Money & Banking (220:301:06) Spring 2010
Dr Raymond Stone NJ Hall 104 E-Mail: [email protected] Office Hours: 3:15-4:00 Tuesdays and Thursdays
Assistant (IMPORTANT--all inquiries regarding homework, etc, should be directed here) Kristin Lo [email protected]
Class meets Tuesdays/Thursdays 4:30pm to 5:50pm Room A7 Hardenbergh Hall CAC
Prerequisites: Eco 102 & 103 (This is a lower level elective)
Welcome to Money & Banking. The current Financial Crisis has resulted in significant innovation on the part of the Federal Reserve. The Fed has addressed the so-called "Zero-Bound" issue. That is, what can be done to support financial markets and the economy once the nominal policy rate has been reduced to zero. New tools have been added to the policy tool-kit.
A new era of Financial Regulation is around the corner. The role of Banks versus other lending institutions is being reviewed. And the once largely unregulated derivative markets are topical in the halls of Congress.
Concepts, such as the role of asset prices in monetary policy, the Too Big to Fail debate, etc are being re-thought.
These topics and more will be discussed in class. We will study core topics addressed in the text, as well as, more current topics, which will be covered in textbooks not yet published.
Final Exam To avoid any confusion it is policy to display the date and time of the final Exam on the front page of the syllabus.
Date: May 12, 2010, Time 4:00pm
Grading Policy First Exam 40% Final Exam 50% Assignments 10%
Make-Up Exams will only be given under extraordinary circumstances. Students should check with me before missing an exam to see whether their particular circumstances meet my very limited definition of extraordinary.
Learning Outcomes Students who satisfactorily complete Money & Banking will understand the role of money and banks in the broader economy. Specifically, students should garner an understanding of the unique role of banks in the financial system.
Students will also learn the relevance of the Federal Reserve and related central banking topics, including the causes, policy responses, and lessons associated with the current financial market crisis.
Attendance Policy Students are expected to attend every class. While I understand that such is not always possible, students should be aware that I will not provide individual review sessions. We will be using "i- clickers", so I will have a good idea of your attendance record. Moreover, students should understand that it is impossible to pass this course without regular attendance.
Other The University has established rather severe penalties for cheating. For example, "Copying from or giving others assistance on an hourly or final examination..." is a Level Three violation. A Level Three violation carries with it "Suspension from the University for one or more terms."
Textbooks Money & Banking (M&B), Robert Wright & Vincenzo Quadrini, Flatworld Knowledge. Online edition available for Free, Black & White edition for $29.95, and in full color edition for $59.95, plus several other options. http://www.flatworldknowledge.com/
The Federal Reserve System Purposes & Functions (FRSPF) Online: http://www.federalreserve.gov/pf/pf.htm (Free) Hard-Copy Order Form: http://www.federalreserve.gov/pubs/orderform.pdf (Free)
Optional--In Fed We Trust. David Wessel, Crown Publishing (2009) Available From Amazon: http://www.amazon.com/Fed-We-Trust-Bernankes- Great/dp/0307459683/ref=sr_1_1?ie=UTF8&s=books&qid=1262618538&sr=1-1 - reader_0307459683
i>clicker: Required Available from Rutgers bookstore, or from Amazon.com http://www.amazon.com/clicker-Frequency-Classroom-Response- System/dp/0716779390/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1198875944&sr=8-1 To register I>clicker go to: http://www.iclicker.com/registration/
Homework Assignments There will be a number of homework assignments. These assignments are designed to get your "hands dirty" with economic and financial market data. You will be required to download data from Federal Reserve and other websites, manipulate the data in an Excel spreadsheet, compile graphs using these data, and reflect upon the underlying story captured in these graphs.
Students should be aware that I am not looking for perfection; each assignment should take only about 1/2 hour. Your mission is an attempt at some basic level of economic research. My thinking is that you will understand the concepts better by actually playing with the data.
Students should use the "Assignments" function on Sakai to turn in assignments. Full credit will be given to all "good-faith" attempts at completing assignments. Thus, make sure you turn in all assignments on time. This is an easy way of securing the full 10% contribution to your final grade.
Class Notes I will use Power-Point presentations in class. I will make these available to you in advance (via Sakai). I recommend that you use printouts of these presentations to take class notes. Some students have found it useful to compile these presentations in a binder.
