Transcript Chapter 1.
Chapter 1
Why Study Money, Banking, and Financial Markets?
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Why Study Money, Banking, and Financial Markets
To examine how financial markets such as bond, stock and foreign exchange markets work To examine how financial institutions such as banks and insurance companies work To examine the role of money the economy in 2
Financial Markets
Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds 3
The Bond Market and Interest Rates
A security is a claim on the issuer’s future income or assets A bond is a debt security that promises to make pre-determined fixed payment(s) at a specific date in future (maturity).
An interest rate is the cost of borrowing or the price paid for the rental of financial capital. Currently, int. rate is 5.75% in TR.
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Interest Rates on Turkish TBills and Gov. Bonds
simple annual int.rate
15 10 5 0 30 25 20
issue date
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The Stock Market
Common stock represents a share of ownership in a corporation A share of stock is a claim on the earnings and assets of the corporation A stock market is where stocks are traded in a “secondary market” 7
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ISE Stock Prices
İMKB-100 / ISE-100 50,000.00
45,000.00
40,000.00
35,000.00
30,000.00
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
0.00
A y / M on Ar th alı k 8 Ar 6 alı k 8 Ar 7 alı k 8 Ar 8 alı k 8 Ar 9 alı k 9 Ar 0 alı k 9 Ar 1 alı k 9 Ar 2 alı k 9 Ar 3 alı k 9 Ar 4 alı k 9 Ar 5 alı k 9 Ar 6 alı k 9 Ar 7 alı k 9 Ar 8 alı k 9 Ar 9 alı k 0 Ar 0 alı k 0 Ar 1 alı k 0 Ar 2 alı k 0 Ar 3 alı k 0 Ar 4 alı k 0 Ar 5 alı k 0 6 9
The Foreign Exchange Market
The foreign exchange market is where funds are converted from one currency into another The foreign exchange rate is the price of one currency in terms of another currency. Currently, 1.77 TL / $ The foreign exchange rate is determined in the foreign exchange market.
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10000000 1000000 100000 10000 1000 100 10 1
TL/$ exchange rate
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Value of Lira against Dollar See: Dolar 1950-2007.htm
1950 -1960: 2.82 TL / $ 1960 – August 1970: 9.08 TL / $ August 1970 – December 1971: 15.15 TL/$ December 1971 – May 1974: 14.30 TL / $ After 1980 variable (depreciations).
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Banking and Financial Institutions
Financial Intermediaries—institutions that borrow funds from people who have saved and make loans to people who need credit.
Banks—institutions that accept deposits and make loans. (not all financial intermediaries accept deposits). Investment banks, insurance companies, etc. do not accept deposits.
Other Financial Intermediaries—insurance companies, mortgage companies, pension funds, mutual funds and investment banks Financial Innovation—in particular, the advent of computers and internet globalized the market, sped up transactions, introduced new financial instruments.
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Money Supply and Business Cycles
Evidence suggests that money plays an important role in generating business cycles.
Business cycles: Recessions (unemployment) and booms (inflation) affect all of us.
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Money Supply and Inflation
Monetary Theory relates changes in the money supply to changes in total output (=total income) and the price level The aggregate price level (P) is a weighted average of the prices of goods and services produced in an economy Quantity theory of money (MV = PY) suggests and empirical data shows a connection between the money supply and the price level. 17
900000
Money supply and price level in TR
800000 700000 600000 500000 400000 300000 200000 100000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 M2Y (1987=100) GDP DEFLATOR (1987=100) 18
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110.00
Money Supply And İnflation in TR
100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
GDP defl. Growth M2Y growth rate 20 1997 1998 1999 2000 2001 2002 2003 2004
110 100 90 80 30 20 10 0 70 60 50 40 Inflation İs The Rate Of Change of The Price Level
GDP deflator vs CPI
GDPDeflator CPI 1997 1998 1999 2000 2001 2002 2003 2004 2005 21
Turkey 22
Monetary Policy and Fiscal Policy
Monetary policy is the control of the money supply. It is conducted by the Central bank. CB uses interest rates and other instruments to control the money supply. The Purpose of Mon. Pol. Is to control inflation which is the rate of change of the price level.
Conducted in Turkey by CBRT, In the U.S. by the Federal Reserve Bank (Fed) Why is it important to control the money supply?
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Monetary Policy and Fiscal Policy
Fiscal policy is the management of the govt. budget: government spending and taxation.
Budget deficit is the excess of expenditures over revenues for a particular year Budget surplus is the excess of revenues over expenditures for a particular year Any deficit must be financed by borrowing.
Before 1994, Turkish Treasury could borrow from the CB: CB printed money and lent to the govt by buying govt. bonds from Treasury. But this was abolished partially after 1994, and fully after 2001. Now CB is more independent from the govt.
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GOVERNMENT BUDGET CONSTRAINT At any year t, govt. budget must satisfy G t + rB t-1 = T t + B t -B t-1 G t B t-1 rB t-1 T t B t -B t-1 : govt. expenditures : govt.’s outstanding stock of debt.
: interest payment on outstanding debt (r:real int. rate) : taxes (revenues) : newly issued debt during year t 25
Turkish Government’s Budget
Billion TRL Revenues
Tax Revenues Other
Expenditures
Expenditures excl. İnterest P Interest Payments (IP)
Budget Balance
Budget Balance excl. IP (FDF)
Cash Balance Financing
Foreign Borrowing Net Domestic Borrıowing Net Other Financing
FDF/GDP (%) Budget Deficit / GDP 2000 33.3
26.5
6.8
46.6
26.2
20.4
-13.3
7.1
-12.6
12.8
2.7
9.4
0.7
5.7
-10.6
2001 51.8
39.8
12.0
80.4
39.3
41.1
-28.6
12.5
-32.1
32.1
-4.4
23.2
13.4
7.1
-16.2
Source: HM, http://www.mahfiegilmez.nom.tr/
2002 76.4
59.6
16.8
115.5
63.6
51.9
-39.1
12.8
-34.4
34.4
16.6
17.5
0.3
4.7
-14.3
2003 100.2
84.3
15.9
140.1
81.4
58.6
-39.8
18.8
-41.9
41.9
2.7
42.9
-3.7
5.3
-11.2
2004 109.9
90.1
19.8
140.2
83.7
56.5
-30.3
26.2
-30.4
30.4
4.0
30.8
-4.4
6.1
-7.1
35.9
-10.4
10.4
-1.2
21.3
-9.7
7.4
-2.0
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2005 134.8
106.9
27.9
144.6
98.9
45.7
-9.8
Turkish Government’s Budget
STOCK of DEBT & DEBT/GDP
(billion dollars) Total public debt Domestic public debt Foreign public debt Public Debt/GDP CBRT Foreign Debt Private sector foreign debt Private sector foreign debt/GDP USD Exchange rate GDP Source: Mahfi Eğilmez, “Borcumuz Ne Kadar?” Radikal, 16 Şubat 2010 Salı
2002
151.5
94.5
56.8
65.7
22.0
43.1
18.7
1.51
230.5
2009
301.3
227.3
74.0
47.8
13.6
176.3
27.0
1.50
630.0
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US Government’s Budget
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