Financial assets. The need to raise money vertebrates economies

1 8 March 2016

2 8 March 2016

Financial assets The need to raise money vertebrates economies Financial asset = promise of payment in the future in exchange for receiving money now Function: way of saving / getting purchasing power Properties: maturity / risk / liquidity / return Types: tradable (securities) / non-tradable Securitization Trade-offs between properties 3 8 March 2016

Vulnerability of the financial sector 4 8 March 2016

Financial sector instability/fragility /1 Reckless and/or excessive lending by banks? Possibility of bank runs Stability relies on the belief that the sector is stable Shadow banking sector that sidesteps regulations Speculation contributes to magnify outcomes and create bubbles (Ponzi schemes) Abuse of leverage? 5 8 March 2016

Financial sector instability/fragility /2 Financial activities increase interdependence long chains of connections Contagion effects Myopic decisions ignorance of systemic risks (belief that what holds locally, holds globally) Emergent properties larger scale, new banking and/or derivatives risks (banks too big to fail) Minsky s instability hypothesis overoptimism 6 8 March 2016

5400 5100 4800 NASDAQ (5 Feb 1971-29 Feb 2016) http://finance.yahoo.com/q/hp?s=^ixic&a=01&b=5&c=1971&d=02&e=1&f=2016&g=d 4500 4200 3900 3600 3300 3000 2700 2400 2100 1800 1500 1200 900 600 300 0 05/02/1971 05/02/1972 05/02/1973 05/02/1974 05/02/1975 05/02/1976 05/02/1977 05/02/1978 05/02/1979 05/02/1980 05/02/1981 05/02/1982 05/02/1983 05/02/1984 05/02/1985 05/02/1986 05/02/1987 05/02/1988 05/02/1989 05/02/1990 05/02/1991 05/02/1992 05/02/1993 7 8 March 2016 05/02/1994 05/02/1995 05/02/1996 05/02/1997 05/02/1998 05/02/1999 05/02/2000 05/02/2001 05/02/2002 05/02/2003 05/02/2004 05/02/2005 05/02/2006 05/02/2007 05/02/2008 05/02/2009 last: 4,557.95 05/02/2010 05/02/2011 05/02/2012 05/02/2013 05/02/2014 05/02/2015 05/02/2016

Dow Jones (1 Oct 1928-29 Feb 2016) http://finance.yahoo.com/q/hp?s=^dji&a=00&b=11&c=2010&d=01&e=29&f=2016&g=d&z=66&y=1254 19000 18000 17000 17/12/1928 03/03/1930 13/05/1931 21/07/1932 11/10/1933 27/12/1934 10/03/1936 19/05/1937 28/07/1938 10/10/1939 23/12/1940 09/03/1942 18/05/1943 26/07/1944 09/10/1945 26/12/1946 10/03/1948 18/05/1949 01/08/1950 11/10/1951 29/12/1952 10/03/1954 17/05/1955 25/07/1956 03/10/1957 11/12/1958 19/02/1960 01/05/1961 11/07/1962 18/09/1963 27/11/1964 04/02/1966 17/04/1967 01/07/1968 14/10/1969 18/12/1970 25/02/1972 08/05/1973 16/07/1974 22/09/1975 29/11/1976 06/02/1978 16/04/1979 20/06/1980 28/08/1981 04/11/1982 12/01/1984 20/03/1985 29/05/1986 05/08/1987 11/10/1988 18/12/1989 26/02/1991 04/05/1992 12/07/1993 16/09/1994 22/11/1995 30/01/1997 09/04/1998 18/06/1999 24/08/2000 07/11/2001 17/01/2003 29/03/2004 07/06/2005 15/08/2006 24/10/2007 02/01/2009 15/03/2010 20/05/2011 30/07/2012 09/10/2013 17/12/2014 29/02/2016 8 8 March 2016 16000 15000 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

