Money, Financial Intermediation and Governance
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Money, Financial Intermediation and Governance

Dino Falaschetti and Michael J. Orlando

Dino Falaschetti and Michael Orlando unify the treatment of the many deeply related topics in money and banking in this wide-ranging book. By continually building on the assumption that economic actors are maximizers, they explain how monetary and financial services, as well as related governance mechanisms, influence economic performance. In this manner, Money, Financial Intermediation and Governance not only lets readers make sense of today’s monetary authorities and financial markets, it lets them see through superficial complexities to the fundamental influences that will shape those organizations for years to come.
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Chapter 1: Modeling

Dino Falaschetti and Michael J. Orlando


Models do not represent literal truth. Rather, they are tools for viewing the world, its problems, and contexts. (Poirier, 1995: 2) WHAT ARE MODELS, AND WHY ARE THEY NECESSARY? To better understand phenomena associated with money and banking, we will make extensive use of economic ‘models.’ Models are simple characterizations of forces that influence our empirical reality, and are necessary to examine difficult to track issues in a logically consistent manner. Every problem that individuals confront is a simplified version of ‘reality.’ In the extreme, inherent physical limitations preclude us from immediately sensing many aspects of what is ‘true,’ and thus from ever acting on a problem without first simplifying it. We rely on models long before bumping into physical limitations, however. Consider, for example, the last time you used a road map.1 Was your map a ‘simplified representation’ of an empirical reality? Of course it was – indeed, a ‘real’ map would have never fit in your car! But notice that, rather than clouding the issue under consideration (for example, directions from one town to another), this simplification made it more transparent – that is, it let you see past relatively unimportant issues to carefully contemplate questions of particular interest (such as how far, and in what direction, is your destination?). The question before us is thus not whether to simplify, but rather how to simplify problems so that they become tractable (without becoming trivial). The simplification on which we’ll progressively build is that...

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