Post on 25-Dec-2015
transcript
Chapter 1Chapter 1
Why Study Money, Why Study Money, Banking, and Banking, and
Financial Markets?Financial Markets?
http://www.youtube.com/watch?v=YmwwrGV_aiE
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http://www0.gsb.columbia.edu/faculty/fmishkin/http://www0.gsb.columbia.edu/faculty/fmishkin/
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AppetizersAppetizers
What are interest rates?What are interest rates?Why are they important?Why are they important?How different interest rates are related to How different interest rates are related to
each other?each other?How can “the government” control interest How can “the government” control interest
rates?rates?Why does it control them?Why does it control them?Should it?Should it?
http://research.stlouisfed.org/publications/mt/page9.pdf
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Why Study Money, Banking, and Why Study Money, Banking, and Financial MarketsFinancial Markets
To examine how financial markets such as To examine how financial markets such as bond, stock and foreign exchange markets bond, stock and foreign exchange markets workwork
To examine how financial institutions such To examine how financial institutions such as banks and insurance companies workas banks and insurance companies work
To examine the role of money in the To examine the role of money in the economyeconomy
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Financial MarketsFinancial Markets
Markets in which funds are transferred Markets in which funds are transferred from people who have an excess of from people who have an excess of available funds to people who have a available funds to people who have a shortage of fundsshortage of fundsBond marketBond marketStock marketStock marketForeign exchange marketForeign exchange market
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The Bond MarketThe Bond Market
A security (financial instrument) is a claim A security (financial instrument) is a claim on the issuer’s future income or assetson the issuer’s future income or assets
A bond is a debt security that promises to A bond is a debt security that promises to make payments periodically for a specified make payments periodically for a specified period of timeperiod of time
An interest rate is the cost of borrowing or An interest rate is the cost of borrowing or the price paid for the rental of fundsthe price paid for the rental of funds
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Interest Rates on Interest Rates on Selected BondsSelected Bonds
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The Stock MarketThe Stock Market
Common stock represents a share of Common stock represents a share of ownership in a corporationownership in a corporation
A share of stock is a claim on the earnings A share of stock is a claim on the earnings and assets of the corporationand assets of the corporation
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S & P 500S & P 500
http://finance.yahoo.com/?u.http://finance.yahoo.com/?u.
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International FinanceInternational Finance
Financial markets have become increasingly Financial markets have become increasingly integrated throughout the world. integrated throughout the world.
The international financial system has The international financial system has tremendous impact on domestic economies:tremendous impact on domestic economies: How a country’s choice of exchange rate policy affect How a country’s choice of exchange rate policy affect
its monetary policy?its monetary policy? How capital controls impact domestic financial systems How capital controls impact domestic financial systems
and therefore the performance of the economy?and therefore the performance of the economy? Which should be the role of international financial Which should be the role of international financial
institutions like the IMF?institutions like the IMF?
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The Foreign Exchange MarketThe Foreign Exchange Market
The foreign exchange market is where The foreign exchange market is where funds are converted from one currency funds are converted from one currency into anotherinto another
The foreign exchange rate is the price of The foreign exchange rate is the price of one currency in terms of another currencyone currency in terms of another currency
The foreign exchange market determines The foreign exchange market determines the foreign exchange ratethe foreign exchange rate
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Exchange Rate of the U.S. DollarExchange Rate of the U.S. Dollar
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Financial InstitutionsFinancial Institutions
Financial Intermediaries: institutions that Financial Intermediaries: institutions that borrow funds from people who have saved borrow funds from people who have saved and make loans to other people:and make loans to other people: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 Innovation: in particular, the Financial Innovation: in particular, the advent of the information age and e-financeadvent of the information age and e-finance
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Financial CrisesFinancial Crises
Financial crises are major disruptions in Financial crises are major disruptions in financial markets that are characterized by financial markets that are characterized by sharp declines in asset prices and the sharp declines in asset prices and the failures of many financial and nonfinancial failures of many financial and nonfinancial firms.firms.