390 380 370 360 350 340 330 320 310 300 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Dow Jones (1 Oct 1928-31 Dec 1953) http://finance.yahoo.com/q/hp?s=^dji&a=00&b=11&c=2010&d=01&e=29&f=2016&g=d&z=66&y=1254 01/10/1928 28/02/1929 28/07/1929 25/12/1929 24/05/1930 21/10/1930 20/03/1931 17/08/1931 14/01/1932 12/06/1932 09/11/1932 08/04/1933 05/09/1933 02/02/1934 02/07/1934 29/11/1934 28/04/1935 25/09/1935 22/02/1936 21/07/1936 18/12/1936 17/05/1937 14/10/1937 13/03/1938 10/08/1938 07/01/1939 06/06/1939 03/11/1939 01/04/1940 29/08/1940 26/01/1941 25/06/1941 22/11/1941 21/04/1942 18/09/1942 15/02/1943 15/07/1943 12/12/1943 10/05/1944 07/10/1944 06/03/1945 03/08/1945 31/12/1945 30/05/1946 27/10/1946 26/03/1947 23/08/1947 20/01/1948 18/06/1948 15/11/1948 14/04/1949 11/09/1949 08/02/1950 08/07/1950 05/12/1950 04/05/1951 01/10/1951 28/02/1952 27/07/1952 24/12/1952 23/05/1953 20/10/1953 9 8 March 2016

19000 Dow Jones (2 Jan 1986-29 Feb 2016) http://finance.yahoo.com/q/hp?s=^dji&a=00&b=11&c=2010&d=01&e=29&f=2016&g=d&z=66&y=1254 18000 17000 29/05/1986 05/08/1987 11/10/1988 18/12/1989 26/02/1991 04/05/1992 12/07/1993 16/09/1994 22/11/1995 30/01/1997 09/04/1998 18/06/1999 24/08/2000 07/11/2001 10 8 March 2016 17/01/2003 29/03/2004 07/06/2005 15/08/2006 24/10/2007 02/01/2009 15/03/2010 20/05/2011 30/07/2012 09/10/2013 17/12/2014 29/02/2016 16000 15000 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

26/01/1999 18/06/1999 Dow Jones (4 Jan 1999-29 Feb 2016) http://finance.yahoo.com/q/hp?s=^dji&a=00&b=11&c=2010&d=01&e=29&f=2016&g=d&z=66&y=1254 09/11/1999 03/04/2000 24/08/2000 18/01/2001 12/06/2001 07/11/2001 04/04/2002 26/08/2002 17/01/2003 12/06/2003 03/11/2003 29/03/2004 20/08/2004 12/01/2005 07/06/2005 27/10/2005 23/03/2006 15/08/2006 09/01/2007 04/06/2007 24/10/2007 19/03/2008 11 8 March 2016 11/08/2008 02/01/2009 28/05/2009 19/10/2009 15/03/2010 05/08/2010 28/12/2010 20/05/2011 12/10/2011 07/03/2012 30/07/2012 21/12/2012 17/05/2013 09/10/2013 05/03/2014 28/07/2014 17/12/2014 13/05/2015 05/10/2015 29/02/2016 18500 18000 17500 17000 16500 16000 15500 15000 14500 14000 13500 13000 12500 12000 11500 11000 10500 10000 9500 9000 8500 8000 7500 7000 6500

16000 15500 15000 14500 14000 13500 13000 12500 12000 11500 11000 10500 10000 9500 9000 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 IBEX-35 (5 Jan 1987-1 Mar 2016) http://stooq.com/q/d/?s=^ibex&c=0 last: 8,611 05/01/1987 24/07/1987 09/02/1988 27/08/1988 15/03/1989 01/10/1989 19/04/1990 05/11/1990 24/05/1991 10/12/1991 27/06/1992 13/01/1993 01/08/1993 17/02/1994 05/09/1994 24/03/1995 10/10/1995 27/04/1996 13/11/1996 01/06/1997 18/12/1997 06/07/1998 22/01/1999 10/08/1999 26/02/2000 13/09/2000 01/04/2001 18/10/2001 06/05/2002 22/11/2002 10/06/2003 27/12/2003 14/07/2004 30/01/2005 18/08/2005 06/03/2006 22/09/2006 10/04/2007 27/10/2007 14/05/2008 30/11/2008 18/06/2009 04/01/2010 23/07/2010 08/02/2011 27/08/2011 14/03/2012 30/09/2012 18/04/2013 04/11/2013 23/05/2014 09/12/2014 27/06/2015 13/01/2016 12 8 March 2016

