One of the most important concepts in modern finance – and one that I always insist my students master – is that of arbitrage. Unlike speculators (or investors) who seek risks for the sake of netting a profit, arbitrageurs don’t take any risks for the same sake. They exploit differences in prices for similar financial…
While the US Federal Reserve and the ECB have been busily adopting counter-cyclical measures aimed at stabilising economic growth and price increases, commercial banks have been at the other extreme, always frustrating such measures and acting pro-cyclically. The Fractional Reserve system that allows for faster credit creation than the economy can absorb is the main…
Planting the Seeds The financial crisis of 2007-2009 is often seen as one of the worst ever crises faced by the US economy. The capitalisation of the S&P 500 was halved, the unemployment rate was doubled, and the Federal Reserve had to go out of bounds in rescuing the economy to avoid the collapse of…
Economic analysis by Filipe R. Costa Long gone are the days when central banks used to target monetary aggregates in order to attain price stability. Until the early 1990s, central banks thought the correlation between the money supply and inflation was strong enough for them to be able to define as their intermediate objectives some…
Every time I look at the chart below, I have mixed feelings and I am not sure which of them dominates. On one side, I am delighted with the spectacular rise in equities seen since 2009. In just six years, the market fully recovered from losses that pushed the S&P 500 back to its 1996…
