ECON-630 Monetary Theory and Policy
Prof. Martha Starr
American University
Fall 2011
Telephone: (202) 885-3747
Office: Kreeger Hall, Room 118
Office hours: Mondays, 5:00-8pm; Wednesdays, 3-5pm
Class website: AU Blackboard, ECON-630
Email: mstarr@american.edu
± ± ±
“[S]o much barbarism … still
remains in the transactions of most civilized nations, that almost all
independent countries choose to assert their nationality by having, to their
own inconvenience and that of their neighbors, a peculiar currency of their own.”
-- J.S. Mill, Principles of Political Economy, Vol. II
(1894).
Monetary theory and policy
This class covers analysis of key issues in monetary theory and policy,
including relationships between money,
output and prices; hyperinflations; business cycles; inflation targeting;
monetary unions; monetary policy in open- and emerging-market economies; and monetary
policy in financial crises. The objective of the class is to provide a
rigorous overview of these issues, with emphasis on recent scholarly work and
policy debates.
Monetary Theory and Policy is one of the recommended classes for the
monetary field for PhD students (the other being ECON-633 Financial Markets).
The course should be accessible to students who have made reasonable progress
in their core macroeconomics sequence. M.A. students should have completed
ECON-501 and ECON-505. PhD students should have completed ECON-702 [Macro I];
completion of ECON-712 [Macro II] is advantageous but not necessary. Material
in the class may overlap with ECON-702 and -712. Exposition will be mostly in
terms of linear models and diagrams; models using calculus will be presented
but in a self-contained way.
Readings
The textbook for the class is Carl Walsh’s Monetary Theory and Policy, 3rd edition (MIT Press, 2010). There
are also many required articles posted in the “Course Documents” section of the
class Blackboard site. This course is reading-intensive, although readings can
be done selectively (i.e. identify the paper’s key argument, the way in which
it is elaborated, and key steps of its theoretical or econometric development).
Graded work
The grade for this class will be determined as follows:
|
Item |
Contribution to final grade (percent) |
Due date |
|
VAR
project |
12.5 |
Sept. 28 |
|
Take-home
midterm |
20 |
Oct. 5 (class does not meet that night) |
|
Policy debates |
12.5 |
Nov. 16 [note: no class on Nov. 9; use this time to prepare] |
|
Research paper
(15-20 pages, instructions distributed soon) |
25 |
Dec. 7 – last day of class |
|
Take-home final exam |
25 |
Dec. 19 |
|
Class participation |
5 |
Throughout |
VAR project
In the VAR project, you will be expected to run
basic vector-autoregressive analyses using data on monetary-policy variables,
output and prices for a country of your choice. The assignment requires you to use
Eviews -– a software package that emphases time-series applications and is
widely used for analysis of macroeconomic and financial data. There will be a detailed
hand-out on running VARs in Eviews to help you get started.
Course Outline
[readings
other than Walsh are posted in Blackboard]
1.
Introduction: Monetary-policy
basics and background on contemporary issues (Aug. 31)
Gourinchas
– “U.S. Monetary Policy, ‘Imbalances’ and the
Financial Crisis”
Chapter
1 from Reinhart and Rogoff, “This time is different”
2. Empirical evidence on money and output (Sept.
7)
Walsh -- Chapter 1
Pedro Teles and Harald Uhlig, “Is quantity theory
still alive?” NBER WP No. 16393 (Sept. 2010).
Excerpt from Enders on Granger causality & VARs
3. Long-run models of money, inflation and
growth (Sept. 14 & 21)
Walsh -- Chapters 2-4
Milton Friedman, "The Role of Monetary
Policy," American Economic Review, March 1968.
Isaac Mbiti and
David Weil, “Mobile banking and the impact of M-Pesa in Kenya,” NBER WP No.
17129 (June 2011).
Thomas Sargent, Noah Williams,
and Tao Zha, “The conquest of South American inflation” (Dec. 2006).
4. Monetary policy and the business cycle
(Sept. 21 & 28)
Walsh –- Chapter 5 (pp. 195-209) and Chapter 6
Adam
Cagliarini, Tim Robinson, Allen Tran (2011).