16000 15500 15000 14500 14000 13500 13000 12500 12000 11500 11000 10500 10000 9500 9000 8500 8000 7500 7000 6500 6000 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 IBEX-35 (daily, 5 January 1987 27 February 2015) http://stooq.com/q/d/?s=^ibex&c=0 Last: 11,152 05/01/1987 04/06/1987 01/11/1987 30/03/1988 27/08/1988 24/01/1989 23/06/1989 20/11/1989 19/04/1990 16/09/1990 13/02/1991 13/07/1991 10/12/1991 08/05/1992 05/10/1992 04/03/1993 01/08/1993 29/12/1993 28/05/1994 25/10/1994 24/03/1995 21/08/1995 18/01/1996 16/06/1996 13/11/1996 12/04/1997 09/09/1997 06/02/1998 06/07/1998 03/12/1998 02/05/1999 29/09/1999 26/02/2000 25/07/2000 22/12/2000 21/05/2001 18/10/2001 17/03/2002 14/08/2002 11/01/2003 10/06/2003 07/11/2003 05/04/2004 02/09/2004 30/01/2005 29/06/2005 26/11/2005 25/04/2006 22/09/2006 19/02/2007 19/07/2007 16/12/2007 14/05/2008 11/10/2008 10/03/2009 07/08/2009 04/01/2010 03/06/2010 31/10/2010 30/03/2011 27/08/2011 24/01/2012 22/06/2012 19/11/2012 18/04/2013 15/09/2013 12/02/2014 12/07/2014 09/12/2014 13 8 March 2016

Robert Menschel (2002): Markets, Mobs, and Mayhem. A Modern Look at the Madness of Crowds, p. 47 14 8 March 2016

900 LOANS (TOTAL) 850 800 750 700 LENDING FOR HOUSE PURCHASE 650 600 550 500 450 Spain (outstanding amount at the end of the period, EUR billions) http://sdw.ecb.europa.eu/browse.do?node=2116074 CREDIT FOR CONSUMPTION SPAIN Nominal GDP 1.029 trillion (2012) 400 350 300 250 200 150 2003Mar 2003Jun 2003Sep 2003Dec 2004Mar 2004Jun 2004Sep 2004Dec 2005Mar 2005Jun 2005Sep 2005Dec 2006Mar 2006Jun 2006Sep 2006Dec 2007Mar 2007Jun 2007Sep 2007Dec 2008Mar 2008Jun 2008Sep 2008Dec 2009Mar 2009Jun 2009Sep 2009Dec 2010Mar 2010Jun 2010Sep 2010Dec 2011Mar 2011Jun 2011Sep 2011Dec 2012Mar 2012Jun 2012Sep 2012Dec 2013Mar 2013Jun 2013Sep 2013Dec 15 8 March 2016 100 50 0

Eurozone (outstanding amount at the end of the period, EUR trillions) http://sdw.ecb.europa.eu/browse.do?node=2116074 EUROZONE Nominal GDP 9.5 trillion (2012) LOANS (TOTAL) LENDING FOR HOUSE PURCHASE EUROPEAN UNION Nominal GDP 12.9 trillion (2012) Largest economy of the world CREDIT FOR CONSUMPTION 1997Dec 1998Apr 1998Aug 1998Dec 1999Apr 1999Aug 1999Dec 2000Apr 2000Aug 2000Dec 2001Apr 2001Aug 2001Dec 2002Apr 2002Aug 2002Dec 2003Apr 2003Aug 2003Dec 2004Apr 2004Aug 2004Dec 2005Apr 2005Aug 2005Dec 2006Apr 2006Aug 2006Dec 2007Apr 2007Aug 2007Dec 2008Apr 2008Aug 2008Dec 2009Apr 2009Aug 2009Dec 2010Apr 2010Aug 2010Dec 2011Apr 2011Aug 2011Dec 2012Apr 2012Aug 2012Dec 2013Apr 2013Aug 2013Dec 16 8 March 2016 5,5 5,25 5 4,75 4,5 4,25 4 3,75 3,5 3,25 3 2,75 2,5 2,25 2 1,75 1,5 1,25 1 0,75 0,5 0,25 0

