30159 - MONETARY THEORY AND POLICY
Course taught in English
Go to class group/s: 31
Class-group lessons delivered on campus
Students attending this course should be familiar with the basic concepts developed in an introductory macroeconomics course and with the fundamentals of unconstrained and constrained optimization problems.
Monetary policy, conducted by central banks such as the U.S. Federal Reserve (Fed) or the European Central Bank (ECB), is an essential policy tool for achieving both inflation and growth objectives. In a recession, for example, there is a decline in aggregate demand (consumers reduce spending; production declines and firms lay off workers; inflation falls) to which policymakers can respond with a policy that leans against the direction taken by the economy. Monetary policy is often that countercyclical tool of choice. The global financial crisis of 2008, however, has brought to light limitations of conventional monetary policy. In fact, when central banks cut policy rates sharply and reach the zero lower bound, they exhaust the potential for cuts. Even so, since 2008 central banks have found unconventional ways to continue expansionary policy. This course studies the conduct of monetary policy by central banks and its effects on the economy. After defining money and its functions, it studies the money supply process and compares monetary policy tools and institutions at different central banks. It then examines theory and empirical evidence related to the mechanisms through which policy actions are transmitted to the real economy. Then, it discusses the optimal design of monetary policy, developing a model of inflation targeting. Finally, it analyses the unconventional monetary policy tools developed during the recent financial crisis. Simple analytical models are develop.
- What is money and what are its main functions?
- What are the tools available to central banks to conduct monetary policy? How is monetary policy conducted at the Fed and the ECB?
- What is the role of banks in the creation of money?
- How is monetary policy transmitted to the real side of the economy? What are the effects on inflation, unemployment and output?
- What are the features of financial and labor markets that make them special, and how these interact with monetary policy and the rest of the economy?
- How should central banks conduct monetary policy?
- How has monetary policy in the US and in the euro area responded to the emergence of the liquidity trap and the financial crisis? How do quantitative easing, credit easing and other conventional monetary policies work?
- Define money and its primary functions.
- Illustrate the money supply process and the role of banks in the creation of money.
- Describe the monetary policy tools and institutions at different central banks, such as the Fed and the ECB.
- Develop empirical evidence and simple theoretical models of the transmission mechanisms of monetary policy to the real side of the economy.
- Illustrate a model of optimal monetary policy with inflation targeting and identify the trade-offs faced by central banks in stabilizing inflation and output.
- Describe the unconventional monetary policies implemented since the financial crisis in the euro area and the US.
- Chose and apply the appropriate model to assess the effects of conventional and unconventional monetary policies on the economy.
- Choose and apply the appropriate model to assess the trade-offs faced by central banks when setting monetary policy.
- Justify the choices of institutional settings and monetary policy tools in different countries and at different central banks.
- Interpret the monetary policy decisions on key interest rates and other non-standard measures taken by the Federal Open Market Committee at the Fed and the Governing Council at ECB during their regular meetings.
- Formulate a desirable monetary policy action based on the assessment of the inflation outlook and the economic developments on the real side (unemployment, consumption, investment...).
- Interact in a constructive way and think critically.
- Face-to-face lectures
- Guest speaker's talks (in class or in distance)
- Exercises (exercises, database, software etc.)
- Individual assignments
- Group assignments
- The learning experience of this course includes, in addition to face-to-face lectures, the solution in class of the Problem Sets assigned to students throughout the course.
- Those exercises allow students to apply the analytical tools and models illustrated during the course and to familiarize with downloading and elaborating key macroeconomics data (on alternative measures of inflation; wages; indicators of labor market activity such as unemployment, vacancies posted, labor force participation; output; consumption; investment...).
- Students are encouraged to work on the assignments in groups, though they are asked to submit individually. Guest speaker’s talks from policymakers at central banks may be organized.
With the purpose of measuring the acquisition of the above-mentioned learning outcomes, the students’ assessment is based on three components:
- Written exam (70 percent of the final grade). The written exam consists of open questions and exercises. Exercises are aimed at assessing students' ability to apply the analytical tools illustrated during the course. Open questions are aimed at assessing students’ ability to articulate economic reasoning and elaborate on the economic concepts discussed in class. Students can take two partial exams (one in the middle and one second exam at the end of the course, with equal weight) or a general exam at the end of the course. To pass the exam, the grade (for both partials and the general) has to be at least 18/30.
- Two problems sets with equal weight (30 percent of the final grade). Problem sets are aimed at testing students' ability to go beyond what has been discussed in class and provide independent and critical thinking. If the exam grade is higher than the grade from the problem sets, only the exam grade counts.
- Additional 1 to 2 points for class participation. Class participation is aimed at testing students' ability to interact in a constructive way and think critically.
Students' assessment is based on the written exam (either two partials with 50 percent weight or one general exam at the end of the course).
The course material, for both attending and non-attending students, consists on a combination of few selected chapters from:
- F. MISHKIN, K. MATTHEWS, M. GIULIODORI, The Economics of Money, Banking and Financial Markets, European Edition, Pearson, 2013.
- Several additional readings. Lecture slides, problem sets and additional readings are uploaded in the Bboard platform of the course.