2121 - Financial Economics Tuesday/Thursday Spring 2017 Section 12: 12:45-2:00 Room 351 Duques Hall George Washington University

Prerequisites: Economics 1011-Economics 1012

Required Textbook

Mishkin, F.S. [2015]. The Economics of , Banking, and Financial Markets, School Edition, fourth edition, Addison-Wesley - ISBN13: 9780133859805. Earlier editions are acceptable, but there are some important differences between the earlier editions and the newest edition. Please note the University bookstore has recently changed its policy. It will no longer stock the textbooks and all textbook orders must be done through online purchase. There are several good sources of books online. One mentioned by many colleagues is gettext- books.com.

Suggested Textbooks Gambler, E. and D. Hakes Study Guide to Mishkin’s textbook, Addison-Wesley. Buy this book only if you are the type of student who finds study guides useful.

Office Hours My office hours are on Tuesdays 1:30-2:30 and Thursdays 2:30-3:30 on the main campus 315 Monroe Hall. Other times are available by appointment. Please send me an email to set up an appointment.

Course Requirements There will be two in-class exams scheduled for February 15 and April 3. There is one homework assignment using information from the Wall Street Journal, Financial Times and the internet, which is designed to ensure you know how to find and interpret financial data. The first part of the assignment requires you register for a stock game on Investopedia. This must be completed by January 25. The remainder of the assignment is due April 26 (the last class) by 5 pm. No late assingments are accepted. You are welcome to work with other students. The maximum size group is three students. You must submit a hard copy, which will be graded, and an electronic copy (for insurance). There will be a final exam that will

1 be more heavily weighed toward the material covered at the end of the semester (after the second exam), but will include concepts from the first part of the semester. The independent, out-of-class learning expected per week is 5-6 hours on average. The in-class time is two and one half hours. Grading The first two exams will count 25% each, the homework 15% and the final exam 35%. Class attendance is not mandatory, but let me stress the following fact: there is a very strong (positive!) correlation between class attendance and grades. I have never had a student receive an A in the course who failed to attend class regularly.

NOTE: In accord with University policy, the final exam will be given during the final exam period and not the last week of the semester. The final exam period is Maya 7-15. DO NOT purchase airline tickets until the exam date is announced.

Exam Policy and Late Assignments Two exams are scheduled during the semester. No make-up exams will be scheduled. If you miss an exam, you need to contact me as soon as possible. The homework assignment is due by 5 pm April 26 and you must submit a hard copy (graded) and an electronic copy. Failure to comply will result in a point deduction for calculation of grades.

University Policy on Religious Holidays

1. Students should notify faculty during the first week of the semester of their intention to be absent from class on their day(s) of religious observance.

2. Faculty should extend to these students the courtesy of absence without penalty on such occasions, including permission to make up examinations.

3. Faculty who intend to observe a religious holiday should arrange at the beginning of the semester to reschedule missed classes or to make other provisions for their course- related activities

2 Support for students outside of the classroom

Disability Support Services (DSS) Any student who may need an accommodation based on the potential impact of a disability should contact the Disability Support Services office at 202-994-8250 in Rome Hall, Suite 102, to establish eligibility and to coordinate reasonable accommodations. For additional information please refer to:

http://gwired.gwu.edu/dss/

Mental Health Services 202-994-5300 The University’s Mental Health Services offers 24/7 assistance and referral to address stu- dents’ personal, social, career, and study skills problems. Services for students include: crisis and emergency mental health consultations confidential assessment, counseling services (in- dividual and small group), and referrals.

http://counselingcenter.gwu.edu/

Academic Integrity Code Academic dishonesty is defined as cheating of any kind, including misrepresenting one’s own work, taking credit for the work of others without crediting them and without appropriate authorization, and the fabrication of information. For the remainder of the code, see: http://studentconduct.gwu.edu/code-academic-integrity” studentconduct.gwu.edu/code-academic- integrity

Course Outline and Objectives This course provides economics analysis of key financial institutions and markets. It inves- tigates the performance of asset markets and the roles of money, credit, rates, and exchange rates. Private sector institutions like equity markets and the banking system are examined, as is the role of regulators such as the Federal Reserve. The course will be divided into three parts. The first part is an overview of the financial system and its role in the macro-. We will develop simple models of the money and credit market. At the end of this section, the student will be able provide an overview of the financial system, to explain its role in the macro-economy, and to use simple models to predict the impact of changes in monetary and fiscal policy. In the middle part of the course, we discuss the role of asymmetric information in the functioning of financial markets, stressing the importance of moral and adverse selection. Our

3 discussion will focus on the economic events of the past decade, such as the problems in the subprime mortgage market and the credit default market. At the end of this section, the student should understand how asymmetric information impacts the efficacy of the market system, understand the basic microeconomic structure of a bank, provide an overview of the derivatives market, and discuss issues in the regulation of the financial sector. The final third of the course focuses on the process, , the determination of the nominal exchange rate, and financial crises. At the end of this section, the student will understand the process of , describe the recent changes in Federal Reserve policy, and will be able to discuss the basic determinants of nominal exchange rates. The homework assignment is designed to ensure students know how to access basic macroeconomic data and interpret financial information from various sources. We will not study the IS-LM framework: that framework is studied in great detail in an intermediate course. We are covering many of the chapters in the book. It is a lot of material and, over the course of the semester, I will be specific about what material is subject to examination. I will use Blackboard extensively during the semester and will post announcements, lec- ture notes, and newspaper articles. Also I will post old exams with answers to help with your exam preparation.

Course Schedule Please notify me the first week of class if you will be absent because of a religious holiday.

Jan. 16-18 Introduction to Financial Economics - ch. 1 Lecture Notes: Credit Market, Business Cycles, and Basic Accounting 18-23 Overview of the Financial System - ch. 2 23 Deadline to register for stock-trading game 25-30 What is Money? - ch. 3 and ch. 22, pp. 565-572 Lecture notes on Real and Nominal Interest Rates Feb. 1-6 Understanding Interest Rates - ch. 4 and ch. 6 8-13 The Behavior of Interest Rates - ch. 5 15 EXAM 1 - Chapters 1-6, parts of 22, and lecture notes 20-22 An economic analysis of financial structure - ch. 8 and ch. 15 27-Mar. 6 Banking and the Management of Financial Institutions - ch. 9 8 Economic Analysis of Financial Regulation - Ch. 10 13-15 Spring Break! 20 Banking Industry Structure - ch. 11 22 Nonbank - Ch. 13

4 27-29 Derivatives - ch. 14 April 3 EXAM 2 - Chapters 8–15, omitting chapter 12 5-10-12 Determinants of the Money Supply and Tools of Monetary Policy- ch. 16-19 Bernanke Lecture notes - particularly lectures 3 and 4 17-19 The Foreign Exchange Market - ch. 20 24 The International Financial System - ch. 21 26 The Stock Market, the of , and the Efficient Market Hypothesis - ch. 7. and Financial Crises (ch. 12) April 26 ASSIGNMENT DUE - You must submit a hard copy by 5 pm May 7-15 Final Exam period

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