Category Archives: Eric Tymoigne

Money and Banking Part 17: History of Monetary Systems

By Eric Tymoigne

This is the last post of this series. Many more topics need to be covered to make a full Money and Banking course, but the series should help those of us who are dissatisfied with the current Money & Banking textbooks.

Here is what is coming up in the near future: I will edit all the posts for typos (most of them hopefully) and to account for comments I received. Devin Smith kindly agreed to post the changes without changing any of the links. Formatting the text from a Word doc to a webpage is actually tedious work so many thanks to Devin. An M&B tag will be created at the top of the NEP homepage that will direct readers to links for each post. I will also make a fancy-looking pdf with all the posts, a table of content, etc. It will be more textbook-like and may be more appealing for some readers.

In the long term, there is a textbook coming. When? Difficult to say. I plan to write most of the first draft of the text next spring while on sabbatical. Then, several rounds of testing (and rewriting) must be done to include feedbacks from students. Test banks and exercises must be created and tested too. So there is some work to do.

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Money and Banking Part 16: FAQs about Monetary Systems

By Eric Tymoigne

The following answers a few question in order to illustrate Post 15 and to develop certain points.

Q1: Can a commodity be a monetary instrument? Or, does money grow on trees?

Let us tackle the idea that “gold is money”. Clearly, a gold ingot is not a monetary instrument. There is no issuer, no denomination, no term to maturity or any other financial characteristics. A gold ingot is just a commodity, a real asset not a financial asset. Gold coins have been monetary instruments and are still issued at times (Figure 1).

Figure 1. Gold (ingots) vs. Gold Coin (2009 $50 American Buffalo Gold Coin)

Figure 1. Gold (ingots) vs. Gold Coin (2009 $50 American Buffalo Gold Coin)

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Money and Banking Part 15: Monetary Systems

By Eric Tymoigne

Throughout this series, posts have used balance sheets extensively to get an understanding of the monetary operations of developed economies, but nothing has been said about what a monetary instrument is. It is time to spend some time on the nature of monetary instruments and the inner workings of monetary systems. A monetary system is composed of two core elements:

  • A unit of account that provides a common method of measurement: the euro (€), the pound sterling (₤), the yen (¥), the dollar ($), etc.
  • Monetary instruments: specific financial instruments denominated in the unit of account and issued by the government and the private sector.

This post first explains what financial instruments are and how monetary instruments fit within the existing range of instruments. It then delves into what determines the nominal and real value of monetary instruments and into what makes them accepted.

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Money and Banking Part 14: Financial Crises

By Eric Tymoigne

While visiting the London School of Economics at the end of 2008, the Queen of England wondered “why did nobody notice it?” In doing so, she echoed a narrative that had been promoted among some prominent economists: the Great Recession (“it”) was an accident, a random extreme event that no-one saw coming. This narrative is false. Quite of few economists saw it coming and it was not an accident. A previous post showed how different theoretical frameworks about financial crises lead to different regulatory responses. This post studies more carefully the mechanics of financial crises and how an economy gets there.

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Money and Banking Part 13: Balance Sheet Interrelations and the Macroeconomy

By Eric Tymoigne

Past posts have focused on the mechanics of a specific balance sheet, specifically that of the central bank and of private banks. This post looks at the balance-sheet interrelations between the three main macroeconomic sectors of an economy: the domestic private sector, the government sector and the foreign sector. This macro view provides some important insights about issues such as the public debt and deficit, policy goals that are more likely to be achieved, the business cycle, among others.

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Money and Banking Part 12: Economic Growth and the Financial System

By Eric Tymoigne

Money is the blood of capitalist enterprise and finance is about money now for money later. As such a well-developed financial system is essential for economic activity in a capitalist economy. The broader the range of promissory notes that can be issued, the more accommodative the financial system is to the demands of the productive system. Households cannot fund the purchase of a house with a credit card and there is no point in buying groceries with a 30-year mortgage. While all this may seem obvious, economists have been divided about the relevance of finance for economic activity. This divide ultimately rests on different premises on how to do economics, which John Maynard Keynes characterized as Real Exchange Economy versus Monetary Production Economy.

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Money and Banking – Part 11: Inflation

By Eric Tymoigne

We are done with the study of banking operations. The next step is to incorporate them into the analysis of macroeconomic issues and this post begins on such topic by focusing on inflation. When inflation is mentioned, it is usually in relation to the cost of buying newly produced goods and services for consumption purpose. Another type of inflation concerns asset prices, i.e. the price of non-producible commodities and old producible commodities. This post does not study asset-price inflation, which concerns theories of interest rate.

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Money and Banking-Part 10: Monetary Creation by Banks

By Eric Tymoigne

The last three posts have explained how the operations of banks are constrained by profitability and regulatory concerns, and how banks operate to try to bypass these constraints. It is now time to go into the details of how banks provide credit and payment services to the rest of the economy.

Monetary Creation by Banks: Credit and Payment Services

Bank A just opened for business and its balance sheet looks like this:

b1

Now comes household #1 who wants to buy a house worth $100 from household #2. #1 sits down with a banker (a.k.a. loan officer) who asks a few questions regarding annual income, available assets, monetary balances, the downpayment #1 is willing to make, among others. The banker asks for documentations that corroborate the answers provided by #1.
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Money and Banking – Part 9: Banking regulation

By Eric Tymoigne

It may surprise you to know that the banking sector is one of the most regulated industries in the United States with a bank having to file regulatory documents with several agencies. These regulations determine how banks should and should not operate their business in terms of many aspects; from disclosure of information to potential customers, to means of determining creditworthiness of a potential client, to the amount of reserves to hold, to management issues, among others. For example the National Association of Mortgage Brokers noted in 2006

Mortgage brokers are governed by a host of federal laws and regulations. For example, mortgage brokers must comply with: the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), the Home Ownership and Equity Protection Act (HOEPA), the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), the Gramm-Leach-Bliley Act (GLBA), and the Federal Trade Commission Act (FTC Act), as well as fair lending and fair housing laws. Many of these statutes, coupled with their implementing regulations, provide substantive protection to borrowers who seek mortgage financing. These laws impose disclosure requirements on brokers, define high-cost loans, and contain anti-discrimination provisions. Additionally, mortgage brokers are under the oversight of the Department of Housing and Urban Development (HUD) and the Federal Trade Commission (FTC); and to the extent their promulgated laws apply to mortgage brokers, the Federal Reserve Board, the Internal Revenue Service, and the Department of Labor.

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Money and Banking-Part 8: The Private Banking Business

By Eric Tymoigne

The US financial system is extremely complicated and this series shades light only on some corners of that system by focusing on the banking sector. Here is a broad picture of the US financial system (some things have changed since the last time I made this). Since the beginning of this M&B series, posts have emphasized the importance of balance sheet to get a solid understanding the mechanics at play in the financial sector. This post continues that trend.

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