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1、Lecturer: Zheng Yi Yan Wenye Time: 2:00pm-4:30pm Semester 1; 2009-2010 Why Money and Banking ?Money and Banking is an exciting field of great importanceWhat happens in the banking system and financial market can affect a nations overall economy and peoples daily life greatly in many ways2GlobalFinan
2、cialCrisisSep15,2008:USfourthinvestmentbankLehmanBrotherwentbankruptJob loss go home SADILY 3Global Finance Crisis45“ Black Monday” Oct 6,20086JobLossEverywhere!40,000 Job Loss in Wall Street in the US , to make a living , they are doing acrobatics on the street. In UK , unemployment rate raises to
3、the highest record of 3.8% for the past of nine years.In Australia , unemployment climbs to 4.8% In Russia, 1.7 million is now under unemployment 7Job Fair of 2009 China8Financial Crisis has caused great concern to the governments in the world -Headache! What to DO? CChinas 4 trillion yuan to stimul
4、ate economy USs $780 billion stimulus package 9GlobalFinancialCrisis5/29/2008: The fifth investment bank , Bear Stearns (贝尔斯登）斯登）was taken by JPMorgen.9/7/2008: Two Government Sponsored Enterprise, Fennie Mae (房利房利美）美）and Feddie Mac （房地美（房地美) was taken over by US government. 9/14/2008, Merrill Lynch
5、 (美林）美林）was sell to Bank of America with US$50 billion 9/15/2008: Lehman Brother went bankrupt9/17/2008:The biggest insurance company AIG ( American International Group) was taken over by US government and filled with US$85 billion of rescue fund. 9/22/2008:Morgan Stanley (摩根斯坦利）摩根斯坦利） and Goldman S
6、achs （高盛）（高盛）were transformed to be bank-holding companies.9/26/2008: FDIC (Federal Deposit Insurance Corporation) was take over by the government. 10/6/2009: “Black Monday” of global stock markets10/7/2009: governments of major economies start to cut interest rate to boost the world markets. Over 1
7、60 banks became insolvent in the US between 2008 and 2009.10FacingFinancialCrisisFirst G-20 Leaders Summit on Financial Markets and World Economy, November 14-15, 2008, Washington, D.C.reached a common understanding of the root causes of the global crisis; reviewed actions countries had taken and wo
8、uld take in the future to address the immediate crisis and strengthen growth; agreed on common principles for reforming their financial markets; launched an action plan to implement those principles and asked ministers to develop further specific recommendations that would be reviewed by leaders at
9、a subsequent summit; and reaffirmed their commitment to free market principles.11FacingFinancialCrisisSecond G-20 Summit : April 2,2009, London US$500 billion for the IMF to aid struggling economies, US$250 billion to boost world tradeUS$250 billion for a new IMF overdraft facility, US$100 billion t
10、o assist international development banks in lending to poor countries. The next G-20 Summit took place on September 2425, 2009,Pittsburgh, US a proposal to radically reform the International Monetary Fund One of the major announcements of the meeting was that the group will become the new permanent
11、council for international economic cooperation. This means that the much larger G-20 meeting will essentially replace the smaller G8, which will continue to meet on major security issues but will carry reduced influence The Battle against Financial Crisis and Economic Recess is stilling going on in
12、many countries !12What caused the financial crisis ? What is the true reason behind?Why one event in real estate markets can lead to such a huge mess on the financial markets all over the world and go even further to cause a world economy recess? What was wrong in the US economy and global financial
13、 system ? How great effect was the crisis to the US economy and other economies ? Where is the eventual way out ? 13Objectives of the CourseUnderstand what is Money? Its meaning, types, role, and importance Provide sufficient understanding of the concept of Interest Rate its types, behavior, role, a
14、nd importance in the economyExpose students to wide variety of Financial Markets their types, functions, role and importanceSound understanding of the tools of Monetary Policy, its determinants, conduct, and importance Study Demand for Money, Money & Inflation, Monetarist vs. Keynesian views on thes
15、e issues14 Course Outline Required Text: Mishkin, F. S. (2006). The Economics of Money, Banking and Financial Markets (8th ed.) Approach: 80% of the time explain the topics of the day, 20% time, open for discussion & class participation Assessment: Final Exam :70%; Tutorials&Class participation 30%
16、15About the AuthorFredericS.MishkinistheAlfredLernerProfessorofBankingandFinancialInstitutionsattheGraduateSchoolofBusiness,ColumbiaUniversity.SincereceivinghisPh.D.fromtheMassachusettsInstituteofTechnologyin1976,hehastaughtattheUniversityofChicago,NorthwesternUniversity,PrincetonUniversityandColumb
17、ia.HehasalsoreceivedanhonoraryprofessorshipfromtheRenminUniversityofChina.HisresearchfocusesonmonetarypolicyanditsimpactonfinancialmarketsandtheaggregateeconomyHehaspublishedover150papersinjournalsasAmericanEconomicReview,JournalofPoliticalEconomy,Econometrica,QuarterlyJournalofEconomics,JournalofFi
