Money, Banking and Financial Markets
Course Number: 45810
This course employs a modern macroeconomic model of monetary policy to explain the interplay between real, monetary, and financial macroeconomic variables and the policies that influence them. We begin by studying the joint determination of aggregate output and the real interest rate. We see how interest rate policy offsets fluctuations in inflation and employment that occur otherwise due to macroeconomic shocks. And we see why inflation targeting is welfare-maximizing monetary policy.
We see how a central bank implements interest rate policy in practice through its influence on bank lending and money stock determination. We discuss the implementation and effectiveness of monetary and fiscal policy at the zero interest bound.
We distinguish banking from bond and equity finance in the capital markets. We discuss how money markets grew in size with the help of depository institution sponsors, securitization, structured finance, and regulatory permissiveness to rival the volume of credit intermediated through the banking system. We see how money markets helped to create the credit turmoil of 2007-2009.
We see that significantly higher bank capital requirements are not costly from the social point of view, and that they are the best regulatory means of maintaining the health and stability of the financial system.
We assess central banking in the recent credit turmoil by classifying core central bank initiatives into monetary policy, credit policy, and interest on reserves policy. We understand the power of each central bank policy to stabilize economic activity in terms of its fiscal policy features. We compare and contrast central bank credit policy to line of credit services provided privately by commercial banks. And we discuss the critical role that interest on reserves will play in the future when interest rate policy must exit the zero bound to stabilize inflation. Finally, we consider the boundary of a central banks credit policy powers needed to secure its independence on monetary and interest rate policy.
Course Materials: Course packet of articles, problem sets, answers, and other handouts. We interpret economic, central banking, and financial news in the Wall Street Journal with conceptual tools developed in the course.
Academic Year: 2019-2020
Semester(s): Mini 3