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 differential calculus (so as to solve simple unconstrained and constrained optimization problems).
Monetary policy, conducted by central banks such as the Fed or 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 financial crisis of 2008, however, has brought to light limitations of conventional 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. More tools have been recently developed to deal with the Covid recession. This course studies the conduct of monetary policy by central banks and its effects on the economy. After defining money and its functions, it 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 unconventional monetary policy developed during the recent financial crisis and the Covid recession. It mixes theory, empirics and institutional analysis.
- 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, as well as the Covid recession? 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, as well as during the Covid recession.
- 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
- Online 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 and online 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.
There are two evaluation formats for the course. A format for students regularly attending lectures - either in presence if they are on campus or online if they are unable to be on campus - and a non-attending students format. The first format is the preferred evaluation procedure as it is designed to foster gradual and effective learning and to ensure a wide-ranging final evaluation.
The attending students format consists of take-home assignments and a final examination, possibly held online. Take-home assignments are worth 60% of the final grade, and the final exam is worth the remaining 40%.
Take-home assignments are taken at specific dates during classroom time, while the final exam can be taken at any of the exam sessions offered within the academic year.
Students who have submitted the take-home assignments, can choose to move to the non-attending students format at a second stage, in which case assignments will not contribute to the final grade.
There are 4 take-home assignments throughout the course. These are open books, and students will have 2-3 days to solve and submit their solutions. While students can work in groups, each student must hand-in his/her own copy of the solution, clearly indicating those students he/she has worked with. The final elaboration and writing of the assignment must be individual and submitted solutions cannot be exactly identical.
Each assignment consists of two parts. In the first part, students will be asked to solve an exercise that is a variation on the material covered in class. In the second part, they will work with real data. Students will be asked to plot relevant empirical relationships - hence no econometrics is needed - and interpret their findings in light of what they saw in class.
Out of the 4 assignments, only the 3 best contribute to the final grade, i.e. the assignment with the lowest grade will be automatically disregarded. Thus, each assignment is worth 20% of the final grade. While it is not compulsory to submit all the assignments, a student submitting all of them will be awarded 1 extra point on the final grade from the assignments.
The final exam is monitored (if online it is held on Blackboard on Respondus). Students have 1 hour to answer 4 out of 5 short questions. We value short, clear-cut and precise answers. Within the attending students format, the final exam only consists of theoretical essay questions.
The non-attending students format consists on a final exam (possibly online) with two parts.
In the first part, students have to answer to 4 out of 5 short questions. We value short, clear-cut and precise answers. The first part covers the theoretical content of the lectures and lasts 1 hour. In the second part, students are asked to solve an exercise that is a variation on the material covered in class. Part 2 lasts 45'.
Part 1 and 2 are taken during the same exam session. If the exam is held in presence, both Part 1 and Part 2 are monitored. If the exam is held online, Part 1 is monitored and held on Blackboard using the Respondus browser. Part 2 is instead taken outside the Respondus browser. After completing the first part, students exit Respondus, download the text of the exercise, solve it and upload it on Blackboard (some extra time is allowed in this case for completing the procedure).
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.