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MONETARY THEORY AND POLICY

Economics 412 M.D. Bordo


Spring 2008

Course Requirements

The requirements for this course are: a midterm examination worth 25% of the
grade; a final examination worth 40% of the grade, and a term paper worth 35% of the
grade. The typed term paper should be no longer than 15 pages, including footnotes and
references, and it is due no later than Thursday, May 1.

The topic for the paper can be anything in monetary theory and policy. It can be
an empirical paper, a summary of the literature, or a topic in monetary history. Some
examples follow:

The Resolution of Banking Crises

Inflation Targeting vs Price Level Targeting

The Case for Discretionary Monetary Policy

The Greenspan Federal Reserve

Good vs Bad Deflation

The ‘Taylor’ Rule

The Case for a Return to the Gold Standard

The European Central Bank

The Case for Central Bank Independence

Monetary Policy and the Stock Market

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MONETARY THEORY AND POLICY

Economics 412 M.D. Bordo


Spring 2008

Note: Starred readings are required. Other readings are only suggested.

Textbook:

Readings packet at Pequods.

I. MONETARY MACROECONOMICS (Review)

*Bennett R. McCallum. Monetary Economics: Theory and Policy MacMillon 1989,


Ch. 5.

II. THE NATURE OF MONEY

*McCallum, Ch. 2.

M. Friedman and A.J. Schwartz, Monetary Statistics of the United States. Columbia,
(1970), pp. 89-198.

R. Clower, “Foundations of Monetary Theory,” pp. 202-211 in R. Clower ed. Monetary


Theory (1967).

N. Kiyotakji and R. Wright, “A Search Theoretic Approach to Monetary Economics,”


American Economic Review. 1992. 83 (March): 63-77.

III. THE DEMAND FOR MONEY

*McCallum, Ch. 3.

*New Palgrave Dictionary of Economics. Demand for money: theoretical studies,


pp. 770-775.

Laidler, D., The Demand for Money: Theories and Evidence. fourth edition, New York,
Harper Collins, 1993.

Friedman, M., “The Quantity Theory of Money – A Restatement,” in Studies in the


Quantity Theory of Money, Friedman, (ed.) 1956, reprinted in Friedman, M., The
Optimum Quantity of Money. (1969).

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IV. MONEY SUPPLY

*McCallum, Ch. 4.

*New Palgrave Dictionary of Economics: money supply pp. 527-528; monetary base
pp. 500-502; high powered money and the monetary base pp. 654-655; monetary policy
pp. 508-514.

*Poole, W., “Optimal Choice of Monetary Policy Instruments in a Simple Stochastic


Macro Model,” Quarterly Journal of Economics, May 1970.

Goodfriend, M., “Interest Rates and the Conduct of Monetary Policy,” Carnegie
Rochester Conference Series on Public Policy, 1991, 34: 7-30.

V. MONEY AND THE PRICE LEVEL

*McCallum, Chs. 6 and 7.

*New Palgrave Dictionary of Economics: inflation pp. 832-837; inflationary


expectations 842-843, the optimum quantity of money, 744-745.

Cagan, P., “The Monetary Dynamics of Hyperinflation,” in Studies in the Quantity


Theory of Money, ed. Milton Friedman, Chicago, 1956.

M. Friedman, “The Optimum Quantity of Money,” The Optimum Quantity of Money,


1969. Ch. 1.

M. Bailey, “The Welfare Cost of Inflationary Finance,” Journal of Political Economy,


April, 1956.

Michael Bordo and Andrew Filardo. “Deflation and Monetary Policy in a Historical
Perspective: Remembering the Past or Being Condemned to Repeat it? NBER Working
Paper 10683 November 2004 www.NBER.org.

VI. MONEY AND OUTPUT

*McCallum, Chs. 9 and 10.

*New Palgrave Dictionary of Economics: The Phillips Curve, 858-861.

*O. Blanchard and L. F. Katz, “What We Know and Do Not Know About the Natural
Rate of Unemployment,” Journal of Economic Perspectives Vol 11, No. 1, Winter 1997.
51-72.

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VII. MONEY AND INTEREST RATES

*Friedman, M. and A.J. Schwartz, Monetary Trends in the United States and United
Kingdom, 1982, Chicago, Ch. 10

*New Palgrave Dictionary of Money and Finance, (1992) “The Fisher Effect” 123-124.

*Barsky, R., “The Fisher Hypothesis and the Forecastibility and Persistence of Inflation,”
Journal of Monetary Economics (1987) 9, 3-24.

