Stanford Graduate School of Business

Transcription

1 Stanford Graduate School of Business Syllabus and Course Outline Finance Money and Banking Professor Arvind Krishnamurthy, Rm E256 a-krishnamurthy@stanford.edu Course Content: This course is designed to help students understand the connections between money (the Federal Reserve), financial markets, and the macroeconomy. How are interest rates determined, and how does the Federal Reserve conduct monetary policy? What economic factors drive the yield curves in different bond markets? We will pay particular attention to the banking system, with an eye toward understanding the function and importance of banks. Topics will include the role of the Federal Reserve as a lender of last resort during the recent, and prior, financial crises, unconventional monetary policy tools such as quantitative easing and forward guidance. We discuss the role of the government in regulating the financial sector, paying particular attention to capital requirements for banks. We will often begin class with a discussion of current macrofinancial market events in the context of our course coverage. The course is appropriate for anyone trying to gain a macroeconomic perspective on capital markets, from investors to bankers, or those simply interested in the linkages between interest rates, banks and the economy. Given the topics we cover, the course will also be interesting to those who want a better understanding of the financial crisis and the ongoing Federal Reserve experiment in unconventional monetary policy. Grading: Student grades will be determined by homework exercises, class participation, and in-class quizzes. Reading Materials: There is a case packet that must be purchased that includes cases, weekly lecture notes, and some readings. There is also a small booklet that contains 5 chapters from two textbooks, which must also be purchased. If you would like a full textbook, my recommendations are Mishkin s Money, Banking and Financial Markets, or Hubbard-O Brien s Money, Banking, and the Financial System. The syllabus also has links to readings on the web, which I have not included in the case-packet to save on printing costs. Additionally, I have slides covering each of the lectures that are posted. The slides are still work in progress, so please download them only the day before class. 1

2 Crisis Material: Many of the lectures deal with topics that are directly relevant for understanding aspects of the financial crisis. So, we will often discuss crisis topics over the course of the ten weeks. I have noted down some reading that I think are particularly good. This is not required reading in the sense that I will not test you on this material. But, many of you will find the readings interesting. Books David Wessel s book, In Fed We Trust, is a great and easy read. It is particularly good reading for this class because it closely follows the topics we cover in class (Fed/Economy/Bond Market nexus). It will help you to follow the class, especially with some of the drier lectures. I like books that compare the recent events with those of the Great Depression. Liaquat Ahmed s, Lords of Finance, is a good read on this topic. It is much more of a slog than Wessel s book (576 pages), so be warned. Another good book is Understanding Financial Crises, by Gary Gorton. This book also places the recent crisis in historical perspective. Relative to the Ahmed book, the Gorton book is both shorter and more technical. I tend to not recommend books like the Big Short which are short on substance (although it is a fun read). Articles (you should be able to find all of these on the web) Banking and the Crisis Gary Gorton, Questions and Answers About the Financial Crisis, Prepared Testimony for the Financial Crisis Inquiry Commission, Feb. 20, Gary Gorton and Andrew Metrick, Getting up to Speed on the Financial Crisis: A One- Weekend-Reader s Guide, NBER working paper Arvind Krishnamurthy, How Debt Markets Have Malfunctioned in the Crisis, Journal of Economic Perspectives, 24, No. 1, Winter 2010, pp Markus Brunnermeier, Deciphering the Liquidity and Credit Crunch , Journal of Economic Perspectives, 23, No. 1, Winter 2009, pp Duffie, Darrell, The Failure Mechanics of Dealer Banks, Journal of Economic Perspectives, 24, No. 1, Winter 2010 Hanson, Samuel, Anil Kashyap, and Jeremy Stein, A Macroprudential Approach to Financial Regulation, Journal of Economic Perspectives, 25, No. 1, Winter 2011, pp

