About this Course
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Approx. 45 hours to complete

Suggested: 13 weeks of study, 5 hours/week...

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Subtitles: English

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Start instantly and learn at your own schedule.

Flexible deadlines

Reset deadlines in accordance to your schedule.

Approx. 45 hours to complete

Suggested: 13 weeks of study, 5 hours/week...

English

Subtitles: English

Syllabus - What you will learn from this course

Week
1
2 hours to complete

Introduction

The first two lectures paint a picture of the monetary system as the essential infrastructure of a decentralized market economy. The second lecture, "The Natural Hierarchy of Money", is a kind of high-level overview of the entire course, so don't expect to fully understand it until you look back after completing the rest of the course. Nevertheless it provides essential orientation for what comes after. Lectures notes for these and subsequent lectures may be found in the very first segment of this module. ...
12 videos (Total 124 min), 2 readings
12 videos
Prerequisites?7m
What is a Bank, a Shadow Bank, a Central Bank?12m
Central Themes13m
Reading: Allyn Young3m
FT: The Eurocrisis, Liquidity vs. Solvency10m
Hierarchy of Financial Instruments9m
Hierarchy of Financial Institutions6m
Dynamics of the Hierarchy6m
Discipline and Elasticity, Currency Principle and Banking Principle8m
Hierarchy of Market Makers9m
Managing the Hierarchy18m
2 readings
Lecture Notes (for download)10m
Allyn Young10m
Week
2
3 hours to complete

Introduction, continued

The next two lectures are meant to introduce a key analytical tool, the balance sheet approach to monetary economics, that we will be using repeatedly throughout the course. As inspiration, first I provide a concrete example of how the approach works by "translating" the Allyn Young reading into the balance sheet language. I follow that with a more systematic introduction to this essential tool....
20 videos (Total 130 min), 1 reading, 1 quiz
20 videos
Allyn Young: Money and Economic Orthodoxy9m
National Banking System Before the Fed3m
Civil War Finance, Bonds, and Loans8m
Civil War Finance, Legal Tenders7m
National Banking System, Origins6m
National Banking System, Instability5m
Federal Reserve System, Plan6m
Federal Reserve System, Actual6m
FT: Dealer of Last Resort5m
Reading: Hyman Minsky3m
Sources and Uses Accounts6m
Payments: Money and Credit5m
Payments: Discipline and Elasticity4m
The Survival Constraint3m
Payment Example: Money and Credit10m
Flow of Funds Accounts10m
The Survival Constraint, Redux2m
Liquidity, Long and Short9m
Financial Fragility, Flows and Stocks6m
1 reading
Hyman Minsky10m
1 practice exercise
Introduction12m
Week
3
2 hours to complete

Banking as a Clearing System

In the next four lectures, we build intuition by viewing banking as a payments system, in which every participant faces a daily settlement constraint (a survival constraint). From this point of view, the wholesale money market plays a key role by allowing banks to relax the discipline of a binding settlement constraint, delaying final payment by putting settlement off until a later date. The relative importance of the various money markets has changed since the 2008 crisis--Fed Funds is now less important--but the conceptual framework remains valid, indeed not only for dollar money markets but also for non-dollar money markets....
20 videos (Total 125 min), 1 reading, 1 quiz
20 videos
One Big Bank8m
Multiple Banks, A Challenge3m
Reading: Charles F. Dunbar2m
Correspondent Banking, Bilateral Balances10m
Correspondent Banking, System Network3m
Clearinghouse, Normal Operations8m
Clearinghouse, Private Lender of Last Resort10m
Central Bank Clearing4m
Central Bank Cooperation5m
FT: European Bank Deleveraging5m
What are Fed Funds?5m
Payment Settlement versus Required Reserves1m
Payment Elasticity/Discipline, Public and Private9m
The Function of the Fed Funds Market9m
Payment versus Funding: An Example11m
Brokers versus Dealers2m
Payments Imbalances and the Fed Funds Rate7m
Secured versus Unsecured Interbank Credit5m
Required Reserves, Redux7m
1 reading
Dunbar10m
1 practice exercise
Banking as a Clearing System12m
Week
4
3 hours to complete

