Economics of Money and Banking

Go to Course: https://www.coursera.org/learn/money-banking

Introduction

**Course Review: Economics of Money and Banking** As the intricacies of modern economies evolve and as recent financial crises remind us of the fragility of our monetary systems, a new understanding of money and banking has become increasingly essential. The Coursera course titled **"Economics of Money and Banking,"** produced and sponsored by the Institute for New Economic Thinking, approaches this necessity head-on. This review will detail my experience with the course, its content, and why I recommend it as a valuable resource for students, professionals, and anyone eager to understand the dynamics of our financial ecosystem. ### Overview of the Course "Economics of Money and Banking" seeks to bridge the gaps in our understanding of the monetary system through the lens of emerging economic theories that challenge conventional wisdom. The course introduces students to the complexities of banking and financial markets, focusing on critical areas that were notably highlighted during the financial crisis of 2007-2009. ### Course Structure and Content The course is organized into meticulously crafted modules that foster a comprehensive understanding of monetary economics: 1. **Introduction**: The initial lectures set the stage by illustrating the monetary system's role as the backbone of a decentralized market economy. A unique insight is provided into the 'Natural Hierarchy of Money', laying foundational concepts for the lessons to come. 2. **Analytical Tools and Concepts**: The course introduces the balance sheet approach, an analytical tool that students will frequently utilize. This foundational knowledge is pivotal for the deeper explorations ahead. 3. **Banking as a Clearing System**: The next segments delve into how banking operates as a payment system and how various money markets, post-2008 crisis, have adapted. The inclusion of repo markets and Eurodollar markets broadens the scope of understanding, equipping students with the ability to navigate international monetary systems. 4. **Banking as Market Making**: Subsequent lectures shift focus to the concept of market liquidity, elaborating on how banks function as dealers of money and how central banks intervene during crises. The Treynor model is thoughtfully incorporated, providing a substantive framework for understanding bank operations. 5. **International Money and Banking**: This module extends the conversation to international frameworks, examining exchange rates and money markets. The challenges of theories like Uncovered Interest Parity are explored, equipping learners with practical tools to understand global finance. 6. **Banking as Advance Clearing**: Here, risk pricing in capital markets is addressed, with an emphasis on swaps. This section synthesizes financial theory with real-world application, illustrating the broader implications of banking strategies. 7. **Money in the Real World**: This culminating module integrates the entire course, addressing shadow banking and aligning the unique money view with traditional economic perspectives. It underscores the relevance of these concepts in tackling contemporary financial issues. ### Instruction and Assessment The course employs a mix of lectures, reading materials, and exams to enhance comprehension and retention. The midterm and final exams serve to reinforce the knowledge obtained and challenge students to apply their understanding effectively. Supportive review sessions and student interactions enhance the collaborative learning experience. ### Recommendation I wholeheartedly recommend **"Economics of Money and Banking"** for several reasons: - **Relevance**: In light of current global economic uncertainties, the course provides crucial insights into our financial systems, enabling learners to contextualize theories with current market dynamics. - **Engaging Content**: The course is intellectually stimulating, challenging preconceived notions while also making complex topics accessible. - **Practical Application**: The analytical tools and frameworks presented in the course are applicable not only in academic scenarios but also in professional practice, equipping students to tackle real-world problems adeptly. - **Expert Guidance**: The course is designed and facilitated by leading thinkers in economics, ensuring that learners benefit from rich expertise and forward-thinking perspectives. ### Conclusion "Economics of Money and Banking" is more than just a course; it’s a critical exploration into the foundational constructs that govern our monetary systems. Whether you are a student of economics, a finance professional, or merely an economically inclined individual, this course offers valuable insights that can be applied in various contexts. Embrace the opportunity to expand your understanding of money and banking through this enlightening course on Coursera.

Syllabus

Introduction

The first two lectures paint a picture of the monetary system as the essential infrastructure of a decentralized market economy. The second lecture, "The Natural Hierarchy of Money", is a kind of high-level overview of the entire course, so don't expect to fully understand it until you look back after completing the rest of the course. Nevertheless it provides essential orientation for what comes after. Lectures notes for these and subsequent lectures may be found in the very first segment of this module.

