August 23, 2016

Central Banking

Econ 235a

Professor Browne

Mondays and Wednesdays: 12:30 p.m. – 1:50 p.m.

Location: Lemberg 054

Office Hours: Before or after class; e-mail to arrange. S - 017

e-mail:

Course Overview

For the past 100 years, and in some cases longer, most countries have looked to central banks to protect their financial systems and moderate fluctuations in prices and output. As the recent financial crisis highlights, the record of central banks in this regard has been mixed. The purpose of this course is to provide an understanding of the purposes and functions of central banks and the challenges they confront. What is a central bank? What is it trying to do and how does it achieve its goals? How have central banks’ activities changed over time – and why?

We will devote considerable attention to the roles of central banks’ in the 2007-2009 financial crisis and the ensuing global slowdown and to current debates over the policies that central banks followed before and after the crisis. We will consider the degree to which the crisis changed thinking regarding central banks’ responsibilities and capabilities.

Learning Goals and Outcomes

Among the topics we will address are the following:

What are the origins of banking and central banks?

What are the purposes and functions of central banks?

What does “independence” mean for a central bank?

How do central banks affect the banking system and the economy?

What tools do they use?

Is communication a policy tool?

What is the debate over rules versus discretion?

What rules might a central bank follow?

Should central banks have an inflation target?

How should we measure inflation?

Why is deflation worrisome?

Should central banks react to rising asset prices?

What does “lender of last resort” mean?

What is a “bank run”? Do they still occur?

What is quantitative easing and why is it controversial?

What are the lessons of the 2007-9 financial crisis and the subsequent recession?

How might central banks be different in the future?

At the end of the course, students should understand the goals and functions of central banks and the current policy debates surrounding them.

Course description

The course is a combination of seminar and lecture. The instructor will generally provide an overview of key issues and points of debate, with illustrations based on developments in the United States. However, students will contribute actively to the group learning experience by discussing what they learned from the assigned readings and by becoming “experts” on central banks they have selected.

Readings will be assigned for each class. Students are expected (a) to have read these materials in advance and (b) to be ready talk about what they learned. Most weeks, students will prepare a short essay (2-4 pages single space) addressing the topic just covered. These papers are normally due the following week. These essays account for 60 percent of the grade for the course.

An important part of the course is learning about developments in central banks in different countries. Each student will select a different central bank to study. Students will become the “experts” on these banks and share their insights with the group in the general discussion. Towards the end of the semester, each student will make a 10-15-minute presentation summarizing his/her analysis of the selected central bank.

Pre-requisites

Students should have a practical understanding of intermediate macroeconomics, including the money supply process, as well as the basics of banking and financial markets (ECON 82b or ECON 202a or equivalent.)

Evaluation

Grades will be based on the short papers prepared each week, class participation and the presentation at the end of the course on their central bank.

Grading:

Short weekly papers 60 percent

Class participation 20 percent

Central bank presentation 20 percent

Assignments and due dates are listed in the syllabus after each topic’s readings. Make sure you have the correct assignment.

Issues to be covered in central bank presentations include but are not limited to the following: central bank history, governance, functions (especially any supervisory role), monetary policy objectives, monetary policy tools, exchange rate regime, how the country was affected by the 2007-9 crisis and how the central bank responded, and current challenges and debates.

Presentations will take place November 21, 28 and 30 and possibly December 5. Dates for each student’s presentation will be determined in early October.

Class dates:

M / W / M / W / M / W / M / W / M / W
Aug / 29 / 31
Sep / - / 7 / 8 / 12 / 14 / 19 / 21 / 26 / 28
Oct / - / 5 / 10 / - / - / 19 / - / 25 / 26 / 31
Nov / 2 / 7 / 9 / 14 / 16 / 21 / - / 28 / 30
Dec / 5 / 7

Note that we have many holidays and two “Brandeis Mondays” – Thursday, Sep 8 and Tuesday, Oct 25.

Communications: Outside of class, most communications will be by e-mail, not LATTE. Essays should be submitted by e-mail () and essay evaluations will be provided by e-mail. Supplementary readings will be distributed by e-mail.

Things you should do

Attend class.

Ask questions and share your own thoughts.

Complete all essays.

Submit essays on time. If you have questions, ask in advance of submission.

Cite others’ work in your essays and presentation. (You may do so with footnotes or more informally, but list your sources. Direct quotations must be in quotation marks.)

Things you should not do

Do not quote others without attribution!

Do not skip an essay.

Do not collaborate on the weekly essays. However, you are encouraged to talk about policy issues with your classmates and colleagues.

