Lectures on the Theory of Money and Banking

CEU 2008

Introduction

The definition of money. Forms of payment versus methods of payment. Why is money necessary? Lack of double-coincidence: necessary, but not sufficient. Opportunism arising from limited commitment. Incentive systems: the need to condition rewards and punishments on individual trading histories. Opportunism arising from private information over personal trading histories: the need for a reliable record-keeping technology. Money as a record-keeping technology.

Readings:
Lecture notes.
Private Money in our Past, Present, and Future (Bruce Champ, 2007) .

A Wicksellian Model

Formalizing a lack of double-coincidence: multilateral gains to trade in the absence of bilateral gains. The properties of efficient mechanisms when commitment is limited and individual trading histories are private information. Tangible versus intangible money. Identity theft and counterfeiting. Intermediated versus unintermediated trading systems. A rudimentary theory of banking.

Readings:
A Wicksellian Model (Lecture notes).
Money, Intermediation, and Banking (David Andolfatto and Ed Nosal, 2008). Optional
Evil is the Root of All Money (Nobu Kiyotaki and John Moore, 2002); See also, their Clarendon Lecture1. Optional
The Technological Role of Fiat Money (Narayana Kocherlakota, 1998). Optional

The Overlapping Generations Model

The OLG model as a simple modification of the Wicksellian model. How pure fiat money can be valued in equilibrium. Multiple equilibria and self-fulfilling prophesies. Money and inflation. Inflation as a distortionary tax. The limits to seigniorage.

Readings:
An OLG Model (Lecture notes).
Chapters 1 and 3 in Modeling Monetary Economies (Bruce Champ and Scott Freeman). Optional
Chapter 8 (pp. 180-193) in Macroeconomic Theory and Policy (David Andolfatto).

International Monetary Systems

Nominal exchange rate indeterminacy. Fixed versus flexible exchange rate systems. Speculative attacks and self-fulfilling prophesies. Dollarization and Common Currency Areas.

Readings:
Chapter 4 in Modeling Monetary Economies (Bruce Champ and Scott Freeman).
Chapter 8 (pp. 202-212) in Macroeconomic Theory and Policy (David Andolfatto).
Notes on Manuelli and Peck (David Andolfatto). Optional

Money, Capital, and Banking

Explaining the coexistence of money with higher rate of return assets. Inside money versus outside money and the money multiplier. Interpreting the cyclical behavior of money, velocity, output and prices. Reverse causality. An interpretation of banking panics.

Readings:
Money and Capital (Lecture notes).
Chapter 8 (pp. 194-201) in Macroeconomic Theory and Policy (David Andolfatto).
Banking Crises in Monetary Economies (Janet Jiang 2008).

Assignments

Assignment 1 (Due: October 10).
Assignment 2 (Due: October 14): Exercises 1-3 in An OLG Model Lecture notes.
Assignment 3 (Due: October 21).
Assignment 4 (Due: October 29).

Exams

Practice Exam: Monday, October 27.
Midterm Exam: Thursday, October 30.
Final Exam: To be scheduled during the final exam period.

Grading

Assignments (25%); Mid-term exam (25%); Final exam (50%).