LENDING FOR HOUSE PURCHASE Spain (annual change, %) http://sdw.ecb.europa.eu/ browse.do?node=2116074 40 35 30 25 20 15 10 5 0 LOANS (TOTAL) -5 CREDIT FOR CONSUMPTION -10-15 2004Mar 2004Jun 2004Sep 2004Dec 2005Mar 2005Jun 2005Sep 2005Dec 2006Mar 2006Jun 2006Sep 2006Dec 2007Mar 2007Jun 2007Sep 2007Dec 2008Mar 2008Jun 2008Sep 2008Dec 2009Mar 2009Jun 2009Sep 2009Dec 2010Mar 2010Jun 2010Sep 2010Dec 2011Mar 2011Jun 2011Sep 2011Dec 2012Mar 2012Jun 2012Sep 2012Dec 2013Mar 2013Jun 2013Sep 2013Dec 17 8 March 2016-20

LENDING FOR HOUSE PURCHASE LOANS (TOTAL) Eurozone (annual change, %) http://sdw.ecb.europa.eu/ browse.do?node=2116074 CREDIT FOR CONSUMPTION 1998Dec 1999Apr 1999Aug 1999Dec 2000Apr 2000Aug 2000Dec 2001Apr 2001Aug 2001Dec 2002Apr 2002Aug 2002Dec 2003Apr 2003Aug 2003Dec 2004Apr 2004Aug 2004Dec 2005Apr 2005Aug 2005Dec 2006Apr 2006Aug 2006Dec 2007Apr 2007Aug 2007Dec 2008Apr 2008Aug 2008Dec 2009Apr 2009Aug 2009Dec 2010Apr 2010Aug 2010Dec 2011Apr 2011Aug 2011Dec 2012Apr 2012Aug 2012Dec 2013Apr 2013Aug 2013Dec 18 8 March 2016 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 -6-7

130 120 110 100 Spain (EUR billions amounts at the end of the period) http://sdw.ecb.europa.eu/ browse.do?node=2116075 LOANS TO GOVERNMENT 90 80 70 60 50 40 30 20 10 0 01/09/1997 01/01/1998 01/05/1998 01/09/1998 01/01/1999 01/05/1999 01/09/1999 01/01/2000 01/05/2000 01/09/2000 01/01/2001 01/05/2001 01/09/2001 01/01/2002 01/05/2002 01/09/2002 01/01/2003 01/05/2003 01/09/2003 01/01/2004 01/05/2004 01/09/2004 01/01/2005 01/05/2005 01/09/2005 01/01/2006 01/05/2006 01/09/2006 01/01/2007 01/05/2007 01/09/2007 01/01/2008 01/05/2008 01/09/2008 01/01/2009 01/05/2009 01/09/2009 01/01/2010 01/05/2010 01/09/2010 01/01/2011 01/05/2011 01/09/2011 01/01/2012 01/05/2012 01/09/2012 01/01/2013 01/05/2013 01/09/2013 19 8 March 2016

