810: Money and Banking
Instructor: David Andolfatto
Room: WMC 2684
What this course is about. Intertemporal exchange
can be a tricky business. Financial market participants may possess private
information. They may be unwilling or unable to commit to the promises they
make. Communication and record-keeping systems may be imperfect or even absent.
Financial market institutions can be largely understood as solutions to the
problem of mitigating the frictions that impede intertemporal trade.
Technological improvements in communications and record-keeping systems imply
that institutions need to evolve over time. The course is devoted to describing
theories of money, credit and banking, and what these theories imply for
monetary and fiscal policy making.
Exam dates and weights.
Midterm 1 (25%): Wednesday, June 29, 2016.
Midterm 2 (25%): Wednesday, July 13, 2016.
Midterm 3 (25%): Monday, August 08, 2016.
Term paper (25%): Proposal due June 22. The final draft is due August 15.
Class cancellation: The class for Monday, June 27 is cancelled. Extra classes will be held during the scheduled tutorial time as needed.
Course textbook. Modeling Monetary Economies, 3rd edition, by Bruce
Champ, Scott Freeman and Joseph Haslag.
Slide deck 1: An introduction.
Slide deck 2: Incentive feasible allocations in a quasilinear mechanism.
Slide deck 3: Money in a quasilinear environment.
Reading 1: The simple analytics of money and
credit in a quasilinear environment.
Reading 2: Incentive-feasible deflation.
Reading 3: Essential interest-bearing money.
Reading 4: On the societal benefits of illiquid bonds.
Slide deck 3: Bitcoin.
Reading 5: Bitcoin: A peer-to-peer electronic cash system, Nakamoto (2008).
Reading 6: Money and payments, or how we move marbles.
Reading 7: Fedcoin: On the desirability of a government cryptocurrency.
Reading 8: Which Fedcoin? Sams (2015).
Reading 9: Bitcoin and central banking.
Reading 10: Why the blockchain should be familiar to you.
Slide deck 1: Financial fragility.
Reading 1: Notes on Diamond and Dybvig (1983) and Jacklin (1987), Kurlat (2013).
Reading 2: Bank runs: deposit insurance and capital requirements, Cooper and Ross (2002).
Reading 3: Bank runs and the
suspension of deposit convertibility, Engineer (1989).
Reading 4: Financial intermediaries and liquidity creation, Gorton and Pennacchi (1990).
Reading 5: Understanding financial crises, Allen and Gale (2007).
Reading 6: Modeling financial instability: A survey of the literature, Lai (2002).
Reading 7: Money creation in the modern economy, McLeay, Radia and Thomas (2014).
Reading 8: Why do banks want our deposits? Brown (2014).
Reading 9: Liquidity crises, Lucas and Stokey (2011).
Reading 10: Bank capital
regulation in contemporary banking theory, Santos (2001).
Reading 11: The Basel norms explained in simple language.
Reading 12: The
solution is full reserve banking, Musgrave (2014).
Reading 13: Narrow banking: theory, evidence and prospects in India, Ghosh and Saggar (1998).
Reading 14: The
missed opportunity and challenge of capital regulation, Admati
Reading 15: 31 flawed claims debunked, Admati and Hellwig (2015).
Reading 16: Narrow
banking, Pennacchi (2012).
Reading 17: Liquid claim production, risk management and bank capital structure, DeAngelo and Shulz (2014).
Reading 18: What makes U.S. government bonds safe assets? He, Krishnamurthy and Milbradt (2016).
Slide deck 2: Low interest rate policy and financial stability, Andolfatto, Berentsen and Martin (2016).
Asset prices and liquidity
Slide deck 1: Information disclosure and exchange media, Andolfatto and Martin (2012).
Reading 1: A theory of asset price booms and
busts, Chatterjee (2011).
Reading 2: Notes on the Zeira (1999) model.
Reading 3: Pricing assets in an economy with two types of people, Farmer (2016).
The leverage cycle
Slide deck 1: The leverage cycle, Sethi (undated).
Reading 1: Solving
the present crisis and managing the leverage cycle, Geanakoplos
Reading 2: John Geanakoplos on the leverage cycle, Sethi (2010).
Monetary and fiscal policy
Slide deck 3: Inflation finance.
Slide deck 4: Money and capital.
Slide deck 5: Central bank liquidity facility (Supplementary reading: Clearinghouses and the origin of central banking in the U.S., Gorton (1985)).
Reading 3: Monetary
implications of the Hayashi-Prescott hypothesis for Japan.
Reading 4: Monetary policy in the 2008-2009 recession, Hetzel (2009).
Reading 5: Divorcing
money from monetary policy, Keister, Martin and McAndrews (2008).
Reading 6: Evidence that monetary intervention mitigated bank panics in the Great Depression, Richardson and Troost (2009).
Reading 7: Arresting bank panics: Federal Reserve liquidity provision and the forgotten panic of 1929, Carlson, Mitchener and Richardson (2011).
Reading 8: The check is in the mail: Correspondent clearing and the collapse of the banking system 1930-33, Richardson (2007).
