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Economics of Money and Banking
  • Level Foundation
  • Duration 33 hours
  • Course by Columbia University
  • Offered by

About

The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant. Three features of the new system are central. Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse. Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order. Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That's the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.

Modules

The Four Prices of Money I

    • 5 Videos
    • 2 Readings
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5 Videos

  • The Big Picture
  • Prerequisites?
  • What is a Bank, a Shadow Bank, a Central Bank?
  • Central Themes
  • Reading: Allyn Young

2 Readings

  • Lecture Notes (for download)
  • Allyn Young

The Natural Hierarchy of Money

    • 7 Videos
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7 Videos

  • FT: The Eurocrisis, Liquidity vs. Solvency
  • Hierarchy of Financial Instruments
  • Hierarchy of Financial Institutions
  • Dynamics of the Hierarchy
  • Discipline and Elasticity, Currency Principle and Banking Principle
  • Hierarchy of Market Makers
  • Managing the Hierarchy

Money and the State: Domestic I

    • 4 Videos
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4 Videos

  • FT: Quantitative Easing and the Fed
  • Allyn Young: Money and Economic Orthodoxy
  • National Banking System Before the Fed
  • Civil War Finance, Bonds, and Loans

Money and the State: Domestic II

    • 5 Videos
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5 Videos

  • Civil War Finance, Legal Tenders
  • National Banking System, Origins
  • National Banking System, Instability
  • Federal Reserve System, Plan
  • Federal Reserve System, Actual

The Money View, Micro and Macro I

    • 6 Videos
    • 1 Readings
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6 Videos

  • FT: Dealer of Last Resort
  • Reading: Hyman Minsky
  • Sources and Uses Accounts
  • Payments: Money and Credit
  • Payments: Discipline and Elasticity
  • The Survival Constraint

1 Readings

  • Hyman Minsky

The Money View, Micro and Macro II

    • 5 Videos
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5 Videos

  • Payment Example: Money and Credit
  • Flow of Funds Accounts
  • The Survival Constraint, Redux
  • Liquidity, Long and Short
  • Financial Fragility, Flows and Stocks

Review

    • 1 Assignment
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1 Assignment

  • Introduction

The Central Bank as a Clearinghouse I

    • 5 Videos
    • 1 Readings
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5 Videos

  • FT: Martin Wolf on QE3
  • One Big Bank
  • Multiple Banks, A Challenge
  • Reading: Charles F. Dunbar
  • Correspondent Banking, Bilateral Balances

1 Readings

  • Dunbar

The Central Bank as a Clearinghouse II

    • 5 Videos
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5 Videos

  • Correspondent Banking, System Network
  • Clearinghouse, Normal Operations
  • Clearinghouse, Private Lender of Last Resort
  • Central Bank Clearing
  • Central Bank Cooperation

Federal Funds, Final Settlement I

    • 5 Videos
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5 Videos

  • FT: European Bank Deleveraging
  • What are Fed Funds?
  • Payment Settlement versus Required Reserves
  • Payment Elasticity/Discipline, Public and Private
  • The Function of the Fed Funds Market

Federal Funds, Final Settlement II

    • 5 Videos
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5 Videos

  • Payment versus Funding: An Example
  • Brokers versus Dealers
  • Payments Imbalances and the Fed Funds Rate
  • Secured versus Unsecured Interbank Credit
  • Required Reserves, Redux

Review

    • 1 Assignment
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1 Assignment

  • Banking as a Clearing System

Repos, Postponing Settlement I

    • 6 Videos
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6 Videos

  • FT: The Impact of QE3
  • Money Market Interest Rate Patterns
  • What is Repo?
  • Repo in Balance Sheets
  • Comparison with Fed Funds
  • Legal Construction of Repo

Repos, Postponing Settlement II

    • 4 Videos
    • 1 Readings
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4 Videos

  • Security Dealers Balance Sheet
  • Repo, Modern Finance, and the Fed
  • Interest Rate Spreads: Before the Crisis
  • Interest Rate Spreads: After the Crisis

1 Readings

  • Bagehot

Eurodollars, Parallel Settlement I

    • 5 Videos
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5 Videos

  • FT: Ring-fencing and the Volcker Rule
  • The Eurodollar Market in Crisis
  • What are Eurodollars?
  • Why is There a Eurodollar Market?
  • Eurodollar as Global Funding Market

Eurodollars, Parallel Settlement II

    • 5 Videos
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5 Videos

  • Liquidity Challenge of Eurodollar Banks
  • FRA as Implicit Swap of IOUs
  • Forward Parity, Interest Rates, EH
  • Forward Parity, Exchange Rates, UIP
  • Forward Rates are NOT Expected Spot Rates

Review

    • 1 Assignment
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1 Assignment

  • Banking as a Clearing System, continued

The World that Bagehot Knew I

    • 5 Videos
    • 1 Readings
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5 Videos

