The Money View is an attempt to put the real world practitioners’ view of the financial market into an academic perspective. This view is pioneered by Perry Mehrling, Professor of International Political Economy, at the Pardee School of Global Studies, Boston University.
Money View is different from Economics View and Finance View. While Economics View emphasizes the role of the past investment in today’s growth, and Finance View focuses on the role of future cash payments on today’s asset prices, Money View highlights the importance of today’s cash flow imbalances and liquidity needs for the survival of financial participants.
Overview of the Money View
Here is a summary of the Money View framework through its main players:
Market-Based Finance (Or Shadow Banking System)
- Shadow banking is a money market funding of capital market lending.
- Cash flows and payment systems connect a series of balance sheets in the capital market and the money market together.
- Dealers are providers of liquidity in this system.
- Derivatives’ main role is to manage liquidity and cash flows in the future.
- Liquidity management is a way of meeting survival constraints.
- In other words, the financial system is an interrelationship between monetary liquidity, funding liquidity, and market liquidity.
- Financial cycles are periods of elasticity and discipline in the credit market.
Money (Liquidity kills you quick)
- Most monies in the system are the promises to pay the reserves in the central banks.
- In the global dollar funding market, most currencies are the promise to pay a dollar.
- Money (currency versus credit) is hierarchical.
- Four prices of money: par (the price of converting deposits to currency), interest rate (the price of receiving cash flows in future, assuming par is held ), inflation (the overall price of goods and services), and exchange rate (the price of one currency in terms of another currency).
- Par is the price of providing a payment system. The interest rate is the price of providing liquidity. Inflation is the price of producing goods. The exchange rate is the price of providing eurodollar outside the U.S. (or FX services in general).
- The payment system is a credit system.
Money Market
- Banks are the dealers in the money market.
- Banks provide funding liquidity.
- Banking, as a function, is the provision of an advanced clearing.
- Banks determine the term (such as 3-month) interest rates.
- The money market sets the interest rates for the short-term end of the yield curve.
Capital Market
- Security dealers are the main dealers in this market.
- Security dealers are the providers of market liquidity and set the price of risk.
- Security dealers’ inventory position determines asset prices.
- The capital market determines long-term interest rates in the yield curve.
Foreign Exchange Market
- FX dealers are the market-makers in the FX market.
- The international financial system is a hierarchical system.
- The foreign exchange rate is a hybrid of state and private money.
- FX dealers (Both public and private ones) set the price of the FX rate.
- FX rate is the price of one currency in terms of another currency.
Central Banks (as providers of monetary liquidity)
- Central banks are the dealers in the market for reserves. In doing so, they set an overnight risk free interest rate.
- Central banks are the lenders of the last resort in the money market.
- Central Banks are the dealers of last resort for the capital market.
- Central banks’ swap lines with the Federal Reserve enables the Fed to become the lender of last resort for the international monetary system (FX market).
I am aiming at using Money View in my research, teaching, and blogs to study how the financial market and central banking evolve over time.
The following Money and Banking course by Prof. Perry Mehrling is the best first step in learning Money View:
Also, here is the link to the Money View blog by Prof. Mehrling: