Money, Banking, and Finance

Lecture-1:
Introduction

October 5, 2023
Shigenori SHIRATSUKA
 Today’s Lecture
• Self-introduction

• Course Overview

• Basics on Money, Banking, and Finance

1
 Self-introduction
• Birth: March 29, 1965 in Saitama Prefecture
• Education: B.A. from Keio Univ. in 1987, Ph. D.
from Keio Univ. in 2000
• Job Career: Mainly as an economist at the BOJ
– 32 years: From Apr 1987 to Aug 2019
– Final position: Director-General of the Institute
for Monetary and Economic Studies
– Research topics: Price measurement, Asset price
bubble, Monetary policy under zero interest rates,
Financial stability and central banks
2
 Today’s Lecture
• Self-introduction

• Course Overview

• Basics on Money, Banking, and Finance

3
 Objectives
• To Learn a Basic Framework of Monetary
Policy:
– W/ particular emphasis on the practical aspects
of central bank policy making.

4
 Lecture Schedule
Date Topics Assignments
Class-1: Oct 3 Introduction: Basics on MBF
Class-2: Oct 10 Currency and Financial System
Class-3: Oct 17 Prices and Risks in Financial Markets
Class-4: Oct 24 Bond Pricing and Term Structure of Interest Rates Quiz-1
Class-5: Oct 31 Central Banks
Class-6: Nov 7 Money Market Operations
Class-7: Nov 14 Foreign Exchange Arrangements Quiz-2
Class-8: Dec 5 Monetary Policy Rule Quiz-3
Class-9: Dec 12 Monetary Policy Analysis (1)
Class-10: Dec 19 Monetary Policy Analysis (2) Quiz-4
Class-11: Dec 26 Unconventional Monetary Policy Quiz-5
Class-12: Jan 9 Macroprudential Policy
Class-13: Jan 16 Overall Review
Class-14: Jan 23 Final Exam
5
 Course Structure

････
Review
Class t-1
Lecture Prepare
answers to
One Topic assigned
Review questions
Class t
Lecture Prepare
answers to
One Topic
assigned
Review questions
Class t+1
Lecture
････

6
 Grade

Activities Percentage

Quiz 50% (10%x5)

Final Exam (Take-Home) 50%

Classroom Participation Additional Points

7
 Quiz Format
• Using CANVAS
• Ten questions for 15 minutes
• Multiple choice (circle choices), multiple
answers (square choices) or true/false choice
– Questions + Choices are randomized
– One question for one time on screen
– Unable to change your answer afterward

8
 Course Materials & Office Hours
• Course Materials:
Lecture slides are available from CANVS-LMS.

• Office Hours:
Send your questions by email
Or, arrange a meeting by email
Email: shigenori.shiratsuka@keio.jp

9
 References
Mishkin, Frederic. The Economics of Money,
Banking and Financial Markets, Global Edition,
Pearson Education, Limited, 2021. (on-line
version is available)

Stephen G. Cecchetti, Kermit L. Schoenholtz.

Money, banking, and financial markets, Fifth
edition, McGraw-Hill Education, 2017.

10
 Today’s Lecture
• Self-introduction

• Course Overview

• Basics on Money, Banking, and Finance

11
Money, Banking, and Finance

Money

Banking Finance

12
Money / Currency ?

13
 Banking?

Institutions vs. Activities

Scope of businesses
14
 Financial Transactions
Exchange at an
equivalent value Predetermined
Money Money à Debt contracts
(Today) Time,
(Future) Not predetermined
à Equity contracts
profitability,
volatility,…

Fund Liquidity
Fund Deficit vs.
Surplus Solvency
More efficient
resource allocation
15
Financial Surplus/Deficit by Sector
(Ratio to nominal GDP, %)
15
↑Finacial surplus Private nonfinacial corporations
General government
10 Households
Overseas

-5

-10
↓Financial deficit
-15
1980 90 2000 10 20

Note: Plotted data are fiscal year basis.