Disability: If you are a student with a documented disability on record at Brandeis University and wish to have a reasonable accommodation made for you in this class, please see me immediately.

Academic Integrity is central to the mission of educational excellence at Brandeis. You are expected to be familiar with and to follow the University’s policies on academic integrity (see http://www.brandeis.edu/studentlife/sdec/ai). Instances of alleged dishonesty will be forwarded to the Office of Campus Life for possible referral to the Student Judicial System. Potential sanctions include failure in the course and suspension from the University.

Course Materials and Readings

Most of the readings are on the web; links are provided in the Course Plan.

A recurring reference is

Bank for International Settlements (BIS), Issues in the Governance of Central Banks, A report from the Central Bank Governance Group, Chair: Guillermo Ortiz, May 2009

http://www.bis.org/publ/othp04.pdf

This will also be of value in preparing presentations on central banks.

BIS Annual Reports are another valuable resource.

http://www.bis.org/publ/arpdf/ar2011e.htm

Readings from two books have been assigned. These are relatively inexpensive.

Charles Goodhart, The Evolution of Central Banks. (1988 MIT Press, Cambridge, MA)

Edwin M. Truman, Inflation Targeting in the world economy. (2003 Institute for International Economics, Washington, D.C.)

Two useful but optional references are

Howard Davies and David Green, Banking on the Future: The Fall and Rise of Central Banking. (2010 Princeton University Press)

Lawrence H. White, The Theory of Monetary Institutions. (1999 Blackwell Publishers, Malden, MA)

There are a lot of readings, but many of the online readings are short and non-technical. In the case of long or more technical readings, the key sections are usually indicated. You may skip over models and regressions.

With respect to the books, particularly Goodhart, you should focus on the main points rather than read every word.

Optional readings are just that – optional. If the topic interests you, take a look.

The goal in all cases is to extract the main message, not to absorb all the details.

Course Plan

and Associated Readings

Aug 29 & 31 - Organizational Meeting (Aug 29) and Money Basics (Aug 31)

Discuss course format and what is expected of students (readings, papers, class participation, presentations).

Aug 31 – What purposes are served by money? How did money get started?

Review your former macro text on money multiplier.

OR

look at Schwartz, Anna J. “Money Supply,” Library of Economics and Liberty

http:econlib.org/library/Enc/MoneySupply.html

Optional: White, Lawrence, Skim Chapter 1, esp. pp.1-14, 18-19.

For those interested in the origins of money, an alternative view is summarized in

Tcherneva, Pavlina R. “Chartalism and the tax-driven approach to money,” Sections 1, 2 and 4. This is an optional reading.

pavlina-tcherneva.net/Tcherneva-Chartalism.pdf

Assignment: Pick a central bank (and your 2nd and 3rd choices) that you will study and about which you will become the class expert. In late November, students will give presentations on their central banks. We will finalize choices Sep. 7.

Sep 7 & 8 – History of Money and Banking

Bordo, Michael David, “The Classical Gold Standard: Some Lessons for Today,” Federal Reserve Bank of St. Louis, May 1981

http://research.stlouisfed.org/publications/review/81/05/Classical_May1981.pdf

Bernanke, Ben S. “Money, Gold and the Great Depression,” Remarks, March 2, 2004.

http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm and

“Chapter 1. The Macroeconomics of the Great Depression,” Essays on the Great Depression, Princeton University Press,

http://press.princeton.edu/chapters/s6817.html

Norman,Ben, Rachel Shaw and George Speight, “The history of interbank settlement arrangements: exploring central banks’ role in the payment system, Bank of England Working Paper No. 412 June 2011

http://www.ecb.int/home/pdf/research/Working_Paper_412.pdf

Skim pages 3-19. Read balance for next week.

Optional: Dolan, Ed “Whatever Became of the Money Multiplier,” Ed Dolan’s Econ Blog

http://www.economonitor.com/dolanecon/2013/09/23/whatever-became-of-the-money-mulitplier/

Explains criticisms of the money multiplier. If you have trouble with the link, use the EconoMonitor search function.

Optional: White, Lawrence, Chapter 2, pp. 37-42, 48-49; Chapter 7, pp. 138-142.

Optional: Officer, Lawrence H., “Gold Standard,” EH.net

http://eh.net.encyclopedia/gold-standard/

Detailed information about the gold standard. Useful if you have questions about how it worked.

Assignment: Write a short paper that briefly summarizes how the Gold Standard worked in the Classical Era (1880-1914) and discusses the pros and cons of a gold standard compared to a fiat money system. Short means 2-4 single-space pages. Due Sep.14.