Mishkin, F.S. “The Real Interest Rate: An Empirical Investigation, Carnegie Rochester
Conference Series on Public Policy, 1981, 15, 151-200.

Barsky R. and Summers, L., “Gibson’s Paradox and the Gold Standard,” Journal of
Political Economy, 1989, 96, pp. 528-550.

I. Fisher, The Theory of Interest, Chs. 2, 19.

VIII. MONETARY POLICY; DISCRETION VS RULES

A. The Traditional Approach

*M.D. Bordo and AJ. Schwartz, “The Importance of Stable Money: Theory and
Evidence,” Cato Journal, March 1983.

M. Friedman, A Program for Monetary Stability, Fordham, NY, 1959.

B. Rational Expectations

*McCallum, Chs. 11 and 12.

T. Sargent and N. Wallace, “Rational Expectations and the Theory of Economic Policy,”
Journal of Monetary Economics, 1976, pp. 169-183.

R.E. Lucas, “Econometric Policy Evaluation: A Critique,” in K. Brunner and A.H.


Meltzer (eds.), The Phillips Curve and Labor Markets. North Holland, 1976.

F.E. Kydland and E. Prescott, “Rules Rather than Discretion: The Inconsistency of
Optimal Plans,” Journal of Political Economy, June 1977, pp. 473-492.

R. Barro and D. Gordon, “Rules, Discretion and Reputation in a Model of Monetary


Policy,” Journal of Monetary Economics, July 1983.

IX. INFLATION TARGETING

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*B. Bernanke and F. Mishkin, “Inflation Targeting: A New Framework for Monetary
Policy?” Journal of Economic Perspectives, II, No. 2. (Spring) 97-116.

*Ben S. Bernanke, Thomas Laubach, Frederic S. Mushkin, Adam S. Posen,


Inflation Targeting: Lessons from the International Experience Princeton University
Press 1999, Chapters 1, 2, 3, 11

X. ALTERNATIVE MONETARY Regimes: THE GOLD STANDARD, FREE


BANKING

*McCallum, Ch. 13.

*R.J. Barro, “Money and Prices Under the Gold Standard,” Economic Journal, March
1979.

*M.D. Bordo, “The Classical Gold Standard: Some Lessons for Today,” Federal Reserve
Bank of St. Louis Review, May 1981.

*New Palgrave Dictionary of Money and Finance, “The Gold Standard Theory,”
266-291.

*New Palgrave Dictionary of Money and Finance. “Free Banking: Theory,” 196-197;
“Free Banking: History,” 198-199.

M. Bordo and A. Schwartz, “Monetary Regimes and Economic Performance: The


Historical Record,” NBER working paper no. 6201, 1997

B. Klein, “The Competitive Supply of Money,” J.M.C.B., 6, November 1974,


pp. 423-453.

F. Von Hayek, “Denationalization of Money: An Analysis of the Theory and Practice


of Concurrent Currencies,” Institute of Economic Affairs, Hobart Paper, No. 70, London,
1976.

E. Fama, “Banking in the Theory of Finance,” Journal of Monetary Economics, 6 (1),


January 1980, pp. 39-57.

XI. Financial Crises, the Lender of Last Resort, and Asset Price Booms and Busts.

*Michael D. Bordo, (1992). “Editors Introduction” to Financial Crises, International


Library of Macoeconomic and Financial History, London: Edward Elgar Publishers.

*Anna J. Schwartz, (1986) “Real and Pseudo- Financial Crises” in F. Capie and G. E.
Wood (eds), Financial Crises and the World Banking System, London: MacMillan: 11-
31,[Reprinted in Bordo, Financial Crises.]

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Charles Calomiris and Gary Gorton, (1991). “The Origins of Banking Panics: Models,
Facts, and Bank Regulation” in R. Glenn Hubbard (ed) Financial Markets and Financial
Crises, Chicago: University of Chicago Press.

*M. D. Bordo. (1990), “The Lender of Last Resort: Alternative Views and Historical
Experiences. “Federal R
eserve Bank of Richmond, Economics Review, March.

*Goodhart, C., (1987). Why Do Banks Need a Central Bank? Oxford Economic Papers
39:75-89.

*Michael Bordo and Oliver Jeanne. “Monetary Policy and Asset Prices: Does Benign
Neglect Make Sense?” International Finance. December 2002

*Michael Bordo and David Wheelock. “Monetary Policy and Asset Prices: A Look Back
at Past US Stock Market Booms.” NBER Working Paper No. 10704. Aug 2004
www.NBER.org