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Money and Business CyclesMoney and Business Cycles
Evidence suggests that money plays an Evidence suggests that money plays an important role in generating business important role in generating business cyclescycles
Recessions (unemployment) and Recessions (unemployment) and expansions affect all of usexpansions affect all of us
Monetary Theory ties changes in the Monetary Theory ties changes in the money supply to changes in aggregate money supply to changes in aggregate economic activity and the price leveleconomic activity and the price level
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Monetary Base (Cur+Res)Monetary Base (Cur+Res)
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Money and InflationMoney and Inflation
The aggregate price level is the average The aggregate price level is the average price of goods and services in an economyprice of 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
Data shows a connection between the Data shows a connection between the money supply and the price levelmoney supply and the price level
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Aggregate Price Level and the Money Aggregate Price Level and the Money Supply in the United States, 1950–2008Supply in the United States, 1950–2008
Sources:Sources: www.stls.frb.org/fred/data/gdp/gdpdef; www.federalreserve.gov/releases/h6/hist/h6hist10.txt. www.stls.frb.org/fred/data/gdp/gdpdef; www.federalreserve.gov/releases/h6/hist/h6hist10.txt.
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Average Inflation Rate Versus Average Rate of Money Average Inflation Rate Versus Average Rate of Money Growth for Selected Countries, 1997–2007Growth for Selected Countries, 1997–2007
Source:Source: International Financial Statistics. International Financial Statistics.
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Money and Interest RatesMoney and Interest Rates
Interest rates are the price of moneyInterest rates are the price of money
Prior to 1980, the rate of money growth Prior to 1980, the rate of money growth and the interest rate on long-term and the interest rate on long-term Treasury bonds were closely tiedTreasury bonds were closely tied
Since then, the relationship is less clear Since then, the relationship is less clear but the rate of money growth is still an but the rate of money growth is still an important determinant of interest ratesimportant determinant of interest rates
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Money Growth (M2 Annual Rate) and Interest Rates Money Growth (M2 Annual Rate) and Interest Rates (Long-Term U.S. Treasury Bonds), 1950–2008(Long-Term U.S. Treasury Bonds), 1950–2008
Sources:Sources: Federal Reserve Bulletin, p. A4, Table 1.10; www.federalreserve.gov/releases/h6/hist/h6hist1.txt. Federal Reserve Bulletin, p. A4, Table 1.10; www.federalreserve.gov/releases/h6/hist/h6hist1.txt.
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Monetary and Fiscal PolicyMonetary and Fiscal Policy Monetary policy is the management of the Monetary policy is the management of the
money supply and interest ratesmoney supply and interest rates Conducted in the U.S. by the Federal Reserve Conducted in the U.S. by the Federal Reserve
System (Fed)System (Fed)
Fiscal policy deals with government spending Fiscal policy deals with government spending and taxationand taxation Budget deficit is the excess of expenditures over Budget deficit is the excess of expenditures over
revenues for a particular yearrevenues for a particular year Budget surplus is the excess of revenues over Budget surplus is the excess of revenues over
expenditures for a particular yearexpenditures for a particular year Any deficit must be financed by borrowingAny deficit must be financed by borrowing
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Federal Government Budget Surplus or Deficit as a Federal Government Budget Surplus or Deficit as a Percentage of Gross Domestic Product, 1920–2012Percentage of Gross Domestic Product, 1920–2012
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The Road MapThe Road Map A simplified approach to the demand for A simplified approach to the demand for
assetsassets The concept of equilibriumThe concept of equilibrium Basic supply and demand to explain behavior Basic supply and demand to explain behavior
in financial marketsin financial markets The search for profitsThe search for profits An approach to financial structure based on An approach to financial structure based on
transaction costs and asymmetric informationtransaction costs and asymmetric information Aggregate supply and demand analysisAggregate supply and demand analysis