Introduction to Money & Banking Lecture notes 2010 Matti Estola

Macroeconomic Dynamics, 2023

We examine a theoretical model of liquidity with three assets-money, government bonds, and equity-that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.

The money market has traditionally been defined as the market for marketable shortterm securities. It has deep historical roots. Today, it is not an illuminating definition. The genesis of interest rates, which is the quintessence of monetary policy implementation, does not originate in market for marketable short-term securities. It is found in the non-marketable interbank debt market. Money creation, that is, new bank lending and its corollary bank deposit creation, is firmly in the province on the money market. Given these, we offer an alternative definition of the money market.

2016

We study the information contained in the interaction between unsecured and collateralized money markets. We present a model to capture probabilities of migration between lending segments, and probabilities of liquidity shocks (which move the trading-activity in both markets in the same direction). We apply our model to a novel dataset of European interbank-lending, and we show that useful information is obtained from money market interactions. We report that information captured by our model describes historical macroeconomic and liquidity events in the European banking system, and explains interest rate spreads after controlling for different measures commonly used to characterize money markets. In particular, an increase in 10% of the probability of migration from the Unsecured to Secured Market is associated to a 20% percent increase in the spread between Unsecured and Secured rates.

SSRN Electronic Journal, 2014

SSRN Electronic Journal, 2000

Many researchers are now extending standard macromonetary models to include …nancial intermediation and to allow for the impact of …nancial sector stresses on the wider economy. This is being done in many di¤erent ways and the resulting models exhibit widely varying dynamics and sensitivities. This paper takes a step backward, examining the somewhat simpler setting of a world with a single period of employment and with uncertainty in both the level and the timing of subsequent outputs and income. Financial frictions are imposed which create a role for both banks and for a central bank. Banks monitor and insure risks of production, this is the credit side of the model, and provide bank money, used a means of payment to overcome transcations costs. Because banks are unable to borrow freely from each other, the central bank provision of reserves and loans against collateral, plays a crucial role in determining the willingness of the banks to both create credit and money. This setting appears appropriate for investigation of central bank policies, including reserve creation, reserve remuneration and 'lender of last resort', and their e¤ects on the nominal price level (the price of money) and rates of return on …nancial assets. * The views expressed here are not necessarily those of the Bank of Finland. Any remaining errors are my own responsibility. I am grateful for valuable discussion with Will Roberds. y

SSRN Electronic Journal, 2018

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

PROCEEDINGS OF THE 45TH INTERNATIONAL CONFERENCE ON APPLICATION OF MATHEMATICS IN ENGINEERING AND ECONOMICS (AMEE’19), 2019

In the invest theory and practice is widely spread the approach of reducing the negative influence of the risky assets by their division in a portfolio. The necessity for diversification of the assets is obvious and it's due to the desire for reducing the risk of the entire portfolio. On the other hand, there are little deliberations on the over-fragmentation of the assets. Every diversification has own price and the over-fragmentation of the assets in the portfolio makes the approach counter-productive. In the paper is presented a mathematical approach which determines the effective level of allocation of the Cash Financial Asset in the integrated portfolio. In this article are adopted the constraints about the division of the asset on equal parts and equal risk level of each fraction. It proves that there is an optimal portfolio for a given asset size. Staging of the task A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets [1]. According to the commonly cited definition from the International Financial Reporting Standards (IFRS), financial assets include: Cash; Equity instruments of an entity-for example a share certificate; A contractual right to receive a financial asset from another entity-known as a receivable; The contractual right to exchange financial assets or liabilities with another entity under favorable conditions; A contract that will settle in an entity's own equity instruments [1,2]. In addition to stocks and receivables, the above definition comprises financial derivatives, bonds, money market or other account holdings, and equity stakes. Many of these financial assets do not have a set monetary value until they are converted into cash, especially in the case of stocks where their value and price fluctuate. [1]. Some of the most important decisions, which every business entity must decide, concern the financial assets which it has. The purpose is twofold. On the one hand, the financial asset has to increase. On the other hand, It must be preserved and It has to be warranted that in case of emergency the financial asset will be available and could be used. Defining the goals, which the financial asset obeys, the business entity alway determines this one that prevails. This decision determines and what the functions of the asset will be: to bring incomes or security. This paper doesn't discuss the case when the financial asset has the growth as a primary goal. No less important goal of the business entity is a guaranteeing the security of their business operations and preventing from a lack of liquidity. Strong companies are those that, in addition to their other characteristics, can afford the security associated with guaranteed liquidity in all likely circumstances. This is the reason why certain financial assets have the aim to be available and their main characteristic is to ensure their security. This doesn't mean that the increase is undesirable, but it is an additional effect that is not due to a decrease in the security of the asset. In view of the construction of the mathematical model and the need for a high degree of liquidity of the financial asset, this article will discuss the case of cash amount deposited with financial and credit institutions. It is also assumed that the financial asset is in one

