Edward McPhail                                                                                                            Economics-347

Fall 2006                                                                                                                           MTh  10:30-11:45

Money and Banking

This course addresses classical and contemporary issues in the theory of money, banking, and financial institutions.  Topics covered include: the gold standard, the structure of central banks and the Federal Reserve system, theories of money demand and money supply, the relationship between money supply and overall economic activity, the theoretical and practical aspects of monetary policies and money creation, the efficacy of fiscal policies versus monetary policies, and the role the Federal Reserve plays in economic stabilization.  We shall pay particular attention to the money creation process, to endogenous money versus exogenous money, and to the ability of the Federal Reserve to stabilize the economy.

Office Hours

Edward McPhail, Landis House #10

Office Phone:  245-1264 (message)

Hours:  MTh 4:30 - 5:30 & by appointment.

email:  mcphail@dickinson.edu

home page:  www.edwardmcphail.com

Prerequisites

               The prerequisites for this course are Economics 112 or 100.  Economics 268 (Intermediate Macroeconomics) is recommended.  If you have not successfully completed a prerequisite course (grade of C or better), talk to me after class.  Economics 278 (Intermediate Microeconomics) is not a prerequisite.

Class Lectures

               In class I will use a variety of different tools:  overhead projector, computer presentations, handouts, and the ye olde trusty blackboard.  I will experiment with a variety of methods of presenting the material to see what works best and what does not.  Your input will play an integral role in this matter.  Helpful suggestions and constructive criticism are always welcome

               The course home page is located at www.edwardmcphail.com.  This page is under constant construction.  Over the course of the semester I will make class material available to you on the home page.  Any posted excerpts from class lectures are intended to improve the quality of your notes.  They are not substitutes for attending class and taking your own notes.

Attendance

               Though I will not take attendance on a regular basis, I will note from time to time whether or not you show up for class.  When final grades are tabulated, class attendance and participation will play a role in determining the course grade for those students on the borderline.  I do not advise skipping class.  Lectures play a fundamental role in the class and even though I will post excerpts from the lectures on the web, they are no substitute for the real thing. 

Texts

               The required textbook is Frederic S. Mishkin's The Economics of Money, Banking, and Financial Markets (use a recent edition).  This book can be found at the campus bookstore located in the HUB.

               In addition to Mishkin's text, I require three books:

1.       Maestro: Greenspan's Fed and the American Boom by Bob Woodward is a behind the scenes blow by blow description of policy making at the Fed under Allan Greenspan's guidance.

2.      A Term at the Fed: An Insider's View by Laurence Meyer and

3.      Inflation, Unemployment, and Monetary Policy by Robert M. Solow and John B. Taylor. 

Both books 2 and 3 are filled with keen insights and observations about economies, economic theories, and the role that monetary theory has played in policy making.  Reading (and rereading) the required books will help you develop an intellectual interest in economic issues. 

Worksheets, Problem Sets, and class assignments

               Over the course of the session I will hand out worksheets, assign problems from the text and/or assign small group projects that will help you prepare for the exams.  Your task is to complete these assignments on time.  Late assignments and worksheets will not be accepted.  Worksheets, problems sets, and class assignments make up 1/6 of your final grade.    

Presentations

The class will form groups and each group will give a web-based presentation that will take place the last week of class.  Presentations will consist of short talks @30 minutes in length (we may make changes in this as time and class size dictate).  The point of this exercise is to give you some experience applying the tools that you have learned in class.  It lets you hone your research skills and gives you a chance to practice speaking in front of an audience (and a sympathetic one at that).  Both of these skills are highly prized in the business world and the more practice you get the better off you are.  During the course of the semester I will suggest possible topics and you are free to suggest your own.  Whatever topic you choose you must get my approval.  Your presentation will make up 1/6 of your final grade.

Course Requirements

Your course grade will be based on homework assignments, three exams, and a project/presentation.   The grading breakdown follows:

                              Homework:  100pts

                              Exam #1:       100pts

                              Exam #2:       100pts

                              Project:           100pts

                              Final Exam:  200pts

Examination Schedule

Exams are tentatively scheduled to be held in class on

In Class Exam #1

In Class Exam #2

Final Exam

Tuesday October 3

Thursday November 16

Wednesday, December 13 2:00 PM

There are no make-up exams scheduled.  If a medical emergency occurs, please prepare adequate documentation from the appropriate authorities.

               The following tentative course outline gives the proposed order of topics for the course and the readings that will provide background for the lectures.  Class lectures will not always emphasize the material to the same degree as the textbook and at some points in the course, my lectures will diverge from the material discussed in the text.  Some topics in your reading I will mention briefly if at all, and on others I will spend a great deal of class time.  Remember that the textbook provides background material for the lectures, but the lectures are not simply a repetition of the book.  You should read all of the assigned articles (and unassigned) to improve your economic intuition and knowledge of institutional details.  If during the course of the semester I come across any articles that warrant our attention I may distribute them in class, put them on reserve, or provide a URL on our home page. 

Tentative Course Outline (chapters refer to Mishkin, 7th edition. Parentheses denote the 8th.)

1.  Introduction to Monetary Analysis, Institutions and Policy

               Chapters 1 and 2

2.    Aggregate Demand and Aggregate Supply analysis

               Chapter 25 (22)

3.  The Functions and Form of Money.

               M1, M2, M3, and Innovations in Money

               Chapter 3

4.  How is money created?

               Chapter 15 (13)

5. What Determines the Supply of Money? 

               Open market operations, money multiplier, currency ratio, reserve ratio

               Chapter 16 (14)

6. The Complete Money Supply Model. 

        Determinants of the money supply and bank panics.     

        Chapter 16 (14)

7. How Does the Fed Operate? 

               The organization and independence of the Fed.

               Chapter 14 (12)

8. The Monetary Base

               Budget deficits and the monetary base

               Chapter 15 (13)

9. What are the Tools of the Fed?

               Open market operations, discount policy, reserve requirements

               Chapter 17 (15)

10. Conduct of Monetary Policy

               What are the appropriate goals and targets?

               Chapter 18 (16)

11. Transmission Mechanism of Monetary Policy

               The Evidence

               Chapter 26 (23)

12. Money and Inflation

               How does monetary policy cause inflation?, Monetizing the debt

               Chapter 27 (24)

13. International Financial System and Monetary Policy

               Foreign exchange and the money supply

               Chapter 20 (18)

14. Overview of the Financial System

               Why do we need financial markets? Financial markets vs. financial intermediaries

               Chapter 2

15. Understanding Interest Rates

               Present value, price vs. interest rate, discount and coupon bonds

               Chapter 4

16.  How Do Interest Rates Fluctuate?

               What determines demand for an asset? Bond demand and supply

               Chapter 5

17. The Federal Reserve Bank, Bond, and Money Markets

               Money demand and supply, relationship of bond and money markets

               Chapter 5

18. Why Interest Rates Differ and Term Structure of Interest Rates

               Risk and liquidity premia

               Yield Curve 

               Chapter 6:

19. The Gold Standard

               class notes

               handouts on the gold standard