Money, Institutions, and Markets
Course readings for ECON 3320 – Money and Banking – The University of Texas at El Paso.
Preface
Welcome to Money, Institutions, and Markets, the reading companion for ECON 3320 – Money and Banking at the University of Texas at El Paso.
This book was designed for the fully online, accelerated version of the course. It covers the same core ideas as the in-person version, condensed into seven weeks of focused, readable chapters. Each chapter combines economic theory with real-world examples and live data — the goal is not just to understand how money and financial markets work in the abstract, but to be able to look at the actual world and make sense of what you see.
How to use this book
Each chapter corresponds to one week of the course. Within each chapter you will find:
- Learning objectives at the start, so you know what to focus on
- Callout boxes that flag key definitions, helpful intuitions, common mistakes, and essential takeaways
- Interactive charts built from real economic data, so you can explore the evidence behind the concepts
- Key terms collected at the end of each chapter
Read actively. If a concept isn’t clicking, the charts and examples are there to make it concrete — use them.
Course structure
| Week | Chapter | Words |
|---|---|---|
| 1 | The Nature and Price of Money | 9,434 |
| 2 | How Banking Developed Before Central Banks | 11,356 |
| 3 | Central Banks and the Macroeconomy | 9,355 |
| 4 | How Central Banks Operate — and Why It Matters | 10,732 |
| 5 | How Financial Markets Work | 8,283 |
| 6 | Pricing Financial Assets | 8,187 |
| 7 | Managing Risk in Financial Markets | 8,990 |
Chapter 1 — The Nature and Price of Money
- Functions of money; the money supply hierarchy from monetary base to M2
- Payment technologies: cash, checks, and electronic payments
- How money emerged: the regression theorem and chartalism
- Monetary history in six stages, from commodity money to digital currency
- The price level, inflation, and the quantity theory
- Cryptocurrencies and central bank digital currencies
Chapter 2 — How Banking Developed Before Central Banks
- Commodity money; inside and outside money; seigniorage and debasement
- Free banking theory and the adverse clearing mechanism
- Free banking in practice: Scotland, Canada, and Australia
- The US National Banking era — not genuine free banking
- The classical gold standard
- Bretton Woods and the transition to floating exchange rates
Chapter 3 — Central Banks and the Macroeconomy
- Why central banks exist: fiscal origins and the stability rationale
- The monetary anchor problem and the independence problem
- Fiscal dominance; seigniorage and the inflation tax
- The Federal Reserve: origins, structure, and how the FOMC operates
- The European Central Bank: structure, mandate, and the sovereign debt crisis
- The central bank balance sheet as a window into monetary policy
Chapter 4 — How Central Banks Operate — and Why It Matters
- Rules vs. discretion; the time-inconsistency problem
- Monetary policy frameworks: Friedman’s k-percent rule, NGDP targeting, the Taylor Rule, and inflation targeting
- Nominal vs. real shocks: what monetary policy can and cannot fix
- Open market operations; corridor and floor systems; quantitative easing
- Bank runs and maturity transformation; the Diamond-Dybvig model
- The lender of last resort and Bagehot’s rule
Chapter 5 — How Financial Markets Work
- Interest rates as the price of time, not the price of money
- Real vs. nominal rates and the Fisher equation
- Future value, present value, and duration
- Bond structures: coupon bonds, zero-coupon bonds, perpetuities, and sinking funds
- The financial system: direct and indirect finance, primary and secondary markets
- Asymmetric information: adverse selection and moral hazard
Chapter 6 — Pricing Financial Assets
- Bond valuation: present value of cash flows, yield to maturity, and yield measures
- Duration and modified duration; interest rate risk
- The yield curve: expectations hypothesis, term premium, and inversions
- The zero-coupon yield curve and spot rates
- Stock valuation: the Gordon Growth Model and price-earnings ratios
- The Efficient Market Hypothesis and the case for passive investing
Chapter 7 — Managing Risk in Financial Markets
- Risk and return; idiosyncratic vs. systematic risk; diversification
- The Capital Asset Pricing Model and the security market line
- Derivatives: forwards, futures, options, and interest rate swaps
- Financial regulation: a brief US history from Glass-Steagall to Dodd-Frank
- Exchange rates: purchasing power parity, exchange rate regimes
- The Mundell trilemma and open-economy monetary policy
A note on prerequisites
This course assumes you have completed introductory economics (principles of micro and macro). You do not need a background in finance or advanced mathematics — but you should be comfortable thinking in terms of supply, demand, and incentives. When we need a new tool, we will build it from scratch.
Nicolas Cachanosky, PhD
Center for Free Enterprise
Department of Economics and Finance
The University of Texas at El Paso
ncachanosky@utep.edu