EC3115 Monetary economics
This course is split into three sections. Each one builds on the ideas and theories of the previous section, working up from microeconomic explanations of why people hold money, to models of international monetary economies.
Section 1: Introduction to money and monetary economics
The nature of money
- What constitutes money. Why people hold money; introduction to cash in advance (CIA) and money in the utility (MIU) functions.
Money demand and supply
- Microeconomic determinants of the demand for money and macroeconomic money demand functions. Financial intermediaries, banks and money creation.
The Classical school, neutrality of money and the quantity theory
- The Classical dichotomy, Walras' and Say's laws, introduction to money in a general equilibrium setting.
Section 2: Monetary policy
The Classical model, flexible price economies and monetary policy
- Rational expectations, representative agents and real business cycle theory. MIU, CIA, Lucas supply functions and the effects of monetary policy.
The Keynesian approach to monetary policy - nominal rigidities
- Multi-period pricing and the persistence of monetary policy shocks.
Policy ineffectiveness and Central Bank independence
- The Lucas critique. Monetary policy rules: interest rate targeting and money targeting. Issues in monetary policy: rules versus discretion.
The welfare effects of inflation and monetary policy
- Neutrality and superneutrality of money, welfare costs and the Friedman rule, seigniorage and the inflation tax.
Term structure of interest rates
- Explanation of the yield curve: expectations hypothesis and the segmentation hypothesis.
Section 3: International monetary arrangements
Money, interest rates and exchange rates
- Introduction to income accounting in an open economy, uncovered and covered interest rate parity.
Prices and the exchange rate
- Law of one price, absolute and relative purchasing power parity.
Monetary policy in an open economy setting
- Monetary theory of the exchange rate, monetary policy and exchange rate overshooting.
Exchange rate regimes
- Gold standard, Bretton Woods, floating exchange rates, optimal currency area theory and issues in the euro.