18、nance,JournalofMonetaryEconomics.16Syllabus Part I Introduction1. Why study money, banking, and financial markets?2. An overview of the Financial system3. What is money ?Part II Financial Markets4.Understanding interest rates5.Behavior of interest rate6.Risk and term structure of interest ratesPart
19、III Financial Institutions9.Banking firm and management of financial institutions10.Banking industry: structure and competition11.Economic analysis of banking regulation17Part IV Central Banking and Conduct of Monetary Policy14.Structure of central banks and federal reserve system (Reading Only)15.M
20、ultiple Deposit Creation and Money supply process16.Determinants of money supply17.Tools of Monetary Policy18.Conduct of Monetary policy: Goals and Targets (Reading Only)Part VI Monetary Theory22.Demand for money23.Keynesian Framework and IS-LM Model25.Aggregate Demand and Aggregate Supply Model18So
21、urces www.aw- more information of the bookhttp:/www0.gsb.columbia.edu/faculty/fmishkin/for more about Frederic S. MishkinTo look for data, go tohttp:/www.federalreserve.gov/econresdata/default.htmEmail:Pin : moneybank19 Chapter 1Why Study Money, Banking, and Financial Markets?Financial System In thi
22、s Course In this Course we will study we will study how Financial how Financial Markets & Markets & Institutions Institutions work and will work and will explore the role explore the role of money in the of money in the economyeconomy Financial Markets:Financial Markets:Bond MarketBond MarketStock M
23、arketStock MarketForeign Exchange MarketForeign Exchange MarketOther MarketsOther MarketsFinancial Institutions:Financial Institutions:Chartered BanksChartered BanksTrust & Mortgage Companies Trust & Mortgage Companies Credit UnionsCredit UnionsInsurance CompaniesInsurance CompaniesMutual Fund Compa
24、niesMutual Fund CompaniesOther CompaniesOther Companies21Functions of Financial System22Why Financial Markets? Financial Markets help in transferring funds from people with excess funds to people with productive use and ideas but have a shortage of funds. They have significant impact on our daily li
25、fe as they are involved in huge flow of fund in our economy. Financial markets will affect Efficiency of economy by reallocating the Efficiency of economy by reallocating the financial resourcesfinancial resourcesBusiness profitsBusiness profitsEconomic well being of other countries Economic well be
26、ing of other countries 23Well functioning Financial Markets are a key factor in producing high economic growth Poor management of Financial Markets is one reason that many countries remain desperately poorFinancial market activities also have direct effects onpersonalwealththebehaviorofbusinessandco
27、nsumerscyclicalperformanceoftheeconomy241st Market: Bond Market A Security or a Financial Instrument is a claim on issuers future income or asset (e.g. any financial claim or piece of property owned)A Bond is a debt security a promise to make payments periodically for a specific period of time Bond
28、Market is typically important for economic activity. It enables corporations and governments to borrow to finance their activitiesIt is the Bond Market where Interest Rates are determined 25What is Interest Rates?It is the cost of borrowing or the price paid for the rental of funds .There are number
29、 of different interest rates (e.g. mortgage interest rate , car loan rates , house loan rates, and bond rates) Changes in interest rates have important effects on individuals, financial institutions, businesses, and the overall economy. High interest rate discourages consumptionBut encourages saving
30、sCan influence business decisions on same grounds and thus retard economic activity, affect employment and so on and forth 26A further look at Bond Market will be in Chapter 2, 4,5,6 272nd Market: Stock Market A place where stocks are traded What is a stock?A share of ownership in a corporationIt is
31、 a claim on the earnings & assets of the corporationIt is a way to finance corporations activities 28The stock market is the most widely followed financial market in almost every nationIt is a place where people can get rich or poor quickly.on“BlackMonday,Oct19,1987,DowJonesfellby22%.withthecollapse
32、oftheinternetbubblein2000,thestockmarketdroppedbyover30%andsomestocksdroppedmorethan90%bylate2002.OnOct6,2008,DowJonesfellby800pointtothelevelofbelow10,000These fluctuations in stock prices affect peoples wealth and can effect their willingness to spendThe stock market is an important factor in busi
33、ness investment decisions, because the price of shares affects the amount of funds that can be raised by selling newly issued stock (IPO) to finance investment spending29US Stock Market : 1950-2005 3031China Stock Market: 1992-2008We shall follow up issues on stock market in Chapter 2 & 7 323rdMarke
34、t: Foreign Exchange MarketThis market is used to transfer funds from one country to anotherIt is important because it is the place where exchange rate price of one currency in terms of the other is determined It is relative price of two currency and therefore can be quoted in two ways (e.g. RMB￥/US$
35、 or US$/RMB￥)Fluctuations in exchange rate have direct implications for an economyAppreciated RMB is good for imports but not so good for exports Strong RMB benefit consumers but exports become more expensive for foreigners3334Why Banking and Financial Institutions?Financial system is complex and co
