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Economics of Money and Banking

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Course Summary

This course provides an introduction to the principles of money and banking, including monetary policy, banking operations, and financial markets.

Key Learning Points

Learn about the history and functions of money and banking
Understand the role of central banks in monetary policy
Explore the workings of financial markets and institutions

Learning Outcomes

Understand the principles of money and banking
Analyze the functions of central banks
Evaluate the workings of financial markets and institutions

Prerequisites or good to have knowledge before taking this course

Basic knowledge of economics
Familiarity with financial math

Course Difficulty Level

Intermediate

Course Format

Online
Self-paced
Video lectures
Quizzes and assignments

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Description

The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant.

Three features of the new system are central. Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse. Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order. Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That's the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.

Outline

Introduction
The Big Picture
Prerequisites?
What is a Bank, a Shadow Bank, a Central Bank?
Central Themes
Reading: Allyn Young
FT: The Eurocrisis, Liquidity vs. Solvency
Hierarchy of Financial Instruments
Hierarchy of Financial Institutions
Dynamics of the Hierarchy
Discipline and Elasticity, Currency Principle and Banking Principle
Hierarchy of Market Makers
Managing the Hierarchy
Lecture Notes (for download)
Allyn Young

Introduction, continued
FT: Quantitative Easing and the Fed
Allyn Young: Money and Economic Orthodoxy
National Banking System Before the Fed
Civil War Finance, Bonds, and Loans
Civil War Finance, Legal Tenders
National Banking System, Origins
National Banking System, Instability
Federal Reserve System, Plan
Federal Reserve System, Actual
FT: Dealer of Last Resort
Reading: Hyman Minsky
Sources and Uses Accounts
Payments: Money and Credit
Payments: Discipline and Elasticity
The Survival Constraint
Payment Example: Money and Credit
Flow of Funds Accounts
The Survival Constraint, Redux
Liquidity, Long and Short
Financial Fragility, Flows and Stocks
Hyman Minsky
Introduction

Banking as a Clearing System
FT: Martin Wolf on QE3
One Big Bank
Multiple Banks, A Challenge
Reading: Charles F. Dunbar
Correspondent Banking, Bilateral Balances
Correspondent Banking, System Network
Clearinghouse, Normal Operations
Clearinghouse, Private Lender of Last Resort
Central Bank Clearing
Central Bank Cooperation
FT: European Bank Deleveraging
What are Fed Funds?
Payment Settlement versus Required Reserves
Payment Elasticity/Discipline, Public and Private
The Function of the Fed Funds Market
Payment versus Funding: An Example
Brokers versus Dealers
Payments Imbalances and the Fed Funds Rate
Secured versus Unsecured Interbank Credit
Required Reserves, Redux
Dunbar
Banking as a Clearing System

Banking as a Clearing System, continued
FT: The Impact of QE3
Money Market Interest Rate Patterns
What is Repo?
Repo in Balance Sheets
Comparison with Fed Funds
Legal Construction of Repo
Security Dealers Balance Sheet
Repo, Modern Finance, and the Fed
Interest Rate Spreads: Before the Crisis
Interest Rate Spreads: After the Crisis
FT: Ring-fencing and the Volcker Rule
The Eurodollar Market in Crisis
What are Eurodollars?
Why is There a Eurodollar Market?
Eurodollar as Global Funding Market
Liquidity Challenge of Eurodollar Banks
FRA as Implicit Swap of IOUs
Forward Parity, Interest Rates, EH
Forward Parity, Exchange Rates, UIP
Forward Rates are NOT Expected Spot Rates
Bagehot
Banking as a Clearing System, continued

Banking as Market Making
FT: Depreciation of Iran's Currency
Reading: John Hicks
Bagehot's World, Wholesale Money Market
Economizing on Notes: Deposits, Acceptances
Managing Cash Flow: Discount, Rediscount
Market Rate of Interest
Central Bank and Bank Rate
The Bagehot Rule, Origin of Monetary Policy
Limits on Central Banking: Internal vs. External Drain
FT: Asymmetric Credit Growth in Europe
Market Liquidity, Dealers, and Inventories
Two-Sided Dealer Basics
Economics of the Dealer Function: the Treynor Model
Leveraged Dealer Basics
Real World Dealers
Arbitrage and the Assumption of Perfect Liquidity
Hicks
Banking as Market Making

Banking as Market Making, continued
FT: Money Market Mutual Funds
Banks as Money Dealers, a Puzzle
Security Dealers as Money Dealers, Matched and Speculative Book
Adapting Treynor to Liquidity Risk
Digression: Evolution of American Banking
The Fed in the Fed Funds Market
Return to the Initial Puzzle
FT: Citibank and the SIVs
The Art of Central Banking
Evolution of Monetary Policy: 1951-1987
The Taylor Rule: 1987-2007
Monetary Transmission Mechanism
Anatomy of a Normal Crisis
Anatomy of a Serious Crisis
Should the Fed Intervene or Not?
The Fed as Dealer of Last Resort: 2007-2009
Treynor
Banking as Market Making, continued

