Syllabus
Monetary
Theory and Policy
ECON 6411
(formerly ECON 446)
Fall 2009
Mondays and Wednesdays, 8:00 - 9:15
AM
Monteith Building, Room 311
Prof. Steven R.
Cunningham
Office: Monteith 418
Office Telephone: (860) 486-3550
EMAIL: Steven.R.Cunningham@uconn.edu
Summary
This is a first field course in Monetary Economics. Traditional topics are covered. The course is intended for Ph.D. students specializing in Monetary Economics, Macroeconomics, or International Finance. Therefore, I expect I higher degree of motivation and energy from the students than in some other courses.
I operate under the assumption that to develop an active knowledge of Monetary Economics, it is necessary for the student to get intimately involved in the literature, to perform a variety of econometric estimations, and to analyze the results. As course is intended to prepare students for research in the field, students must actually read the literature and directly handle the data.
Therefore, I will expect the students to write analyses of aspects of the literature, and to estimate and analyze common relationships. This is a hands-on course.
Prerequisites
Students are expected to have completed the Ph.D. sequence in macroeconomics. This implies that students are comfortable with stochastic modeling. While not a formal requirement, students should have completed substantial graduate training in microeconomic theory as well, and have a good grasp of basic econometrics (esp. regression analysis). Students are expected to have developed broad maturity in economic analysis.
Textbook
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000).
Grading
Grades will be determined by homework assignments (50%) and a final exam (50%). Homeworks assignments will consist of econometric analyses and short papers.
Reference Books
Course Outline and Readings
Always Subject to
Change!
(1) Introductory
What is Money?
Simmel's Philosophy of Money
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapter 1. Introduction.
Supplemental Readings:
Gurley, J. G., and E. S. Shaw, Money in a Theory of Finance. Brookings Institute, 1960.
Johnson, Harry G., "Inside Money, Outside Money, Income, Wealth, and Welfare in Monetary Theory," Journal of Money, Credit and Banking, February 1969, pp. 30-45.
Lucas, Robert, "Money in a Theory of Finance " Carnegie-Rochester Conference Series on Public Policy, 1985.
Velde, Francois R., "Lessons from the History of Money," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 22 no. 1 (Quarter 1, 1998), 2-16.
(2) The Quantity Theory and Neoclassical Notions of Money
Neoclassical Model
Friedman's Restatement of the Quantity Theory
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapter 2. The Analysis of Money and Prices: The Heritage..
Supplementary Readings:
Alchian, AA, "Why Money?," Journal of Money, Credit and Banking, February 1977, Part 2, pp. 133-40.
Blanchard and Fischer, Lectures on Macroeconomics, pp. 154-168.
Felderer, Bernhard, and Stefan Homburg. Macroeconomics and New Macroeconomics. Berlin: Springer-Verlag (1987), Chapter IV.
Friedman, Milton, "The Quantity Theory of Money: A Restatement," in M. Friedman (ed.), Studies in the Quantity Theory of Money (Chicago: The University-of Chicago Press, 1956, p. 3-21.
__________. "Quantity Theory of Money" in The New Palgrave, John Eatwell, Murray Milgate, and Peter Newman, eds. New York: W. W. Norton (1989), 1-40.
__________. "Neutrality of Money" in The New Palgrave, John Eatwell, Murray Milgate, and Peter Newman, eds. New York: W. W. Norton (1989), 273-287.
Hahn, Frank. "General Equilibrium Theory," The Public Interest, Special Edition (1980), 123-138.
__________, "On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy," in Clower.
Kohn, M., "In Defense of the Finance Constraint," Economic Inquiry. April 1981, pp. 177-195.
Miller, M., and C. W. Upton. Macroeconomics: A Neoclassical Introduction. Chicago: Univ. of Chicago Press (1974/1986).
Ostroy and Starr, "The Transactions Role of Money," in Handbook of Monetary Economics, vol. 1, Ch. 1.