Week 1 (Jan 19/Jan 21) Macro-Review Lesson 1--What Is Money? Chapter 3--M&B Lesson 2--What Is a Bank? Chapter 2--M&B
Assignment 1: Fun with "T-Accounts" Details to be announced
Week 2 (Jan 26/Jan 28) Lesson 3--The Interbank Market for Reserves
FedPoint:-- Federal Funds http://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html
Assignment 2: Graph the following (1995 to present monthly, all on same graph) Federal Funds rate 1-month Eurodollar 1-month Commercial Paper (Nonfinancial) 1-month CD (secondary market) Bank Prime Loan 3-month Treasury Bill (secondary Market) These data can be found here: http://www.federalreserve.gov/releases/h15/data.htm
Lesson 4--The Banking Panic of 1907 and the Creation of the Federal Reserve
Panic of 1907 Federal Reserve Bank of Boston http://www.bos.frb.org/about/pubs/panicof1.pdf
Historical Beginnings…. The Federal Reserve System (Chapter 3) Federal Reserve Bank of Boston http://www.bos.frb.org/about/pubs/begin.pdf
Systemic Risk and the Federal Reserve, Bob McTeer's Blog, July 30, 2009 http://taxesandbudget-blog.ncpa.org/systemic-risk-and-the-federal-reserve/
Week 3 (Feb 2/Feb 4) Lesson 5 & 6-- Money Supply and the Economy
Who Was Milton Friedman (Paul Krugman, February 15, 2007) http://www.nybooks.com/articles/19857
Monetary Policy And The Legacy of Milton Friedman (Anna J. Schwartz, Cato Journal, Vol 28, No2, Spring/Summer 2008) http://www.cato.org/pubs/journal/cj28n2/cj28n2-9.pdf
Do Monetary Aggregates Help Forecast Inflation? http://frbsf.org/publications/economics/letter/2007/el2007-10.html
Milton and Money Stock Control, William Poole (FRBSL July 30, 2007) http://www.stls.frb.org/news/speeches/2007/07_31_07.html
Week 4 (Feb 9/Feb 11) Lesson 7 & 8 Understating Interest Rates Chapter 4--M&B
FedPoint--Estimating Yields on Treasury Securities http://www.newyorkfed.org/aboutthefed/fedpoint/fed28.html
FedPoint--Understanding U.S. Government Securities Quotes http://www.newyorkfed.org/aboutthefed/fedpoint/fed07.html
FedPoint--Treasury Auctions http://www.newyorkfed.org/aboutthefed/fedpoint/fed41.html•
Assignment 3: Bond Math Worksheet
Week 5 (Feb 16/Feb 18) Lesson 7 & 8 Understating Interest Rates (Continued)
Lesson 9 Interest Rate Determination Chapter 5--M&B
Week 6 (Feb 23/Feb 25) Lesson 10 & 11 The Risk and Term Structure of Interest Rates Chapter 6--M&B
The Yield Curve as a Leading Indicator, Arturo Estrella (FRBNY October 2005) http://www.newyorkfed.org/research/capital_markets/ycfaq.html - Main
To Boldly Go Where We Have Gone Before, Adam Zaretsky, FRB of St Louis (2009) http://acheson.files.wordpress.com/2008/03/operationtwist.pdf
Assignment 4: Graph the following (1980 to present monthly)
(1) Yield Curve Slope--10-yr constant maturity Treasury minus effective Fed Funds rate Compare Yield Curve Slope series with 12-month % chg in Industrial Production
These data can be found on the St Louis Fed's FRED Database: http://research.stlouisfed.org/fred2/
Week 7 (Mar 2/Mar 4) Lesson 12 & 13--The Money Supply Process Chapters 14 & 15 M&B-- Multiple Deposit Creation and the Money Supply Process
Is the Fed Printing Too Much Money? Bob Mcteer (Jan 2, 2009) http://www.bob-mcteer-blog.com/fed-printing-too-much-money/ - comment-8713
Why Are Banks Holding So Many Excess Reserves, Todd Keister & James McAndrews, FRBNY Staff Report no 380 http://www.newyorkfed.org/research/staff_reports/sr380.pdf
Assignment 5: Graph the following: (Monthly 1978 to present) M1 & M2 Money Supply Multipliers (Money Supply/Monetary Base) Required Reserves, Excess Reserves, and the Monetary Base Total Reserves: http://www.federalreserve.gov/releases/h3/hist/h3hist1.txt Money Supply: http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt
Week 8 (Mar 9/Mar 11) First Exam
Lesson 14--The Federal Reserve System FRSPF-- Chapter 1
Biography: Marriner Stoddard Eccles http://richmondfed.org/publications/research/special_reports/treasury_fed_accord/bios/eccles.cfm
Week 9 (Mar 23/Mar 25) Lesson 15 & 16--The Federal Reserve System (continued)
A Day in the Life of the FOMC http://www.philadelphiafed.org/education/teachers/resources/day-in-life-of-fomc/
Federal Reserve Communications, Ben Bernanke, November 14, 2007 http://www.federalreserve.gov/newsevents/speech/Bernanke2007114a.htm
Week 10 (Mar 30/Apr 1) Lesson 17-- Monetary Policy & the Economy/Tools of the Fed FRSPF-- Chapter 2 Chapter 16-- M&B
FedPoint--Open Market Operations http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
FedPoint-- Repurchase and Reverse Repurchase Transactions http://www.newyorkfed.org/aboutthefed/fedpoint/fed04.html FedPoint-- Discount Window http://www.newyorkfed.org/aboutthefed/fedpoint/fed18.html
Lesson 18--Implementation of Policy/A View From the Open Market Desk FRSPF-- Chapter 3
Week 11 (Apr 6/Apr 8) Lesson 19 --The Taylor Rule Chapter 17-- M&B
Donald Kohn: John Taylor rules http://www.bis.org/review/r071019f.pdf
Monetary Policy and The Housing Bubble, Ben Bernanke (January 3, 2010 ) http://www.federalreserve.gov/newsevents/bernanke20100103a.htm
Taylor Says Bernanke Gets Rate Rule Right While Goldman Doesn’t (Bloomberg, July 24, 2009) http://www.bloomberg.com/apps/news?pid=20601109&sid=a7cS00ug7huI
Assignment 6: Graph the following (Quarterly 1992 to present) Effective Funds Rate and Taylor Rule estimate of Funds Rate--Data to be provided
Lesson 20 --The Transmission of Monetary Policy
The Monetary Transmission Mechanism: Some Questions and Further Answers, Kenneth Kuttner and Patricia Mosser, FRBNY Economic Policy Review, May 2002 http://www.newyorkfed.org/research/epr/02v08n1/0205kutt.pdf
The Financial Accelerator and the Credit Channel, Ben Bernanke, At the The Credit Channel of Monetary Policy in the Twenty-first Century Conference, Federal Reserve Bank of Atlanta, Atlanta, Georgia, June 15, 2007 http://www.federalreserve.gov/newsevents/speech/bernanke20070615a.htm
Week 12 (Apr 13/Apr 15) Lesson 21--Credit Crisis--How Did We Get Here?
