Frederic S. Mishkin: The Economics of Money, Banking, and Financial Markets, Seventh Edition, Addison Wesley, 2003
Structure of the Course:
1. Money, interest rates, and financial markets
1.1 Overview of the financial system
1.2 Understanding money and interest rates
1.3 The risk and term structure of interest rates
1.4 The foreign exchange market
2. Financial institutions
2.1 Financial structure
2.2 The banking firm and the management of financial institutions
2.3 Banking industry: structure and competition
2.4 Banking regulation
2.5 Nonbank financial institutions
2.6 Financial derivatives
3. Central banking and the conduct of monetary policy
3.1 Structure of central banks
3.2 Money supply process and determinants of money supply
3.3 Tools of monetary policy
3.4 Conduct of monetary policy: Goals, targets, and strategies
3.5 International financial system
4. Monetary theory
4.1 The demand for money
4.2 IS-LM/AS-AD model and monetary/fiscal policy
4.3 Transmission mechanisms of monetary policy
4.4 Money and inflation
4.5 Rational expectations and efficient capital markets
This course will cover various topics in monetary economics, monetary policy and central banking. Although this course will contain a mix of old and new theories, we will mostly concentrate on the recent developments on monetary policy and theory. This course will give you an overview of the main issues in monetary theory and policy and possibly ideas for thesis or dissertation research.
Four Quizzes: 20%
First Midterm Exam, 20%
Second Midterm Exam, 20%
Final Exam: 40%
Credits & Workload:
4 Credits & 4 hours per Week (teaching) + 2 hours per Week (tutoring); 15 Weeks, 60 hours (teaching) + 30 hours (tutoring)
Part Two (Short Answers) of the first Midterm Exam:
1. [15 points] Suppose that the price level rises slowly after an unexpected temporary increase in money growth rate (from previously 0% to 10%). Consider the short-run effect of this monetary expansion.
(1) Why is there an anticipated inflation effect on the nominal interest rate, holding real interest rate fixed? Briefly explain using an equation.
(2) Why is there a liquidity effect on the nominal interest rate, holding real income fixed? Briefly explain using another equation.
(3) In equilibrium, how does current real interest rate change? Illustrate your answer using an IS-LM diagram as we showed in class. Put real income on the horizontal axis and real interest rate on the vertical axis. When you shift curves, give the reasons why curves shift.
2. [10 points] (1) What is the mean reversion phenomenon of stock prices? (2) Why does it indicate that the stock market is inefficient?
3. [5 points] Information production in the financial industry can suffer the free-rider problem. Briefly discuss how this is related to the efficient market theory.