Patinkin, Don. Money, Interest, and Prices, 2nd edition. Cambridge: MIT Press (1965), Chapters 8-12, 15.
Samuelson, P.A., "An Exact Consumption-Loan Model of Interest With or Without the Social Contrivance of Money," Journal of Political Economy. December 1958, pp. 467-482.
Williamson, S., and Wright, R., "Barter and Monetary Exchange under Private Information," American Economic Review. March 1994, pp. 104-123.
(3) Walras' and Say's Law, Homogeneity
Basic Concepts
Hicks' Medieval Fair Model
First and Second Principles of Monetary Theory
Patinkin's Extension to Hicks' model
Portfolio Approach
Marshallian Model
Walrasian Model
Quantity Theory
Excess Demand, Aggregate Excess Demand
Walras' Law
Homogeneity Postulate
Say's Law
The Invalid Dichotomy
Money in the Utility Function
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapter 3. Money in the Economy: General Equilibrium Analysis..
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapter 17. Walras' Law and the Interaction Among Markets.
Supplementary Readings:
Fama, Eugene. "Banking in a Theory of Finance," Journal of Monetary Economics, 1980.
Felderer, Bernhard, and Stefan Homburg. Macroeconomics and New Macroeconomics. Berlin: Springer-Verlag (1987), Chapter IV.
Gurley, J. G., and E. S. Shaw, Money in a Theory of Finance. Brookings Institute, 1960.
Harris, Laurence. Monetary Theory. McGraw-Hill, 1981.
Hicks, Sir John. Critical Essays in Monetary Theory. Oxford, 1967.
Patinkin, Don. Money, Interest, and Prices, 2nd edition. Cambridge: MIT Press (1965).
_________. "The Indeterminacy of Absolute Prices in Classical Economic Theory," Econometrica 17 (January 1949), 1-27.
Pesek, B.P., and T. R. Saving, Money, Wealth, Economic Theory. MacMillan, 1967.
Pesek and Saving, "Theory of Money and Wealth: A Comment," Journal of Money, Credit, and Banking, August 1969 pp. 535-537.
(4) Empirical Money Demand Models, MIUF, Buffer Stocks
Money Demand
Precautionary and Buffer Stock Models
Expected Utility Model
Long-Run & Short-Run Money Demand
Scale Variables and Opportunity Cost Variables
Velocity
Case of the Missing Money
Alternative Aggregation
Disaggregation
Partial Adjustment Models
Distributed Lag Models
Error Correction Models
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapters 4-9. Money Demand.
Carlson, John B., "The Stability of Money Demand, Its Interest Sensitivity, and Some Implications for Money as a Policy Guide," Economic Review of the Federal Reserve Bank of Cleveland, vol. 25 no. 3 (Quarter 3, 1989), 2-13.
Cunningham, Steven R., "The Relationship of Opportunity Costs to the Interest Elasticity of Money Demand," Eastern Economic Journal (Summer 1993) pp. 309-319.
Darby, Michael R., William Poole, David E. Lindsey, Milton Friedman, and Michael J. Bazdarich. "Recent Behavior of the Velocity of Money," Contemporary Policy Issues 5 (January 1987), 1-33.
Laidler, David E. W., The Demand for Money, 4th edition. HarperCollins, 1993. Chapters 6-11.
Supplementary Readings:
Baumol, W.J., "The Transactions Demand for Cash: An Inventory-Theoretic Approach," Quarterly Journal of Economics, 1952, pp. 545-556.
Blanchard and Fischer, Lectures on Macroeconomics. pp. 168-181.
Cropper, M.L, "A State-Preference Approach to the Precautionary Demand for Money," American Economic Review, June 1976, pp. 388-395.
Dutkowsky, Donald H., and William G. Foote, "The Demand for Money: A Rational Expectations Approach," Review of Economics and Statistics, 1988, pp. 83-92.
Frenkel, Jacob A., and Boyan Jovanovic, "On Transactions and Precautionary Demand for Money," Quarterly Journal of Economics, August 1980.