Sources: Cabinet Office “National Account”; Bank of Japan “Flow of Funds.” 16
 Market Determine Prices
and Allocate Resources
Price & Interest Rate Mechanisms in F-system

Transfer of Funds Transfer of Risk

Allocation of funds to Efficient diversification and
economic agents with allocation of risks among
higher profitability economic agents

Promoting more efficient allocation

of economic resources

Sustainable Economic Growth

17
 Players in Financial System

Financial
Financial
Markets Instruments
Customer Customer
Financial Financial
! !
!
! Institution Institution !
!
! !
Money
Customer Customer

Central Bank

Regulatory Agencies
18
 Financial System
Bank-centered Market-based
Household Household
Household Household Household Household

Financial Institution

Bank Asset Financial Markets

Transformation
Financial Institution

Firm Firm Firm Firm

Firm Firm

Japan, Continental European Countries, USA, UK?

East Asian Countries (Shadow Banking System)
19
 Financial Structure
Japan The United States
(Ratio to nominal GDP, %) (Ratio to nominal GDP, %)
800 400
Other financial institutions
700 Insurance and pension funds 350

Depository corporations
600 300

500 250

400 200

300 150

200 100

100 50

0 0
1980 90 2000 10 20 1980 90 2000 10 20

Sources: (Japan) Bank of Japan, Cabinet Office; (USA)Board of Governors of the Federal Reserve System, Bureau of Economic Analysis
20
Economics of Financial Intermediaries

Standard Asymmetric
General Equilibrium Information
Model Paradigm
(Perfect information, no frictions) (Imperfect information, frictions)

No explanation on Useful in explaining

role of financial role of financial
intermediaries intermediaries

21
 Information Asymmetries
Type of Information Asymmetries
Ex ante: Adverse selection
Interim: Moral hazard
Ex ante: Costly state verification

Transaction costs

FIs Economies of Scale Economies of Scope

22
 Adverse Selection
George A. Akerlof, (1970). “The Market for ‘Lemons’: Quality Uncertainty and the
Market Mechanism,” The Quarterly Journal of Economics 84 (3), pp. 488–500.

Quality of Used Cars = Hidden Attribute

No Market for High-Quality Used Cars 23

 Moral Hazard
Michael Rothschild and Joseph E. Stiglitz, (1976) “Equilibrium in Competitive Insurance
Markets: An Essay on the Economics of Imperfect Information,” The Quarterly Journal of
Economics, 90 (4), pp. 629-649.

Behavior of Insurance Policy Buyer = Unobservable

More risky actions 24

Outline of MP Implementation
Monetary Policy Meeting
(decision making body)

Money Market Operations

(balancing D&S of reserves)

Policy Target Indicators

(O/N call rate + a)

Financial Markets Financial Intermediaries

Real Economy

Policy Objectives
(price stability à sustainable growth) 25
 Key Feature of MP Making
• Institutional Arrangements

• CB’s Banking Operation as a First-step of MP

• Complicated Transmission Channels

– Limited knowledge + Uncertainty
– Long + varying time lags

26
 What You Need to Understand
• Key Concepts for MBF:
– Information asymmetries (today)
– Credibility (Class-2)
– No free lunch, risk-return trade-off (Class-3+4)
• In Monetary Policy Analysis
– Forget LM curve: In normal time, no central banks
control monetary aggregates, but policy interest
rates
– Theory vs. practice
– Credibility
27
 Review Questions
1. Many people believe that, despite ongoing financial
innovations, cash will always be with us to some degree as a
form of money. Do you agree or not? Why?

2. The island of Utopia has a very unusual economy. Everyone

knows everyone else and knows all about the firms they own
and operate. The financial system is well developed.
Everything else being equal, how would you expect the mix
between internal finance and external funding to compare
with other countries? What role would financial
intermediaries play in this economy?

28
 Lecture Schedule
Date Topics Assignments
Class-1: Oct 3 Introduction: Basics on MBF
Class-2: Oct 10 Currency and Financial System
Class-3: Oct 17 Prices and Risks in Financial Markets
Class-4: Oct 24 Bond Pricing and Term Structure of Interest Rates Quiz-1
Class-5: Oct 31 Central Banks
Class-6: Nov 7 Money Market Operations
Class-7: Nov 14 Foreign Exchange Arrangements Quiz-2
Class-8: Dec 5 Monetary Policy Rule Quiz-3
Class-9: Dec 12 Monetary Policy Analysis (1)
Class-10: Dec 19 Monetary Policy Analysis (2) Quiz-4
Class-11: Dec 26 Unconventional Monetary Policy Quiz-5
Class-12: Jan 9 Macroprudential Policy
Class-13: Jan 16 Overall Review
Class-14: Jan 23 Final Exam
29