Currency Theory

Optimum Currency Area

In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency. The theory is used often to argue whether or not a certain region is ready to become a monetary union, one of the final stages in economic integration.

In theory, an optimal currency area could also be smaller than a country. Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country.The theory of the optimal currency area was pioneered by economist Robert Mundell. 

Quantity theory of money

In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level.

The theory was challenged by Keynesian economics, but updated and reinvigorated by the monetarist school of economics.

While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in theshort run.

Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.

Velocity Of Money - velocity of circulation

The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.

Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy's inflation calculation. Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant.

Economy

The large set of ...

Gross National Product - GNP

An economic ...

Money Supply

The entire stock ...

Equation Of Exchange

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Inflation

The rate at ...

Electronic Communication Network - ECN

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Market Sentiment

The feeling or ...

Immediate Or Cancel Order - IOC

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Stop Order

An order to buy ...

Xenocurrency

M0

A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. In the United Kingdom, the M0 supply is also referred to as narrow money.

M0 (M-zero) is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency. 

This measure is known as narrow money because it is the smallest measure of the money supply.

M1

A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts.

M2

A category within the money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions.

M3

The category of the money supply that includes M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.

This is the broadest measure of money; it is used by economists to estimate the entire supply of money within an economy.

Broad Money

In the U.S. the most common measures of the money supply are termed M0, M1, M2 and M3. These measurements vary according to the liquidity of the accounts included. M0 includes only the most liquid instruments, and is therefore narrowest definition of money. M3 includes includes liquid instruments as well as some less liquid instruments and is therefore considered the broadest measurement of money. Complicating the situation, different countries often define their measurements of the money slightly differently. In academic settings, the term "broad money" should be separately defined in order to prevent potential misunderstandings.   

Crowding Out Effect

Governments often borrow money (by issuing bonds) to fund additional spending. The problem occurs when government debt 'crowds out' private companies and individuals from the lending market. 

Increased government borrowing tends to increase market interest rates. The problem is that the government can always pay the market interest rate, but there comes a point when corporations and individuals can no longer afford to borrow.

Corporate Finance

Any financial or monetary activity that deals with a company and its money

Keynesian Economics

A supporter of Keynesian economics believes it is the government's job to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax breaks in order to stimulate the economy, and government spending cuts and tax hikes in good times, in order to curb inflation.

Animal Spirits

A term used by John Maynard Keynes used in one of his economics books. In his 1936 publication, "The General Theory of Employment, Interest and Money," the term "animal spirits" is used to describe human emotion that drives consumer confidence. According to Keynes, animal spirits also generate human trust.    

Animal Spirits

There has been a resurgence of interest in the idea of animal spirits in recent years. Several books and articles have been published on this topic. Keynes believed that animal spirits were necessary to motivate people to take positive action.

Structured Finance

A service that generally involves highly complex financial transactions offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don't match conventional financial products such as a loan.

Structured finance has become a major segment in the financial industry since the mid-1980s. Collateralized bond obligations (CBOs), collateralized debt obligations (CDOs), syndicated loans and synthetic financial instruments are examples of structured financial instruments.

Hybrid Security'

A security that combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics. 

The most common example is a convertible bond that has features of an ordinary bond, but is heavily influenced by the price movements of the stock into which it is convertible.

Some of these securities get so complicated that it's tough to define them as either debt or equity.

Securitization'

The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

Mortgage-backed securities are a perfect example of securitization. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's inherent risk of default and then sell those smaller pieces to investors. 

The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. Using the mortgage-backed security example, individual retail investors are able to purchase portions of a mortgage as a type of bond. Without the securitization of mortgages, retail investors may not be able to afford to buy into a large pool of mortgages