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Economics of banking and finance (Theories (Terms structure of interest…
Economics of banking and finance
Concepts
Money
Function
Evolution
Measurement
Interest rate
Calculate yield to maturity
distinguish related concepts
yield to maturity vs. rate of return (=current yield + rate of capital gain)
real vs. nominal interest rates
Financial crisis
3 stages
Initial phase: credit/asset price boom and bust
Banking crisis
Debt deflation
Exchange rate
Nominal vs. real
Spot vs. forward
Theories
How are nominal interest rates determined?
Bond market equilibrium
Money market equilibrium
What affect the risk structure of interest rates?
Terms structure of interest rates
Expectations theory
Segmented market theory
Liquidity premium theory
Preferred habitat theory
Asymmetric information and
financial crisis
Problems
Adverse selection
Moral hazard
Principal-agent problem
Case studies
The Great Depression
The Great Recession
What determines exchange rates?
LR: PPP
SR: Portfolio choice theory
Interest rate parity condition
market for domestic currency assets
Mechanisms
How is money created?
The deposit creation process
Commercial banks
Management
liability
capital adequacy
credit risk
Interest rate risk
Asset
liquidity
Off balance sheet activities
balance sheet
Control of the monetary base
Central bank
Control of the monetary base?
balance sheet
The money multiplier
Exchange rate regimes
Fixed
How does it work?
Central bank maintains the fixed rates by buying or selling domestic currency
Problems
loss of international reserves
accumulation of unwanted international reserves
speculative attacks
The policy trilemma
Floating
Hybrid
Monetary policy
Tools
Conventional
Open market operations
Discount policy and lender of last resort
Reserve requirements
Interest on reserves
Non-conventional
liquidity provision
Asset purchase
Commitment to future policy
Goals
Primary goal: Price stability
Output stability
Stability of financial markets; etc
Strategy
Inflation targeting
Exchange rate targeting
International considerations
Direct effects of central bank foreign exchange intervention
Balance of payment
Use MP to affect exchange rate
Yield curve
empirical facts
caculate present value
WLC2018