Unconventional monetary policy has become the norm since the 2008 financial crisis. Central bank balance sheets have swelled and new tools for interest rate control have now emerged. This technical note provides a framework to help students understand the nature of unconventional monetary policy and interpret recent changes in how short-term policy rates are controlled. It can serve as a technical supplement to an event-study case on monetary policy responses to the 2008 financial crisis and/or the COVID-19 pandemic. It would also complement a case on monetary policy in a world with central bank digital currency. Alternatively, it can form the basis of its own tool-building class ahead of such cases.
This case explores the role of deposit insurance in financial stability, including the importance of risk-adjusted insurance premiums and the complementarity between capital requirements and deposit insurance when risk is imperfectly measured by the insurer. The case is intended to follow a class on maturity transformation (e.g., as presented in ""The Economics of Maturity Transformation"" [UVA-GEM-0191]). It begins with a fictional cryptocurrency exchange, Koble, which proposes to conduct maturity transformation outside of the current purview of the Federal Deposit Insurance Corporation (FDIC). The chair of the FDIC, Jelena McWilliams, now faces a huge normative question: should deposit insurance be extended to Koble? Her answer could change the trajectories of both the FDIC and the cryptocurrency market. The case reviews the history of deposit insurance in the United States and concludes with a series of questions for McWilliams to ponder, specifically questions that connect Koble to the historical lessons.
This case explores private and public proposals for digital forms of money that bypass the commercial banking system. A private proposal comes from Facebook's Libra. A public proposal comes from central bank digital currency (CBDC). The case begins with Mark Zuckerberg's vision for Libra and the ensuing pushback from policymakers. One of the main concerns-financial stability-is revisited during a tour of the arguments for and against a CBDC. The introduction of the first official CBDC by the Central Bank of the Bahamas is then discussed. The case closes with Zuckerberg pondering the economics of Libra in a bid to bring policymakers on board. The case is intended to follow a class on the economics of cryptocurrency (e.g., as presented in "The Economics of Cryptocurrency" [UVA-GEM-0190]). Prior exposure to the causes of and responses to the 2008 financial crisis is also strongly recommended to permit a substantive discussion of financial stability risks.
Few concepts are as important as maturity transformation for understanding financial crises. This technical note guides students through the key mechanisms in the theory using a representative investor, a long-term borrower, and an issuer of shorter-term claims. It then highlights the pervasiveness of maturity transformation in modern financial products. It works well before classes on deposit insurance, bank regulation, the 2008 financial crisis, and/or shadow banking generally.
What is monetary policy and what is the Federal Reserve's (Fed's) role in determining monetary policy in the United States? How are changes in monetary policy implemented and how do these changes affect firms, households, and other stakeholders? This technical note addresses these questions by outlining the Fed's legal mandate, the tools at its disposal to achieve that mandate, and the mechanisms through which the Fed's policy choices affect macroeconomic outcomes. This note is designed to follow a sequence on the IS/LM-AD/AS model of the macroeconomy (e.g., as presented in UVA-GEM-0125, UVA-GEM-0126, and UVA-GEM-0127). In particular, students are expected to approach this note with prior exposure to a formalization of an economy's potential level of output and how changes in the money supply affect GDP, employment, and the price level. This note expands on prior technical material by distinguishing between the monetary base and the money supply (and hence defining the money multiplier).
Cryptocurrencies claim to be the future of money and payments, the lifelines of any business. An informed evaluation requires understanding both the economics and the computer science behind the technology. Designed for an MBA elective on money and banking, this technical note guides students through the building blocks of cryptocurrencies using the one that launched them all: Bitcoin. To provide a logically consistent framework for interpreting future innovations, the technical note digs deeper into the technological ingredients of Bitcoin than is typical in economics, while also connecting the technology back to a core set of economic principles, all in an accessible way.