1,25 1,2 1,15 1,1 1,05 1 0,95 0,9 0,85 0,8 0,75 0,7 0,65 0,6 0,55 0,5 0,45 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0,05 0 LOANS TO GOVERNMENT Eurozone (EUR trillions amounts at the end of the period) http://sdw.ecb.europa.eu/ browse.do?node=2116075 01/09/1997 01/01/1998 01/05/1998 01/09/1998 01/01/1999 01/05/1999 01/09/1999 01/01/2000 01/05/2000 01/09/2000 01/01/2001 01/05/2001 01/09/2001 01/01/2002 01/05/2002 01/09/2002 01/01/2003 01/05/2003 01/09/2003 01/01/2004 01/05/2004 01/09/2004 01/01/2005 01/05/2005 01/09/2005 01/01/2006 01/05/2006 01/09/2006 01/01/2007 01/05/2007 01/09/2007 01/01/2008 01/05/2008 01/09/2008 01/01/2009 01/05/2009 01/09/2009 01/01/2010 01/05/2010 01/09/2010 01/01/2011 01/05/2011 01/09/2011 01/01/2012 01/05/2012 01/09/2012 01/01/2013 01/05/2013 01/09/2013 20 8 March 2016

Spain Debt to GDP (%) http://economia.elpais.com/economia/2015/02/16/actualidad/1424114459_766802.html 21 8 March 2016

Spain Debt to GDP ratio http://cincodias.com/cincodias/2014/12/12/graficos/1418410740_043679.html 22 8 March 2016

Spain Government debt (EUR million) http://economia.elpais.com/economia/2015/02/16/actualidad/1424114459_766802.html Spain, 2015 Q4 : 1,069,876 EUR million (98,95%) http://www.datosmacro.com/deuda/espana 23 8 March 2016

Spain, public debt (millions of euros) http://www.datosmacro.com/deuda/espana 1.100.000 1.050.000 1.000.000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 950.000 900.000 850.000 800.000 750.000 700.000 650.000 600.000 550.000 500.000 450.000 400.000 350.000 300.000 250.000 200.000 150.000 100.000 50.000 0 24 8 March 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

1.100.000 1.050.000 1.000.000 950.000 900.000 850.000 800.000 750.000 700.000 650.000 600.000 550.000 500.000 450.000 400.000 350.000 300.000 250.000 200.000 150.000 100.000 50.000 Spain, public debt (debt-to-gdp ratio, millions of euros) http://www.datosmacro.com/deuda/espana debt-to-gdp ratio 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 25 8 March 2016 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Spain, per capita public debt (euros) http://www.datosmacro.com/deuda/espana 24.000 23.000 22.000 21.000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 26 8 March 2016 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20.000 19.000 18.000 17.000 16.000 15.000 14.000 13.000 12.000 11.000 10.000 9.000 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0

Allianz Global Wealth Report 2013 EUR 111.2 trillion World GDP 2012 USD 72 trillion Average rate USD/EUR 2012 = 1.2848 World GDP 2012 EUR 92.5 trillion End of 2012 (share) 32% 36% 30% https://www.allianz.com/v_1380187782000/media/ economic_research/publications/specials/en/agwr2013e.pdf 27 8 March 2016

Allianz Global Wealth Report 2013 28 8 March 2016

http://www.mckinsey.com/insights/ global_capital_markets/mapping_global_ capital_markets_2011 29 8 March 2016

Financial depth financial sector size http://www.mckinsey.com/insights/economic_studies/ debt_and_not_much_deleveraging 30 8 March 2016

http://www.mckinsey.com/insights/ global_capital_markets/uneven_progress _on_the_path_to_growth 31 8 March 2016

32 8 March 2016

12,5 12 11,5 11 10,5 10 9,5 9 8,5 8 7,5 7 6,5 6 5,5 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 1995M01 1995M07 1996M01 1996M07 1997M01 1997M07 1998M01 1998M07 1999M01 Spain, interest rates (January 1995 November 2011) CONSUMER LOANS (banks) 10 yr BONDS CONSUMER LOANS (savings banks) MORTGAGES PREFERENTIAL RATE (banks) EURIBOR http://www.ine.es/jaxi/menu.do?type=pcaxis&path=/t38/bme2/t30/b092/&file=pcaxis 1999M07 2000M01 2000M07 2001M01 2001M07 2002M01 2002M07 2003M01 2003M07 33 8 March 2016 2004M01 2004M07 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 2011M07 2012M01 2012M07