Sep 12 – History and Functions of Central Banks

BIS material is most important. Bordo is short and interesting. Look at Dincer and Eichengreen’s rankings of independence

Bank for International Settlements (BIS), Issues in the Governance of Central Banks, A report from the Central Bank Governance Group, Chair: Guillermo Ortiz, May 2009

http://www.bis.org/publ/othp04.pdf

Chapter 1, pp. 5-16. (Note definition in introduction.)

Chapter 2, esp. pp. 18-20 and 28-37. (Skim rest.)

Chapter 6, pp. 103-105.

Norman,Ben, Rachel Shaw and George Speight, “The history of interbank settlement arrangements: exploring central banks’ role in the payment system,” Bank of England Working Paper No. 412 June 2011

http://www.ecb.int/home/pdf/research/Working_Paper_412.pdf

Read pages 20 on.

Bordo,Michael, “A Brief History of Central Banks”, Federal Reserve Bank of Cleveland Economic Commentary, December 2007

https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2007-economic-commentaries/ec-20071201-a-brief-history-of-central-banks.aspx

Goodhart, Charles, The Evolution of Central Banks, Chapter 1

For rankings of central bank independence and transparency, see

Dincer, N. Nergiz and Barry Eichengreen “Central Bank Transparency and Independence: Updates and New Measures,” International Journal of Central Banking, March 2014, Tables 1 and 8.

http://www.ijcb.org/journal/ijcb14q1a6.pdf

and

Crowe, Christopher and Ellen E. Meade, “Central bank independence and transparency: Not just cheap talk,” VOX, July 27, 2008

http://www.voxeu.org/article/central-bank-independence-and-transparency-not-just-cheap-talk-part-1?quicktabs_tabbed_recent_articles_block=1

Optional: White, Lawrence, Chapter 4.

Assignment: Write a short paper describing your central bank: when created, why created, primary functions, and the degree to which it is independent. Explain your reasoning about your central bank’s independence.

On your central bank’s balance sheet, what are the most important asset categories? What are the most important liabilities? Have the size and composition of assets and liabilities changed substantially from pre-financial crisis levels (2006 or 2007)? A summary table may be helpful in presenting major assets and liabilities and highlighting important changes. Due Sep. 21.

Sep 14, 19 21 – Monetary Policy (Objectives and Tools)

Ortiz, Issues in Governance, Chapter 2, esp. pp.18-25, 28-33 and Chapter 4, pp.77-78 and 85-90

http://www.bis.org/publ/othp04.pdf

Meyer, Laurence H., “Inflation Targets and Inflation Targeting,”

http://research.stlouisfed.org/publications/review/01/11/1-14Meyer.pdf

First two pages are relevant to this topic, the balance to the next - rules vs. discretion.

Keister, Todd, Antoine Martin and James McAndrews, “Divorcing Money from Monetary Policy” Economic Policy Review, September 2008

http://www.newyorkfed.org/research/EPR/08v14n2/0809keis.pdf

Section 2 (pages 43-46) and Section 4.

OR

Clews, Roger, Chris Salmon and Olaf Weeken, “The Bank’s money market framework,” Bank of England Quarterly Bulletin Money Market Articles, 2010Q4

www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100404.pdf

Both articles discuss the market for reserves, the Keister article from the Fed’s perspective and the Clews’ piece from the BOE’s view. Read one.

For transparency rankings look at Table 1 in Dincer, N. Nergiz and Barry Eichengreen “Central Bank Transparency and Independence: Updates and New Measures,” International Journal of Central Banking, March 2014.

http://www.ijcb.org/journal/ijcb14q1a6.pdf

Optional: BIS Communication of monetary policy decisions by central banks: What is revealed and why. BIS Papers No. 47, May 2009.

http://www.bis.org/publ/bppdf/bispap47.pdf

Results of a survey of central bank communications.

Optional: Hoover, Kevin D. “Phillips Curve,” Library of Economics andLiberty,

http://www.econlib.org/library/Enc/PhillipsCurve.html

Short review of Phillips Curve.

Optional: BIS Markets Committee, MC Compendium: Monetary policy frameworks and central bank market operation, May 2009.

http://bis.org/publ/mktc04.pdf

Skim information on 2-4 central banks to get a sense of similarities and differences. If your bank is one of those covered in this compendium, you may find the information helpful. However, some central banks have changed their practices in response to the financial crisis of 2007-9.

Assignment: Write a short essay summarizing your central bank’s monetary policy objectives and key tools for implementing monetary policy. What is the overall objective? If multiple objectives, are they prioritized? Are there specific targets?