Banking as a Clearing System, continued

The next two lectures extend the payments system frame to non-banks by bringing in repo markets, and to the international monetary system by bringing in Eurodollar markets. Here, as in the previous two lectures, the emphasis is on settlement, and so implicitly on so-called "funding liquidity". The last three segments of the Eurodollar lecture, on the failure of two seemingly obvious arbitrage conditions, are meant to motivate the shift to market-making and "market liquidity" in the next module. ...
20 videos (Total 131 min), 1 reading, 1 quiz
20 videos
Money Market Interest Rate Patterns3m
What is Repo?3m
Repo in Balance Sheets7m
Comparison with Fed Funds5m
Legal Construction of Repo9m
Security Dealers Balance Sheet11m
Repo, Modern Finance, and the Fed8m
Interest Rate Spreads: Before the Crisis5m
Interest Rate Spreads: After the Crisis8m
FT: Ring-fencing and the Volcker Rule9m
The Eurodollar Market in Crisis4m
What are Eurodollars?7m
Why is There a Eurodollar Market?4m
Eurodollar as Global Funding Market11m
Liquidity Challenge of Eurodollar Banks10m
FRA as Implicit Swap of IOUs4m
Forward Parity, Interest Rates, EH3m
Forward Parity, Exchange Rates, UIP5m
Forward Rates are NOT Expected Spot Rates2m
1 reading
Bagehot10m
1 practice exercise
Banking as a Clearing System, continued12m
Week
5
2 hours to complete

Banking as Market Making

"Market liquidity" is supplied by dealers who stand ready to absorb temporary imbalances in supply and demand by taking the imbalance onto their own balance sheets, for a price. From this point of view, banks can be considered a special kind of dealer, since they absorb imbalances in payment flows. The first lecture is meant to build intuition by using our familiar balance sheet method to make sense of how this all worked in a system much simpler than our own. The second lecture introduces a formal model of the economics of the dealer function, which we will be using throughout the rest of the course. ...
16 videos (Total 114 min), 1 reading, 1 quiz
16 videos
Reading: John Hicks3m
Bagehot's World, Wholesale Money Market7m
Economizing on Notes: Deposits, Acceptances8m
Managing Cash Flow: Discount, Rediscount7m
Market Rate of Interest2m
Central Bank and Bank Rate8m
The Bagehot Rule, Origin of Monetary Policy4m
Limits on Central Banking: Internal vs. External Drain10m
FT: Asymmetric Credit Growth in Europe6m
Market Liquidity, Dealers, and Inventories7m
Two-Sided Dealer Basics6m
Economics of the Dealer Function: the Treynor Model11m
Leveraged Dealer Basics7m
Real World Dealers7m
Arbitrage and the Assumption of Perfect Liquidity9m
1 reading
Hicks10m
1 practice exercise
Banking as Market Making12m
Week
6
2 hours to complete

Banking as Market Making, continued

Here we adapt the Treynor model to banks, which we conceptualize as dealers in money, specifically term funding. Like Treynor's security dealers, banks supply market liquidity for a price. But sometimes, in a financial crisis, demand for market liquidity overwhelms supply, and that's where the central bank comes in, as dealer of last resort in money markets. And if the crisis is big enough, as 2007-2009, the central bank comes in as dealer of last resort in capital markets as well....
16 videos (Total 126 min), 1 reading, 1 quiz
16 videos
Banks as Money Dealers, a Puzzle4m
Security Dealers as Money Dealers, Matched and Speculative Book11m
Adapting Treynor to Liquidity Risk6m
Digression: Evolution of American Banking11m
The Fed in the Fed Funds Market12m
Return to the Initial Puzzle2m
FT: Citibank and the SIVs5m
The Art of Central Banking3m
Evolution of Monetary Policy: 1951-19877m
The Taylor Rule: 1987-20077m
Monetary Transmission Mechanism10m
Anatomy of a Normal Crisis8m
Anatomy of a Serious Crisis4m
Should the Fed Intervene or Not?8m
The Fed as Dealer of Last Resort: 2007-200915m
1 reading
Treynor10m
1 practice exercise
Banking as Market Making, continued12m
Week
7
1 hour to complete

