fundamentals of money and bankingcbaeconomia.com/teaching/macroiii/fundamentals of money and...
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Alfredo Schclarek Curutchet National University of Córdoba, Argentina
National Scientific and Technical Research Council (CONICET), Argentina www.cbaeconomia.com
The 24th NSE International Development Forum INSE, PKU
August 9, 2018 1
Fundamentals of Money and Banking
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Plan for presentation
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1. Motivation
2. Visions of money
3. Money view 1. Hierarchy of monetary system 2. Fluctuation of monetary system 3. Liquidity and (in)stability of monetary
system
4. Credit, money and investment
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Motivation � Recent international financial crisis (2007/2009) shows:
� Understand financial and banking system for macroeconomic analysis
� Mainstream theories (Neoclassical and NewKeynesian) not useful for: understanding, predicting and giving policy advise
� Not sufficient to incorporate credit frictions and banking sector in standard DSGE models
� Main problem: underlying theory of money
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Visions of money
� Metalist: Jevons, Menger, von Mises, Kiyotaki, Wright, neo-classical and neo-keynesian
� Cartalist: Knapp, Mireaux, Goodhart, and post-Keynesian
� Money view: Perry Mehrling (Columbia University and Institute for New Economic Thinking)
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Metalist � Origin: Private sector (minimize transactions costs
involved in barter and advantageous characteristics of the precious metals as a medium of exchange e.g., durability, divisibility, portability, etc.)
� Value of money: backing (gold, metals) � Loss in value: reduction of gold and metals, relative to
quantity money � Quantity of money: exogenous, given by availability of
gold and dollars
� Role of banks: only intermediaries
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Cartalist � Origin: the State (technology to pay taxes and solve legal
disputes with state money) � Value of money: state power, given by political sovereignty
and fiscal authority � Loss in value: war or collapse of state power � Quantity of money: exogenous, determined by Central
Bank and Ministry of Finance � Role of banks: create money, but full control by Central
Bank
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Money view � Origin: Private sector (private money) AND state (state
money); � Value of money: degree acceptance of money to settle
payments; stable purchasing power through time; credibility & creditworthiness issuer. state money dominates private money due to relative size (not only “power”)
� Loss in value: fall in credibility & creditworthiness issuer. � Quantity: endogenous, determined by supply (issuance) and
demand (acceptance)
� Role of banks: create money, not only intermediaries, only limited control by Central Bank
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Definitions money and credit � Definition money: financial instrument that is used for
payment (means of payment) � Definition credit: promise to pay money in future
Example: - Bank deposit is money for enterprise/families (use
to pay) - Bank deposit is credit (liability) for bank (a promise to give notes and coins when asked for)
Conclusion 1: Distinction between money and credit not clear
cut and not that useful
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Hierarchy of monetary system Hierarchy of financial instruments considered “money” and issuing financial institutions
Conclusion 2: Hierachy of monies matters, especially during a
crisis! But also to how financial institutions pay to each other.
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Financial instruments Financial institutions Dollars FED
Central Bank deposits of banks
Domestic Central Bank
Bank notes/bills and coins Domestic Central Bank
Bank deposits Commercial Banks
Bank Check Enterprise (some control by banks)
Promisory note Enterprise (no control by banks)
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Fluctuations in monetary systems
� The Elasticity of Credit (Banking principle): � A given financial institution can create money of own hierarchy
by granting loans (credit) � Allows expansion of monetary system (and trade and
investment)
� The Scarcity of Money (Currency principale): � A given financial institution can not create money of higher
hierarchy � Availability of money of higher hierarchy constraints expansion
of monetary system (and trade and investment)
Conclusion 3: Balance between elasticity and discipline, with one or other dominant feature on monetary system
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The Elasticity of Credit
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The Scarcity of Money
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The Scarcity of Money
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Liquidity and (in)stability of monetary system � Funding liquidity: ease of access to money of higher hierarchy
through credit
� Market liquidity: ease of access to money of higher hierarchy through selling financial instrument in secondary market
� Solvency problems (SP) vs Liquidity problems (LP): � SP: Net return of project negative, not satisfying obligations in the long term � LP: Net return of project positive, but cash-flow negative, not satisfying
immediate obligations
� Abandon “Rational Expectations” theory and perfect information assumption: use Imperfect Information, Knightian Uncertainty and Expectations by Bounded rationality.
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Funding liquidity
15 Conclusion 4: Key role for Central Bank (state), providing funding liquidity
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Market liquidity
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Conclusion 5: Key role for well developed secondary bond market (private sector and state), providing market liquidity
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Liquidity problems (balance of payment crisis)
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Conclusion 6: Key role for export led growth in order to have dollars and avoid balance of payment crisis (private sector and state)
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Credit, Money, and Investment
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Conclusion 7: Ex-ante saving is irrelevant for credit and investment, but deposit holding is key (proxy for ex-post saving), to avoid scarcity of money (liquidity problem).
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Further reading and material Web page by Perry Mehrling
http://www.perrymehrling.com/
Online course in COURSERA on Economics of Money and Banking by Perry Mehrling
https://www.coursera.org/learn/money-banking
Mehrling, Perry. (2013) “The Natural Hierarchy of Money: Insight into the way monetary systems interact”
http://www.perrymehrling.com/wp-content/uploads/2015/05/Lec-02-The-Natural-Hierarchy-of-Money.pdf
Mehrling, Perry. (2013) “The Money View, Micro and Macro”
http://www.perrymehrling.com/wp-content/uploads/2015/05/Lec-04-The-Money-View-Micro-and-Macro.pdf
Mehrling, Perry. (2013) “Central Bank as a Clearinghouse: The central bank can be viewed as way to regulate the clearinghouse system”
http://www.perrymehrling.com/wp-content/uploads/2015/05/Lec-05-The-Central-Bank-as-a-Clearinghouse.pdf
Mehrling, Perry and Pozsar, Zoltan and Sweeney, James and Neilson, Daniel H., Bagehot was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance (November 5, 2013).
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2232016
Goodhart, Charles (1998). “The two concepts of money: implications for the analysis of optimal currency areas” European Journal of Political Economy, vol. 14(3), pages 407-432, August.
http://ideas.repec.org/a/eee/poleco/v14y1998i3p407-432.html
Jakab, Z. y Kumhof, M. (2015). ”Banks are not Intermediaries of Loanable Funds - And Why This Matters”. Bank of England Working Paper Series No. 529, May.
https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters
McLeay, M., Radia, A. y Thomas, R. (2014). ”Money Creation in the Modern Economy”. Bank of England Quarterly Bulletin Q1: 14-27.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
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Thanks!
Alfredo Schclarek Curutchet www.cbaeconomia.com
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