Econometrics & integration: Money, Banking &
Financial markets
June 19, 2025
1
,Econometrics & integration: Money, Banking & Financial markets
Contents
1 Lecture 1: Introduction 4
1.1 Course setup & paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 Lecture 2: Money, Bonds, & interest rates 6
2.1 What is money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 history of money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 measuring money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Types of credit market instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5.1 Simple loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5.2 Yield to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3 Lecture 3: Bonds, interest rates and Yield curves 10
3.1 determinants of interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Theory 1: supply and demand in the bond market . . . . . . . . . . . . . 10
3.1.2 Theory 2: supply and demand in the market for money, the liquidity
preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 yield curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2.1 Expectations theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.2.2 theory 2: segmented markets theory . . . . . . . . . . . . . . . . . . . . . . 14
3.2.3 Preferred habitat theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4 Lecture 4: The stock market 16
4.1 what is the stock market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.2 valuation of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.3 market price setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.4 Efficient market hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.5 Empirical evidence: Efficint market hypothesis . . . . . . . . . . . . . . . . . . . 19
5 Lecture 5: Financial institutions & banking 21
5.1 financial intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.1.1 Example: the lemons problem . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 asymmetric information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.3 Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 Bank management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.4.1 Liquidity management: Excess reserves . . . . . . . . . . . . . . . . . . . . 24
5.4.2 asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4.3 Liability management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4.4 Capital adequacy management . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4.5 manageging interest-rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
,Econometrics & integration: Money, Banking & Financial markets
6 Lecture 6: central banks 27
6.0.1 Problem: time inconsistency . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.0.2 price stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.0.3 monetary policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.1 money supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.1.1 control of the monetary base . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.1.2 multiple deposit creation: a simple model . . . . . . . . . . . . . . . . . . 30
7 Lecture 7: Monetary policy 32
7.1 The market for reserves and the overnight rate: Demand . . . . . . . . . . . . . . 32
7.2 Supply in the market for reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.3 How changes in the tools of monetary policy affect the overnight rate . . . . . . 33
7.3.1 Open market purchase effect . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.3.2 Lending rate change effect . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.3.3 Change in deposit rate effect . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.3.4 Change in reserve requirements effect . . . . . . . . . . . . . . . . . . . . 35
7.3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.4 conventional monetary policy tools . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.5 nonconventional monetary policy tools during the global financial crisis . . . . 37
7.5.1 APP: asset purchasing program . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.5.2 PEPP: Pandemic emergency purchase programme . . . . . . . . . . . . . 37
7.5.3 expansionary monetary policy (QE) . . . . . . . . . . . . . . . . . . . . . . 38
7.5.4 Recovery from 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8 Lecture 8: Foreign exchange 39
8.1 intervention in the forex market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.2 Exchange rate regimes in the international financial system . . . . . . . . . . . . 41
8.2.1 How a fixed exchange rate regime works . . . . . . . . . . . . . . . . . . . 41
8.2.2 the euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.2.3 OCA conditions in theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
9 Lecture 9: Money demand & inflation 44
9.1 thus far . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.2 Quantity theory of money (irvin fisher) . . . . . . . . . . . . . . . . . . . . . . . . 44
9.3 Keynes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.4 money and inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.4.1 Response to continually rising M s . . . . . . . . . . . . . . . . . . . . . . . 47
9.4.2 Origines of inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10 Lecture 10: Current issues 49
10.1 Cryptocurrencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3
, Econometrics & integration: Money, Banking & Financial markets
1 Lecture 1: Introduction
1.1 Course setup & paper
Written exam is 70% and group paper is 30%. Two R assignments have to be passed in order
to pass the course.
Four individual assignments, do not copy questions to document, it will be checked for pla-
giarism.
If you miss working group, assignment or assignment of poor quality: 0.3 point deduction
from exam grade. 1 Wildcard.
The paper:
Group of 5 students, Academic paper to answer research question which is related to the
content of this course. Use academic skills and econometric techniques which are used in
this course (second part). 12 possible subjects, submit first 3 choices before monday 5 feb.
1.2 Financial markets
Financial markets are markets in which funds are transferred from people, organisations and
gvmts who have an excess of available funds → people, organisations and gvmts who have a
(temporary) need of funds.
Goal of financial markets:
• To allocate capital as efficient as possible
• To generate economic growth
• To allow a transfer of wealth over time
• Without financial markets (most of ) us wouldn’t be here
• Financial markets are the oil of the economic system
• however: they are a means, not an end!
Financial system is a system of supply & demand:
Can be through Financial intermediaries (indirect finance) or directly through financial mar-
kets. Intermediaries can decide to use financial market or directly extend credit.
