates
Bernanke’s FocusBernanke’s Focus
Inflation TargetingInflation Targeting– Adjust “real” rate of interest with eye on pre-Adjust “real” rate of interest with eye on pre-
announced target rate of inflationannounced target rate of inflation– Wiggle room for other objectives/emergenciesWiggle room for other objectives/emergencies– Transparency and accountabilityTransparency and accountability
Joined by Mishkin on Board of GovernorsJoined by Mishkin on Board of Governors
Other Governors:Other Governors:www.federalreserve.govwww.federalreserve.gov/bios/bios
– Oppose Oppose DeDeflationflation
Great Depression and clogged credit channelGreat Depression and clogged credit channel
Core Principles of Money and BankingCore Principles of Money and Banking
• Time has Value Time has Value Interest rateInterest rate• Risk Requires CompensationRisk Requires Compensation• Financial decisions are based on Financial decisions are based on
Information and on Information and on TRUSTTRUST• Markets set prices and allocate Markets set prices and allocate
resources resources • Stability reduces risk and spurs Stability reduces risk and spurs
enterpriseenterprise
Where to Find the NumbersWhere to Find the Numbers
http://research.stlouisfed.org/fred2/http://research.stlouisfed.org/fred2/www.federalreserve.gov/releases/www.federalreserve.gov/releases/ www.economist.comwww.economist.comwww.bea.doc.govwww.bea.doc.govhttp://http://www.gpoaccess.gov/eopwww.gpoaccess.gov/eop//
Function of Financial MarketsFunction of Financial MarketsChannel funds from economic players that Channel funds from economic players that have saved surplus funds to those that have a have saved surplus funds to those that have a shortage of fundsshortage of funds
Promotes economic efficiency by producing Promotes economic efficiency by producing an efficient allocation of capitalan efficient allocation of capital
– increases production increases production
Improves consumer well-beingImproves consumer well-being
– allows them to time purchases betterallows them to time purchases better
Structure of Financial MarketsStructure of Financial Markets
Debt and Equity MarketsDebt and Equity Markets
Primary and Secondary MarketsPrimary and Secondary Markets– Investment Banks Investment Banks underwriteunderwrite securities in primary securities in primary
marketsmarkets– Brokers and dealers work in secondary marketsBrokers and dealers work in secondary markets
Exchanges and Over-the-Counter (OTC) MarketsExchanges and Over-the-Counter (OTC) Markets
Money and Capital MarketsMoney and Capital Markets– Money markets deal in short-term debt instrumentsMoney markets deal in short-term debt instruments– Capital markets deal in longer-term debt and Capital markets deal in longer-term debt and
equity instrumentsequity instruments
Internationalization of Financial MarketsInternationalization of Financial Markets
Foreign Bonds—sold in a foreign country and Foreign Bonds—sold in a foreign country and denominated in that country’s currencydenominated in that country’s currency
Eurobond—bond denominated in a currency other Eurobond—bond denominated in a currency other than that of the country in which it is soldthan that of the country in which it is sold
Eurocurrencies—foreign currencies deposited in Eurocurrencies—foreign currencies deposited in banks outside the home countrybanks outside the home country– Eurodollars—U.S. dollars deposited in foreign banks Eurodollars—U.S. dollars deposited in foreign banks
outside the U.S. or in foreign branches of U.S. banksoutside the U.S. or in foreign branches of U.S. banks
World Stock MarketsWorld Stock Markets
Function of Financial Intermediaries: Indirect Function of Financial Intermediaries: Indirect FinanceFinance
Lower transaction costsLower transaction costs– Economies of scaleEconomies of scale– Liquidity servicesLiquidity services
Reduce RiskReduce Risk– Risk Sharing (Asset Transformation)Risk Sharing (Asset Transformation)– DiversificationDiversification
Asymmetric InformationAsymmetric Information– Adverse Selection (before the transaction)—more likely Adverse Selection (before the transaction)—more likely
to select risky borrowerto select risky borrower– Moral Hazard (after the transaction)—less likely Moral Hazard (after the transaction)—less likely
borrower will repay loanborrower will repay loan
Regulation of the Financial SystemRegulation of the Financial System
To increase the information available to investors:To increase the information available to investors:– Reduce adverse selection and moral hazard Reduce adverse selection and moral hazard
problemsproblems– Reduce insider tradingReduce insider trading
To ensure the soundness of financial intermediaries:To ensure the soundness of financial intermediaries:– Restrictions on entryRestrictions on entry– DisclosureDisclosure– Restrictions on Assets and ActivitiesRestrictions on Assets and Activities– Deposit InsuranceDeposit Insurance– Limits on CompetitionLimits on Competition– Restrictions on Interest RatesRestrictions on Interest Rates