Money and Banking: A Canadian Context
Edition: 2
Copyright: 2021
Pages: 342
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Money and Banking: A Canadian Context is geared toward students who have completed their principles courses, have an interest in economics, and are eager to learn about financial markets and how they interact with the real economy. The objective is to connect theory to the real-world examples that fill the headlines today, and explain ideas in a way that is accessible to second-year students.
The book includes some fo the key topics in money and banking, in a Canadian context, without being overly technical. The goal of this text is to create more interest in the subject and serve as a springboard for the more advanced courses and textbooks.
Acknowledgments
Preface
1
An Overview of Financial Markets
How Important is this Role of Financial Markets?
Direct Versus Indirect Finance
Why is there a Need for Intermediaries?
Added Dimension 1.1: Adverse Selection in the Market for Used Cars: The Lemons Problem
Adverse Selection in the Market for Insurance
Moral Hazard: Asymmetric Information After the Deal
Added Dimension 1.2: Dealing with the Problems of Adverse Selection!
Added Dimension 1.3: How do Markets Deal with the Problem of Moral Hazard?
The Classification of Financial Markets
Participants in the Financial Markets
2
An Overview of Financial Intermediaries
The Way It Used to Be
Classifying Financial Intermediaries:
Depository institutions
Contractual Saving institutions
Investment Intermediaries
Added Dimension 2.1: Savings and Loans (S&L) Crisis
Added Dimension 2.2: How do Insurance Companies Reduce their Risk?
Other Financial Institutions
International Financial Markets
Added Dimension 2.3: Eurocurrency Markets and Eurodollars
Added Dimension 2.4: The Rise and Fall of African Eurobonds!
The Forces of Change
Added Dimension 2.5: Financial Innovation
3
Money
What Do Economists Mean by the Term Money?
The Functions and the Evolution of Money
Added Dimension 3.1: The Economic Organization of a POW Camp
Added Dimension 3.2: The Scrip Movement in the United States and Alberta
The Rise of Cryptocurrencies
On the Importance of Money: Does Money Make a Contribution to Productivity?
Measuring the Canadian Money Supply
Added Dimension 3.3: Where Has All the Cash Gone?
Should Central Banks Abandon Cash?
Added Dimension 3.4: The Case for a Central Bank Digital Currency? (CBDC)
4
Time Valuation of Money
Time Value of Money; A Fundamental Proposition
The FV and PV of a Single Payment Multiple Cash Flows
Future Value of an Annuity
A Few Applications of FV of Annuities
Present Value of an Annuity
A Few Applications of PV of Annuities
Prepetuities and Annuities Due
5
The Variety of Debt Contracts
The Variety of Debt Contracts
Added Dimension 5.1: Separating the Interest from the Principal Paid off in Each Payment
Added Dimension 5.2: Understanding Your Mortgage
Added Dimension 5.3: Sinking Fund
Bond Valuation
A Fundamental Law of Finance and Economics
Distinguishing between the Different Rates of Return
Interest Rate Risk “Interest Rate Risk”
Nominal versus Real interest rates
Financial Engineering and the Variety of Bonds
The Appendix on Duration Analysis
6
Macro-Determinants of Interest Rates
What is the Most Important Price in the Economy?
The Loanable Funds Model
The Bond Markets
The Market for Money: The Liquidity Preference Framework
What is meant by Quantitative Easing
Euro-Area bonds give negative yields
7
Micro-Determinants of Interest Rates
Micro-Determinants of Interest Rates
Risk Structure of Interest Rates
Added Dimension 7.1: A Backgrounder on the Bond Rating Agencies
What Do Rising Spreads Tell Us?
Added Dimension 7.2: Bond Insurance
The Term Structure of Interest Rates
Added Dimension 7.3: The Launch of Euro and the European Corporate Bond Market
Explaining the Shape of Yield Curve
Added Dimension 7.4: Yield Curves are Important to Policy Makers, to Governments and to Individual Investors for Different Reasons
8
Bank Management
Liabilities or Sources of Funds
Assets or Uses of Funds
Added Dimension 8.1: Can Business Cycles Affect the Composition of Banks’ Balance Sheets?
The Variety of Risks
The Four Basic Principles of Banking
Liquidity Management
Asset Management
Liability Management
Added Dimension 8.2: The Case of Northern Rock
Capital Management
Added Dimension 8.3: What Happens When a Bank Becomes Insolvent
Capital as a Regulatory Requirement
Measuring and Managing Interest Rate Risk
Added Dimension 8.4: Basel Accords
Managing Interest Rate Risk
Swaps, Forward, Future and Option Contracts
Added Dimension 8.5: The Pros and Cons of Securitization
Added Dimension 8.6: A Comparison of Canadian and US Banking Systems
Appendix on Duration Gap Analysis
9
The Money Supply Creation
How Do Banks Create Money? Multiple Deposit Creation
The Bank of Canada, its functions and its Balance Sheet The Money Supply Equation
The Monetary Base and the Money Supply
Added Dimension 9.1: Open Market Operations and the Canadian Dollar
On the Role of the Money Multiplier
Added Dimension 9.2: The Financial Crisis of 2008: The US Monetary Base, the Money Multiplier, and the Money Supply
The Great Depression, an Increase in MB, and a Decrease in the MS!
10
Bank of Canada’s Monetary Policy Operational Framework
Large Value Transfer System
Bank of Canada’s Key Policy Rate: The Target Overnight Rate
The Transmission of Monetary Policy
What Else do Central Banks have in their Tool Kit?
Added Dimension 10.1: Emerging Markets React to Fed’s Announcement of “Tapering”.
The Bank of Canada’s Response during the Financial Crisis of 2008
The Operational Framework of the Federal Reserve
Added Dimension 10.2: How the Fed Discovered Open Market Operations
Added Dimension 10.3: Was the Recession of 1937 to 1939 caused by Fed’s Increasing of the Reserve Requirements?
The Federal Reserve’s Response to the Financial Crisis
Added Dimension 10.4: A Guide for Setting the Key Policy Rate: The Taylor Rule
11
Nominal Anchors and Targets for Monetary Policy
What is a Nominal Anchor?
Inflation Targeting
What are the Advantages of Inflation Targeting?
Important Components of Inflation Targeting
Criticisms of Inflation Targeting
Price-Level Targeting
Added Dimension 11.1: Does Monetary Policy Contribute to Asset Bubbles? Should it be used to “Lean or Clean”?
Nominal GDP (NGDP) Targeting
Index