My main objective with this book is to raise awareness of collateral frameworks and, more generally, to advance an agenda of studying the institutional and micro-foundations of the monetary system. The aim is to draw out the wider implications for the financial system and the real economy. The book itself contributes to this agenda through unpacking the opaque foundation of the monetary system, using the complex construction of the euro as an example. In turn, this has led to the euro crisis becoming an important sub-theme in the book.

Well-functioning monetary and financial systems are important to the efficient flow of resources and private and social welfare. This point has been brought home emphatically by the global financial crisis and accompanying recession that emerged in August 2007 and that has taken years to resolve. As late as January 2015, the ECB was still heavily engaged in its fight to preserve the euro. Numerous proposals have been advanced regarding how to “fix” the monetary and financial systems and regulate banks and other types of monetary and financial enterprises. Widespread financial market interventions by central banks have made it difficult to gauge “correct” market prices and, in private, even many central bankers express this exact view. This undermines the efficient allocation of resources in the economy. Improving our understanding of the workings of the monetary and financial system is therefore of central, and also urgent, importance.

The broad perspective put forth in this book is that monetary and financial systems are fundamentally built on top of the collateral that central banks choose to accept in exchange for central bank money. To understand money and the broader financial system, it is therefore necessary to understand central bank collateral frameworks.

In this book, I have taken a first step in that direction by discussing how collateral frameworks work and interact with markets and, ultimately, the real economy. I argue that collateral frameworks can bias the private provision of real liquidity and thereby also the allocation of resources in the economy. They can affect market prices of financial assets and undermine the efficient working of money markets.