3 The Macroeconomy and the Crisis Robert E. Hall, "Why Does the Economy Fall to Pieces after a Financial Crisis?" Journal of Economic Perspectives, 24(4), 2010, pp Atif Mian and Amir Sufi, Housing and the Slump, Bart Hobijn and Colin Gardiner, The Breadth of Disinflation, FRBSF Economic Letter, Zheng Liu and Glenn Rudebusch, Inflation: Mind the Gap, FRBSF Economic Letter, Ricardo Caballero, The other imbalance and the Financial Crisis, VOXEU, 3

4 Week 1: Interest Rates A. Term Structure of Interest Rates B. The Expectations Hypothesis C. The Behavior of Interest Rates: Loanable Funds Framework D. Quiz on bond math 1. How Do Risk and Term Structure Affect Interest Rates, from Mishkin-Eakins. 2. Determining Interest Rates, from Hubbard-O Brien 3. Lecture notes Week 2: Fed Funds Market A. Review of HW1 B. Reserve Requirements and Reserve Management C. Determination of the Fed Funds Rate Homework 1 due 1. Savings Glut Speech by Bernanke: 2. The Tools of Monetary Policy, from Mishkin 3. Chapter 1 4. Lecture notes Optional readings: 1. Chapter 3 Week 3: Policy Tools A. Review of HW2 B. The Discount Window C. Open Market Operations D. Fed Balance Sheet Homework 2 due Same as Week 2. Week 4: Transmission A. Monetary Transmission Mechanism B. Inflation and Unemployment C. Discussion of Case on the The Big News 4

5 Prepare and hand in write-up for Big News case. 1. The Transmission Mechanisms of Monetary Policy, from Mishkin. The first part of the chapter describes some methodological issues in evaluating the effects of monetary policy, as well as the historical debates of Milton Friedman and others. Skim that part. The part I want you to read carefully begins The Transmission Mechanisms of Monetary Policy. 2. Lecture notes Optional 1. Inside the Black Box: The Credit Channel of Monetary Policy Transmission, by Ben Bernanke and Mark Gertler. Week 5: Fed Objectives A. Objectives of the Fed B. Discussion of Case on Monetary Policy Prepare and hand in write-up for Monetary Policy case. 1. The Credit Crunch, by Ben Bernanke and Cara Lown: 2. Article by Meyer in Case Packet 3. Lecture notes Week 6&7: Banking and Financial Crises A. Commercial Banking B. Bank Runs and Monetary Contraction: The Great Depression C. Modern Liquidity Crises: 1987 Market Crash, 1998 LTCM Crisis, Subprime Crisis D. Conflict of Interest: Moral Hazard and the S&L Crisis E. Capital Adequacy Requirements F. Debate on Capital Requirements Homework 3 due. 1. Lecture notes 2. Financial Crises and Financial Regulation, Hubbard-O Brien 3. Charles Calomiris and Gary Gorton, The origins of banking panics, in case packet. Full text available at: 5

6 Optional readings: 4. The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn t Matter, by Christina Romer and David Romer 5. Banks and Liquidity Creation ( Week 8: Treasury and CP Markets A. Treasury Market B. Commercial Paper Homework 4 due. Readings 1. Instruments of the money market: money_market/ Chapters 1, 7, and 9. (These are chapters from an older book, but the descriptions of the markets are still good.) 2. Bagehot, The Only Game in Town, Financial Analysts Journal, Mar/Apr (Read in particular the part beginning with The Market Maker Key to the Stock Market Game ) 3. Lecture notes Week 9: Quantitative Easing A. Repo Market B. Quantitative Easing Case Discussion Prepare and hand in write-up for Quantitative Easing case. 1. Instruments of the money market: Chapter 6 2. Lecture notes Optional readings: 1. Speech by Fed Governor Jeremy Stein, October 11,

7 Week 10: Financial Crisis Discussion A. Bear Stearns Case B. Discussion of Financial Crisis and Current Economy C. Review of Course and Questions. Prepare and hand in write-up for Bear Stearns case. 1. Gary Gorton, Questions and Answers About the Financial Crisis, Prepared Testimony for the Financial Crisis Inquiry Commission Optional readings: See the crisis material earlier in the syllabus. 7