Category Archives: Eric Tymoigne

Money and Banking—Part 18 (B): Overview of the Financial System: A World of Promises

Due to the size of this post, it  has been split into 2. You can find part A here.

Monetary instruments

Monetary instruments are the last type of marketable promissory notes. Post 15 and Post 16 are devoted to their analysis. One of the main characteristics of monetary instruments is that their term to maturity is instantaneous, that is, they can be returned to the issuer at the will of the bearer. In terms of cash, that is physical monetary instruments, the Financial Accounts of the United States make a difference between currency, Treasury currency, and coins. Coins are not included in the Accounts, currency refers to cash issued by the Federal Reserve (Federal Reserve notes), and Treasury currency refers to cash issued by the US Treasury (the Treasury no longer issues any currency but some of it still circulates). Unless stated otherwise, the term “currency” will be used to include paper-made monetary instruments issued by both the Federal Reserve and the Treasury. In 2015, the outstanding dollar amount of currency was $1.5 trillion and Figure 18.20 shows that 95 percent of it was held by the domestic non-federal sectors and the rest of the world. In 2015, about 40 percent of the US-dollar-denominated currency outstanding was held by the rest of the world, and about 55 percent was held by the domestic private sector. The ownership structure of Treasury currency outside the Federal Reserve is not provided by the Financial Accounts, but most of it must be held by the domestic private sector. The Federal Reserve is a significant holder of Treasury currency although the significance of its holding has shrink over time. In 1945, Federal Reserve’s holding of Treasury currency represented about 10 percent of outstanding currency, but, by 2015, it represented less than 5 percent of outstanding currency.

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Money and Banking—Part 18 (A): Overview of the Financial System: A World of Promises

Due to the size of this post, it was split in two. You can find Part B here.

The M&B series is back! The goal is to finish the first complete draft of the book by the time I need to teach my Money and Banking course. Over the coming months, the following topics will be covered.

  1. Overview of the financial system
  2. Federal Reserve System institutional analysis
  3. Interest rate and interest rate structure
  4. Pricing of securities
  5. Off balance sheet: Securitization
  6. Off balance sheet: Derivatives
  7. Monetary policy in action (issues surrounding interest-rate rules, transmission channels, etc.)
  8. International monetary arrangements and exchange rates
  9. Modeling (theory of the circuit, including the money supply in models, stock-flow coherency, portfolio constraints, capital gains, using models, etc.)

With these new sections and the seventeen other chapters of the book (which I have already rewritten in part to take into account feedbacks from my students), one should have a solid alternative preliminary text (let me know if I should cover more topics). The incomplete draft was well received by my students and has been downloaded over 8000 times as of May 2017.

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Bill Clinton’s Surplus: Not Something to Celebrate

Video from Eric Tymoigne’s Modern Money students at Lewis and Clark College.

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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