Midterm review and exam

The first twelve lectures have introduced all of the main concepts of the course. The midterm exam gives you a chance to test whether you have mastered these concepts before extending them into new areas in the second part of the course. But before you try the exam, first use the review lecture, and the questions from students, to review the main concepts....
10 videos (Total 64 min), 1 quiz
10 videos
Inspiration: The Origin of the Fed3m
Central Bank Operations, Normal Times7m
Central Bank Operations, Crisis Times4m
Settlement Risk, Payments, and Market-making4m
Q: Standard and Subordinate Coin2m
Q: War Finance as Financial Crisis4m
Q: Forward Parity7m
Q: Payments, CHIPS and Fedwire12m
Q: Fed Balance Sheet Operations10m
1 practice exercise
Midterm20m
Week
8
3 hours to complete

International Money and Banking

The next four lectures extend the "money view" perspective to the larger world of multiple national monies by thinking about the international monetary system as a payment system, and by thinking of banks as market makers in foreign exchange. The first lecture is introductory and conceptual, while the second builds intuition by "translating" Mundell's account of the development of the international monetary system into money view language (similar to what we did at the beginning of the course for Allyn Young's account of the development of the US monetary system)....
18 videos (Total 136 min), 1 reading, 1 quiz
18 videos
Key Currencies as a Hierarchical System8m
What is Money? Chartalism versus Metallism8m
Chartalism as a Theory of Money2m
Quantity Theory of Money4m
Purchasing Power Parity3m
Metallism as a theory of money5m
A Money View of International Payments, FX Dealers11m
Chartallism, Metallism, and the Money View Compared4m
Private and Public Money: A Hybrid System7m
Hybridity in FX Market-making5m
FT: Costs of Japan's Monetary Policy2m
Reading: Robert Mundell10m
Act 1 (1900-1933): Confrontation of the Fed with the Gold Standard11m
Act 2 (1934-1971): Contradiction Between Keynesian National Management and the Bretton Woods Fixed Rate System14m
The Dollar System7m
Act 3 (1972-1999): Flexible exchange, Learning from Experience8m
Act 4: Global Financial Crisis, Limits of Central Bank Cooperation17m
1 reading
Mundell10m
1 practice exercise
International Money and Banking12m
Week
9
2 hours to complete

International Money and Banking, continued

The next two lectures use the Treynor model to understand how exchange rates are determined in dealer markets. In the second, we confront directly the puzzle we observed earlier in the course, namely why uncovered interest parity (UIP) fails to hold in real world markets....
15 videos (Total 126 min), 1 reading, 1 quiz
15 videos
International Transactions under the Gold Standard11m
Dealer Model for Foreign Exchange10m
Central Banking, Defense of Domestic Exchange8m
Bank of England, Defense Against External Drain12m
Toward a Theory of Exchange, Without the Gold Standard9m
FT: High Frequency Trading4m
Uncovered Interest Parity (UIP) and the Expectations Hypothesis of the Term Structure (EH)2m
FX Dealers Under the Gold Standard, Redux5m
Private FX Dealing System10m
Economics of the Dealer Function, Speculative Dealer5m
Economics of the Dealer Function, Matched-book Dealer6m
Digression: Why do UIP and EH Fail?9m
Central Bank as FX Dealer of Last Resort16m
Reading: McCauley on Internationalization of Renminbi10m
1 reading
Kindleberger10m
1 practice exercise
International Money and Banking, continued12m
Week
10
3 hours to complete

Banking as Advance Clearing

The next four lectures extend the money view to the larger financial world of capital markets, where the price of risk is determined in dealer markets for swaps of various kinds. The first lecture is a kind of conceptual introduction, while the second translates the standard finance account of forwards and futures into money view terms, as key building block for what comes after....
19 videos (Total 135 min), 1 reading, 1 quiz
19 videos
Bagehot's World: Separation of Money Markets and Capital Markets8m
The New World: Integration of Money Markets and Capital Markets10m
Funding Liquidity Versus Market Liquidity2m
Digression: Schumpeter on Banking and Economic Development4m
Payment Versus Funding5m
Reading: Gurley and Shaw2m
Financial Evolution: Indirect Finance to Direct Finance13m
Banking Evolution: Loan-based Credit to Market-based Credit11m
Preview: Central Banking and Shadow Banking8m
FT: Argentina in Court to Fight Debt Ruling4m
Banking as Advance Clearing5m
Forwards versus Futures13m
Forward Contracts, Fluctuations in Value and Final Cash Flow14m
Futures Contracts, Fluctuations in Value and Daily Cash Flows6m
Cash and Carry Arbitrage, Defined7m
Cash and Carry Arbitrage, Explained as Liquidity Risk5m
Cash and Carry Arbitrage, Explained as Counterparty Risk2m
Cash and Carry Arbitrage, as a Natural Banking Business3m
1 reading
Gurley and Shaw10m
1 practice exercise
Banking as Advance Clearing12m
Week
11
3 hours to complete

