The University of the West Indies s4

THE UNIVERSITY OF THE WEST INDIES ST. AUGUSTINE Faculty of Social Sciences Department of Economics

Course Outline

COURSE TITLE: MONETARY THEORY AND POLICY COURSE CODE: ECON 3005 LEVEL: III SEMESTER: III (MAY – JULY 2013) NO. OF CREDITS: 3 PRE-REQUISITE(S): ECON 2000 AND ECON 2002 SUMMER LECTURER: MS. CASSANDRA RATTAN EMAIL ADDRESS: [email protected] LECTURER’S OFFICE: ROOM 214 OLD SOCIAL SCIENCES / HUMANITIES BUILDING OFFICE HOURS: TO BE ANNOUNCED IN CLASS

COURSE DESCRIPTION

This course examines the basic workings of the financial system and monetary policy primarily in developing countries. There is an emphasis on understanding the issues relating to interest rates, the tools of monetary policy, and the role of the Central Bank in Trinidad and Tobago. The general economics and structure of the financial system is also discussed. Furthermore, the main monetary and financial issues confronting the Trinidad and Tobago and the CARICOM region as a whole are examined. For example, possible monetary union, intra-Caribbean investment and exchange rate systems are discussed.

LEARNING OUTCOMES

It is expected that students completing this course will be able to:  Clearly understand the role and function money and the financial system and various views on monetary policy  Appreciate the meaning and functions of monetary policy, and the evolution of the current system of payments  Understand the working of the financial system and monetary policy in Trinidad and Tobago and the wider Caribbean  Understand the basic tools of monetary policy, and the role and function of the Central Bank

LHenry 2013  Appreciate the main pros and cons of forming a Caribbean Monetary Union, and the benefits and pitfalls of the participation in agreements such as the EPA, and the WTO

TEACHING METHODOLOGY This will take the form of a weekly 3-hour Lecture supported by a weekly 2-hour tutorial. Tutorial sheets will be accessed on myeLearning. Readings will also be made available on myeLearning. Lectures would be facilitated via use of PowerPoint presentations on most occasions.

Lecture Hours: Fridays 1-4pm Lecture Room: FSS103 Tutorial Hours: Information on signing-up for classes and tutorial sheets will be available via myeLearning

COURSE ASSESSMENT Your grade will be based on Final Exam : 100%

CONTENT

1. The functions of money, the evolution of the payments system and the structure of financial markets.

2. Theories of Monetary Policy

3. Monetary Policy and financial institutions in Developing Countries

4. Finance, Growth and Development in the Caribbean

5. Financial Liberalization in Developing Countries –Trinidad and Tobago

6. Global Financial Crisis and its Impact on the Caribbean Region

7. The Financial System and Monetary Management

8. Caribbean Monetary Issues

2 LECTURE SESSIONS AND DESCRIPTIONS:

1. INTRODUCTION AND OVERVIEW OF THE COURSE

In this section we review the meaning of money, functions of money, modern types of money, and the evolution of the payments system. In addition we consider the function of financial markets, the structure of financial markets, and instruments of financial market. Asymmetric Information (adverse selection and moral hazard) and Exchange-rate targeting, inflation targeting and monetary targeting is also examined.

Readings:  Mishkin (2010), Chaps. 1, 2, 3 and 8.

2. THEORIES OF MONETARY POLICY Here we look at the various views on monetary policy, namely, Classical, Monetarist, Keynesian, Post-Keynesian views. We also compare and contrast the Orthodox and Post-Keynesian approach to monetary policy. Finally, we will discuss stabilization policy briefly.

Readings:  Tcherneva, P. (2001) “Money: A Comparison of the Post-Keynesian and Orthodox Approaches:, Oeconomicus, Volume IV, Winter.  Mankiw (Chapter 14: Stabilization Policy)

3. MONETARY POLICY IN DEVELOPING COUNTRIES In this section we examine the tools of monetary policy in small open developing countries. The main features of these types of economies will be explained and we will consider the problems associated with the implementation of monetary policies.

Readings:  Ghatak, Chapter 2  Robinson, John. “Independent Monetary Policy In A Very Open Economy - Challenges, Costs and Benefits” Bank of Jamaica http://www.boj.org.jm/uploads/pdf/papers_pamphlets/papers_pamphlets_ind ependent_monetary_policy_in_a_very_open_economy_- _challenges__costs_and_benefits.pdf

FINANCIAL INSTITUTIONS IN DEVELOPING COUNTRIES Here we will discuss the characteristics and structure of financial institutions in developing countries.

Readings:

LHenry May 2013

 Fry, M. J. (1988) Money, Interest, and Banking in Economic Development Chapter 11:” Financial Institutions and Markets in Developing Countries”,  Hein, Scott; Stewart, Jonathan (2002) Reserve Requirements: A Modern Perspective. Federal Reserve Bank of Atlanta ECONOMIC REVIEW Fourth Quarter 2002  Birchwood, Anthony (2003) Banking in Small States: The Case of Caribbean Commercial Banks, St. Augustine: Caribbean Center for Monetary Studies. Chapters 2 and 3

4. FINANCE, GROWTH AND DEVELOPMENT Here we look at the link between financial development and economic growth, financial deepening.