“Reconciling microeconomic and macroeconomic estimates of price stickiness,”
J. Macroeconomics, Vol. 33, No.
1 (March): 102-120.
Argia
Sbordone et al., “Policy Analysis using DSGE Models: An Introduction,” New York Fed Economic Policy Review,
Oct. 2010.
< Midterm – Oct. 5 >
5. Time
inconsistency and contemporary monetary policy (Oct. 12 & Oct. 19)
Walsh
Chap. 8, esp. Barro-Gordon model (pp. 365-378, 393-397) and central bank
institutions (pp. 419-424).
Hand-out
on the Fed, ECB, and Bank of England
Lars Svennson (2010). “Inflation
targeting.” NBER Working Paper No. 16654. Chapter prepared for the Handbook of Monetary Economics, Vol. 3).
Scott
Roger (2009). “Inflation targeting at 20: Achievements and challenges” (IMF WP/09/236).
Carlos J. Garcia, Jorge E. Restrepo, Scott Roger (2011). “Hybrid
Inflation Targeting Regimes,”
International
Journal of Money and Finance, forthcoming.
Joshua Aizenman, Michael
Hutchison and Ilan Noy (2011). “Inflation Targeting and Real
Exchange Rates in Emerging Markets,” World Development, Vol. 39, No. 5 (May): 712-724.
6. International
dimensions of monetary policy: Monetary union, currency competition (Oct. 19
& 26, possibly some of Nov. 2)
Robert Mundell (1961). “A Theory of Optimum Currency Areas,” American Economic Review (Nov.)
Alberto
Alesina and Robert Barro (2002). “Currency Unions,” Quarterly Journal of Economics.
Issing,
O. (2011) “The crisis of European Monetary Union – Lessons to be drawn,” Journal of Policy Modeling.
Campbell
Leith, Simon Wren-Lewis (2011). “Discretionary
policy in a monetary union with sovereign debt,” European Economic
Review, Vol. 55, No. 1 (Jan.):
93-117.
Linda
Goldberg (2010). “Is the international role of the dollar changing?” New York Fed Current Issues in Economics and
Finance, Vol. 16,
No. 1 (Jan.)
Thimann,
Christian
(2008). “Global role of currencies,” International Finance,
11(3): 211-245.
Is
the Era of the Dollar Over?” , Vol. 
7. Financial
frictions and monetary policy (Nov. 30 & Dec. 7)
(a)
Interpreting the Great Depression
David Wheelock, “Monetary Policy in the Great
Depression: What the Fed Did, and Why,” Federal
Reserve Bank of Kansas City Economic Review, Mar/Apr. 1992, pp. 3-28.
Bernanke,
B. S. (1983), “Nonmonetary Effects of the Financial Crisis in the Propagation
of the Great Depression,” American
Economic Review, 73(3): 257-276
(b)
Unconventional monetary policy
Ben Bernanke, Vincent Reinhart, and Brian Sack (2004).
“Monetary Policy Alternatives at the Zero Bound,” Brookings Papers on
Economic Activity, Vol. 2.
Chung, Laforte,
Reifschneider & Williams, “Estimating the Macroeconomic Effects of the
Fed’s Asset Purchases,” Federal Reserve
Bank of San Francisco Economic Letter (Jan. 2011)
(c)
Leverage
John
Geanakoplos, “Solving the Present Crisis and Managing
the Leverage Cycle,” Aug. 2010.
Pierre
Gourinchas & Maurice Obstfeld, “Stories of the 20th Century for
the 21st” (on predictors of financial crises in developed &
emerging-market countries)
Nicola
Cetorelli and Linda Goldberg, “Global banks and international shock
transmission: Evidence from the crisis,” IMF
Economic Review, Vol. 59, No. 1, 2011.
Ji
Wu, Alina Luca, and Bang Nam Jeon, “Foreign bank penetration and the lending
channel in emerging economies: Evidence from bank-level panel data,” Journal of International Money and Finance,
forthcoming.