Transcript Chapter 1 An Introduction to Money and the

ECON 304
Money and Banking
Instructor:
Bernard Malamud
–Office: BEH 502
Phone (702) 895 –3294
Fax:
895 – 1354
»Email: [email protected]
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 economy
TRUST
How financial markets such as bond, stock
and foreign exchange markets work
TRUST
How financial institutions such as banks and
insurance companies work
TRUST
A security (financial instrument) is a claim on
the issuer’s future income or assets
A bond is a debt security that promises to
make specified payments over time
– An interest rate is the cost of borrowing or the
price paid for the rental of funds
Common stock represents a share of
ownership in a corporation
– A share of stock is a claim on the earnings and
assets of the corporation
Banking and Financial Institutions
Financial Intermediaries—institutions that
borrow funds from people who have saved and
make loans to other people and businesses
Banks—accept deposits and make loans
Other Financial Institutions—insurance
companies, finance companies, pension funds,
mutual funds and investment banks
Financial Innovation
– The information age and e-finance
– Derivatives
– Securitization
Money and Business Cycles
Recessions (unemployment) and booms (inflation) affect
all of us
Monetary Theory ties changes in the money supply to
changes in aggregate economic activity and the price level
Money and Inflation
The aggregate price level is an average price
of goods and services in an economy
A continual rise in the price level (inflation)
affects all economic players
Monetary and Fiscal Policies
Monetary policy is the management of the money
supply and interest rates
– Conducted by the Federal Reserve Bank (Fed)
Fiscal policy is government spending and taxation
– Any deficit must be financed by borrowing …
government borrowing affects interest rates
Bernanke’s Focus
Inflation Targeting
– Adjust “real” rate of interest with eye on preannounced target rate of inflation
– Wiggle room for other objectives/emergencies
– Transparency and accountability
Joined by Mishkin on Board of Governors
Other Governors:
www.federalreserve.gov/bios
– Oppose Deflation
Great Depression and clogged credit channel
Core Principles of Money and Banking
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Time has Value  Interest rate
Risk Requires Compensation
Financial decisions are based on
Information and on TRUST
Markets set prices and allocate
resources
Stability reduces risk and spurs
enterprise
Where to Find the Numbers
http://research.stlouisfed.org/fred2/
www.federalreserve.gov/releases/
www.economist.com
www.bea.doc.gov
http://www.gpoaccess.gov/eop/
Function of Financial Markets
Channel funds from economic players that
have saved surplus funds to those that have a
shortage of funds
Promotes economic efficiency by producing
an efficient allocation of capital
– increases production
Improves consumer well-being
– allows them to time purchases better
Structure of Financial Markets
Debt and Equity Markets
Primary and Secondary Markets
– Investment Banks underwrite securities in primary
markets
– Brokers and dealers work in secondary markets
Exchanges and Over-the-Counter (OTC) Markets
Money and Capital Markets
– Money markets deal in short-term debt instruments
– Capital markets deal in longer-term debt and
equity instruments
Internationalization of Financial Markets
Foreign Bonds—sold in a foreign country and
denominated in that country’s currency
Eurobond—bond denominated in a currency other
than that of the country in which it is sold
Eurocurrencies—foreign currencies deposited in
banks outside the home country
– Eurodollars—U.S. dollars deposited in foreign banks
outside the U.S. or in foreign branches of U.S. banks
World Stock Markets
Function of Financial Intermediaries: Indirect
Finance
Lower transaction costs
– Economies of scale
– Liquidity services
Reduce Risk
– Risk Sharing (Asset Transformation)
– Diversification
Asymmetric Information
– Adverse Selection (before the transaction)—more likely
to select risky borrower
– Moral Hazard (after the transaction)—less likely
borrower will repay loan
Regulation of the Financial System
To increase the information available to investors:
– Reduce adverse selection and moral hazard
problems
– Reduce insider trading
To ensure the soundness of financial intermediaries:
– Restrictions on entry
– Disclosure
– Restrictions on Assets and Activities
– Deposit Insurance
– Limits on Competition
– Restrictions on Interest Rates