  • FT: Depreciation of Iran's Currency
  • Reading: John Hicks
  • Bagehot's World, Wholesale Money Market
  • Economizing on Notes: Deposits, Acceptances
  • Managing Cash Flow: Discount, Rediscount

1 Readings

  • Hicks

The World that Bagehot Knew II

    • 4 Videos
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4 Videos

  • Market Rate of Interest
  • Central Bank and Bank Rate
  • The Bagehot Rule, Origin of Monetary Policy
  • Limits on Central Banking: Internal vs. External Drain

Dealers and Liquid Security Markets I

    • 4 Videos
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4 Videos

  • FT: Asymmetric Credit Growth in Europe
  • Market Liquidity, Dealers, and Inventories
  • Two-Sided Dealer Basics
  • Economics of the Dealer Function: the Treynor Model

Dealers and Liquid Security Markets II

    • 3 Videos
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3 Videos

  • Leveraged Dealer Basics
  • Real World Dealers
  • Arbitrage and the Assumption of Perfect Liquidity

Review

    • 1 Assignment
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1 Assignment

  • Banking as Market Making

Banks and the Market for Liquidity I

    • 4 Videos
    • 1 Readings
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4 Videos

  • FT: Money Market Mutual Funds
  • Banks as Money Dealers, a Puzzle
  • Security Dealers as Money Dealers, Matched and Speculative Book
  • Adapting Treynor to Liquidity Risk

1 Readings

  • Treynor

Banks and the Market for Liquidity II

    • 3 Videos
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3 Videos

  • Digression: Evolution of American Banking
  • The Fed in the Fed Funds Market
  • Return to the Initial Puzzle

Lender/Dealer of Last Resort I

    • 4 Videos
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4 Videos

  • FT: Citibank and the SIVs
  • The Art of Central Banking
  • Evolution of Monetary Policy: 1951-1987
  • The Taylor Rule: 1987-2007

Lender/Dealer of Last Resort II

    • 3 Videos
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3 Videos

  • Monetary Transmission Mechanism
  • Anatomy of a Normal Crisis
  • Anatomy of a Serious Crisis

Lender/Dealer of Last Resort III

    • 2 Videos
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2 Videos

  • Should the Fed Intervene or Not?
  • The Fed as Dealer of Last Resort: 2007-2009

Review

    • 1 Assignment
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1 Assignment

  • Banking as Market Making, continued

Review, Q&A, I

    • 6 Videos
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6 Videos

  • FT: Trade Credit and the Eurocrisis
  • Inspiration: The Origin of the Fed
  • Central Bank Operations, Normal Times
  • Central Bank Operations, Crisis Times
  • Settlement Risk, Payments, and Market-making
  • Q: Standard and Subordinate Coin

Review, Q&A, II

    • 4 Videos
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4 Videos

  • Q: War Finance as Financial Crisis
  • Q: Forward Parity
  • Q: Payments, CHIPS and Fedwire
  • Q: Fed Balance Sheet Operations

Exam

    • 1 Assignment
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1 Assignment

  • Midterm

Chartalism, Metallism, and Key Currencies I

    • 6 Videos
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6 Videos

  • FT: Autonomy of Bank of Japan
  • Key Currencies as a Hierarchical System
  • What is Money? Chartalism versus Metallism
  • Chartalism as a Theory of Money
  • Quantity Theory of Money
  • Purchasing Power Parity

Chartalism, Metallism, and Key Currencies II

    • 5 Videos
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5 Videos

  • Metallism as a theory of money
  • A Money View of International Payments, FX Dealers
  • Chartallism, Metallism, and the Money View Compared
  • Private and Public Money: A Hybrid System
  • Hybridity in FX Market-making

Money and the State: International I

    • 4 Videos
    • 1 Readings
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4 Videos

  • FT: Costs of Japan's Monetary Policy
  • Reading: Robert Mundell
  • Act 1 (1900-1933): Confrontation of the Fed with the Gold Standard
  • Act 2 (1934-1971): Contradiction Between Keynesian National Management and the Bretton Woods Fixed Rate System

1 Readings

  • Mundell

Money and the State: International II

    • 3 Videos
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3 Videos

  • The Dollar System
  • Act 3 (1972-1999): Flexible exchange, Learning from Experience
  • Act 4: Global Financial Crisis, Limits of Central Bank Cooperation

Review

    • 1 Assignment
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1 Assignment

  • International Money and Banking

Banks: Global Liquidity I

    • 3 Videos
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3 Videos

  • FT: European Money Market Funds Shifting to Asia and European Core Countries
  • International Transactions under the Gold Standard
  • Dealer Model for Foreign Exchange

Banks: Global Liquidity II

    • 3 Videos
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3 Videos

  • Central Banking, Defense of Domestic Exchange
  • Bank of England, Defense Against External Drain
  • Toward a Theory of Exchange, Without the Gold Standard

Foreign Exchange I

    • 5 Videos
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5 Videos

  • FT: High Frequency Trading
  • Uncovered Interest Parity (UIP) and the Expectations Hypothesis of the Term Structure (EH)
  • FX Dealers Under the Gold Standard, Redux
  • Private FX Dealing System
  • Economics of the Dealer Function, Speculative Dealer

