ECON-332: Money, Banking, and Finance in the Global Economy

 

Prof. Martha Starr

Department of Economics

American University

Fall 2007

 

Telephone:                       (202) 885-3747

Office:                             Roper Hall 201

Office hours:                    Tuesdays 3:00-6:00 pm, Fridays 11:15-2:15 pm

Email:                              mstarr@american.edu

                                       Please put “econ-332 money” in the subject line

Class website:                  AU blackboard

 

“[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, Book III, Chap. 10 (1848)

 

Course description

 

This class covers the economics of money, banking and capital markets in a globalizing world. Instead of the U.S.-oriented, “closed economy” approach taken in traditional money and banking classes, this class takes a globally-oriented, “open economy” approach better suited to present-day realities of money, banking, and capital markets.

 

Part I of the class provides a basic overview of the economics of money, financial institutions, and financial markets and discusses the forces underlying financial globalization. Part II covers issues of national money and monetary policy: definitions of money, basics of central banking, and stabilization policy. Part III looks at international aspects of monetary policy, including exchange-rate regimes, innovative monetary arrangements (monetary unions, currency boards, dollarization), and competition among international currencies. Part IV examines commercial banking and its regulation: basic problems of risk and asymmetric information, the rise of global banking, special problems of banking in emerging-market countries, and evolving international standards for bank supervision and regulation. Part V covers problems of international financial globalization related to financial liberalization in emerging-market countries, global capital flows, and risks of global financial crises.

 

Required readings

 

·          The text for the class is Frederic Mishkin, The Economics of Money, Banking, and Financial Markets, 8th edition, 2007.

·          The Economist. Instructions for signing up for a 12-week subscription are given on the last page of this hand-out. Price is $19.95. Sign up right away! The subscription gives you weekly delivery of the print version and unlimited access to the magazine’s website (www.economist.com).

·          Additional readings are found in the “Course Documents” area of the class Blackboard site, or will be distributed in class. 

 

 


Overview of grades, tests and dates

Item

% of final grade

Dates

 Assignments (~ 3)

20.0

  Distributed as we go along

 Current-events analysis

5.0

  Once during the semester -- schedule to be distributed soon

 Test on fundamentals

17.5

  Friday, Oct. 5

 7-10 page paper

25.0

  1-page summary submitted to Prof. Starr by Oct. 23

  Due the last day of class, Friday, Dec. 7 {or before}

 Final exam

25.0

  Friday, Dec. 14, 8:30-11:00am

 Class participation   

7.5

  Throughout the semester. {policies given below}

       

Assignments

Assignments will be handed out 7-10 days before they are due and will also be posted in the ‘Assignments’ area of the Blackboard site. Assignments involve two types of work: (1) Mini-research projects, intended to build your skills in collecting, interpreting and analyzing economic data and your ability to relate your findings in a clear, compelling way; and (2) Practice problems, which are quantitative exercises intended to provide practice for quantitative-type questions that could appear on exams. Working together on assignments is encouraged –- but you must write up your answers independently. Assignments must be submitted in class, unless you make a prior arrangement with me.

Current-events analysis

Every Friday we will discuss important monetary and financial events written about in previous week’s Economist. On one Friday during the semester, you will be required to present a story related to ideas and issues being discussed in class, and to give an analysis of it. The analysis should also be written up in 1-2 pages and submitted to Prof. Starr. Detailed instructions and a schedule will be distributed soon.

7-10 page paper

This paper can be on a topic of your choice related to the theories, issues, ideas, and/or policy debates discussed in this class. Detailed instructions will be distributed soon. To make sure that your project is viable and well-framed, a 1-page explanation of your intended topic should be submitted to Prof. Starr by Oct. 23.

 

 

CLASS PARTICIPATION

7.5% of the total grade comes from class participation, of which an important component is attendance. To earn all 7.5 points, you would be expected to attend virtually all classes and regularly answer questions, ask illuminating questions, offer good insights, etc. Excellent attendance without much talking is worth about 5 points. Irregularities in attendance automatically reduce participation points to 3 or below. 

