Introduction to Money and Finance

Semester and Year Offered: Monsoon semester 2019

Course Coordinator and Team: Dr. Malabika Pal

Email of the coarse coordinator: malabika[at]aud[dot]ac[dot]in

Pre-requisites: None

Aim:

The course is designed as an introduction to the field of money and finance for beginners with no prior knowledge of the workings of the monetary system. The crucial role played by money and finance in the development of a country will be dealt with in the course. This is important to understand the nature of the development path that a country chooses and how that can be made inclusive through channels such as microfinance. The aim is to explain certain key concepts needed to understand contemporary issues which have an impact on the domestic and international economy.

Course Outcomes:

On successful completion of the course, the students will be able to:

1. Demonstrate an understanding of the fundamental concepts involved in the functioning of the monetary and financial system.

2. Demonstrate an understanding of what causes disruptions in the system and what that implies for the economy.

3. Demonstrate an understanding of the mechanisms that lie behind some major contemporary issues like the financial crisis of 2008, the building of a global currency by China and the demonetization experiment.

Brief description of the Modules/Main modules:

This course will begin with a module which attempts to bring out what constitutes money, its types and functions. This will briefly include some of the alternative perspectives like those given by sociologists and anthropologists with examples of the operation of the monetary system in different societies and the impact of global finance on these. It will attempt to use introductory readings to familiarize students with the basic framework. The alternative perspectives provided give directions for further enquiry which can be taken up in home assignments and presentations since they are important avenues for research and give a more comprehensive understanding of the diversities and complexities involved. There will also be a brief introduction to international finance.

The next section studies the functioning of the money market, the role played by finance in economic development and what causes disruptions in the financial system. This section will be followed by problems in the entire financial system like financial crises and recessions and the issue of financial regulation. The final section covers some contemporary issues in global and domestic finance. An understanding of issues like the financial crisis of 2008, the demonetization experiments and the building of a global currency by China are vital for any discussion of the domestic and global financial system. The course attempts to provide a foundation and some directions for those interested in going deeper into these issues, either in the global context or with respect to individual societies.

Module I:

Basic Concepts:

This module will cover the various definitions of money, covering mainly the conventional thinking but going briefly into the alternative approaches. The financial infrastructure consisting of financial instruments and innovation, financial markets (money, capital and foreign exchange), financial institutions and the Central Bank will be introduced. It will also briefly introduce international finance.

4 weeks

Readings:

• Samuelson, Paul A and Nordhaus, William D (2010), Economics, (Indian Adaptation by Sudip Chaudhuri and Anindya Sen), Chapter 23, Money and the Financial System, Tata McGraw-Hill, pp. 584-614.
• Wray, L.Randall (2010), Alternative Approaches to Money, Theoretical Inquiries in Law, Volume 11, pp. 29-49.
• Karl E. Case and Ray C. Fair (2007), Principles of Economics, Chapter 23, pp 501-506.
• McEachern and Indira A. (2010), Macro ECON: A South- Asian Perspective. Cengage Learning, Chapter 14, Money and the Financial System, Pp. 275 -289, Chapter 19, International Finance, Pp.383 -394.
• Grauwe, Paul De (1989), International Money, OUP, USA. Chapter 1, pp.1-13.
• Armendariz, Beateiz and Jonathan Morduch (2005), The Economics of Microfinance, MIT Press, USA. Chapter 1, pp. 1-24.

Additional Reading (Optional):

• Guyer, Jane (2004), Marginal Gains- Monetary Transactions in Atlantic America, The University of Chicago Press, Chicago, USA, Introduction, pp.1-26.
• Carruthers, Bruce G. (2010), The Meanings of Money: A Sociological Perspective, Theoretical Inquiries in Law, Volume 11, pp.51-74
• Yunus, Muhammad, (1999), Banker to the Poor: The Story of the Grameen Bank, Penguin, New Delhi.
• Galbraith, John Kenneth (1975), Money: Whence it Came, Where it Went, Houghten Mifflin.

Module II:

How the Money Market works:

This module will give the working of banks, how they create money in a modern industrial economy, the demand and supply of money and the concept of high-powered money. It also includes a section on the economics and politics of monetarism. It then explains what causes bankruptcy and introduces banking regulation which is then taken further in the next module under financial regulation.

2 weeks

Readings:

• Karl E. Case and Ray C. Fair (2007), Principles of Economics, Chapter 23, pp 506-524; Chapter 24.
• Bhaduri, Amit (1986), Macroeconomics, Macmillan India. Chapter 4: The Social Device of Money, 101-146.
• Dewatripont, Mathias and Jean Tirole (1999), The Prudential Regulation of Banks, MIT Press, USA. Chapter 1: The Nature of Banking and the Rationale for Regulation, pp.13-45.

Module III:

Role of finance in Economic Development:

This module gives the functions of the financial system in the development of a country. Major disruptions occur when there is financial crisis and recessions caused by financial turmoil. Financial Regulation will be introduced in this module. The case of East Asian Crisis and the role of the International Monetary Fund in that context is explained.

3 weeks

Readings:

• Rangarajan, C. ((1998), Indian Economy: Essays on Money and Finance, UBS Publishers, New Delhi, Chapter 12: Financial Development and Economic Growth, pp.148-160.
• Tirole, Jean (2017), Economics for the Common Good, Princeton University Press, Chapter 11, pp. 296 – 325.
• Shiller, Robert (2000), Irrational Exuberance, Princeton University Press, Chapter 9, Efficient Markets, Random Walks and Bubbles, pp.171-190.
• Rakshit, Mihir (2002), The East Asian Crisis, OUP, New Delhi, Chapters 2 and 3, pp. 8- 73.
• Desai, Padma (2004), Financial Crisis, Contagion and Containment: From Asia to Argentina, OUP, New Delhi., Chapter 11: International Monetary Fund to the Rescue: How Did it Fare? Badly. Pp.212- 241.
• Additional Reading (Optional):
• Sriram, M.S. (2017), Talking Financial Inclusion in Liberalised India: Conversations with Governors of the Reserve Bank of India, Routledge.

Module IV:

Some Contemporary Issues

The framework built in the previous modules will be used to discuss three important contemporary issues. The question of how China is building a global currency, the financial crisis of 2008 and demonetisation- global and Indian experiments will be discussed.

3 weeks

Readings:

• Subacchi, Paola (2017), People’s Money, Columbia University Press, pp1-27.
• Reddy, C. Rammanohar (2017), Demonetisation and Black Money, Orient Black Swan, pp. 1-44.
• Tirole, Jean (2017), Economics for the Common Good, Princeton University Press, Chapter 12, pp. 326-352.
• Tirole, Jean (2014), The Contours of Banking and the Future of its Regulation in Akerlof, George et.al. (ed). What Have We Learned? Macroeconomic Policy after the Crisis, The IMF and MIT.
• Reddy, Y.V. (2009), India and the Global Financial Crisis: Managing Money and Finance, Anthem Press, Chapter 23, Globalisation, Money and Finance: Uncertainties and Dilemmas, pp.328-338.
• Additional Reading (Optional):
• Rogoff, Kenneth (2016), The Curse of Cash: How Large-Denomination Bills Aid Crime and Tax Evasion and Constrain Monetary Policy, Princeton University Press.
• Walby, Sylvia (2015), Crisis, Polity Press, Cambridge UK.

Assessment Details with weights:

• Class assignment: 20%
• Class presentation and participation: 20%
• Mid-term examination: 30%
• End-term examination: 30%

Reading List:

Provided above with module descriptions.