Goldfeld and Sichel, in Handbook of Monetary Economics, vol. 1, Ch. 8.
Judd, John P., and John L. Scadding, "The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature," Journal of Economic Literature Vol. 20, September 1982, pp. 993-1023.
Mankiw, N. Gregory, and Lawrence H. Summers, "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking Vol 18, November 1986, pp. 415-429.
Tobin, James, "The Interest Elasticity of Transactions Demand for Cash," Review of Economics and Statistics, August 1956, pp. 241-247.
__________, "Liquidity Preferences as Behavior Towards Risk," Review of Economic Studies, February 1958, pp. 65-86.
Waud, R.N, "Net Outlay Uncertainty and Liquidity Preference as Behavior Towards Risk," Journal of Money, Credit and Banking, November 1975, pp. 799-806.
Whalen, Edward, "A Rationalization of the Precautionary Demand for Cash," Quarterly Journal of Economics, May 1966.
(5) Money Supply and Money-Income Transmission Mechanisms
Money Supply and the Central Bank
Historic Roles of Central Banks
Policy Targets and Rules
Money-Income Transmission Mechanisms and Causality
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapters 10-12. Money Supply and Central Banking.
Carlstrom, Charles T., and Edward N. Gamber, "Why We Don’t Know Whether Money Causes Output," Economic Review of the Federal Reserve Bank of Cleveland, vol. 25 no. 3 (Quarter 3, 1989), 27-end.
Cunningham, Steven R., and Jon Vilasuso, "Time Aggregation, and the Money-Real GDP Relationship", Journal of Macroeconomics, vol. 19 No. 4 (Fall 1997), 675-696.
__________, "Time Aggregation and Causality Tests: Results from a Monte Carlo Experiment", Applied Economics Letters Vol. 2 No. 10 (October 1995), pp. 403-405.
Supplementary Readings:
Black, Fischer, "Active and Passive Monetary Policy in a Neo-Classical Model," Journal of Finance, September, 1972, pp. 80l-814.
Cecchetti, Stephen G., "Policy Rules and Targets: Framing the Central Banker’s Problem," Economic Policy Review of the Federal Reserve Bank of New York, Vol. 4 No. 2 (June 1998), pp. 1-14.
Friedman, Benjamin M., "Lessons on Monetary Policy from the 1980s", Journal of Economic Perspectives, vol. 2 no. 3 (Summer 1988), 51-72.
__________, "Targets, Instruments, and Indicators of Monetary Policy," Journal of Monetary Economics, 1, 1975, pp. 443-473.
___________, "Monetary Policy with a Credit Aggregate Target," NBER Reprint no. 434, November, 1983, also in Carnegie-Rochester Conference Series-on Public Policy 18, 1983, pp. 117-148.
Friedman, M., and Schwartz, AJ., "Appendix B: Proximate Determinants of the Nominal Stock of Money," in A Monetary History of the United States, 1969.
Harris, Laurence, "Preliminary Questions Concerning Money in the Economy," Monetary Theory, 1981, chapter 3, pp. 30-44.
Hercowitz, Z., "The Real Interest Rate and Aggregate Supply," Journal of Monetary Economics, September, 1986, pp. 121-146.
Laidler, David E. W., The Demand for Money, 4th edition. HarperCollins, 1993. Chapters 12-13.
Laidler, David, "Money and Money Income," Journal of Monetary Economics, April, 1978.
__________, "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit, and Banking, February, 1969.
Lucas, Robert E. and Nancy L. Stokey, "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Journal of Monetary Economics, July, 1983, pp. 55-94.
King, Robert G. and Bharat Trehan, "Money: Endogeneity and Neutrality," Journal of Monetary Economics, November, 1984, pp. 385-394.
Moore, Basil. Horizontalists and Verticalists. Cambridge University Press.
__________. "The Endogeneity of Credit Money", Review of Political Economy.
Niehans, Theory of Money Ch. 8.
Poole, William, "Monetary Policy Lessons of Recent Inflation and Disinflation," Journal of Economic Perspectives, vol. 2 no. 3 (Summer 1988), 73-100.