 

 

 

Class policies

Make-up exams

Not given, except for absences caused by an unavoidable medical or family situation that I can verify (e.g. note from health-care provider).

Late work

Accepted, but with points deducted.

AU’s Academic Integrity Code

In effect at all times! No plagiarism, no submitting work that is not your own, no ‘collaboration’ in exams, etc. Violations will be prosecuted!

Grades

Grades reflect evaluation of course work as follows: 

            A          Outstanding –- superlative work at all times

            A-         Excellent –- consistently superlative work

            B+         Very good

            B          Good

            B-         Good, but with notable gaps in understanding

            C          Satisfactory

            D          Poor

            F          Failing

 


Course outline and approximate schedule

Notes:

·          Readings other than Mishkin are found in the “Course documents” area of the Blackboard site.

·          All readings are required, but not all readings need to be read closely and completely. A good strategy would be to read a paper through once, focusing on: the key issue with which it is concerned, the key position(s) it takes, evidence used to support its arguments, and its policy implications. Then after the reading has been discussed in class, go back through and delve more deeply into sections that were emphasized.

I.    Introduction –- Aug. 31 – Sept. 4

 

II.   Money and monetary policy in the U.S. and Europe –- Sept. 7-25

      A.  Generalities

·          Chap. 3: “What is money?”

B.   Mechanics of money supply and monetary policy

·          Chap. 13: “Multiple deposit creation and the money supply process”

·          Chap. 15: “Tools of monetary policy”

  1. Monetary policy and the business cycle

·          Chap. 22: “Aggregate supply and demand”

      D.   Debates about how best to make monetary policy

·          Chap. 19: “Quantity theory of money” (foundation for monetarism), pp. 493-497

·          Chap. 12: “Structure of central banks and the Federal Reserve System”

·          Chap. 16: “What should central banks do? Monetary policy goals, strategies, and tactics”

·          Hand-out comparing the Fed, European Central Bank, and Bank of England

·          European Central Bank, “What is price stability important for you?”

·          Eric Swanson, “Would an Inflation Target Help Anchor U.S. Inflation Expectations?” (San Francisco Fed, Aug. 2006)

 

      E.   Electronic money and the future of monetary policy

·          Ed Stephens, “Electronic money and the future of central banks” (Cleveland Fed, 2002)

 

III.  Money and monetary policy in the global economy –- Oct. 2-30

 

  1. Background

·          Chap. 17: “Foreign exchange market”

·          Chap. 18: “International financial system”

     B.  Monetary unions

·          Alexandre Swoboda, “Robert Mundell and the Theoretical Foundation for the European Monetary Union” (IMF, Dec. 1999)

·          Michael Klein, “European Monetary Union” (1998)

·          International Monetary Fund, “Emerging Europe” (April 2007)

·          Hand-out on Balassa-Samuelson effect

    C.  Appropriate monetary policy regimes for emerging market countries

·          Collection of short articles, “Alternative monetary policy arrangements for emerging-market countries: Dollarization, currency boards, and monetary unions”

·          Optional: International Monetary Fund, “Does inflation targeting work in emerging-market countries?” – DOES NOT NEED TO BE READ unless you need or want further reading; will be summarized in class

 

  1. “International currencies: The dollar vs. the euro?”

·          Articles from The Economist, “The euro versus the dollar”

·          International Monetary Fund, “Exchange rates and the adjustment of the current-account deficit,” World Economic Outlook, April 2007.

 

IV.  Banking and its regulation –- Nov. 2-27

 

  1. Basics

·          Chap. 2: “Financial intermediaries,” pp. 35-46.

·          Chap. 8: “Economic analysis of financial structure” (information and incentive problems”

·          Chap. 9: “Banking and the management of financial institutions”

 

     B.   Markets for banking services: Competition and consolidation

·          Chap. 10: “Banking industry: Structure and competition”

·          Articles from The Economist, “Global banking”

 

     C.  Bank regulation and financial stability

·          Chap. 11: “Economic Analysis of Banking Regulation”

·          Articles from The Economist, “Basel”

 

V.  Global Financial Markets and Financial Crises –- Nov. 30-Dec. 7