5,75 5,5 5,25 5 4,75 4,5 4,25 4 3,75 3,5 3,25 3 2,75 2,5 2,25 2 1,75 1,5 1,25 1 0,75 0,5 0,25 0-0,25-0,5 Jan99 Jan00 Jan01 Jan02 Jan03 Jan04 Lending MRO Deposit Jan05 Jan06 Jan07 34 8 March 2016 Jan08 Jan09 Jan10 ECB key interest rates 1 Jan 1999 25 Feb 2016 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16

5,6 5,4 5,2 5,0 4,8 4,6 4,4 4,2 4,0 3,8 3,6 3,4 3,2 3,0 2,8 2,6 2,4 2,2 2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0-0,2 Euribor (2 January 2007 24 February 2015) http://www.emmi-benchmarks.eu/euribor-org/euribor-rates.html 1 MONTH 02/01/2007 13/02/2007 27/03/2007 11/05/2007 22/06/2007 03/08/2007 14/09/2007 26/10/2007 07/12/2007 23/01/2008 05/03/2008 18/04/2008 02/06/2008 14/07/2008 25/08/2008 06/10/2008 17/11/2008 02/01/2009 13/02/2009 27/03/2009 13/05/2009 24/06/2009 05/08/2009 16/09/2009 28/10/2009 09/12/2009 25/01/2010 08/03/2010 19/04/2010 31/05/2010 12/07/2010 23/08/2010 04/10/2010 15/11/2010 03/01/2011 14/02/2011 28/03/2011 11/05/2011 22/06/2011 03/08/2011 14/09/2011 26/10/2011 07/12/2011 19/01/2012 01/03/2012 16/04/2012 29/05/2012 10/07/2012 21/08/2012 02/10/2012 13/11/2012 27/12/2012 08/02/2013 22/03/2013 08/05/2013 19/06/2013 31/07/2013 11/09/2013 23/10/2013 04/12/2013 20/01/2014 03/03/2014 14/04/2014 29/05/2014 10/07/2014 21/08/2014 02/10/2014 13/11/2014 29/12/2014 10/02/2015 35 8 March 2016 1 YEAR 1 WEEK

5,6 5,4 5,2 5,0 4,8 4,6 4,4 4,2 4,0 3,8 3,6 3,4 3,2 3,0 2,8 2,6 2,4 2,2 2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0-0,2-0,4 1 MONTH Euribor (2 January 2007 23 February 2016) http://www.emmi-benchmarks.eu/euribor-org/euribor-rates.html 1 WEEK 02/01/2007 13/02/2007 27/03/2007 11/05/2007 22/06/2007 03/08/2007 14/09/2007 26/10/2007 07/12/2007 23/01/2008 05/03/2008 18/04/2008 02/06/2008 14/07/2008 25/08/2008 06/10/2008 17/11/2008 02/01/2009 13/02/2009 27/03/2009 13/05/2009 24/06/2009 05/08/2009 16/09/2009 28/10/2009 09/12/2009 25/01/2010 08/03/2010 19/04/2010 31/05/2010 12/07/2010 23/08/2010 04/10/2010 15/11/2010 03/01/2011 14/02/2011 28/03/2011 11/05/2011 22/06/2011 03/08/2011 14/09/2011 26/10/2011 07/12/2011 19/01/2012 01/03/2012 16/04/2012 29/05/2012 10/07/2012 21/08/2012 02/10/2012 13/11/2012 27/12/2012 08/02/2013 22/03/2013 08/05/2013 19/06/2013 31/07/2013 11/09/2013 23/10/2013 04/12/2013 20/01/2014 03/03/2014 14/04/2014 29/05/2014 10/07/2014 21/08/2014 02/10/2014 13/11/2014 29/12/2014 10/02/2015 24/03/2015 08/05/2015 19/06/2015 31/07/2015 11/09/2015 23/10/2015 04/12/2015 19/01/2016 36 8 March 2016 1 YEAR