Foreign Exchange II

    • 4 Videos
    • 1 Readings
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4 Videos

  • Economics of the Dealer Function, Matched-book Dealer
  • Digression: Why do UIP and EH Fail?
  • Central Bank as FX Dealer of Last Resort
  • Reading: McCauley on Internationalization of Renminbi

1 Readings

  • Kindleberger

Review

    • 1 Assignment
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1 Assignment

  • International Money and Banking, continued

Direct and Indirect Finance I

    • 5 Videos
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5 Videos

  • FT: Shadow Banking
  • Bagehot's World: Separation of Money Markets and Capital Markets
  • The New World: Integration of Money Markets and Capital Markets
  • Funding Liquidity Versus Market Liquidity
  • Digression: Schumpeter on Banking and Economic Development

Direct and Indirect Finance II

    • 5 Videos
    • 1 Readings
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5 Videos

  • Payment Versus Funding
  • Reading: Gurley and Shaw
  • Financial Evolution: Indirect Finance to Direct Finance
  • Banking Evolution: Loan-based Credit to Market-based Credit
  • Preview: Central Banking and Shadow Banking

1 Readings

  • Gurley and Shaw

Forwards and Futures I

    • 4 Videos
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4 Videos

  • FT: Argentina in Court to Fight Debt Ruling
  • Banking as Advance Clearing
  • Forwards versus Futures
  • Forward Contracts, Fluctuations in Value and Final Cash Flow

Forwards and Futures II

    • 5 Videos
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5 Videos

  • Futures Contracts, Fluctuations in Value and Daily Cash Flows
  • Cash and Carry Arbitrage, Defined
  • Cash and Carry Arbitrage, Explained as Liquidity Risk
  • Cash and Carry Arbitrage, Explained as Counterparty Risk
  • Cash and Carry Arbitrage, as a Natural Banking Business

Review

    • 1 Assignment
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1 Assignment

  • Banking as Advance Clearing

Interest Rate Swaps I

    • 4 Videos
    • 1 Readings
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4 Videos

  • FT: Sovereign Debt Crises
  • Reading: FOMC Report (1952)
  • Treasury-swap Spread, a Puzzle
  • What is a Swap?

1 Readings

  • FOMC

Interest Rate Swaps II

    • 5 Videos
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5 Videos

  • Why swap? An Example from Stigum
  • Market Making in Swaps
  • Money Market Swaps, Example
  • Life in Arbitrage Land
  • Treasury-swap Spread, Liquidity Risk or Counterparty Risk?

Credit Default Swaps I

    • 6 Videos
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6 Videos

  • FT: Internationalization of the Euro
  • Credit Indices
  • Fischer Black (1970), Risk-free Security
  • What is a Credit Default Swap (CDS)?
  • Corporate Bonds
  • CDS Pricing

Credit Default Swaps II

    • 4 Videos
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4 Videos

  • Market Making in CDS
  • Example: Negative Basis Trade and Liquidity Risk
  • Example: Private backstop of Marketmaking in CDS
  • Example: Synthetic CDO as Collateral Prepayment

Review

    • 1 Assignment
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1 Assignment

  • Banking as Advance Clearing, continued

Shadow Banking, Central Banking, and Global Finance I

    • 6 Videos
    • 1 Readings
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6 Videos

  • FT: Regulation of Shadow Banking
  • Shadow Banking vs Traditional Banking
  • Liquidity and Solvency Backstops
  • Global Dimension
  • Evolution of Modern Finance
  • What is Shadow Banking?

1 Readings

  • Shadow Banking

Shadow Banking, Central Banking, and Global Finance II

    • 4 Videos
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4 Videos

  • Backstopping the Market Makers
  • Regulation of Systemic Risk
  • Regulation of Collateral and Payment Flows
  • Private Backstop and Public

Touching the Elephant: Three Views I

    • 3 Videos
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3 Videos

  • FT: Future of Banking
  • Three World Views
  • Economics View: Commodity Exchange

Touching the Elephant: Three Views II

    • 4 Videos
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4 Videos

  • Finance View: Risk
  • The Education of Fischer Black
  • Steps From the Finance View to the Money View
  • A Money View of Economics and Finance

Review

    • 1 Assignment
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1 Assignment

  • Money in the Real World

Final Exam

    • 1 Assignment
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1 Assignment

  • Final Exam

Auto Summary

"Economics of Money and Banking" explores the evolution of the modern monetary system and the analytical tools needed to understand it, especially post the 2007-2009 financial crisis. Offered by Coursera and sponsored by the Institute for New Economic Thinking, this foundational course delves into the intertwining of capital and money markets, the global nature of financial crises, and the role of derivative contracts. Ideal for business and management enthusiasts, the course spans 1980 minutes and is available through Starter, Professional, and Paid subscriptions.

Perry G Mehrling
Instructor

Perry G Mehrling