36、mprise of many different types of private sector financial institutions Financial Intermediaries institutions that borrow funds from people who have saved and make loans to other peopleBanks institutions that accept deposits and make loansOther Financial Institutions insurance companies, finance com
37、panies, pension funds, mutual funds and investment banksFinancial Innovation in particular, the advent of the information age and e-finance35Chapter 9: How banks and other financial institution manage their assets and liabilitiesChapter 10: Look at banking industryChapter 11: Understand why bank reg
38、ulation takes the form it does and what can go wrong in the regulatory process36Why Study Money and Monetary Policy? Money , also referred as Money supply , is defined as anything that is generally accepted in payment of goods and services. Money is linked to the changes in economic variables that a
39、re key to the health of the economyMoney and Business Cycle Evidence suggests that money plays an important role in generating business cycles (recession , trough, expansion and peak) Recessions (unemployment) and booms (inflation) affect all of usMonetary Theory ties changes in the money supply to
40、changes in aggregate economic activity and the price level37Shaded areas represent recessions The rate of money growth has declined before every recession, indicating that changes in money might be a driving force behind Business cycle fluctuations38Money and Inflation What is Inflation?What is Infl
41、ation?It is the rate at which price level changes in an economy over a specific period of timeIt affects individuals, businesses, and government thus regarded as an important problem to be solved39Price level and money supply generally move together 40Data shows a connection between the money supply
42、 and the price level from 1950 to 2005, the price level has increased more than six foldthe price level and the money supply generally rise together.Inflation is usually caused by continued increase in money supply too much money chasing too few goodsMilton Friedman, a Nobel Laureate: inflation is a
43、lways and everywhere a monetary phenomenon.41Money Growth and Inflation: Further Money Growth and Inflation: Further EvidenceEvidenceAnecdotal evidence show thatAnecdotal evidence show thatCountries with high growth Countries with high growth of money supply have experiencedof money supply have expe
44、rienced high inflation rates (1992-2004) high inflation rates (1992-2004)42Money and Interest RatesIn addition to other factors , money plays an important role in interest-rate fluctuationsInterest rates are the price of moneyPrior to 1980, the rate of money growth and the interest rate on long-term
45、 Treasury bonds were closely tiedSince then, the relationship is less clear but still an important determinant of interest rates4344Money and Monetary PolicyWhat is Monetary Policy ?What is Monetary Policy ?It is the management of money and interest ratesCentral Bank is the main responsible authorit
46、y to manage monetary policyMoney affect almost all the economic variablesIt is a matter of concern for politician and policy makers throughout the world 45Monetary PolicyMonetary policy is the management of the money supply and interest ratesCentral bank is responsible for a nations monetary policy
47、Conducted in the US by the Federal Reserve Bank Conducted in China by the Peoples Bank of China 46How We Will Study Money, Banking, and Financial MarketsA simplified approach to the demand for assetsThe concept of equilibriumBasic supply and demand to explain behavior in financial marketsThe search
48、for profitsAn approach to financial structure based on transaction costs and asymmetric informationAggregate supply and demand analysis47www.federalreserve.gov/releases/H15484950 Appendix: Aggregate Output, Prices, & Inflation RateAggregate OutputGross Domestic Product (GDP) = Value of all final goo
49、ds and services produced within the economy during a yearAggregate IncomeTotal income from factors of production (land, capital, labor) during the yearNominal vs. Real Nominal = values measured using current pricesReal = quantities, measured with constant pricesAggregate Price LevelGDP Deflator = No
50、minal GDP/Real GDPConsumer Price Index (CPI) price of “basket” of goods and services51OnemeasureofthepricelevelistheGDPdeflatorGDPdeflator=52Another measure is the Consumer Price Index (CPI)The CPI is an index that compares the price of a marketbasket of goods and services in one period with the pri
51、ce ofthe same (or highly similar) market basket in a base period,currently 1982-1984.The CPI includes some 300 products that are presumably purchased by the typical consumer.CPI for any particular year = price of the most recent market basket in the particular year / price of the same market basket
52、in 1982-198453Growth Rates and the Inflation Rate54Inflation is a rise in the general level of prices in an economyThe rate of inflation for a certain year is found by comparing, in percentage terms, that years index with the index in the previous yearExample: the CPI rose from 111 in 2003 to 113 in 200455
