Monetary Theory and Policy

David Andolfatto
Professor of Economics
Vice President, Research Division, FRB St. Louis


Outline: We will explore several classic questions in the theory of money. What is money? What forms does money take? Why is money necessary--why is there a demand for money? What determines the supply of money? What is the debate on central versus free banking? Should banking be regulated, and if so, why and how? What determines inflation? Should nations enter into fixed exchange rate regimes, or should they let the value of their monies be market-determined? What are the tensions that arise in fixed exchange rate regimes and common currency areas? These, and other questions, are explored within the context of theories that model the microfoundations of monetary exchange explicitly.

Textbook: Modeling Monetary Economies, 3rd Edition, Bruce Champ, Scott Freeman, and Joseph Haslag

Grading: Midterm 1 (20%), Midterm 2 (30%), Final (50%) or Final (100%), whichever is greater. Assignments and participation will count as bonus marks. Note: one of the midterms may be replaced by a term paper due by the final class.

Midterm 1: Thursday, June 14. (Past exam 2012) Exam 2013 Partial Answer Key
Midterm 2: Thursday, July 12.
Final exam: TBA

Office hours: Tuesday, 2:30-3:30 (or by appointment). WMC 2684.

Lecture times and locations:

Course Content (under construction, please be patient)
Link to a related course that I taught some time ago: Money and Banking

[1] Introduction. Barter vs. money, direct vs. indirect exchange, limited commitment, lack of double coincidence, Wicksell's triangle
Lecture slides: Monetary Theory: An Introduction to Some Basic Ideas

An introduction to the theory of money and credit, David Andolfatto
Evil is the Root of All Money, David Andolfatto
Private Money in Our Past, Present, and Future, Bruce Champ
From Commodity Money to Bank-Debt Money, Robert Shenk (optional)
Money in a Theory of Exchange, Dan Thornton (optional)

Assignment 1

[2] Economic Methodology. Just a brief overview of how economists generally go about trying to understand things. 
Lecture slides: The Science of Economics.
Video: The Scientific Method, R. Feynman (1964)
On the use of metaphors

The Methodology of Postive Economics
 (Milton Friedman, 1966)

[3] The overlapping generations model. Money as a record-keeping device. Competitive monetary equilibrium. Money neutrality propositions.
Lecture slides: The basic OLG model

Modeling Monetary Economies, Chapter 1: A simple model of money.

[4] Commodity money. The inefficiency of commodity money?
Lecture slides: Commodity money

Modeling Monetary Economies, Chapter 2: Barter and commodity money (section on barter is optional)
Is Gold Money? Robert Blumen
Is Gold a Good Store of Value? David Andolfatto
Return to the Gold Standard. James Hamilton
The Gold Standard. David Andolfatto

[5] Money and inflation. Welfare costs of inflation. Financing government purchases. The limits to seigniorage.
Lecture slides: Inflation

Modeling Monetary Economies, Chapter 3: Inflation

[6] International monetary systems. Nominal exchange rate indeterminacy. Costs and benefits of fixed exchange rate regimes, common currency areas.
Lecture slides: International monetary systems
Lecture slides: International monetary systems (Fernando Martin)
Lecture slides: Understanding sovereign debt crises
Lecture slides: Sovereign Debt: A Modern Greek Tragedy (Chris Waller)

Modeling Monetary Economies, Chapter 4, International monetary systems
Sovereign Debt: A Modern Greek Tragedy (Fernando Martin and Chris Waller)
A short video available here.
The European Central Bank (Wikipedia)
The Limits of the European Central Bank (Martin Feldstein)

Problem set: Assignment 3

[7] Money, capital and banking. Coexistence of fiat money and private money (capital). The money multiplier. Flight to quality and deflation. Nominal debt and price-level surprises.
Lecture slides: A simple monetary model
Optional reading: Money, Output, and the Nominal National Debt

Modeling Monetary Economies, Chapter 6, Capital, and Chapter 9, Money Stock Fluctuations

[8] The payments system.
Lecture slides: Payments

Modeling Monetary Economies, Chapter 11, The payments system
What is Clearing and Why is it Important? (Ed Nosal and Robert Steigerwald)

[9] Bank risk.
Lecture slides: Bank Risk

Modeling Monetary Economies, Chapter 12, Bank risk
Fractional Reserve Banking (Andolfatto)

[10] Financial Crises.
Lecture slides: (none available)
Video: The Leverage Cycle

Modeling Monetary Economies, Chapter 13, Liquidity Risk and Banking Panics