money mishkin

What is MoneyThe Economics of Money, Banking, and Financial Markets, 8th edition

Frederic S. Mishkin

Why should I take this course?

For econ majors, this course relates to macroeconomics, international trade, and growth and development

For business majors, constantly will be confronted with financial decisions

For all other majors, we are all affected by the monetary system: you have checking accounts, will likely buy insurance, have mutual funds, etc.

The Globalization of Money, Banking, and Financial Markets

Changes in the diverse markets in which multinational firms operate affect the financial institutions that serve those firms.

The blending of domestic and global financial markets has increased international competition among financial institutions.

Money and Banking in the Digital Age

Cybertechnologies:Technologies that connect savers,

investors, traders, producers, and governments via computer linkages.

Money and Banking in the Digital Age

Implications of cyber technologies: Major changes for both banks and

their customers: more online banking, customers will have more services on their home computers Policymakers are affected: the nature

of money is changing, what kinds of new regulations will be needed?

Meaning of Money

Anything that is generally accepted in payment for goods or services or in the repayment of debt.

Distinct from income and wealth

Function of Money

Medium of ExchangeUnit of AccountStore of ValueStandard of Deferred Payment

The Desirable Properties of

Money

1. Portability2. Durability3. Divisibilty4. Standardizability5. Recognizability

Evolution of the Payments System

Commodity Money ->metal such as precious metal or another valuable commodity. The problem, is money , very heavy, hard to transport.

Fiat Money -> paper currency -> legal tender

Methods of Exchange and the Evolution of Money

Barter and the double coincidence of wants: Before money there was barter: trading

products for products. This requires a double coincidence of wants, which means two individuals are simultaneously willing and able to make a trade; we each have what the other wants.

Commodity money: A good with a nonmonetary value that is

also used as money.

Methods of Exchange and the Evolution of Money

Commodity standard: A money unit whose value is backed by

the value of another physical good such as gold or silver.

Fiat money: A token that has value only because it is

accepted as money. (most money today is fiat money)

Electronic money (e-money): Money that people can transfer

directly via electronic impulses.

Types of Money

I. Commodity Money a. Full-bodied money b. Representative full bodied money

II. A. Issued by Government and Central Bank 1. Token Money 2. Paper

B. Issued by Depository Institutions 1. Bank Notes 2. Demand deposits

Types of Money

Iron Boar tusk Playing cards

Copper Red woodpecker scalps Leather

Brass Feathers Gold Wine Glas Silver Corn Polished beads (wampum) Knives Salt Rum

Pots Horses Molasses Boats Sheep Tobacco Pitch Goats Agricultural implements Rice Tortoise shell Round stones with centers removed Cows Porpoise teeth Crystal salt bars Paper Whale teeth Snail shells

Cigarettes

Electronic Money : A Coming Global Phenomena

Electronic money is money that stored electronically and it takes several forms.

Debit CardsStored-Value CardElectronic cashElectronic Check’s

Commodity Money Standards

Purchasing power of money: The value of money in terms of the

amount of real goods and services it buys.

Gold standard: A monetary system in which the value of

money is linked to the value of gold. Bimetallic standard:

A monetary system in which the value of money depends on the values of two precious metals, such as gold and silver.

Commodity Standards

Gold bullion: Within a gold standard, the amount of

gold used as money. Monetary base:

A “base” amount of money that serves as the foundation for a nation’s monetary system.

Under a gold standard, the amount of gold bullion is the monetary base

In a fiat money system, the sum of currency in circulation plus reserves of banks and other depository institutions is the monetary base.

The Move to Fiat Money

After 1971, the U.S. renounced the gold standard. Other nations followed.In some countries that have

resorted to excess printing of money, this has led to high rates of inflation.

E-MoneyPerhaps the future of money, uses

microchips to store money values.Check out http://www.e-gold.com/

http://www.e-gold.com/

Money in Circulation: what do we count?

