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Description:
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This course will help the student to understand the interaction of real, monetary, and financial macroeconomic variables and the policies that influence them. We begin by studying the joint determination of aggregate output and the real interest rate in a modern model of monetary policy. We see how interest rate policy offsets fluctuations in inflation and employment that would otherwise occur due to macroeconomic shocks. And we see why inflation targeting is welfare-maximizing monetary policy. Then, we shift the focus to money, credit, and banking matters. We address money as the medium of exchange, credit in the exchange process, and the role of banks in the payments system. We study a model of central bank operations that links banking, money stock determination, and interest rate policy. We discuss the motivation for borrowing and lending, the two-country model of international finance, corporate finance and the external finance premium, and financial intermediation and banks. We discuss banking and financial market distress with reference to recent events. Finally, we distinguish between banking and monetary policies, and assess the power of such policies, including “last resort lending,” to act against financial fragility.
Materials:
Course packet of articles, problem sets and answers handed out in class. We will interpret economic, financial, and monetary policy news in the Wall Street Journal with conceptual tools developed in the course.
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