investment and financial markets

7/31/2019 Investment and Financial Markets

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Investment, Financial

Systems and Monetary PolicyEconomics 101

C. Arcilla


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In this lecture. . .

We explain interest rates and money

Money, money, money function and brief history

We discover the economic role of the financialsystem Financial Markets

Financial intermediaries

Central bank and monetary policyInterest

Monetary Policy


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Investment

purchase of new capital goods

machines, equipment, buildings, or houses

vs. financial investment (purchase of newfinancial assets)

money vs. capital

capital as value put into the production

process to yield more value

money as a store of value


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Money, money, money

Moneyis the set of assets in an economythat people regularly use to buy goods and

services from other people.Is the most liquid form of asset

Liquidityis the ease with which an asset can

be converted into the economys medium ofexchange.


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Money, money, money

Functions of money

As medium of exchange -an item that buyersgive to sellers when they want to purchase

goods and services. It can be anything that isreadily acceptable as payment.

A store of valueis an item that people can use totransfer purchasing power from the present to

the future.A unit of accountis the yardstick people use topost prices and record debts.


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A brief history of money

Barter an economy without money

Commodity moneytakes the form of acommodity with intrinsic value.

Cattle, stone, cigarrettes, olive oil, beer/wine, gold,silver.

Fiat moneyis used as money because ofgovernment decree.

It does not have intrinsic value.

Coins, currency, check deposits.

E-money


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Financial system

The financial systemis composed offinancial institutions that coordinate theactions of savers and borrowers.

to match one persons saving with another

persons investment.

Financial institutions can be grouped into

two different categories: financial marketsand financial intermediaries.


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FINANCIAL INSTITUTIONSFinancial marketsare the institutions throughwhich savers can directly provide funds toborrowers.

Stock Market Bond Market

Financial intermediariesare financial institutionsthrough which savers can indirectly provide

funds to borrowers. Banks

Mutual Funds


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Financial MarketsThe Bond Market A bondis a certificate of indebtedness that

specifies obligations of the borrowerto the holder of the bond.

The Stock Market Stockrepresents a claim to partial ownership

in a firm and is therefore, a claim to the profitsthat the firm makes.

The most important stock exchangesPhilippine Stock Exchange, New York StockExchange, the American Stock Exchange,

and NASDAQ.

IOU


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The Philippine Stock Exchange

The Philippine Stock Exchange, Inc. ("PSE" or the"Exchange") is a private organization that providesand ensures a fair, efficient, transparent and orderlymarket for the buying and selling of securities.

PSE traces its roots from the country's two formerbourses: the Manila Stock Exchange ("MSE") and theMakati Stock Exchange ("MkSE"). In December 23,1992 the MSE and MkSE were unified to become thePSE.

At present, PSE maintains two trading floors -- one inMakati City and another in its head office in Pasig City,where trading participants trade daily - from 9:30 a.m. to12:10 p.m. except Saturdays, Sundays, legal holidays.


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PHISIX

PSE Composite Index, commonly knownpreviously as the PHISIX and presently asthe PSEi, is the main stock market index

of the Philippine Stock Exchange.The PSEi is the most watched index onthe PSE and is also home to 30 majorPhilippine companies listed on the PSE.

It is also one of the indicators on thegeneral state of the Philippine economy.


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Other Important Financial Markets

NASDAQ The National Association of Securities

Dealers Automated Quotations is an

American stock exchange. Largest US electronic screen-based equity

securities trading market.

With approximately 3,800 companies and

corporations, it has more trading volume perhour than any other stock exchange in theworld


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Financial Intermediaries

Banks is a business institutionthat acceptsdeposits

from savers and use the deposits to make

loans to borrowers for interest. help create a medium of exchangeby

allowing people to write checks against their

deposits.


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Financial Intermediaries

Other Financial Institutions

Credit unions

Pension funds

Insurance companies

Loan sharks

Pawn shops


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The banks of all banks

Bangko Sentral ng Pilipinasrestructured from the Central Bank of thePhilippines in 1994

Its primary objective is to maintain pricestability.

Regulates the supply of money, and

affects the level of interest rate
http://../EnglishSeries.pdf


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BSP's Organizational Structure(as of October 2008)


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BSP governanceThe Monetary Board exercises the powers

and functions of the BSP, such as the conductof monetary policy and supervision of thefinancial system. Its chairman is the BSP

Governor, with five full-time members from theprivate sector and one member from theCabinet.

The Governor is the chief executive officer ofthe BSP and is required to direct andsupervise the operations and internal

administration of the BSP.


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BSP Policy Tools of Monetary regulation

Fiat money authority To finance government borrowing during times of insufficient

revenue, central bank prints new money. Like issuing a checking account to government. While this the easiest method to finance government expenditures, it

most likely causes inflation.

Open market operation Government issues bonds to borrow new money from the generalpublic.

Discount rates The central bank lends money to commercial banks for greater

liquidity at a discount rate (interest rates to banks). BSP as the lender of last resort.

Reserve requirements Raising the reserve requirement reduces money supply through the

deposit multiplier.


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Interest

payment made to lender and cost of borrowingmoneyUsually measured in peso per peso borrowedper year, or interest rate

Pt + n = (1 + i)n Pt

where P = principaln = maturityi = simple interest rate, annually


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Nominal vs. Real i

Nominal i (money interest rate)

yield in peso per peso borrowed per year

Real i

measures the quantity of goods we gettomorrow for goods forgone today.

used in highly inflationary periods

Real i = nominal i inflation rate


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Interest rates

At the micro level, interest rates is affected by:terms or maturity Length of time a loan is to be paid

risk

higher risk loans means higher interestLiquidity Loans on illiquid assets have higher interest

Administrative costs higher administrative costs have higher interest

Central bank policies Central bank determines the general level of interest

rates


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The Demand for Money

The Demand for Money, MdLevels of transaction demand Depends on nominal income, $Y An increase in nominal income increases the

demand for money.Interest rates, i An increase in interest rates decreases the

demand for money.

Md = $Y L(i)+ -

The Effects of an Increase in Nominal


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The Effects of an Increase in NominalIncome on the Demand for Money

Copyright 2004 South-Western

Quantity ofMoney

Interest ratei

Moneydemand

0

3

11. An increasein the nominalincome . . .

Moneydemand


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Money upply Money Demand and the


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Money upply, Money Demand, and theinterest rate

Copyright 2004 South-Western

Quantity ofMoney

Interest rate, i

Quantity fixedby the BSP

Money supply

0Money

demand

A


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What happens to i

Increase in money supply (monetaryinjection)

Say because of a change in monetary policy


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Next meeting. . .

Monetary policy of the BSP

The macroeconomic role of commercialbanks

Money multiplier

investment and financial markets

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