ECS 3701 STUDY NOTES 2022 (All Units) This document contains a complete and an all-inclusive guide to ECS3701 - Monetary Economics.
WHY STUDY MONEY, BANKING AND FINANCIAL MARKETS
Why study financial markets?
Securities - a claim on the issuer’s future income or assets that is sold by a
borrow...
Table of Contents
Part 1- Introduction
Chapter 1: Why study money, banking and financial markets?
Chapter 2: An overview of the financial system
Chapter 3: What is money?
Part 2 - Financial Markets
Chapter 4: Understanding interest rates
Chapter 5: The behaviour of interest rates
Chapter 6: The risk and term structure of interest rates
Part 3 - Financial institutions
Chapter 8: An economic analysis of financial structure
Chapter 9: Financial crises in advanced economies
Chapter 10: Financial crises in emerging market economies
Chapter 11: Banking and the management of financial
institutions
Part 4 - Central banking and the conduct of monetary policy
Chapter 14: Central banks: a global perspective
Chapter 15: The money supply process
Chapter 16: Tools of monetary policy
Chapter 17: The conduct of monetary policy
Part 5 - Not Prescribed
Part 6 - Monetary theory
Chapter 20: Quantitative theory, Inflation and the demand for
money
Chapter 21: The IS curve
Chapter 24: Monetary policy theory
Chapter 25: The role of expectations in monetary policy
Chapter 26: Transmission mechanisms of monetary policy
ECS 3701
Lecture Notes
Nicolas Souvaris
, 3
Part one: Introduction
(Textbook: Chapters 1, 2 and 3)
CHAPTER 1: WHY STUDY MONEY, BANKING AND FINANCIAL MARKETS
Why study financial markets?
Securities - a claim on the issuer’s future income or assets that is sold by a
borrower to a lender. Securities may also be referred to as financial
instruments. Financial instruments may be divided into two main categories:
money market instruments (e.g. Negotiable Certificate of Deposit (NCDs),
Commercial Papers; Retirement Annuity (RAs) and Bankers Acceptance
(Bas)) and capital market instruments (e.g. bonds and shares).
Bonds - a specific type of security, namely a debt security that promises to
make payments periodically for a specified period of time.
Interest rate - cost of borrowing or the price paid for the rental of funds. “The”
interest rate is made up of a number of different interest rates that exist in an
economy. E.g. mortgage, car loan etc
Bond Market is especially important to economic activity because it enables
corporations and governments to borrow to finance their activities and it is
where interest rates are determined.
Stock Market is the market in which claims on the earnings of corporations
(shares of stocks) are traded. In SA we refer to the trading of shares rather
than stocks.
Stock (share) - equity: a financial instruments representing part ownership of a
corporate entity. Sometimes referred to as common stock as compared to
the more specialized type of share, e.g. preference shares. Issuing shares is a
way in which a company can raise funds.
Importance of stock /stock market: the price (value) of shares affects the
amount of funds that can be raised by selling newly issued stock to finance
investment spending. The higher the price of a firm’s shares the more money
can be raised to buy, e.g. machinery and equipment to increase production.
Also, as per the study guide: the stock market creates a facility for financial
investors to invest their surplus funds and for firms to facilitate real investment.
Why study financial institutions and banking?
Structure of the Financial System:
The financial system is complex, comprising many different types of private
sector financial institutions (banks, insurance companies, mutual funds,
finance companies, investment banks) all of which are heavily regulated by
Government.
ECS 3701
Lecture Notes
Nicolas Souvaris
, 4
Financial Intermediaries - institutions that borrow funds from people
(surplus units) who have saved and in turn make loans to others (deficit
units).
Financial Innovation - shows how creative thinking on the part of
financial institutions can lead to higher profits. To keep in touch with
what is happening within the financial systems of the world it is
necessary to study the changes that innovation has brought about.
One example is the way in which dramatic improvements in
information technology have brought about new means of delivering
financial services electronically (e-finance).
Why study money and monetary policy?
Definition of money: money is defined as anything that is generally accepted
in payment for goods and services (in terms of its function as a medium of
exchange). In this course, the term money generally refers to the money
supply.
Importance of Money: money is linked to changes in economic variables
and is important to the health of the economy. Money plays an important
role in generating business cycles: empirical data indicates that, in the USA,
the rate of growth in money supply has declined before every recession;
however, not every decline in money growth is followed by a recession.
Inflation is believed to be caused by continuing increases in money supply.
Money plays an important role in interest rate fluctuations.
Aggregate Output: gross domestic product (GDP) = the market (total) value
of all final goods and services produced in a country during the course of a
year.
Aggregate Income: total income received for the use of factors of
production (land, labour and capital) used to produce all the goods and
services in the economy during the course of the year.
Business Cycles: the upward and downward movement of aggregate
output produced in the economy.
Aggregate price level: the average price of goods and services in an
economy. Three commonly used measures are the GDP deflator (nominal
GDP divided by real GDP), the consumer price index (CPI) and the personal
consumption expenditure deflator (PCE).
Inflation: a continual increase in the aggregate price level in an economy.
The price level and money supply generally rise together.
ECS 3701
Lecture Notes
Nicolas Souvaris
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