Readings:  Bennett, Karl (2006) Rethinking the role of the Financial Sector in Economic Growth in CARICOM, Journal of Business, Finance and Economics in Emerging Economies, Volume 1, Number 1, 2006  Birchwood, Anthony (2003) Banking in Small States: The Case of Caribbean Commercial Banks, St. Augustine: Caribbean Center for Monetary Studies. Chapter 4

5. FINANCIAL LIBERALIZATION IN DEVELOPING COUNTRIES We will examine financial liberalization, financial repression and the McKinnon- Shaw hypothesis. The main reasons for the use of these policies, its advantages and disadvantages.

Readings:  Fry, M.J. (1997) “In Favour of Financial Liberalisation”, The Economic Journal, May, pp 754-770  Henry, L. (2000) “Aspects of Financial Liberalization: The Case of Trinidad and Tobago”, the Faculty of Social Sciences Working Paper Series, University of the West Indies, St. Augustine  Ghosh, Jayati (2005) “The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries”, UN/DESA Working Paper No. 4, October, http://www.un.org/esa/desa/papers/2005/wp4_2005.pdf? utm_source=OldRedirect&utm_medium=redirect&utm_campaign=OldRedirect

6. GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON THE CARIBBEAN REGION We discuss the reasons for the recent the global financial crisis and what are the effects on the Caribbean economies in terms of growth rates, tourism, remittances, etc.

Readings:  Mishkin (2010), Chapter 21  Henry, Lester (2009) One Huge “Minsky Moment”: Lessons from the Financial Crisis, Social and Economic Studies, V58. No2, June 2009

4  William te Velde, Dirk (2008) “The global financial crisis and developing countries: Which countries are at risk and what can be done?” Overseas Development Institute (ODI) http://www.odi.org.uk/resources/download/2462.pdf  Williams, Ewart (2010) “Impact of financial crises on the Caribbean” http://www.bis.org/review/r100305d.pdf

7. THE FINANCIAL SYSTEM AND MONETARY POLICY IN TRINIDAD AND TOBAGO Here we look specifically at the structure of the Financial System in Trinidad and Tobago. We will provide a description of the payments system, recent reforms in the system and, the competitiveness of the financial institutions in the country.

Readings:  CBTT Financial Stability Report (2008, 2009, 2010)  CBTT. The Payments System in Trinidad and Tobago. Public Education Pamphlet Series No. 5.  Nicholls, Garth and Seerattan, Dave (2004) The Regulation of Non-Bank Financial Institutions in the Eastern Caribbean, St. Augustine: Caribbean Center for Monetary Studies.  CBTT Monetary Policy Reports,  Ministry of Finance (2004) The Reform of the Financial System  Central Bank Website: http://www.central-bank.org.tt/

MONETARY MANAGEMENT, REGULATION AND SUPERVISION IN THE REGION The role of the Central Bank as regulator; how the Bank conducts monetary policy and exchange rate stability; regional regulatory agencies (Caricris, . - A comparison between our regional credit rating agency and international agencies such as S&Ps and Moody’s Readings:  Henry, L. (2002) “Financial Liberalization and Exchange Rate Inertia: The Case of Trinidad and Tobago”, Caribbean Center for Monetary Studies Conference, Georgetown, Guyana, September.  Central Bank of Trinidad and Tobago: Monetary Policy Reports

8. CARIBBEAN MONETARY ISSUES Caribbean Monetary Integration, Potential Impact of the CSME, the EPA and the WTO on the monetary systems in the Caribbean

Readings:  Henry, L. (2004) “Monetary Integration in Beautiful Places: Prospects for the

LHenry May 2013

Caribbean”, in Michelis and Lovewell eds., Exchange Rates, Economic Integration, and the International Economy, Toronto: APF Press, pp.293-310.  M. Anthony and A. H. Hallett (2000) Is the Case for Economic and Monetary Union in the Caribbean Realistic? World Development, Vol. No.  Worrell, DeLisle (1997) “Bank Behaviour and Monetary Policy in Small Open Economies with Reference to the Caribbean”, Social and Economic Studies, Vol. 46: No. 2 &3, University of the West Indies: Kingston: Jamaica.  Worrell, DeLisle (2006) “A Currency Union for the Caribbean”, in Birchwood and Seerattan eds. Finance and the Real Development in the Caribbean, Caribbean Centre for Monetary Studies, UWI St. Augustine, pp. 313-345.

**Additional readings may be provided during the tenure of the course.

Useful Texts Mishkin, Frederic S. (2010) The Economics of Money, Banking and Finance, 9th Edition, New York: Addison-Wesley

CARICOM (2010) Trade and Investment Report,

Central Bank of Trinidad and Tobago, Monetary Policy Reports and Financial Stability Reports http://www.central-bank.org.tt/

Fry, M. (1995), Money, Interest, and Banking in Economic Development, 2nd ed., London: The Johns Hopkins University Press

Ghatak, Subrata (1995) Monetary Economics in Developing Countries, 2nd Edition, New York: St. Martin’s Press.

REGULATIONS: Students are advised to adhere to UWI Examination Regulation No. 19:

Any candidate who has been absent . . . . or whose attendance at prescribed lectures, classes, ... tutorials, ... has been unsatisfactory . . . . or who has failed to submit essays or other exercises . . . . may be debarred by the relevant Academic Board, on the recommendation of the relevant Faculty Board,. . . . from taking any University examinations . . . . “

Please note that the Department of Economics//Faculty of Social Sciences requires students to attend and participate in at least 75% of tutorials for a course to avoid being debarred from taking the final exam.