The Shadow Banking System and Hyman Minsky’s Economic Journey, Paul McCulley, PIMCO's Global Central Bank Focus, May 2009 http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/Global+Central+Bank+Focus+May+2009 +Shadow+Banking+and+Minsky+McCulley.htm
Lesson 22--Credit Crisis--Unconventional Fed Policies
The Crisis and the Policy Response, Ben Bernanke, January 13, 2009 http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm
The Fed's Expanded Balance Sheet, Brian Sack, December 2, 2009 http://www.newyorkfed/newsevents/speeches/2009/sac091202.html
Monetary Policy in the Crisis: Past, Present and Future, Don Kohn, January 3, 2010 http://www.federalreserve.gov/newsevents/speech/kohn20100103a.htm
Monetary Policy Alternatives at the Zero Bound: An Empirical Assessement, Ben Bernanke, Vincent Reinhart, and Brian Sack, Federal Reserve Board--Read Non-technical summary http://www.federalreserve.gov/Pubs/FEDS/2004/200448/200448pap.pdf
Key Issues for Monetary Policy Makers, Raymond Stone, December 9, 2008 http://www.newyorkfed.org/education/stone_081209.ppt
Interest on Reserves and Monetary Policy, Marvin Goodfriend , FRBNY Economic Policy Review 2002 http://www.newyorkfed.org/research/epr/02v08n1/0205good.pdf
A Primer On Quantitative Easing, Raymond Stone November 23, 2008 http://www.smra.com/rstone/PrimeronQE.pdf
A Guide to the Fed's Alphabet Soup, Raymond Stone, January 26, 2009 http://www.smra.com/rstone/FedsAlphabetSoup.pdf
Week 13 (Apr 20/Apr 22) Lesson 23-- Credit Crisis--Lessons Learned
Too Big To Fail: The Hazards of Bank Bailouts, Excerpts from the 2004 book by Gary H. Stern and Ron J. Feldman, Federal Reserve Bank of Minneapolis, May 2008. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3472
Still More Lessons from the Crisis, Bill Dudley (FRBNY), December 7, 2009 http://www.newyorkfed.org/newsevents/speeches/2009/dud091207.html
Lesson 24--Credit Crisis--The Exit Strategy
The Economic Outlook and the Fed's Balance Sheet: The Issue of "How" versus "When", Bill Dudley President of FRBNY, July 29, 2009 http://www.newyorkfed.org/newsevents/speeches/2009/dud090729.html
The Fed's Exit Strategy, WSJ Editorial by Ben Bernanke (July 21, 2009) http://online.wsj.com/article/SB10001424052970203946904574300050657897992.html
Notes on the Fed's Exit Strategy, Raymond Stone (April 20, 2009) http://www.smra.com/rstone/FedsExitStrategy.pdf
Fed Lessons from 1936-1937, Raymond Stone (May 19, 2009) http://www.smra.com/rstone/FedLessons1936-1937.pdf
Week 14 (Apr 27/Apr 29) Lesson 25 --Topical Issues in Central Banking
The Benefits of Price Stability, Ben Bernanke (2/24/06) http://www.federalreserve.gov/boarddocs/speeches/2006/200602242/default.htm
Practical Problems and Obstacles to Inflation Targeting, Laurence Meyer (October 2003) http://research.stlouisfed.org/conferences/policyconf/papers2003/meyer
Asset-Price "Bubbles" and Monetary Policy, Ben Bernanke (10/15/02) http://www.federalreserve.gov/boarddocs/speeches/2002/20021015/default.htm Lesson 26--Housing Finance/Securitization/Asset Backed Securities
Mortgage-Backed Security http://www .pimco.com/LeftNav/Bond+Basics/2007/Mortgage+Basics.htm
Asset Backed Securities--Statistics http://www.abalert.com/market_statistics.php
Final Exam May 12, 4:00pm: Location To Be Announced