Chapter 15
Money, Inflation, and Banking
Teaching Goals
In the modern world, the u of money as a social contrivance is largely taken for granted. Although study of the mechanisms of trading may em rather arcane, it may open some of the students’ minds to the value of adopting a uniform medium of exchange. Students should fully understand that a world of rugged individualism in which everyone is lf-sufficient is the most likely alternative to a monetary economy. The level of the money supply is neutral. The growth rate of the money supply has allocative effects on the economy. Continuous growth in the money supply caus inflation. Inflation erodes money’s ufulness as a medium of exchange. As inflation worns, houholds substitute nonmarket activities, which require no money, for market activities that do require money. Therefore, as the inflation rate increas, output and employment decrea.
Financial intermediation is an important topic for macroeconomists becau of the role of financial intermediaries in providing a medium of exchange, and becau the interactions between central banks and financial intermediaries is an important component of the money supply process. Financial i
ntermediaries acquire illiquid asts in the form of loans and transform the asts into more liquid asts preferred as media of exchange. The Diamond-Dybvig model is a uful tool that demonstrates how banks might offer insurance against an untimely need for liquidity. The Diamond-Dybvig model is also uful in explaining bank runs and how government-provided deposit insurance may prevent such runs.
Classroom Discussion Topics
An important tenet of monetary economics is the dominance of monetary economies over economies without a commonly accepted medium of exchange. Yet we still find the existence of barter clubs. The clubs sometimes arrange direct one-for-one trades between individuals or business that have a double coincidence of wants. Sometimes they arrange three-way transactions similar to tho depicted in
Figure 15.2 in the text. Some of the clubs utilize credits that circulate as a private medium of exchange between members. To find some examples, suggest a Google™ arch on the term, “barter.” Ask if any of the students have heard of such arrangements or even participated in them. Are the urs of the rvices irrational? Does the existence of such organizations suggest that monetary exchange is becoming outdated?
144 Williamson • Macroeconomics, Third Edition
The widespread u of computer technology has lowered the information costs associated with barter
exchange. But such technology also reduces the cost of engaging in monetary transactions. The marketing materials of the exchanges emphasize that they allow business to buy necessary products and rvices without the need for cash. Does this mean that barter exchange can combine credit exchanges with goods and rvices exchanges? The marketing also promis a source of new business for members. In a perfectly competitive world, there is no need to find more customers. Does this mean that barter
transactions are enhanced by the existence of monopolistic competition? The clubs also suggest the importance of personal relationships between buyers and llers. Is this a solution to informational
problems that are inherent in anonymous markets? In any event, the total volume of transactions on such exchanges is a trivial percentage of all transactions. It is not likely that the foundations of monetary theory will become outdated in the near future.
有雪Most of today’s students have not had any personal experiences with significant inflation or low confidence in the banking system. Ask the students if they ever worry about inflation or the banking system. There may be students from other countries (Russia, Eastern Europe, the former Yugoslavia, etc.) who have experienced quite a lot of inflation. Can anyone imagine a t of circumstances that would lead to a rious U.S. inflation problem? Would students find more inflation objectionable? Do the problems that students ascribe to
inflation conform to theory, or are they more a figment of confusion between real and nominal variables? There may also be students from countries that experienced the collap of the banking ctor (Argentina, etc.). They can testify how a functioning and confidence-inspiring banking system is esntial to the working of a modern economy.
Outline
I. Alternative Forms of Money
A. Commodity M oney
B. Circulating Private Bank Notes
C. Commodity-Backed Paper Money
D. Fiat M oney
E. Transaction Deposits at Private Banks
II. Money and the Abnce of a Double Coincidence of Wants
A. Barter and the Abnce of a Double Coincidence of Wants
B. Commodity Money and Trade
C. Fiat Money and Trade
III. Inflation in the Monetary Intertemporal Model
A. Real and Nominal Interest Rates
1. Nominal Bonds
2. The Nominal Interest Rate
3. The Fisher Relationship
B. Inflation Effects
1. The Money Supply Growth Rate
2. Optimality Conditions
a. Consumption—Savings Choice: ,'1C C MRS r =+
b. Current Leisure—Consumption Choice: ,1l C w MRS R
=+
Chapter 15 Money, Inflation, and Banking 145
C. A Change in the Growth Rate of the Money Supply
1. Output and Employment Effects
2. The Friedman Rule
3. Deflation
4. Hyperinflation
IV. Financial Intermediation and Banking
A. Properties of Asts
1. Rate of Return
2. Risk
a. Diversifiable
b. Nondiversifiable
3. M aturity什么是阳痿
4. Liquidity
B. Financial Intermediation
多少遗憾
1. Characteristics
a. Borrow from One Group and Lend to Another
b. Diversified
c. Ast Transformation
d. Information Processing
2. Types of Financial Institutions
a. Insurance Companies
b. M utual Funds
c. Depository Institutions
3. Problems with Direct Lending
a. Costly M atching
b. Difficulty Evaluating Credit Risks
c. Duplication in Credit Risk Evaluation
d. Lending to Few Borrowers Is Risky
e. Loans Are Illiquid
f. Lenders Prefer Shorter Maturities Than Borrowers
V. The Diamond-Dybvig Model
A. Interrupted Production Process
B. The Optimal Deposit Contract
C. Equilibria with and without Bank Runs
VI. Deposit Insu r ance
A. Bank Failures in the Great Depression
B. M oral Hazard西安法门寺简介
C. Too-big-to-fail policy
146 Williamson • Macroeconomics, Third Edition
Textbook Question Solutions
Questions for Review
1. The five forms of money include commodity money, circulating private bank notes, commodity-
backed paper currency, fiat money, and transaction deposits at private banks.