The next two lectures are meant to introduce a key analytical tool, the balance sheet approach to monetary economics, that we will be using repeatedly throughout the course. As inspiration, first I provide a concrete example of how the approach works by "translating" the Allyn Young reading into the balance sheet language. I follow that with a more systematic introduction to this essential tool.

In the next four lectures, we build intuition by viewing banking as a payments system, in which every participant faces a daily settlement constraint (a survival constraint). From this point of view, the wholesale money market plays a key role by allowing banks to relax the discipline of a binding settlement constraint, delaying final payment by putting settlement off until a later date. The relative importance of the various money markets has changed since the 2008 crisis--Fed Funds is now less important--but the conceptual framework remains valid, indeed not only for dollar money markets but also for non-dollar money markets.

The next two lectures extend the payments system frame to non-banks by bringing in repo markets, and to the international monetary system by bringing in Eurodollar markets. Here, as in the previous two lectures, the emphasis is on settlement, and so implicitly on so-called "funding liquidity". The last three segments of the Eurodollar lecture, on the failure of two seemingly obvious arbitrage conditions, are meant to motivate the shift to market-making and "market liquidity" in the next module.

"Market liquidity" is supplied by dealers who stand ready to absorb temporary imbalances in supply and demand by taking the imbalance onto their own balance sheets, for a price. From this point of view, banks can be considered a special kind of dealer, since they absorb imbalances in payment flows. The first lecture is meant to build intuition by using our familiar balance sheet method to make sense of how this all worked in a system much simpler than our own. The second lecture introduces a formal model of the economics of the dealer function, which we will be using throughout the rest of the course.

Here we adapt the Treynor model to banks, which we conceptualize as dealers in money, specifically term funding. Like Treynor's security dealers, banks supply market liquidity for a price. But sometimes, in a financial crisis, demand for market liquidity overwhelms supply, and that's where the central bank comes in, as dealer of last resort in money markets. And if the crisis is big enough, as 2007-2009, the central bank comes in as dealer of last resort in capital markets as well.

The first twelve lectures have introduced all of the main concepts of the course. The midterm exam gives you a chance to test whether you have mastered these concepts before extending them into new areas in the second part of the course. But before you try the exam, first use the review lecture, and the questions from students, to review the main concepts.

The next four lectures extend the "money view" perspective to the larger world of multiple national monies by thinking about the international monetary system as a payment system, and by thinking of banks as market makers in foreign exchange. The first lecture is introductory and conceptual, while the second builds intuition by "translating" Mundell's account of the development of the international monetary system into money view language (similar to what we did at the beginning of the course for Allyn Young's account of the development of the US monetary system).

The next two lectures use the Treynor model to understand how exchange rates are determined in dealer markets. In the second, we confront directly the puzzle we observed earlier in the course, namely why uncovered interest parity (UIP) fails to hold in real world markets.

The next four lectures extend the money view to the larger financial world of capital markets, where the price of risk is determined in dealer markets for swaps of various kinds. The first lecture is a kind of conceptual introduction, while the second translates the standard finance account of forwards and futures into money view terms, as key building block for what comes after.

In the modern economy, the price of risk is determined in swap markets that distinguish specific forms of risk, most importantly interest rate swaps and credit default swaps. The Treynor model can be adapted to understand how the price of risk is formed in dealer markets.

In this final module, we bring the entire course together. These two lectures build on everything that came before, and show how all the pieces fit together into a unified whole. Specifically, the first lecture uses the conceptual apparatus of the money view to make sense of shadow banking as the quintessential form of banking for the modern financially globalized world. And the second lecture shows how the conceptual apparatus of the money view fits with standard economics view and finance view, by drawing attention to dimensions of the world from which the standard views abstract.

The previous module operated in effect as a review of the entire course, so if you were able to make sense of those lectures, you are ready for the final. But maybe you first want to have a look back at the second lecture, "The Natural Hierarchy of Money", for a high-level summary of the essential concepts of the money view. For almost everybody, the money view is a new and unfamiliar way of thinking about the world, and it takes a while to get used to it. The purpose of this course is to plant the seed, by demonstrating the value of this way of thinking for making sense of real world problems. Once you are done with the final exam, the real work begins, of using the money view to make sense of whatever real world problems confront you in your own daily life.