Lecture_2._What_is_Money - LECTURE 2 What is Money Osvaldo...

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Unformatted text preview: LECTURE 2 What is Money? Osvaldo Lagares, M.S. 1 2 Introduction: Money and Capital ¡ When analyzing money we will consider the institutional environment in which policy makers, firms and consumers operate. This focus will emphasize: Ł Information problems Ł Enforcement problems Ł Legal, regulatory and accounting institutions ¡ It is important in this course to distinguish between money and capital. Capital is an input into production; money is an artifact of governments. Governments have a number of policy variables, including money, taxes and the ¢business environment£. 3 Introduction: Money and Capital ¡ Claim : As a financial market fluct uate s, asset value must be computed precisely to allow investors to calculate the price. This requires: Ł Data processing power (we will learn this) Ł Reliable and timely information (governments must ensure this is provided; individuals may not have an incentive to reveal private information) 4 Introduction: Money and Capital ¡ Claim : Those who have capital to invest will seek to maximize their returns without regard for national boundaries or loyalties. Consequently, investors will demand ¢good institutions£. Ł Capital is expected from rich to capital poor counties (because when K is small its MP is high). Ł We often see ¢reverse K flows.£ ¡ Why does capital sometimes flow from relatively poor to rich countries? Think about expected returns. 5 Introduction: Money and Capital ¡ When investment managers decide how to allocate capital they consider: Ł Economic factors : Expected future earnings (which are affected by inflation, gdp, taxes, etc.) Ł Legal system : C l e a r d e f i n i t i o n o f p r o p e r t y rights and strong contract law enforcement. Ł Political stability : Well grounded rules. 6 Introduction: Money and Capital ¡ *Claim : Withou t a robust contr act law and reli able judiciaries, the modern financial instrument would not exist. Expected asset value is based on the recording and enforcement of the rights of all parties involved via: Ł Bankruptcy law Ł Creditor rights Ł Uniform commercial codes (i.e., business law)Uniform commercial codes (i....
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This note was uploaded on 08/10/2011 for the course ECON 123 taught by Professor Other during the Spring '11 term at Pontificia Universidad Catolica Madre y Maestra.

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Lecture_2._What_is_Money - LECTURE 2 What is Money Osvaldo...

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