37207 - Monetary and Financial Markets Economics

Learning outcomes

At the end of the course, the student attains a deep understanding of the functioning of financial markets, their interactions with the real economy and the role played by monetary policy. Specifically, the student knows: i) the principles that govern the managing and the allocation of risk; ii) the pricing of financial assets in competitive market; iii) the concepts (models) of market liquidity, liquidity risk and price informativeness. With regard to the economy and monetary policy of developed and emerging countries, the course analyses: i) monetary aggregates; ii) the functioning and transmission mechanisms of monetary policy; iii) and its implications on financial markets and inflation.

Course contents

The goal of this course is twofold: 1) to provide the instruments for understanding the workings of financial markets; 2) to analyze the role of financial markets for the broader macroeconomy, and the crucial role of monetary policy.

The course will discuss the basic role of financial markets in intertemporal resource allocation, allocation of risk, and information aggregation. We will introduce technical tools for valuing risk, creating portfolios, pricing financial assets and the analysis of monetary policy. Finally, we will employ these insights to discuss issues of broader relevance for the macro economy, with special emphasis on the current financial crisis.

The course is structured in two parts:

Part 1: The Economics of Financial Markets

• Intertemporal resource allocation, Risk allocation

• Risk management:

- Decisions under uncertainty

• Expected utility : theory and applications

• Certainty Equivalent:  theory and applications

- Portfolio theory

• Feasible portfolios and Non-dominated portfolios

- Safe asset, Efficient portfolio set and tangency portfolio

• Capital Asset Pricing Model  (CAPM)

• Market equilibria and Asset prices

• Empirical evidence of CAPM

• Asset market liquidity and asset prices

• Funding liquidity and market liquidity

• Theory and  empirical evidence

Part 2 : Monetary economics in economies with financial markets

• Central bank balance sheet: static balance sheet, intertemporal balance sheet

• Seignorage : modelling seignorage and  limits to Seignorage (Laffer curve)

• Monetary policy at work:

• Instruments

• Intermediate targets

• Final targets

• The mechanism of monetary policy transmission

• The role of asset market  liquidity  in the functioning of  the transmission mechanism : Empirical evidence

• Asset market liquidity and monetary policy:

• Quantitative easing

• Qualitative easing

• Evidence: Central bank balance sheets  ante and post crises

• Focus on the Eurosystem

 

Readings/Bibliography

Readings will be detailed in class and made available on AMS Campus.

 

Reference texbooks:

 Part 1: Agliardi, E. , G. Chiesa, Economia dei Mercati Finanziari, Carocci Editore, 2003; Cap.1,2,6

Bodie, Z., A. Kane, A.J. Marcus, Investments, McGraw Hill, 9ÃÆ'‚° Edition

Part 2:

The Monetary Policy of the ECB, Editor : ECB, 2011

"The Supply of Money: Bank Behaviour and the Implications for Monetary Analysis"‚ in ECB monthly Bulletin , October 20

"Global Economics View, Looking into the Deep Pockets of the ECB", W.Buiter e E. Rahbari, Citigroup Global Markets,  27 February 2012

"Global Economics View, Why Does The ECB Not Put Its Mouth Where Its Money Is? The ECB As Lender Of Last Resort For Euro Area Sovereigns And Banks", W.Buiter e E. Rahbari, Citigroup Global Markets, 27 February 2012.

Teaching methods

Lectures in class, discussion of financial events

Assessment methods

Written exam

Teaching tools

Slides, PC

Websites of financial press -- Financial Times, Bloomberg

Office hours

See the website of Gabriella Chiesa