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ECON 304 Money and Banking Instructor: Bernard Malamud Office: BEH 502

ECON 304 Money 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; a nd by appointment.

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ECON 304 Money and Banking Instructor: Bernard Malamud Office: BEH 502

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  1. ECON 304 Money 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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. Bernanke’s Focus • Inflation Targeting • Adjust “real” rate of interest with eye on pre-announced 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

  9. Core Principles of Money and Banking • 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

  10. 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/

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

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