Introduction and Course Overview

Transcription

1 Introduction and Course Overview ECON 40364: Monetary Theory & Policy Eric Sims University of Notre Dame Fall / 17

2 Readings Mishkin Ch. 13, pg / 17

3 Monetary Theory and Policy Investopedia defines monetary theory as a set of ideas about how monetary policy should be conducted within an economy. Wikipedia defines monetary policy as the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency... Further goals of a monetary policy are usually to contribute to economic growth and stability, to lower unemployment, and to maintain predictable exchange rates with other currencies. 3 / 17

4 Questions In this course we ll be focusing on a series of interrelated questions: 1. What is money? What determines the supply of money? The demand for money? The price of money? 2. What determines interest rates? Why are they important? Why are there so many? 3. What are banks and bank-like institutions, why are they important, and why are they regulated (either implicitly or explicitly by central banks)? 4. How should central banks conduct monetary policy in normal times? 5. What are financial crises? How should central banks react to financial crises? How can central bank policy be structured to eliminate or limit financial crises? 6. What happened during the recent financial crisis and Great Recession, and what role did central banks play? We will (almost exclusively) focus on the US economy and the Federal Reserve 4 / 17

5 Lecture Slides Lecture slides will be made available on the course website through Sakai Important terms or items will be highlighted in blue, while links to outside readings or websites will be in orange 5 / 17

6 Syllabus and Course Logistics 6 / 17

7 About Me Associate Professor, Dept. of Economics, Universitatis Dominae Nostrae a Lacu BA, Trinity University, 2003 Miracle in Mississippi PhD, University of Michigan, 2009 Don t get the wrong picture Wife proud Lewis Hall Chicken Signed Charlie Weis picture in office Print from 2012 ND-Stanford game in office straight from Brian Van Gorder s basement I am Roman Catholic And I believe in Bigfoot 7 / 17

8 Weis 8 / 17

9 Straight Outta BVG s Basement 9 / 17

10 Bigfoot 10 / 17

11 Family 11 / 17

12 Federal Reserve The Federal Reserve (or just the Fed) is the central bank of the US It was only created in 1913 Many other countries have had central banks for far longer (e.g. the Sveriges Riksbank [Sweden] was founded in 1668 and the Bank of England was founded in 1694) By congressional mandate the Fed has three main objectives (the first two of which are called the dual mandate ): 1. Maximum employment 2. Stabilizing prices 3. Moderating long term interest rates Fed also plays an increasingly large role in regulating/supervising banks and related financial institutions and in promoting financial stability 12 / 17

13 Structure of the Fed There are three main entities which comprise the Fed: 1. Regional Reserve Banks 2. The Board of Governors 3. Federal Open Market Committee (FOMC) Twelve member banks are quasi-private owned by commercial banks within each district. They perform operational duties related to banking within their districts, and presidents serve on a rotating basis on the FOMC The Board controls a majority share on the FOMC and does things like set reserve requirements The FOMC makes decisions concerning monetary policy, including the target for the Federal Funds Rate (the key policy interest rate) 13 / 17

14 Independence The Fed is structured to be more or less independent from the usual political process Fed officials are not elected, though they are appointed through the political process Lots of research stressing importance of independence: a lack of independence can induce an inflationary bias and encourage fiscal mischief The Fed, especially since the Great Recession, is increasingly powerful, so much so that David Wessel refers to the Fed as the fourth branch of government 14 / 17

15 Origins of the Fed The primary motivation in the founding of the Fed was to deal with banking panics and subsequent financial crises. A particularly virulent banking panic, the Panic of 1907, was the impetus for the founding of the Fed The main goal was for the Fed to serve as the lender of last resort, which would hopefully stop banking panics before they started Other intended goals of the Fed included maintaining the money supply, to regulate banks, and to provide financial services to depository institutions The goal of the Fed fine-tuning business cycle fluctuations only evolved over time, with these goals officially enshrined with the Federal Reserve Reform Act of 1977 and the Humphrey-Hawkins Act of / 17

16 Brief History of the Fed It is generally accepted that the Fed failed in its lender of last resort role during the Great Depression For the next 70 years, the US economy didn t really experience financial/banking crises In this time, the Fed s objective evolved into the use of monetary policy to fine-tune the economy With recent financial crisis and ensuing Great Recession, the Fed s role as lender of last resort came to the forefront once again The Fed also has an increasingly important role in regulating and overseeing the financial system 16 / 17

17 Structure of the Course The course as I have designed it is not quite as linear as I would like, in part because the development of central banking has not been all that linear We will talk about crises and the lender of last resort function of the Fed last, rather than first The course will be divided into three parts: 1. Traditional monetary theory and conventional monetary policy: money supply, money demand, monetary policy as a macroeconomic stabilization tool 2. Topics in finance and banking: bond pricing, term structure of interest rates, stock market, information asymmetry and financial structure, and banking 3. Financial crises and unconventional monetary policy: Great Depression, Great Recession, unconventional monetary policy, lender of last resort, questions to ponder 17 / 17