August 18, 2017
Central Banking
Econ 235a
Professor Browne
Mondays and Wednesdays: 12:30 p.m. – 1:50 p.m.
Location: Lemberg 054
Office Hours: S-001;Wednesdays 2 – 3 pm; Mondays 11am –noon; e-mail to arrange.
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 15 percent
Mini presentation (no slides) 5 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.
The mini presentation is a three-minute presentation on inflation. It is primarily an opportunity to practice for the central bank presentation.
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 20, 27 and 29 and possibly December 4. Dates for each student’s presentation will be determined in early October.
Class dates:
M / W / M / W / M / W / M / W / M / WAug / 30
Sep / 6 / 11 / 13 / 18 / 20 / 25 / 27
Oct / 2 / 4 / 9 / 11 / 16 / 18 / 23 / 25 / 30
Nov / 1 / 6 / 8 / 13 / 15 / 20 / - / 27 / 29
Dec / 4 / 6
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.
Workload: Success in this four-credit course is based on the expectation that students will spend a minimum of 9 hours of study time per week in preparation for class (readings, papers, discussion sections, preparations for exams, etc.)
Course Materials and Readings
Most of the readings are on the web; links are provided in the Course Plan.
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.)
A useful but optional reference is
Howard Davies and David Green, Banking on the Future: The Fall and Rise of Central Banking. (2010 Princeton University Press)
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 30 - Organizational Meeting
Discuss course format and what is expected of students (readings, papers, class participation, presentations).
Assignment: 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
Sep 6 – Functions of Money
Schwartz, Anna J. “Money Supply,” Library of Economics and Liberty
http:econlib.org/library/Enc/MoneySupply.html
For Sep 11, 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.
Sep 11 & 13 – 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 OR
“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: 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.
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 or just look for EconoMonitor Ed Dolan Multiplier.
Assignment: Write a short paper that briefly summarizes how the Gold Standard worked in the Classical Era (1880-1914) and describes the pros and cons of a gold standard compared to the pros and cons of a fiat money system. Short means 2-4 single-space pages. Due Sep.20.
Sep 18 & 20 – 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. Liberty Street Economics is helpful understanding balance sheets.
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
Eisner, Emily, Antoine Martin and Ylva Sovik, “What is the Composition of Central Bank Balance Sheets in Normal Times?” and “How Do Central Bank Balance Sheets Change in Times of Crisis?” Federal Reserve Bank of New York, Liberty Street Economics, February 2016
http://libertystreeteconomics.newyorkfed.org/2016/02/what-is-the-composition-of-central-bank-balance-sheets-in-normal-times.html
http://libertystreeteconomics.newyorkfed.org/2016/02/how-do-central-bank-balance-sheets-change-in-times-of-crisis.html
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
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. 27.
Sep 25 & 27 – 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 and Liberty,
http://www.econlib.org/library/Enc/PhillipsCurve.html
Short review of Phillips Curve.
Assignment: Write a short essay summarizing your central bank’s monetary policy objectives and key tools for implementing monetary policy. What is the overall monetary policy objective? If multiple objectives, are they prioritized? Are there specific targets?
How is monetary policy implemented? How does your bank affect interest rates and/or the supply of money and credit? If your bank engages in open market operations, what does it buy/sell? What other tools does it use?
Assess your bank’s transparency.
(If your bank is an inflation-targeting bank, you should look at Gil Hammond in the references for the next topic – rules vs. discretion.) Due Oct. 4.
Oct 2 & 4 – Monetary Policy (Rules vs. Discretion)
Hammond provides a good summary of the inflation targeting approach and information on 27 inflation-targeting central banks.
Buol, Jason L. and Mark D. Vaughan, “Rules vs. Discretion: The Wrong Choice could Open the Floodgates, The Regional Economist, Federal Reserve Bank of St. Louis. http://www.stlouisfed.org/publications/re/articles/?id=426