Money and Banking

We construct a simple environment that combines a limited communication friction and a limited information friction in order to generate a role for money and intermediation. We ask whether there is any reason to expect the emergence of a banking sector (i.e., institutions that combine the business of money creation with the business of intermediation). In our model the unique equilibrium is characterized, in part, by the existence of an agent that: (1) creates money (a debt instrument that circulates as a means of payment); (2) lends it out (swapping it for less liquid forms of debt); (3) is responsible for monitoring those agents in control of the capital backing the illiquid debt; and (4) collects on money loans as they come due. Furthermore, the bank money in our model is a debt instrument that embeds within it important stipulations that are found in actual private money instruments. Thus, our model goes some way in addressing the questions of why private money takes the form that it does, as well as why private money is typically supplied by banks.
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An Introduction to The Economics of Money Banking and Financial Market:

The economics of money banking and financial market is integral to the proper functioning of the banking system of an economy. It not only prevents overheating of the economy by letting appropriate quantity of money flow in the economy. Besides, anyone trying to figure out the basics of monetary and credit policy must possess an in-depth knowledge of the economics of money banking and financial market.

Understanding the basics of economics of money banking and financial market:

Money Banking:

The definitive money in the nation that consists of all the base money in private hands comes from the monetary base created by the Fed. Besides this money(in the particular country's currency) is also held by government and foreign central banks but this is not included in the Federal Reserve notes. Commercial banks are also an important player in the economics of money banking and financial market. Their main function is however bilateral. On one hand they lend out in the form of a deposit to the borrower which he can withdraw according to his wish. This money however is not counted as base money but is a form of base money on demand. On the other hand they accept cash deposits which is converted into credit when the bank lends it out in the market.
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A bank however can't lend out all the money it accepts as deposits as banks have to store away a portion of the money. These official reserve are in the form of vault cash and deposits at the Fed. Banks can also hold secondary reserve in the form of Treasury Bills. A bank complying with all the conditions laid down by the Fed may still be insolvent if its liability exceeds its other assets(principal assets being the recoverable as well as unrecoverable loans) and reserves.
So far so good, the quantity of money in circulation is ultimately decided by the public. The central bank just replenishes the lost reserves. The liquidity of the banking system is in jeopardy if the attempts made by the central bank fails. There is a monetary crisis and a deflationary situation is created. The interest rate adjustment then comes into play to correct the situation.



Financial Market:

A financial market is crucial for the smooth functioning of the economics of money banking and financial market. Financial market refers to the place where creation and exchange of financial instruments take place. Usually these are the stock exchanges in countries, but they also include online and distant communication and transactions between buyers and sellers. These include markets for transaction of stocks, bonds, foreign exchange. Money market and capital market are the two broad parts of a financial market. Money market deals mainly with short-term debt instruments such as Treasury Bills, commercial paper,banker's acceptance and certificate of deposits. The maturity period of most of these instruments are less than one year.
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Capital market on the other hand mainly deals with equity and long-term debt securities. With a maturity period of more than one year.

The economics of money banking and financial market is a huge subject that is ever changing and is without any prescribed syllabus. The above is only an attempt to understand the basics.

http://www.economywatch.com/banking/the-economics-of-money-banking-and-financial-market.html

http://www.prudentpressagency.com/modules/news/article.php?storyid=13938

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