The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant. Three features of the new system are central. Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse. Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order. Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That's the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.
Monetary Transmission Mechanism
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来自 Columbia University 的课程
Economics of Money and Banking
503 个评分
从本节课中
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.
与讲师见面
Perry G MehrlingProfessor
Economics, Barnard College
Connect that now, to the story I was telling you last time about
the monetary transmission mechanism, because that's
what, I was telling you last time.
Okay, remember there were three diagrams.
There was one we started with securities
market, the dealer market for bonds, then we
moved to the term funding rate okay, then we move to the Fed Funds market okay.
Now I am just going to go in the reverse direction,
okay, because the Fed funds market, is here, okay, term
funding, okay, is three months, and then the bond market is
out here, okay, these are the three, these are the
three sort of points of reference that I introduced last time.
Let me just refresh your memory about what those things look like.
Okay?
so we will start here on the left with. The
Fed Funds market.
And you'll remember that we were talking about a kind
of outside spread that was set by the central bank.
That we have the interest on excess reserves, and the discount rate.
As the outside spread. And that there is a upward-sloping sort of
bid-ask kind of line here. and so this is an interest rate here.
But it's an overnight interest rate, let's say,overnight interest rate.
I, I notice in my notes that I, I put on
the horizontal axis here, liquidity risk, when I taught this on Monday.
and, and I put on the horizontal axis for the term also liquidity risk.
Okay.
So let's, let's have two different terms so we don't confuse ourselves.
Let's call this settlement risk, here, because we
introduced the Fed Funds market when we were talking
about the payment system, and talked about how
this allowed, allowed people to put off' til tomorrow.
You know borrow the reserves they need to clear
their payments now and put off payment until until
tomorrow, so so this is sort of all about
settlement risk in overnight and short, short, short-term here.
and then we had a second tier.
Okay. Where we were
talking about liquidity risk and proper
[SOUND]
Which is the risk involved in borrowing short, and lending long.
Or borrowing overnight, and lending for three months.
Something like that. That was what he had in, had in mind.
and again we had upward sloping. And this was a term interest rate here.
Not overnight. Okay.
And then we had a third diagram that was about the bond
market, and here we had an asset price, the price of bonds.
and so we had a downward sloping curve, and here, this was sometimes
I put, I put inventories on here, so this is a long position in bonds.
but the inventories.
The important thing about the inventories is that
this is exposure to a certain kind of risk.
So this is price risk, here.
Okay?
When I develop this, we started with this' because this
is the Traynor model, okay that you've seen now twice.
Okay?
And, and then I, I said, well let's then use that same thing to talk about this.
And then let's use that same thing to talk about this.
Okay.
What I'm, what I'm worry, when we talk about the
transmission mechanism for monetary policy, we're going the other way.
Okay? We're saying that the Fed is fixing here
a target. Fed Funds rate.
Okay? And it's trading in the market.
And I showed you last time how it's doing that.
It's doing temporary open market operations.
in order to make that effective.
Okay? That trading, leads to a, a, a.
Level, of settlement risk in the, in the economy here.
Okay. Which is the discipline element.
Because I'm showing it to, to the right here, okay?
and and and or we saw now there's so many excess reserves, it's smack
up against, against the left, so that was total elasticity here, so it's sort of.
Discipline on this side.
Elasticity the more you go in this direction.
So this diagram is meant to help you think about the Fed in choosing its
Fed funds target is trying to choose how much, how much it wants to lean
towards making things a little more elastic.
How much it wants to lean toward making things a little more disciplined.
And that's a policy choice.
That's a policy choice.
The same interest rate is going to be, is going to be elath, cause elasticity
in some circumstances and in, and in, in a in discipline in other circumstances.
So, this is very much responding to the conditions of
the market but this is a way of understanding what the
Fed is doing when it's picking off a Fed Funds rate.
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that is connected to our understanding of the microstructure of the market.
And isn't just you know, an algebraic equation there that
doesn't seem to really connect to the reality of, of institutions.
This then gets transmitted. Okay?
Because remember here we had we had, there's a, there's a certain amount of.
Of liquidity risk here, to a term rate, to a three term rate or something,
which is the spread between the three month rate and the fed funds rate, okay.
And it gets transmitted, also, to a certain amount of price risk.
Here, inventories, I'm showing long bond holdings because
the dealers tend to hold quote long bond
And so the argument I would, I would make here, just a little spread around that.
Okay, is that the if the Fed wants to move the
Fed Funds rate around, what it does is it shifts the target
then also shifts the discount rate because that's a spread above
and it's going to shift this so it's moving all of this.
That makes, if it, if it raises the Fed Funds rate,
that narrows the, the, the gap between fed funds
and the term rate which the dealers aren't happy with.
Okay.
So they raise their, their term interest rates so
that pushes upward pressure on the term interest rate.
That makes funding more expensive.
So, so, bond hold, bond dealers here don't want to quite hold as a large inventory.
So, that puts downward prices on bond prices.
So, the story I'm telling here is about a transmission
mechanism from the overnight Fed Funds rate,
to the term interest rate, to asset price.
Ok, and those asset prices then influence the price
of loans, because workers backed securities are in fact bonds.
and, and so forth. And so the transmission to the, to the
real economy comes through the price of money here, okay, and, and And the price
of capital here.
The money market and the capital market here.
This I think is a clear, clean story about monetary
transmission that doesn't involve talking about instituions that no longer exist.
Okay, like banks that are making multiples of their
reserves, you know, money multiplier ideas, stuff like this.
This stuff just does not connect up with
the reality in modern, in modern financial markets.
And so, but, and so, many people in finance even say,
they because I told you in finance theory and asset pricing theory.
Of an abstract from liquidity in the first place, and
they just say, well, so there should be no monetary theory.
Okay.
And I'm saying, there should be monetary theory.
It jsut should be focusing on how the money market works.
Okay.
Not, not on bank lending channel or something like that.
Okay. That, that this, this channel
works instantaneously You know because when you, it
doesn't really require anyone to expand lending or anything.
because it's arbitrage relationships and securities markets.
OK?
So these, these things move you move
this, you're going to move the term interest rate.
You're going to move this, this price.
You may not move it exactly the way you want.
Because there's a market out there that's watching what you're doing.
And anticipating what comes next and all of that.
OK?
But, but this is a transmission mechanism that I think you can hang your hat on
for the modern economy in which there is
deregulated banking and, and, and, and so forth.
So, monetary policy does matter.
Okay?
In, in, in the modern world despite all that deregulation.
I'm not going to tell you what monetary policy should be doing.
You know, what we should be doing with this, because I don't really know.
This is what we have to rethink.
You know, we, the whole profession walked down this road, and it's not clear
that this is the right way to think about what the Fed should be doing.
Anymore, okay.
But we're still using that because it's what we have.
Okay?
And, what I'm, what I'm, what I'm
emphasizing in this class is let's just understand
when we talk about the Fed changing the Fed Funds rate, what are we imagining?
How are we imagining
that is going to influence the real economy or the price level or something?
And this is the first step here that I want to get you to see.
The transition, trans, transmission from the Fed Funds
Market to the term interest rate to asset prices.