Competition and Change, 2019

Since the 2008 crisis, the liquidity of collateral has become a serious concern for financial market institutions and regulators due to its increased importance in risk and cash flow management. Surprisingly, market participants mobilize old-fashioned economic theory, such as Irving Fisher’s quantity theory of money in their discussions of how to deal with the new problems of collateral liquidity. Today, ‘collateral is the new cash’, as one sector report claims, marking a shift from a quantity theory of money to one of collateral. Liquidity, I argue, poses not only practical problems to market participants and regulators, but also epistemic ones. Accordingly, practitioners not only produce practical but also theoretical responses to it, mobilizing classical economic theory in so doing. The problem of liquidity is shown to relate closely to a problem of ‘sovereignty’ in the narrow sense of guaranteeing the safe value of collateral. Contrary to established conceptions, sovereignty in this sense is not limited to states, but can also occur with monopolistic agents in the market such as global custodians. Thus, following the recent decade of crisis, general epistemic problems of liquidity and sovereignty in contemporary finance become visible through the practical problems and solutions in relation to collateral – specifically in the practical problems of buttressing liquidity in its double nature of collateral velocity and quality or safety.

2010

Money and Liquidity in Financial Markets We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. In particular, tighter interbank markets should lead to relatively more volume in more liquid assets. Empirical tests on the stock market support this. While our data covers part of the recent crisis period, our results are not driven by the crisis. Our general point is that money matters in financial markets. Different financial assets have different degrees of moneyness (liquidity) and, as a result, there are systematic cross-sectional variations in trading activity as the price of liquidity, or the level of tightness, in the interbank market fluctuates. Our tests control for a va...

quimbaya.banrep.gov.co

Journal of Financial Economics, 2014

Finance Institute is a private foundation funded by the Swiss banks and Swiss Stock Exchange. It merges 3 existing foundations: the International Center FAME, the Swiss Banking School and the Stiftung "Banking and Finance" in Zurich. With its university partners, the Swiss Finance Institute pursues the objective of forming a competence center in banking and finance commensurate to the importance of the Swiss financial center. It will be active in research, doctoral training and executive education while also proposing activities fostering interactions between academia and the industry. The Swiss Finance Institute supports and promotes promising research projects in selected subject areas. It develops its activity in complete symbiosis with the NCCR FinRisk. The National Centre of Competence in Research "Financial Valuation and Risk Management" (FinRisk) was launched in 2001 by the Swiss National Science Foundation (SNSF). FinRisk constitutes an academic forum that fosters cutting-edge finance research, education of highly qualified finance specialists at the doctoral level and knowledge transfer between finance academics and practitioners. It is managed from the University of Zurich and includes various academic institutions from Geneva,

The following descriptive paper surveys the various types of loan securitisation and provides a working definition of so-called collateralised loan obligations (CLOs). Free of the common rhetoric and slogans, which sometimes substitute for understanding of the complex nature of structured finance, this paper describes the theoretical foundations of this specialised form of loan securitisation. Not only the distinctive properties of CLOs, but also the information economics inherent in the transfer of credit risk will be considered, so that we can equally privilege the critical aspects of security design in the structuring of CLO transactions.

Verslas: teorija ir praktika, 2008

Th e aim of this paper is to clarify the role of money supply as the most important target of the classical monetary policy for the price stability, infl ation and economic growth. Th e theory of monetary policy was developed by observing the money supply. Th e simple relationship of the monetary policy including all instruments, targets and goals contains a huge number of empirical models which express relationship between money supply and demand, interest rates and asset prices. Accepting all determinations about regulation of money supply including the theory of quantity of money, money supply is described as supplementary function of infl ation, interest rate, wealth, human capital, etc. Th e problem is to determine how the arguments will have infl uence on the money supply growth, which argument will initiate higher infl ation, when and how long monetary policy instruments should be used. Using empirical models we examined relationship between money supply and assets value. Diff erentiation of the bond and money market was provided by the author using partial derivatives for estimating interaction between interest rates, prices, money supply, and assets value.

2023

I extend my heartfelt gratitude to my supervisor, Prof. Laetitia Lepetit, for her unwavering support and guidance throughout my PhD journey. Her expertise in banking and finance, combined with her kindness and dedication, greatly enriched my learning experience. I am grateful for her constant encouragement and for pushing me to excel, even during challenging times. I also express sincere appreciation to Dr. Frank Strobel for his meticulous guidance and collaboration throughout my thesis. Prof. Wolf Wagner, Prof. David Dickinson, and Prof. Isabelle Distinguin deserve my deepest thanks for accepting roles on my dissertation committee. My PhD training allowed me to connect with exceptional scholars worldwide, such as Prof. Iftekhar Hassan and Prof. John Kose. Their mentorship significantly improved my argumentation and methodology skills, inspiring me to think creatively and approach empirical work innovatively.