Week 6 — Lectures 10 & 11, Reading 5

We're discussing the following for week 6:

Lecture 10: Dealers and Liquid Security Markets

Lecture Notes
Introduction to the Treynor model of the economics of the dealer function. Inventories absorb order flow mismatches. Market liquidity vs. funding liquidity. Matched book vs. gross exposure. Arbitrage and brings liquidity.

Lecture 11: Banks and the Market for Liquidity

Lecture Notes
Generalize the Treynor model to banks (a.k.a. money dealers). Why is it profitable for banks to run the payment system at par when there's no bid/ask spread? How the Fed manages interest rates (floor vs. corridor system). The evolution of shadow banking.

Reading 5: Three chapters from A Market Theory of Money by John Hicks (1989)

Study Questions
Hicks reinforces some of what we've already learned in the course so far, namely that banks are a kind money dealer. But he also ties the function money to the "real" side of the economy—the market for goods and services—which Mehrling tends not to emphasize.

Money and Banking Summer 2021 Reddit Master Thread