(6) Keynes versus the Classics
Classical And Keynesian Models
Keynes' General Theory
Meltzer's View
Meir Kohn's View
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapters 13-14. Classical and Keynesian Models.
*Meltzer, Allan H. "Interpreting Keynes," Journal of Economic Literature 21 (March 1983), 66-78.
Supplemental Readings:
Davidson, Paul. "Would Keynes Be a New Keynesian?" Eastern Economic Journal 18 (Fall 1992), 449-464.
Greenwald, Bruce, and Joseph E. Stiglitz. "New and Old Keynesians," Journal of Economic Perspectives 7 (Winter 1993), 23-44.
Hansen, Alvin H. A Guide to Keynes. New York: McGraw-Hill (1953).
Hicks, John. "Mr Keynes and the Classics: A Suggested Interpretation," Econometrica 5 (April 1937), 147-59.
Keynes, John Maynard. A Treatise on Money. London: MacMillan (1930), Chapters 16-19, 27-29, 37.
__________. The General Theory of Employment, Interest, and Money. New York: Harvest/HBJ (1936).
King, Robert G. "Will the New Keynesian Macroeconomics Resurrect the IS-LM Model?" Journal of Economic Perspectives 7 (Winter 1993), 67-82.
Laidler, David E. W., The Demand for Money, 4th edition. HarperCollins, 1993. Chapters 1-4.
Leijonhufvud, Axel. On Keynesian Economics and the Economics of Keynes. Oxford: Oxford University Press (1968).
Patinkin, Don. "On different interpretations of the General Theory," Journal of Monetary Economics 26 (October 1990), 205-244.
Phelps, Edmund S. "A Review of Unemployment," Journal of Economic Literature 30 (September 1992), 1476-90. .
Pigou, A. C. Keynes’ ‘General Theory’: A Retrospective View. London: MacMillian & Co., Ltd. (1950).
Romer, David. "The New Keynesian Synthesis," Journal of Economic Perspectives 7 (Winter 1993), 5-22.
(7) Dual Decision Hypothesis
More Keynes
Dual Decision Hypothesis
Clower Demand
Dreze Demand
Supplementary Readings:
Leijonhufvud, Axel. On Keynesian Economics and the Economics of Keynes. Oxford: Oxford University Press (1968).
(8) Expectations, New Classical and New Keynesian Models
Expectations in Macroeconomics and Monetary Policy
Rational Expectations
Lucas-Sargent-Wallace Model
New Keynesian Models: Contracting
Time Inconsistency
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapters 15-16. Expectations, Policy Rules, Etc.
Supplementary Readings:
Barro, Robert J., "Reputation in a Model of Monetary Policy with Incomplete Information," Journal of Monetary Economics, January, 1986, pp. 3-20.
__________, "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, v. 67, no. 2, 1977.
__________, "Rational Expectations and the Role of Monetary Policy," Journal of Monetary Economics, 2, January, 1976, pp. 1-32.
__________, "Are Government Bonds Net Wealth?," Journal of Political Economy, November, 1974, pp. 1095-lli.
Barro, Robert J. and David B. Gordon, "A Positive Theory of Monetary Policy in a Natural-Rate Model," Journal of Political Economy, 91, August, 1983, pp. 589-610.
__________, "Rules, Discretion, and Reputation in a Model of Monetary Policy," Journal of Monetary Economics, 12, July, 1983, pp. 101-121.
Cukierman, Alex and Allan H. Meltzer, "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information, Econometrica, September, 1986, pp. 1099-1128.
Geweke, John, "The Superneutrality of Money in the United States: An Interpretation of the Evidence," Econometrica, v. 54, no. 1, January, 1986, pp. 1-22.
Gray, Jo Anna, "Wage Indexation: A Macroeconomic Approach," Journal of Monetary Economics, 2, April, 1976, pp. 861-874.
