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2ème année de la Grande Ecole de l’Institut de Rabat
Semestre 3
Monetary and Financial Economic
Lecture 1
Dr. Azeddine DAIF
1st Term 2017-2018
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Contact
• Lectures
• Email* ([email protected])
*Please mention in email’s subject : “ISCAE_MFE_Subject”
Monetary and Financial Economics
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Course objectives
• Study the role of money in the economy.
• Examine the links among monetary policy, the business cycle, and
economic variables.
• Understand how financial institutions such as banks work.
• Study interest rate behaviors.
• Introduce the interest rate risk management.
• Identify the reasons for and list the types of financial market
regulations.
• Study the financial crisis of 2007-2009.
• Learning approach: Mix of formal lectures and applications
Material: book, slides. Artciles.
Monetary and Financial Economics
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Assessment
• Attendance and Participation : 20%
• Mid-term Exam: 40%
• Final Exam : 40 %
Monetary and Financial Economics
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Indicative Course Outline
• The Financial System: an Overview
• Money Defined & Measured
• The goals and structure of central banks
• Money and Money Supply Process
• Quantity Theory, Inflation and the Demand for Money
• The tools of monetary policy,
• The Conduct of monetary policy
• An economic analysis of financial structure
• Banking and the management of financial institutions
• Fixed Income: Interest Rates and Returns
• Interest Rate Risk Management
• Financial crises
Monetary and Financial Economics
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• REQUIRED TEXTBOOKS
– Mishkin, F. S. , Matthews K., and Giuliodori M. (2013). The
Economics of Money, Banking and Financial Markets, European
Edition. 10th edition, Pearson.
– Cecchetti, G. S. and K. L. Schoenholtz, (2015). Money, Banking and
Financial Markets, 4th edition,
• Other References
– Bank Al Maghrib Reports (www.Bkam.ma)
– European Central Bank Reports (www.ecb.eu)
– Financial Times. The Wall Street Journal
– Regular reading of The Economist.
– L’Economiste, la Vie eco.
Monetary and Financial Economics
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Monetary and Financial Economics
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1. What is the Financial System?
Views from the floor
Monetary and Financial Economics
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• Performs the essential function of channeling funds from
economic players that have saved surplus funds to those that
have a shortage of funds.
• Promotes economic efficiency by producing an efficient
allocation of capital, which increases production.
• Lower transaction costs (time and money spent in carrying out
financial transactions)
– Economies of scale
– Liquidity services
• Reduce the exposure of investors to risk
– Risk Sharing (Asset Transformation)
– Diversification
Monetary and Financial Economics
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• Deal with asymmetric information problems:
– Adverse Selection (before the transaction): try to avoid
selecting the risky borrower by gathering information about
them
– Moral Hazard (after the transaction): ensure borrower will
not engage in activities that will prevent him/her to repay the
loan.
• Sign a contract with restrictive covenants.
Monetary and Financial Economics
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Flows of Funds Through the Financial System
Monetary and Financial Economics
Mishkin (2013)
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1. Money
To pay for purchases and store wealth.
2. Financial Instruments
To transfer resources from savers to investors and to transfer
risk to those best equipped to bear it.
3. Financial Markets
To buy and sell financial instruments.
4. Financial Institutions
To provide access to financial markets, collect information &
provide services.
5. Regulatory Agencies
To provide oversight for financial system.
6. Central Banks
To monitor financial Institutions and stabilize the economy.
Monetary and Financial Economics
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1. Money :
– Money has changed from gold/silver coins to paper currency to
electronic funds.
2. Financial instruments
– Debt instruments (maturity)
– Equities (dividends)
Monetary and Financial Economics
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3. Financial Markets
• Debt and Equity Markets
• Primary and Secondary Markets
– Investment banks underwrite securities in primary markets.
– Brokers and dealers work in secondary markets.
• Exchanges and Over-the-Counter (OTC) Markets:
– Exchanges: NYSE, CSE
– OTC markets: Foreign exchange, Treasury Bond
• Money and Capital Markets:
– Money markets deal in short-term debt instruments
– Capital markets deal in longer-term debt and equity instruments
Monetary and Financial Economics
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3. Financial Markets
– Once financial markets were located in coffeehouses and
taverns.
– Then organized markets were created, like the New York Stock
– Exchange Vs. OTC Markets.
– Now transactions are mostly handled by electronic markets.
• This has reduced the cost of processing financial
transactions.
– There is a much broader array of financial instruments
available.
Monetary and Financial Economics
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4. Financial Institutions
– Banks began as vaults, developed into institutions, to today’s
financial supermarket.
– Offer a huge assortment of financial products and services.
Monetary and Financial Economics
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Six Parts of the Financial System
5. Government regulatory agencies
– Government regulatory agencies provide wide-ranging
financial regulation - rules and supervision.
– In Morocco : BAM, AMMC, ACAPS, OC
• To ensure the soundness of financial intermediaries:
– Restrictions on entry (License process).
– Disclosure of information.
– Restrictions on Assets and Activities (control holding of
risky assets).
– Limits on Competition
Monetary and Financial Economics
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Six Parts of the Financial System
6. Central banks
– Central banks began as large private banks to finance
wars.
– Central banks control the availability of money and credit
to ensure low inflation, high growth and stability of
financial system.
– Today’s policymakers strive for transparency in their
operations.
– Issue of Independence!
Monetary and Financial Economics
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Five Core Principles of Money and Banking
1. Time has value.
2. Risk requires compensation.
3. Information is the basis for decisions.
4. Markets determine prices and allocation resources.
5. Stability improves welfare.
Monetary and Financial Economics
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Five Core Principles of Money and Banking
A. Core Principle 1: Time has value
– Time affects the value of financial instruments.
– Interest is paid to compensate the lenders for the time the
borrowers have their money.
B. Core Principle 2: Risk requires compensation
– In a world of uncertainty, individuals will accept risk only
if they are compensated.
– In the financial world, compensation comes in the form of
explicit payments: the higher the risk the bigger the
payment.
Monetary and Financial Economics
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Five Core Principles of Money and Banking
C. Core Principle 3: Information is the basis for decisions
– The more important the decision, the more information we
gather.
– Collection and processing of information is the foundation
of the financial system.
Monetary and Financial Economics
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Five Core Principles of Money and Banking
D. Core Principle 4: Markets determine prices and allocate
resources.
– Markets are the core of the economic system.
– Markets channel resources and minimize the cost of
gathering information and making transactions.
– The better developed the financial markets, the faster the
country will grow.
Monetary and Financial Economics
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Five Core Principles of Money and Banking
E. Core Principle 5: Stability improves welfare.
– A stable economy reduces risk and improves everyone's
welfare.
– Financial instability in the autumn of 2008 triggered the
worse global downturn since the Great Depression.
– A stable economy grows faster than an unstable one.
Monetary and Financial Economics
