MATT SEKERKE is a Managing Director at SEDA Experts, Senior Macro Advisor at Hiddenite Capital Partners, a Fellow at the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at the Johns Hopkins University, and a Visiting Fellow in the Department of Finance at Durham University Business School. He is the author of Bayesian Risk Management (Wiley Finance, 2015). STEVE H. HANKE is a Professor of Applied Economics and Founder and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at the Johns Hopkins University. Hanke has served as an advisor to governments and heads of state in Europe, South America, and Asia. Currently, he serves as Chairman of the Supervisory Board of AMG Critical Materials in Amsterdam. He is the co-author of Capital, Interest, and Waiting (Palgrave Macmillan, 2024) with Leland B. Yeager.

Select Guide Rating

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

MATT SEKERKE is a Managing Director at SEDA Experts, Senior Macro Advisor at Hiddenite Capital Partners, a Fellow at the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at the Johns Hopkins University, and a Visiting Fellow in the Department of Finance at Durham University Business School. He is the author of Bayesian Risk Management (Wiley Finance, 2015). STEVE H. HANKE is a Professor of Applied Economics and Founder and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at the Johns Hopkins University. Hanke has served as an advisor to governments and heads of state in Europe, South America, and Asia. Currently, he serves as Chairman of the Supervisory Board of AMG Critical Materials in Amsterdam. He is the co-author of Capital, Interest, and Waiting (Palgrave Macmillan, 2024) with Leland B. Yeager.

Select Guide Rating

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