2,2 2,0 1,8 Euribor (4 January 2010 23 February 2016) http://www.emmi-benchmarks.eu/ euribor-org/euribor-rates.html 1,6 1 YEAR 1,4 1,2 1,0 0,8 1 MONTH 0,6 0,4 1 WEEK 0,2 0,0-0,2-0,4 04/01/2010 15/02/2010 29/03/2010 10/05/2010 21/06/2010 02/08/2010 13/09/2010 25/10/2010 06/12/2010 24/01/2011 07/03/2011 18/04/2011 01/06/2011 13/07/2011 24/08/2011 05/10/2011 16/11/2011 29/12/2011 09/02/2012 22/03/2012 08/05/2012 19/06/2012 31/07/2012 11/09/2012 23/10/2012 04/12/2012 18/01/2013 01/03/2013 16/04/2013 29/05/2013 10/07/2013 21/08/2013 02/10/2013 13/11/2013 27/12/2013 10/02/2014 24/03/2014 08/05/2014 19/06/2014 31/07/2014 11/09/2014 23/10/2014 04/12/2014 20/01/2015 03/03/2015 16/04/2015 29/05/2015 10/07/2015 21/08/2015 02/10/2015 13/11/2015 28/12/2015 09/02/2016 37 8 March 2016

http://www.mckinsey.com/insights/economic_studies/ qe_and_ultra_low_interest_rates_distributional_effects_and_risks 38 8 March 2016

Prices of financial assets and Justifications of the inverse relationship financial arbitrage prices of financial assets as present values equalization of rates of return 39 8 March 2016

Financial arbitrage 40 8 March 2016

Central bank Monetary authority of an economy Monetary policy instruments Open market operations Standing facilities: lending / deposit Reserve requirements Policy interest rate Credit controls Tension between controlling and M1 41 8 March 2016

Expansionary OMO Contractionary OMO 42 8 March 2016

Reverse-repo 43 8 March 2016

Effects of a contractionary OMO The central bank cannot simultaneously control M1 and the interest rate. 44 8 March 2016

Central bank and the payment system 45 8 March 2016

A liquidity market model Supply of liquidity: direct / indirect Supply of liquidity function Demand for liquidity: direct / indirect Demand for liquidity function Market equilibrium Comparative statics 46 8 March 2016

= interest rate in a period = volume of liquidity supplied in the period 47 8 March 2016

= interest rate in a period = volume of liquidity supplied in the period 48 8 March 2016

= interest rate in a period = volume of liquidity supplied in the period 49 8 March 2016

= interest rate in a period = volume of liquidity supplied in the period 50 8 March 2016

= interest rate in a period Supply of liquidity function = volume of liquidity supplied in the period 51 8 March 2016

52 8 March 2016

= interest rate in a period = volume of liquidity demanded in the period 53 8 March 2016

= interest rate in a period = volume of liquidity demanded in the period 54 8 March 2016

= interest rate in a period = volume of liquidity demanded in the period 55 8 March 2016

= interest rate in a period = volume of liquidity demanded in the period 56 8 March 2016

= interest rate in a period = volume of liquidity demanded in the period Demand for liquidity function 57 8 March 2016

58 8 March 2016

* * 59 8 March 2016

* * 60 8 March 2016

Equilibrium effect of a demand shift This is a demand-side explanation of a rise in the interest rate: more liquidity wanted. 61 8 March 2016

Equilibrium effect of a supply shift This is a supply-side explanation of a rise in the interest rate: less liquidity available. L 62 8 March 2016

Effect of simultaneous shifts /1 The effect on is certain (a reduction) but the effect on is ambiguous. The precise effect on depends on the magnitude of the shifts. 63 8 March 2016

Effect of simultaneous shifts /2 Now the effect on is ambiguous but the effect on is certain: an increase. 64 8 March 2016