Banking as Advance Clearing, continued

In the modern economy, the price of risk is determined in swap markets that distinguish specific forms of risk, most importantly interest rate swaps and credit default swaps. The Treynor model can be adapted to understand how the price of risk is formed in dealer markets....
19 videos (Total 131 min), 1 reading, 1 quiz
19 videos
Reading: FOMC Report (1952)7m
Treasury-swap Spread, a Puzzle11m
What is a Swap?2m
Why swap? An Example from Stigum10m
Market Making in Swaps8m
Money Market Swaps, Example5m
Life in Arbitrage Land5m
Treasury-swap Spread, Liquidity Risk or Counterparty Risk?7m
FT: Internationalization of the Euro5m
Credit Indices3m
Fischer Black (1970), Risk-free Security2m
What is a Credit Default Swap (CDS)?6m
Corporate Bonds3m
CDS Pricing11m
Market Making in CDS4m
Example: Negative Basis Trade and Liquidity Risk10m
Example: Private backstop of Marketmaking in CDS15m
Example: Synthetic CDO as Collateral Prepayment6m
1 reading
FOMC10m
1 practice exercise
Banking as Advance Clearing, continued12m
Week
12
3 hours to complete

Money in the Real World

In this final module, we bring the entire course together. These two lectures build on everything that came before, and show how all the pieces fit together into a unified whole. Specifically, the first lecture uses the conceptual apparatus of the money view to make sense of shadow banking as the quintessential form of banking for the modern financially globalized world. And the second lecture shows how the conceptual apparatus of the money view fits with standard economics view and finance view, by drawing attention to dimensions of the world from which the standard views abstract....
17 videos (Total 134 min), 1 reading, 1 quiz
17 videos
Shadow Banking vs Traditional Banking6m
Liquidity and Solvency Backstops7m
Global Dimension5m
Evolution of Modern Finance3m
What is Shadow Banking?12m
Backstopping the Market Makers7m
Regulation of Systemic Risk6m
Regulation of Collateral and Payment Flows10m
Private Backstop and Public8m
FT: Future of Banking4m
Three World Views15m
Economics View: Commodity Exchange8m
Finance View: Risk15m
The Education of Fischer Black4m
Steps From the Finance View to the Money View7m
A Money View of Economics and Finance5m
1 reading
Shadow Banking10m
1 practice exercise
Money in the Real World12m
Week
13
20 minutes to complete

Final Exam

The previous module operated in effect as a review of the entire course, so if you were able to make sense of those lectures, you are ready for the final. But maybe you first want to have a look back at the second lecture, "The Natural Hierarchy of Money", for a high-level summary of the essential concepts of the money view. For almost everybody, the money view is a new and unfamiliar way of thinking about the world, and it takes a while to get used to it. The purpose of this course is to plant the seed, by demonstrating the value of this way of thinking for making sense of real world problems. Once you are done with the final exam, the real work begins, of using the money view to make sense of whatever real world problems confront you in your own daily life....
1 quiz
1 practice exercise
Final Exam20m
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Top Reviews

By BGJul 17th 2017

An intellectually engaging course opening a debate about how we think about markets and how we should tackle the current challenges. Accessible to non-economists. I warmly recommend it to everyone.

By AKNov 18th 2017

This course is really useful to me ... I was always interested on monetary and fiscal policies and associate mechanism in Macroeconomics and this course covers the Monetary part in good details.

Instructor

Avatar

Perry G Mehrling

Professor
Economics, Barnard College

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