Lender savers (supply):
1. Households
4
Financial markets
June 19, 2025
1
,Econometrics & integration: Money, Banking & Financial markets
Contents
1 Lecture 1: Introduction 4
1.1 Course setup & paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2 Lecture 2: Money, Bonds, & interest rates 6
2.1 What is money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 history of money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 measuring money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Types of credit market instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5.1 Simple loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5.2 Yield to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3 Lecture 3: Bonds, interest rates and Yield curves 10
3.1 determinants of interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1.1 Theory 1: supply and demand in the bond market . . . . . . . . . . . . . 10
3.1.2 Theory 2: supply and demand in the market for money, the liquidity
preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 yield curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2.1 Expectations theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.2.2 theory 2: segmented markets theory . . . . . . . . . . . . . . . . . . . . . . 14
3.2.3 Preferred habitat theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4 Lecture 4: The stock market 16
4.1 what is the stock market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.2 valuation of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.3 market price setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.4 Efficient market hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.5 Empirical evidence: Efficint market hypothesis . . . . . . . . . . . . . . . . . . . 19
5 Lecture 5: Financial institutions & banking 21
5.1 financial intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.1.1 Example: the lemons problem . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 asymmetric information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.3 Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 Bank management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.4.1 Liquidity management: Excess reserves . . . . . . . . . . . . . . . . . . . . 24
5.4.2 asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4.3 Liability management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4.4 Capital adequacy management . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4.5 manageging interest-rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
,Econometrics & integration: Money, Banking & Financial markets
6 Lecture 6: central banks 27
6.0.1 Problem: time inconsistency . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.0.2 price stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.0.3 monetary policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.1 money supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.1.1 control of the monetary base . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.1.2 multiple deposit creation: a simple model . . . . . . . . . . . . . . . . . . 30
7 Lecture 7: Monetary policy 32
7.1 The market for reserves and the overnight rate: Demand . . . . . . . . . . . . . . 32
7.2 Supply in the market for reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.3 How changes in the tools of monetary policy affect the overnight rate . . . . . . 33
7.3.1 Open market purchase effect . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.3.2 Lending rate change effect . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.3.3 Change in deposit rate effect . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.3.4 Change in reserve requirements effect . . . . . . . . . . . . . . . . . . . . 35
7.3.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.4 conventional monetary policy tools . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.5 nonconventional monetary policy tools during the global financial crisis . . . . 37
7.5.1 APP: asset purchasing program . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.5.2 PEPP: Pandemic emergency purchase programme . . . . . . . . . . . . . 37
7.5.3 expansionary monetary policy (QE) . . . . . . . . . . . . . . . . . . . . . . 38
7.5.4 Recovery from 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8 Lecture 8: Foreign exchange 39
8.1 intervention in the forex market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.2 Exchange rate regimes in the international financial system . . . . . . . . . . . . 41
8.2.1 How a fixed exchange rate regime works . . . . . . . . . . . . . . . . . . . 41
8.2.2 the euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.2.3 OCA conditions in theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
9 Lecture 9: Money demand & inflation 44
9.1 thus far . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.2 Quantity theory of money (irvin fisher) . . . . . . . . . . . . . . . . . . . . . . . . 44
9.3 Keynes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.4 money and inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.4.1 Response to continually rising M s . . . . . . . . . . . . . . . . . . . . . . . 47
9.4.2 Origines of inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10 Lecture 10: Current issues 49
10.1 Cryptocurrencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3
, Econometrics & integration: Money, Banking & Financial markets
1 Lecture 1: Introduction
1.1 Course setup & paper
Written exam is 70% and group paper is 30%. Two R assignments have to be passed in order
to pass the course.
Four individual assignments, do not copy questions to document, it will be checked for pla-
giarism.
If you miss working group, assignment or assignment of poor quality: 0.3 point deduction
from exam grade. 1 Wildcard.
The paper:
Group of 5 students, Academic paper to answer research question which is related to the
content of this course. Use academic skills and econometric techniques which are used in
this course (second part). 12 possible subjects, submit first 3 choices before monday 5 feb.
1.2 Financial markets
Financial markets are markets in which funds are transferred from people, organisations and
gvmts who have an excess of available funds → people, organisations and gvmts who have a
(temporary) need of funds.
Goal of financial markets:
• To allocate capital as efficient as possible
• To generate economic growth
• To allow a transfer of wealth over time
• Without financial markets (most of ) us wouldn’t be here
• Financial markets are the oil of the economic system
• however: they are a means, not an end!
Financial system is a system of supply & demand:
Can be through Financial intermediaries (indirect finance) or directly through financial mar-
kets. Intermediaries can decide to use financial market or directly extend credit.
Lender savers (supply):
1. Households
4