Slide deck 6: Lift-off in a world of excess reserves.
Reading 9: Monetary
science, fiscal alchemy, Leeper (2010).
Reading 10: Understanding inflation as a joint monetary-fiscal policy phenomenon, Leeper and Leith (2016).
Reading 11: Fiscal/monetary coordination when the anchor cable has slipped, Sims (2009).
Reading 13: Interpreting the Reagan deficits, Sargent (1986).
Reading 14: The interaction between monetary and fiscal policy, Canzeroni, Cumby and Diba (2011).
Reading 1: Secular stagnation then and now.
Reading 2: A model of secular stagnation, Eggertsson and Mehrotra (2014).
Slide deck 1: A contagious malady? Eggertson, Mehrotra, Singh, Summers (2015).
International monetary systems
Slide deck 1: International monetary systems.
Reading 1: A theory of optimum
currency areas, Mundell (1968).
Reading 2: Lessons from the tequila crisis, Mishkin (1999).
Reading 3: The euro: love it or leave it? Eichengreen (2010).
Reading 4: Europe’s fiscal union envy is misguided, Sandbu (2015).
Reading 5: Capital controls gum up Greek businesses struggling to survive, (2015).
sudden stops, bargaining freeze.
Warren Buffet on gold Ivanhoff Apr 2013.
Statistics and causal inference,
Chain reaction Espinosa (undated).
Bitcoin: a peer-to-peer electronic cash system, Nakamoto 2009.
Demystifying incentives in the consensus computer Luu, Teutsch, Kulkarni, Saxena (undated).
Money and payments, or how we move marbles MacroMania Feb 2015.
Fedcoin: on the desirability of a government cryptocurrency Macromania Feb 2015.
Which fedcoin? Sams Feb 2015.
Bitcoin and blockchain: two revolutions for the price of one? Brown 2015.
Public and private blockchains Buterin Aug 2015.
The state of blockchains Kulman Aug 2015.
Banking and Liquidity Crises
Financial fragility Andolfatto 2015.
Notes on Jacklin 1987 Andolfatto 2008.
Optimal financial crises Allen and Gale JF 1998.
Modelling financial instability: a survey of the literature Lai 2002.
Financial intermediaries and markets Allen and Gale 2003.
States, banks and the financing of the economy: monetary policy and regulatory perspectives Ballling, Gnan and Jackson (eds) 2013.
Why do banks want our deposits? Hint: it’s not to make loans Brown Oct 2014.
Liquidity crises Lucas and Stokey, May 2011.
On the social usefulness of fractional reserve banking Chari and Phelan 2013.
Information based bank runs in a monetary economy Loewy 1998.
Banking with nominal deposits and inside money Skeie 2008.
Why do markets freeze? Leitner 2011.
Payments and liquidity under adverse selection Rocheteau 2011.
The liquidity time bomb Roubini May 2015.
Repo runs: evidence from the tri-party repo market Copeland, Martin, Walker 2014.
Repo and securities lending Adrian, Begalle, Copeland, Martin 2013.
Understanding liquidity fees and redemption gates Blackrock Securities 2013.
Bank capital regulation in contemporary banking theory Santos 2001.
International Monetary Systems
Optimal Currency Areas
A theory of optimum currency areas Mundell 1968.
Mankiw and conventional wisdom on Europe Cochrane Jul 2015.
The downside of labor mobility Krugman Aug 2015.
Labor mobility within currency unions Farhi and Werning 2014.
Lessons from the tequila crisis Mishkin 1999.
European Monetary Union
The euro: love it or leave it? Eichengreen, May 2010.
Doubts grow over peripheral eurozone nations Financial Times, Nov 2009.
Sovereign debt markets in turbulent times IMF working paper, Dec 2013.
A new deal for debt overhangs? Rogoff, Aug 2015.
Europe’s fiscal union envy is misguided Financial Times, Jul 2015.
The role of currency in the global financial crisis Kinsella, Jul 2015.
The birth of European macroeconomics Kang and Mody Jul 2015.
Greece and Europe: Is Europe holding up its end of the bargain? Bernanke, Jul 2015.
Balance of payments in the European periphery FRB SF, Jan 2013.
Is Germany’s trade surplus a problem? MacroMania, Aug 2015.
Germany is being crushed by its export obsession Posen, Sep 2013.
This isn’t the Chinese capital account liberalization you were looking for Keohane, Jul 2015.
Capital controls gum up Greek businesses struggling to survive, Aug. 2015.
Greece’s ills require a banking fix, Atkeson and Cochrane, Aug. 2015.
Squaring the Eurozone’s vicious circle, Garicano and Reichlen, Jan. 2014.
Germany, Greece and the future of Europe, Sachs, Jul. 2015.
Fetters of gold and paper Eichengreen and Temin, 2010.
Monetary intervention mitigated banking panics during the great depression Richardson and Troost 2009.
A theory of disagreement in bargaining Crawford, 1982.
Global games: theory and applications Morris and Shin, 2006.
Bubbles Brunnermeier, undated.
Higher order expectations Shin 2005.
Some music to help you relax while you’re studying.