Lucas, Robert E., "Expectations and the Neutrality of Money," Journal of Economic Theory, 4, April, 1973, pp. 103-124.
McCallum, Bennett T., "Price-Level Stickiness and the Feasibility of Monetary Stabilization Policy with Rational Expectations," Journal of Political Economy, v. 85, no. 3, June, 1977, pp. 627-63
Rolnick, Arthur J., and Warren E. Weber, "Money, Inflation, and Output inder Fiat and Commodity Standards," Journal of Political Economy, vol. 105 no. 6 (December 1997), pp. 1308-1321.
__________, "Rational Expectations and the Theory of Economic Policy," Journal of Monetary Economics, 2, April, 1976, pp. 169-184.
(9) Theory of the Rate of Interest
Theories
Term Structure
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapters 20-21. Theory and Structure of Interest Rates.
(10) Overlapping Generations Models
Basic Model
Model with Population Growth
Model with Money Growth and Population Growth
The Wallace-Modigliani-Miller (W-M-M) Theorem
Required Readings:
Handa, Jagdish. Monetary Economics. London & New York: Routledge (2000). Chapters 22-24. Overlapping Generations Models of Money.
Miscellaneous Supplementary Readings
Monetarism
Friedman, M., "A Monetary Theory of Nominal Income," Journal of Political Economy, March/April 1971 (plus comments by K, Brunner and A..L. Meltzer, and by J. Tobin, same issue).
Friedman, M. and Schwartz, A.J., A Monetary History of the United States. 1963, Ch. 13.
Macesich, George. The Politics of Monetarism. Rowman and Allanheld (1984), Chapters 1-3.
Mayer, Thomas. "Modigliani on Monetarism: A Rejoinder," Contemporary Policy Issues 6 (October 1988), 19-24.
Mayer, Goodhart and Hall, "Friedman and Schwartz’s Monetary Trends: Three Views," Journal of Economic Literature, December 1981.
Modigliani, Franco. "The Monetarist Controversy Revisited," Contemporary Policy Issues 6 (October 1988), 3-18.
Tobin, J., "The Monetary Interpretation of History," American Economic Review, June, 1965.
*__________, "Money and Income—Post Hoc Ergo Propter Hoc," Quarterly Journal of Economics, May 1970.
Sims, Christopher A., "Comparison of Interwar and Postwar Cycles: Monetarism Reconsidered," American Economic Review, 70, 1980, pp. 250-257.
Money and Inflation: Phillips Curve
Bailey, "The Welfare Cost of Inflationary Finance," in Arrow and Scitovsky, Readings in Welfare Economics.
Driffill, J., Mizou, G.E,, & Ulph, A., "Costs of Inflation" in Handbook of Monetary Economics vol. 2 Ch. 19.
Isaac, Alan G. "Is there a natural rate?" Journal of Post Keynesian Economics 15 (Summer 1993), 453-470.
Lipsey, R. G. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957: A Further Analysis," Economica 27 (February 1960).
Lucas, R. E. "Real Wages, Employment, and Inflation," Journal of Political Economy 77 (September/October 1969).
*McCallum, B.T., "Inflation: Theory and Evidence" in Handbook of Monetary Economics, vol. 2, Ch. 18.
Muth, John. "Rational Expectations and the Theory of Price Movements," Econometrica vol. 29 (July 1961).
Phelps, E. S. "Money Wage Dynamics and Labor Market Equilibrium," Journal of Political Economy vol 76 (July/August 1968).
Phillips, A. W. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957," Economica 25 (November 1958).
Santomero, Anthony, and John Seater. "The Inflation-Unemployment Trade-off: A Critique of the Literature," Journal of Economic Literature 16 (June 1978), 499-544.
Consumption
Mankiw, G. N. "Hall’s Consumption Hypothesis and Durable Goods," Journal of Monetary Economics 10 (1982), 417-425.
Mankiw, G. N., and M. D. Shapiro. "Trends, Random Walks, and Tests of the Permanent Income Hypothesis," Journal of Monetary Economics 16 (1985), 165-174.