Midterm review and exam
FT: Trade Credit and the Eurocrisis
Inspiration: The Origin of the Fed
Central Bank Operations, Normal Times
Central Bank Operations, Crisis Times
Settlement Risk, Payments, and Market-making
Q: Standard and Subordinate Coin
Q: War Finance as Financial Crisis
Q: Forward Parity
Q: Payments, CHIPS and Fedwire
Q: Fed Balance Sheet Operations
Midterm

International Money and Banking
FT: Autonomy of Bank of Japan
Key Currencies as a Hierarchical System
What is Money? Chartalism versus Metallism
Chartalism as a Theory of Money
Quantity Theory of Money
Purchasing Power Parity
Metallism as a theory of money
A Money View of International Payments, FX Dealers
Chartallism, Metallism, and the Money View Compared
Private and Public Money: A Hybrid System
Hybridity in FX Market-making
FT: Costs of Japan's Monetary Policy
Reading: Robert Mundell
Act 1 (1900-1933): Confrontation of the Fed with the Gold Standard
Act 2 (1934-1971): Contradiction Between Keynesian National Management and the Bretton Woods Fixed Rate System
The Dollar System
Act 3 (1972-1999): Flexible exchange, Learning from Experience
Act 4: Global Financial Crisis, Limits of Central Bank Cooperation
Mundell
International Money and Banking

International Money and Banking, continued
FT: European Money Market Funds Shifting to Asia and European Core Countries
International Transactions under the Gold Standard
Dealer Model for Foreign Exchange
Central Banking, Defense of Domestic Exchange
Bank of England, Defense Against External Drain
Toward a Theory of Exchange, Without the Gold Standard
FT: High Frequency Trading
Uncovered Interest Parity (UIP) and the Expectations Hypothesis of the Term Structure (EH)
FX Dealers Under the Gold Standard, Redux
Private FX Dealing System
Economics of the Dealer Function, Speculative Dealer
Economics of the Dealer Function, Matched-book Dealer
Digression: Why do UIP and EH Fail?
Central Bank as FX Dealer of Last Resort
Reading: McCauley on Internationalization of Renminbi
Kindleberger
International Money and Banking, continued

Banking as Advance Clearing
FT: Shadow Banking
Bagehot's World: Separation of Money Markets and Capital Markets
The New World: Integration of Money Markets and Capital Markets
Funding Liquidity Versus Market Liquidity
Digression: Schumpeter on Banking and Economic Development
Payment Versus Funding
Reading: Gurley and Shaw
Financial Evolution: Indirect Finance to Direct Finance
Banking Evolution: Loan-based Credit to Market-based Credit
Preview: Central Banking and Shadow Banking
FT: Argentina in Court to Fight Debt Ruling
Banking as Advance Clearing
Forwards versus Futures
Forward Contracts, Fluctuations in Value and Final Cash Flow
Futures Contracts, Fluctuations in Value and Daily Cash Flows
Cash and Carry Arbitrage, Defined
Cash and Carry Arbitrage, Explained as Liquidity Risk
Cash and Carry Arbitrage, Explained as Counterparty Risk
Cash and Carry Arbitrage, as a Natural Banking Business
Gurley and Shaw
Banking as Advance Clearing

Banking as Advance Clearing, continued
FT: Sovereign Debt Crises
Reading: FOMC Report (1952)
Treasury-swap Spread, a Puzzle
What is a Swap?
Why swap? An Example from Stigum
Market Making in Swaps
Money Market Swaps, Example
Life in Arbitrage Land
Treasury-swap Spread, Liquidity Risk or Counterparty Risk?
FT: Internationalization of the Euro
Credit Indices
Fischer Black (1970), Risk-free Security
What is a Credit Default Swap (CDS)?
Corporate Bonds
CDS Pricing
Market Making in CDS
Example: Negative Basis Trade and Liquidity Risk
Example: Private backstop of Marketmaking in CDS
Example: Synthetic CDO as Collateral Prepayment
FOMC
Banking as Advance Clearing, continued

Money in the Real World
FT: Regulation of Shadow Banking
Shadow Banking vs Traditional Banking
Liquidity and Solvency Backstops
Global Dimension
Evolution of Modern Finance
What is Shadow Banking?
Backstopping the Market Makers
Regulation of Systemic Risk
Regulation of Collateral and Payment Flows
Private Backstop and Public
FT: Future of Banking
Three World Views
Economics View: Commodity Exchange
Finance View: Risk
The Education of Fischer Black
Steps From the Finance View to the Money View
A Money View of Economics and Finance
Shadow Banking
Money in the Real World

Final Exam
Final Exam

Summary of User Reviews

Money and Banking course on Coursera has received highly positive reviews from learners. The course covers a wide range of topics related to money and banking, and is presented in a clear and engaging manner. Many learners have appreciated the practical insights provided in the course. Overall, the course has been highly recommended by learners.

Key Aspect Users Liked About This Course

Practical insights provided in the course

Pros from User Reviews

Covers a wide range of topics related to money and banking
Clear and engaging presentation of the course material
Practical insights provided to learners
Highly recommended by learners
Interactive and engaging course content

Cons from User Reviews

Some learners have found the pace of the course to be too fast
Some of the course content may be too basic for learners with prior knowledge of money and banking
Some learners have reported technical issues with the online platform
Some learners have found the assessments to be too challenging
No certificate provided for completing the course

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