Module description
Please note you cannot take this module if you are also taking 6QQMB300 Money and Banking.
What is the module about?
This is an advanced course in monetary theory and central bank policy. It involves theoretical modelling and econometric concepts.
This module has three main parts. The first part of the module covers elements of monetary theory. Topics include the evolution of money, the reasons for holding money, the demand for money, the supply of money, monetary aggregates, and the money creation process. In addition to the traditional theoretical approaches, the students will be exposed to major contributions of the recent years (including the money-in-the-utility-function and the cash-in-advance approaches, as well as the “new monetarist economics”.)
The second part of the module focuses on the monetary aspects of various macroeconomic frameworks that we use for monetary policy analysis and the implications of money and monetary policy for the business cycle and prices. In discussing the transmission mechanism of monetary policy, we will explore the role of financial intermediation.
The third part of the module focuses on central banking and monetary policy. We start with a discussion on the development of central banks, and their goals and functions in an international context. Then, we provide the theoretical foundation for the understanding of the modern institutional design of monetary policy, focusing on time-inconsistency, inflation bias and credibility. We discuss the institutional aspects and governance aspects of central banking as well as the competing monetary policy frameworks, targets and strategies. Then we discuss the conduct of monetary policy, covering topics that include the monetary policy operating procedures, monetary policy reaction functions, monetary policy rules, etc. Special attention is given to monetary policy under uncertainty, the zero-lower bound, unconventional monetary policy, and forward guidance. At least one lecture will explore the links between monetary policy and financial stability.
Who should do this module?
Students with an interest in economic theory and monetary policy. Students with a solid background in macroeconomics.
Provisional Lecture Outline
Lecture 1: The evolution of money. Money, payments, and liquidity: the quantity theory, money in the utility function and the cash-in-advance constraint. “New monetarist economics”.
Lecture 2: The demand for money: Quantity theory, inventory models, the Keynesian view, monetarism and hyperinflations.
Lecture 3: The supply of money: Monetary aggregates, money creation and the multiplier.
Lecture 4: Money and monetary policy in the traditional and modern workhorse macroeconomic models. Money and the business cycle. Empirical evidence on money output and prices.
Lecture 5: The transmission mechanism of monetary policy. The role of financial intermediation. Money and financial markets. Credit cycles.
Lecture 6: The development of central banks. The international experience. Goals and functions. The theoretical foundations for understating modern central bank design: Time-inconsistency, inflation bias and credibility. Reputation, preferences, contracts, institutions and targeting rules.
Lecture 7: The institutional design of monetary policy: Central bank independence transparency and accountability. Central bank communication. Committee decision-making and monetary policy. The conduct of monetary policy: Monetary policy frameworks and strategies: Monetary policy targets. Inflation targeting in theory and practice.
Lecture 8: The conduct of monetary policy (continues): Monetary policy operating procedures. Monetary policy reaction functions. Monetary policy rules. Monetary policy under uncertainty. The great moderation and the great recession. Monetary policy at the zero-lower bound. Unconventional monetary policy. Forward guidance
Lecture 9: Monetary policy and financial stability: Financial stability and the lender of last resort function. Financial crises.
Lecture 10: Timely topics in monetary policy: Electronic Money, Cryptocurrencies, and the Central Bank. The natural real interest rate. The term structure of interest rates.
Assessment details
25% Mid-Term Examination
75% In Person Examination
The format of the examination has not yet been confirmed. All students will be expected to sit any remote exams in January, but semester 1 only students will be set an alternative assessment or sit the exam remotely in lieu of any in-person exams.
Teaching pattern
Weekly Lectures
Fortnightly Tutorials
Suggested reading list
Key text or background reading
In alphabetical order
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Carlin, W. and D. Soskice (2014). Macroeconomics: Institutions, Instability, and the Financial System, Oxford University Press
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Cecchetti, S. &. Schoenholtz, (2017) Money, Banking, and Financial Markets, 5th Edition, McGraw-Hill.
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Gali, J., (2015) Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, 2nd Edition, Princeton University Press. (#)
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Mishkin, Frederic S., (2018) The Economics of Money, Banking and Financial Markets: Global Edition, 12th edition (or any other edition), Pearson.
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Walsh, C., (2017), Monetary Theory and Policy, 4th Edition (or any other edition), MIT Press, Cambridge Massachusetts & London, England. (#)
(#) denotes advanced material