Liquidity:The ease with which an asset can

be sold or redeemed for a known amount of cash at short notice and at low risk of loss of nominal value.

Monetary aggregate:A grouping of assets sufficiently

liquid to be defined as a measure of money.

Measuring Money

M1, which includes currency, checking account deposits and travelers check.

M2, aggregate to M1 other assets that have money market deposit account and money market mutual find shares, small denomination time deposits, saving deposits, overnight repurchase agreement.

M3, monetary aggregate adds to M2 somewhat less liquid assets such as large denomination, term repurchase agreements, and institutional money market fund shares.

Measures of the Monetary Aggregates

M1= Currency (Transaction Approach}

Traveler’s cheks

Demand deposits

Other checkable deposits

Total M 1

M2 = M1 + ( The liquidity approach )

Small-denomination time deposits

Saving deposits and money market deposits accounts

Money market mutual fund shares (noninstitutional)

Total M2

M3 = M2 + Large denomination time deposits Money Market mutual fund shares Term repurchase agreements Term Eurodollars Total M3

The Monetary Base

Currency: Coins and paper money.

Depository financial institutions: Financial institutions that issue checking and

savings deposits that are included in measures of money and that legally must hold reserves on deposit with Federal Reserve banks or in their vaults.

Reserves: Cash held by depository institutions in their

vaults or on deposit with the Federal Reserve System.

Monetary base equals currency plus these reserves.

M1: A Basic Definition of “Cash”

M1: Currency, traveler’s checks, and

transactions deposits. Transactions deposits (checking

accounts): Demand deposits:

Non-interest-bearing checking accounts. Negotiable-order-of-withdrawal (NOW)

accounts: Interest-bearing checking deposits.

Automated-transfer-system (ATS) account:

An interest-bearing savings account and non-interest-bearing checking account.

Components of the Monetary Base and M1 ($ Billions)

M2: Cash Plus Other Liquid Assets

M2: M1 plus savings and small-denomination

time deposits and balances of individual and broker-dealer money market mutual funds.

Savings deposits: Interest-bearing savings accounts without set

maturities. Money market deposit accounts:

Savings accounts with limited checking privileges.

Small-denomination time deposits: Deposits with set maturities and denominations

of less than $100,000.

The Components of M2 ($ Billions)

M1 $1,365.1

Small-denomination time Deposits 867.0

Savings deposits and money market deposits 3,574.8

Individual and broker-dealer money market mutual funds 707.8

M2 $6,514.7

M3: The Broadest Monetary Aggregate

M3: M2 plus large-denomination time deposits,

Eurodollars and repurchase agreements, and institution-only money market mutual funds.

Large-denomination time deposits: Deposits with set maturities and denominations

greater than or equal to $100,000. Repurchase agreements:

Contracts to sell financial assets with a promise to repurchase them at a later time.

Eurodollars: Dollar-denominated deposits located outside the

U.S.

The Components of M3 ($ Billions)

M2 $6,514.2

Large-denomination time deposits 1,203.4

Repurchase agreements and Eurodollar deposits 853.6

Institution-only money market mutual funds 1,039.3

M3 $9,611.0

Annual Growth Rates of M1 and M2.

Nonelectronic paymentsCurrencyCredit-cardMoney orders

Electronic paymentsWire transfers: Payments made via

telephone lines or through fiberoptic cables.

Money in the Digital Economy

Electronic versus Nonelectronic Payments


Electronic Payments (cont’d) Automated clearinghouses:

Institutions that process payments electronically on behalf of senders and receivers of those payments.

Point-of-sale (POS) transfer: Electronic transfer of funds from a

buyer’s account to the firm from which a good or service is purchased at the time the sale is made.

Automated bill payment: Direct payment of bills by depository

institutions on behalf of their customers.


Computer shopping

Internet-based financial exchanges

Innovations in electronic payments technology

As assets become more liquid, the meaning and measurement of “money” may change the composition of future monetary aggregates.

money mishkin

Documents