2. Both Yap stones and playing card money in New France are examples of commodity-backed money.
渑池相会However, the commodity backing of the playing card money was uncertain, whereas the existence of the Yap stones was well known to esntially everyone living on the island of Yap.
3. The abnce of a double coincidence of wants means that traders cannot find trading partners wh
o
want to make the exact complementary barter transaction. In such a barter economy, traders must first trade their goods for something that they believe is desired by the traders who would provide them with the good that they wish to purcha. A cond barter transaction later provides the good that they wish to purcha. This trading process is greatly simplified if agents can agree on a commonly
accepted medium of exchange that can be ud in all trades.
4. The steady-state effects of an increa in the money growth rate include an increa in the rate of
inflation, a reduction in output, a reduction in employment, an increa in the real wage, and an
increa in the nominal interest rate.
5. Inflation induces houholds to economize on holding money, which has no social cost. This reaction
leads to too little output and employment, and the consumption of too many credit goods and not enough cash goods.
6. Probably not. The costs of low to moderate inflation are quite small, and there may be significant
costs in lost output in the transition to lower inflation.
7. The necessary steady-state deflation may involve costs not explicitly included in the monetary
intertemporal model. The potential costs probably outweigh the relatively small gains achieved by lowering the nominal rate of interest to zero. Another, less dangerous policy would be to allow the payment of interest on money, which would also eliminate the opportunity cost of holding money. 8. The four principle properties of an ast are its rate of return, the amount of its nondiversifiable risk,
its maturity, and its liquidity.
9. A financial intermediary borrows from one group of economic agents and lends to another,
diversifies by lending to and borrowing from large groups of agents, transforms asts, and process information.独活的功效与作用
10. Examples of financial institutions include insurance companies, mutual funds, and depository
institutions.
怎样鉴定天珠
11. Depository institutions are a unique type of financial intermediary becau their liabilities are ud
extensively in transactions.
12. In the Diamond-Dybvig model, bank deposit contracts offer consumers a higher level of expected
utility than they could otherwi obtain. The bank esntially offers insurance against the need for early withdrawal. Bank deposits are more liquid than the other asts that consumers could hold.
Chapter 15 Money, Inflation, and Banking 147
13. In the Diamond-Dybvig model, banks are able to diversify risks by borrowing from a large number of
depositors. While each individual borrower’s actions cannot be accurately predicted, the average behavior of a large number of borrowers is perfectly predictable. Banks provide ast transformation by offering liquid deposit liabilities, while holding less liquid asts.
14. Banks are able to honor their deposit contracts as long as no late consumers withdraw their deposits
early. As long as banks can credibly honor their contracts, it is irrational for late consumers to
withdraw early. However, if some late consumers believe that some other late consumers might
withdraw early, the consumers fear that the bank may not be able to honor its cond-period
commitments. When bank runs occur, tho in the front of the line get 1,c while tho at the end of
the line get zero. If one of the late consumers decided not to run, she would be guaranteed to get
210.c c =< Therefore all of the late consumers decide to withdraw their deposits early and the bank
cannot honor any of its cond-period commitments.
15. Bank runs only occur if depositors lo confidence in the bank’s ability to honor its commitments.
Third-party deposit insurance can credibly commit to making good on the bank’s commitments even if a run develops. The resulting confidence assures the late consumers that they will receive their deposits back, and so, becau there is no reason for late consumers to withdraw early, bank panics should not occur.
16. Moral hazard is the phenomenon in which insured economic agents are less careful in preventing
insured loss. Explicit deposit insurance and implicit promis of a too-big-to-fail policy provide incentives for depository institutions to take on excessive risk.
Problems
1. In this ca, Type I traders would u the commodity money they produce (good 2) to buy good 1
from Type III agents. Type III agents would then u the commodity money to buy good 3 from
Type II agents. Type II agents would consume the commodity money.
2. Consumes 1Consumes 2Consumes 3Type I Type II Type III Produces 3Produces 1Produces 2⎧⎧⎧⎪⎨⎨⎨⎪⎩⎩⎩
(a) Type II agents who produce the commodity money (good 1) u the commodity money to buy
嘴唇上火起泡good 2 from Type III agents. Type II agents then u the commodity money to buy good 3 from
Type I agents. Type I agents consume the commodity money.
(b) Type I agents u fiat money to buy good 1 from Type II agents. Type II agents u fiat money to
buy good 2 from Type III agents. Type III agents u fiat money to buy good 3 from Type I
agents.
3. This question combines the effects of an increa in the growth rate of the money supply, developed
in this chapter, with the effects of a permanent increa in government spending, analyzed in
Chapter 9. The increa in the money supply growth rate shifts the output supply curve and the output demand curve to the left. The text considers a benchmark ca in which the sizes of the shifts are equal. Output and consumption both decrea by the same amount and the real interest rate is
unchanged. The nominal interest rate increas becau expected inflation increas. Note however, that the leftward shift in the output demand curve is due to a substitution effect, not a wealth effect. The inflation acts as a tax on market activity relative to nonmarket activity. However, in
the abnce of a change in government spending, the government budget constraint requires that the igniorage generated by money growth be returned to consumers in the form of a decrea in lump-sum taxes.
