Download MIDLANDS STATE UNIVERSITY FACULTY OF COMMERCE

MIDLANDS STATE UNIVERSITY
FACULTY OF COMMERCE
DEPARTMENT OF BANKING & FINANCE
Course Outline: Monetary Economics II (MECO806)
Lecturer: Mr N. Nkomazana, Msc.
Phone: 0774 382 517 AND Email: [email protected]
COURSE OBJECTIVES:
ASSESSMENT
Coursework will constitute 30% of the final mark, with the final examination at the end of the
semester contributing the remaining 70%. Coursework will be made up of one individual assignment
and one class presentation (also individual). The course contents are as follows:
COURSE CONTENT
1. THE MONEY SUPPLY PROCESS
 Major participants in the determination of money supply
 Money supply identities
 A behavioral theory of the money supply
 The general money supply function and its empirical estimates
2. THE CENTRAL BANK: GOALS, TOOLS AND GUIDES FOR MONETARY POLICY
 The historic goals of central banks
 The evolution of the goals of central banks
 Levels of objectives
 The tools or instruments of monetary policy
 The competitive supply of money and efficiency and competition in the financial sector
 Administered interest rates and economic performance
 The regulation of banks relative to other financial intermediaries
 Currency boards
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3. THE CENTRAL BANK: TARGETS, CONFLICTS, INDEPENDENCE AND TIME
CONSISTENCY OF POLICIES
 Guides to monetary policy
 The guides of monetary policy
 Monetary and reserve aggregates as targets
 Interest rates as targets
 The price level or the rate of inflation as a target
 Nominal national income as a target
 Targeting the deviation of output from full employment
 Choosing among multiple goals
 Conflict among policy makers: empirical illustrations
 The independence of the central bank
 Time consistent policies versus discretionary ones and policy rules
 The credibility of monetary policy
4. THE OVERLAPPING GENERATIONS MODEL OF FIAT MONEY
 The basic OLG model
 The basic OLG model with a growing population
 Welfare in the basic OLG model
 The basic OLG model with a growing money supply and with a growing population
 The inefficiency of monetary expansion
 The inefficiency of price stability with monetary expansion and population growth
 Money demand in the OLG model with a positive rate of time preference
5. THE OLG MODEL: SEIGNORAGE, BONDS AND THE NEUTRALITY OF FIAT
MONEY
 The seignorage from fiat money and its uses
 Fiat money and bonds
 The Wallace-Modigliani-Miller theorem on open market operations
 The neutrality and non-neutrality of money in OLG models
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6. THE OLG MODEL OF MONEY: MAKING IT MORE REALISTIC
 A T-period cash-in-advance money-Bonds model
 An extended OLG model with transactions time for consumers and the indirect MIUF
 An extended OLG model for firms with money indirectly in the production function
(MIPF)
 The basic OLG model with the indirect MIUF and MIPF
MAIN TEXTBOOKS
Lewis M. K. and Mizen P. D. (2000) Monetary Economics. 1st edition. Oxford University
Press, New York: USA.
Handa, J. (2000) Monetary Economics. 1st edition. Routledge, New York: USA
INDIVIDUAL ASSIGNMENT QUESTION
QUESTION ONE (BEATRICE MASHORA)
Using appropriate illustrations outline what happens to the monetary base and the money supply if:
a) The central bank lowers the discount rate.
b) The central bank lowers the discount rate and also sells bonds to the public.
c) The central bank forbids overnight loans and eliminates the overnight loan market.
QUESTION TWO (VICTORIA MOYO)
Show what happens to money supply if:
a)
b)
c)
d)
e)
The economy enters a boom and interest rates rise
The underground economy with illegal holdings of currency is eliminated.
Firms give a significant discount for payment in cash rather than credit cards
Credit cards are replaced totally by debit cards
Both credit and debit cards are replaced by smart cards
QUESTION THREE (ERIA VENGESAI)
a) Does the central bank have tight control over the money supply?
b) What are the factors that weaken the link between the central bank policies and the changes in
the money supply?
QUESTION FOUR (ROBSON MANDISHEKWA)
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a) Why has the use of changes in reserve requirements as a tool of monetary policy been largely
abandoned in western economies?
b) What were the reasons for the virtual elimination of reserve requirements?
c) Is there a case for their revival and usage as a tool for monetary policy in the context of
Zimbabwe and other LDCs?
QUESTION FIVE (SHADRECK MATINDIKE)
“If the monetary authority wants to control inflation, it should directly target the rate of inflation” “If
the monetary authority wants to control inflation, it should use the rate of inflation as the only goal”
Discuss
QUESTION SIX (FRANCIS MHERE)
Note that recessions seem to be caused by either reductions in the aggregate demand or aggregate
supply or by the two acting in concert.
a) What targets should the central bank adopt?
b) Would the optimal choice of the target be the same for reductions in aggregate demand as for
the reductions in aggregate supply?
QUESTION SEVEN (CANICIO DZINGIRAI)
The time consistency of policy requires the specification of a policy plan for the future, say for the
next five years and sticking to it. Under what conditions – and shocks – is this a desirable policy?
When is it not desirable? Discuss
QUESTION EIGHT (MWALE BWANARI)
a) What is the relationship between rational expectations and the credibility of monetary policy?
b) What do they imply for the relevance of credibility to the success of an anti-inflation
programme?
c) What do they imply for the choice between a gradualist versus a cold turkey approach to
fighting inflation? Discuss
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