70575 - Central Banking and Monetary Policy

Learning outcomes

This course studies the purpose and the functions of central banks and monetary policies and how they have evolved over time. Students are introduced to the tools of monetary policy and to the rules that central banks follow, with special attention to inflation targets. At the end of the course students know the effects of the main policy tools and understand how central banks affect the financial system and the economy more generally and the role they have played in the recent financial crisis.

Course contents

1. Topic 1: Introduction to Monetary Policy
   1. Introduction to money and the financial system
   2. The role of money in the economy
   3. Key issues in Monetary Policy today
2. Topic 2: Interest rates, exchange rates and Monetary and Financial Institutions
   1. Review of interest rates
   2. The term structure of interest rates
   3. Exchange rates: nominal and real
   4. Financial institutions

   Case study: The 2008 crisis, subprime loans and the faults of Central Banks

3. Topic 3: Central Banks
   1. The role of Central Banks in the world today
   2. The structure of Central Banks
   3. The Central Bank balance sheet

   Case study: The Wizard of Oz, an allegory of Monetary Policy

4. Topic 4: Conducting Monetary Policy: the money supply process and economic stabilization
   1. The money multiplier
   2. The monetary base and money supply
   3. Operational policy at the ECB and the Federal Reserve
   4. Monetary policy objectives: inflation targeting and monetary targeting

   Case study: Hyperinflation

5. Topic 5: Exchange rate policy
   1. Exchange rate management by the Central Bank
   2. Exchange rate regimes: fixed, flexible, managed
   3. The costs, benefits and risks of fixed exchange rates

   Case study: Exchange rate crises

6. Topic 6: Money demand, inflation, output and Monetary Policy
   1. The quantity theory of money
   2. The demand for money
   3. Output and inflation in the long run
   4. Aggregate demand, aggregate supply and monetary policy

   Case study: Cryptocurrencies

7. Topic 7: Business cycle fluctuations and the challenges for Monetary Policy
   1. Sources of fluctuation in output and inflation
   2. How Monetary Policy contributes to economic stabilization
   3. The monetary transmission mechanism
   4. New challenges for Monetary Policy
8. Topic 8: Unconventional Monetary Policy
   1. The influence of the 2008 crisis on monetary policy
   2. The ECB’s “Securities Market Programme”
   3. Quantitative easing

Case study: Central Banks and Climate Change

Readings/Bibliography

Cecchetti, S. and Schoenholtz (2017) “Money, Banking and Financial Markets”, McGraw-Hill Education International Edition, Fifth Edition

Additional readings:

Svensson, L.E.O. (1999). "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.

ECB (2011) The monetary policy of the ECB, published online at: https://www.ecb.europa.eu/pub/pdf/other/monetarypolicy2011en.pdf?4004e7099b3dcdbf58d0874f6eab650e

Krugman, P., Obstfeld, M. and M. Melitz (2018) “International Economics: Theory and Policy” (11th edition), Pearson. Chapters 15, 18, 20.

Teaching methods

The course is delivered through a mix of theory/powerpoint presentations, case analysis, readings and group discussions.

Assessment methods

Students’ evaluation will be based on the submission of a short final project during the regular exam session.

The rules concerning the final project are the following:

1. The papers must be entirely typewritten, including any formula or graph.
2. Each student will be assigned a different topic for the project. The list of topics will be provided at the beginning of the course and the topics are assigned on a first come, first serve basis. Failure to comply with the assigned topic will result in failing the exam.
3. The final project can take the form of an essay or a briefing note. Instructions will be given in this regard.
4. The submission must be original. If part of the submitted project turns out being copied from an external source, the student will fail the exam. He/She will only be allowed to repeat the exam in the following session with a different topic.
5. The final assignment will include some additional rules (e.g. minimum and maximum length, formatting… ).

Office hours

See the website of Gaetano D'Adamo