Foreword xvii
Introduction xix
Part One: How Money Works: Institutions of the Monetary Economy 1
Chapter 1: Rethinking Monetary Economics 3
Macroeconomics Without Money 4
Broad Money and the Banking System 5
From Interest-rate Policy to Quantity-based Policy 7
Neutral Monetary Policy 9
Productive Capital Markets 9
Chapter 2: Fiat Money Systems 13
Specifying Money So That Money Matters 14
Money Is Essentially an Abstract Measure of Value 14
Money Consists in a Claim or Credit 16
The State, or an Authority, Is an Essential Basis for Money 18
Money Is Not Neutral in the Economic Process 19
Fiat Monetary Standards 21
Metallic Standards 21
Standards After Metallic Standards 23
Foreign Exchange and the Quest for an International Monetary Standard 25
Revisiting the Foundations of Monetary Economics 27
Chapter 3: The Institutional Structure of the Monetary Economy 35
The Government Sector 36
The Fiscal Authority 36
The Monetary Authority 38
The Consolidated Government 39
The Commercial Banking System 41
Deposit Creation by Individual Banks 43
Fallacious Accounts of Bank Funding and Deposit Creation 45
Financial Intermediaries 48
Asset Managers 49
Money Market Funds 50
Asset-backed Securities 51
Consolidated Financial Intermediation Sector 53
The Nonbank Public: Nonfinancial Firms and Households 54
Nonfinancial Business 54
Households 56
The Rest of the World 57
The Money Supply and Its Connections to the Nonbank Public 58
The System of Claims as a Foundation for Monetary Theory 60
Chapter 4: Financial Intermediation in the Capital Markets 67
Savings and Investment: The Standard Macroeconomic Story 68
Savings and Investment: The Microeconomic Foundations 70
The NPV Criterion 71
Information Asymmetry 72
Equity Rationing 74
Revising the Growth Model 75
Financial Intermediation and Project Stratification 75
Chapter 5: Credit Creation by the Commercial Banking System 81
Savings and Investment: Expanding the Standard Story 82
The Set of Bankable Projects 85
Maturity Transformation and Bank Risk Management 88
Credit Risk Management 89
Interest Rate Risk Management 91
Liquidity Risk Management 93
Economic Growth with Credit and Capital Markets 96
Chapter 6: Universal Banks and the Banking–Capital Markets Boundary 103
Complementarities and Competition in Banking and Capital Markets Business 106
Risk Transformation in Securitization Markets 108
Risk Transfer Contracts 111
Bank Lending to Nonbank Financial Institutions 114
Risk Management in Universal Banks 116
Part Two: A Broader View of Monetary Policy 121
Chapter 7: Analytical Frameworks and Basic Monetary Facts 129
The Equation of Exchange and the Demand for Money 130
The Cambridge Equation 132
The Equation of Exchange in Economic Theory 132
Divisia Broad Money 135
Constructing Divisia Indices 136
Comparing Divisia and Simple Sum Aggregates 138
Sources of Divisia Money 141
Divisia Money by Sectors and Strata 144
Evolution of Bank Balance Sheets from 1945 to 2023 149
Broad Trends 150
Finer Details 153
Bank Lending Versus Capital Market Finance 156
Three Big Questions 163
Chapter 8: The Regulation of Universal Banks 173
Bank Capital Regulation 176
Defining Bank Capital 177
Capital Adequacy Before the Basel Era 179
Capital Adequacy After the First Basel Accord 180
The 1996 Market Risk Amendment 182
The Monetary Policy Impact of the Basel I Era 183
The Problem of the Trading Book 184
Regulatory Capital Under Basel III 187
Bank Liquidity Regulation 189
The Liquidity Coverage Ratio 190
The Net Stable Funding Ratio 194
Summing Up 195
Chapter 9: Monetary Aspects of the Government Budget 203
Stable Government Debt Dynamics and the Monetary Standard 205
Stability Conditions 205
Deposit Insurance 208
Fiscal Influences on Aggregate Conditions 209
Central Bank Transactions in Government Obligations 210
Government-sponsored Enterprises and Financial Agencies 211
Monetary Consequences of GSE Guarantees 213
The Federal Home Loan Bank System 214
Crowding-out in Capital Markets 216
The Disaggregated Budget Arithmetic 217
Some Examples of Sector-level Fiscal Influence 219
Sectoral Impact of the Fiscal Impulse from Quantitative Easing 220
Appendix 9.A Propagation of a Fiscal Impulse 223
Chapter 10: Central Bank Policy 231
Central Bank Policy Implementation Before and After the GFC 233
Quantitative Easing and Its Consequences 234
Reestablishing Control Over Short-term Interest Rates 237
The Path to Normalization and the COVID Interventions 238
Structural Changes in the Reserve Market 242
Interest Rate Policy Transmission and Asset Prices 245
An Unintended Period of Steady Broad Money Growth 247
Prospects for Future Interest Rate Policy 251
Part Three: Rewriting the Rules of Our Financial System 259
Chapter 11: Defining Neutral Monetary Policy 261
Neutral Monetary Policy 262
Defining Neutrality 264
Why Neutrality? 266
Efficient Use of Global Savings 267
Formation of Investable Projects 268
Formation of Bankable Projects 269
Chapter 12: Universal Banks in the Monetary System 271
Competition in Commercial Banking 273
Competition in Capital Markets 276
Competition Within Universal Banks 277
Competition Versus Financial Stability 278
Governance 279
Regulation 281
Chapter 13: The Base of Investable and Bankable Projects 285
Of Savings Gluts and Safe Assets 286
Shifts in the Balance of Domestic Saving 287
Safe Assets as a Sink for the Saving Glut 288
Apres le deluge 289
The Pathological Character of Land and Real Estate 290
Investable Projects Involving Land 290
The Bankability of Investable Projects Involving Land 292
Exposure of the Banking System to Land Values 294
Is Technology Making Fewer Projects Bankable? 296
How to Expand the Base 297
Chapter 14: Rewriting the Rules 303
Toward a New Central Bank Operating Model 304
Errors of the Old Monetarism 305
Targeting Divisia Money 306
Reserve Management 309
Standing Facilities 309
Monitoring the Distributional Impact of Broad Money Growth 311
Fixing Bank Regulation 311
Splitting the Banking Book and the Trading Book 312
Neutral Credit Risk Weights 314
Liquidity Risk Management 318
Underwriting, Pricing, and Innovation 318
Using Savings More Efficiently 320
Reducing Government’s Footprint in the Capital Markets 320
Unwinding the Federal Reserve Balance Sheet 322
Unfinished Business 324
Appendix 14.A Neutral Credit Risk Weights 326
About the Authors 331
Index 333
