Econ 810: Money and Banking
Instructor: David Andolfatto
Room: WMC 2684

What this course is about. Every society depends on a credit system to allocate resources and distribute production. Credit systems are hampered limited commitment and private information. The former implies that individuals cannot always be counted on to honor their promises. The latter implies that some individuals may want to lie for a personal gain at the expense of the community. On top of this, 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.



2015 Course Outline

Exam dates and weights.
Midterm 1 (25%): Thursday, June 14, 2018.
Midterm 2 (25%): Thursday, July 12, 2018.
Midterm 3 (25%): Tuesday, August 02, 2018.
Term paper (25%): Proposal due June 19. Follow up due on July 24. Final draft is due August 12 (emailed to:

Course textbook. Modeling Monetary Economies, 3rd edition, by Bruce Champ, Scott Freeman and Joseph Haslag.


Course Content


Monetary theory


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: An introduction to money and credit.

Reading 2: The simple analytics of money and credit in a quasilinear environment.
Reading 3:  Incentive-feasible deflation.
Reading 4:  Essential interest-bearing money.
Reading 5:  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.



Banking theory

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 (2015).
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).

Reading 19: Economics and Banking -- James Tobin (Redux). Cullen Roche (2013).

Reading 20: The Sovereign Money Initiative in Switzerland: An Economic Assessment. Bacchetta (2018).

Reading 21: Banks and Macroeconomic Models. Waldman (2013).

Reading 22: The commercial banking firm. Tobin (1982).
Reading 23: Reconciling Orthodox and Heterodox views on money and banking. Andolfatto (2018).

Reading 24: What Holmstrom and Gorton Get Right and Wrong about Banking. Sissiko (2015).

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 (2010).
Reading 2:  John Geanakoplos on the leverage cycle, Sethi (2010).


Monetary and fiscal policy

Slide deck 1:  A simple OLG model.
Slide deck 2:  Commodity money.

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 1:  A model of U.S. monetary policy before and after the Great Recession.
Reading 2:  A model to help think about the conduct of monetary policy.

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 12: Volcker versus Yellen. (Supplementary reading: Understanding lowflation).

Reading 13: Interpreting the Reagan deficits, Sargent (1986).

Reading 14: The interaction between monetary and fiscal policy, Canzeroni, Cumby and Diba (2011).



Secular stagnation

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.


Selected readings

Warren Buffet on gold Ivanhoff Apr 2013.

Statistics and causal inference, Holland (1986).

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.

Global Imbalances
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.

Monetary History
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.
Bailout tracker.
Higher order expectations Shin 2005.

Some music to help you relax while you’re studying.