Chapter 13 Outline
      •    1.The Function of a Financial System 
         –   Money and the Money Supply 
         –   Financial Intermediation 
         –   Transformation and Distribution of Risk 
         –   Stabilization 
      •    2.Inflation and Savings Mobilization 
         –   Inflation Episodes 
         –   Forced Mobilization of Savings 
         –   Inflation as a Stimulus to Investment 
         –   Inflation and Interest Rates 
      •    3.Interest Rates and Saving Decisions 
      •    4.Financial Development 
         –   Shallow Finance and Deep Finance 
         –   Shallow Financial Strategy 
         –   Deep Financial Strategy 
         –   Panic, Moral Hazard, and Financial Collapse 
         –   Informal Credit Markets 
      •    5.Monetary Policy and Price Stability 
         –   Monetary Policy and Exchange-Rate Regimes 
         –   Sources of Inflation 
         –   Controlling Inflation through  Monetary Policy 
         –   Reserve Requirements 
         –   Credit Ceilings 
         –   Interest-Rate Regulation and Moral Suasion 
                                   
            Financial Policy: Introduction
        •  Financial policy deals with all measures intended to affect 
           growth, efficiency and use of diversified financial system to 
           meet it objective. It is also called Monetary Policy
        •  There are 4 basic functions of a financial system:
        •  1. medium of exchange, &store of value,  
        •  2.Moblize savings from various sources and channel it to 
           investment-financial intermediation. 
        •  3. Transfers and distributes risk across the across the 
           economies
        •   4. serves as policy instruments of stabilization 
                                            
         Functions of Financial System
      • 1. Medium of exchange: Money supply
      • Transfer deposits, checking & demand deposits, 
         time deposits, 
      • Money Supply: M1= narrow money (C +D)
      • Broad Money M2= includes time deposits (T)
      • Broadest Money=M3 includes liabilites of 
         specialized institutions
      • Summary: M1=C+D, M2= M1 +T, M3 =M2+ O
                                   
           Concepts of Macro-finance
      • Financial ratio= financial assets/GDP
      • Financial Intermediation: Measure by flow 
        of funds-accounts or liquid/Asset Ratio
      • Risk Transformation and distribution: A 
        perfectly working Financial system will 
        reduce risk with exception of disasters.
      • Stabilization function- to control inflation 
        and recession 
                               
         Inflation and Saving Mobilization 
      • 1. Prevent severe inflation and deflation or 
         hyperinflation such as Zimbabwe.
      • Moderate inflation rate should be within the range 
         of 8 to 12%
      • Inflation episodes (see table 13.2 for history of 
         inflation in various countries)
      • Inflation in major regions of the world including 
         global inflation ( see table 13.1)
      • Case study: Hyper-inflation in Peru: 1988-90