Summary ECS 3701 - All Units

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 3 ECS 3701 Lecture Notes Nicolas Souvaris 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.