Download ECON 611-001 Money and Central Banking

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ECON. 611
MONEY/CENTRAL BANKING
Michael G. Bradley
Office: 111 Econ
Office Hours: 10-12:00 MWF
Phone : 492-8268 or by appointment
University of Colorado
Fall 1983
This course is planned as an integrated sequence with Economics 613 so as to provide
together a comprehensive survey of topics and issues in monetary theory. Grades
exercises will include two hour exams, referee reports, a final exam and a term paper
not to exceed 15 typed, double-spaced pages. The paper is due no later than December
9, 1983 . Paper topics are to be chosen in consultation with the instructor no later
than November 11th.
Course Grade Weights :
1st exam
2nd exam
--Highest two receive 20% each
Referee reports
Final--40%
Paper--20%
A basic knowledge of Money and Banking, Macroeconomics, Microeconomics and Econometrics
is assumed. You may want to consult the following optional texts:
Johnson, I.e. and Roberts, W.W., Money and Banking: A Market Oriented Approach,
(The Dryden Press, 1982).
Branson, W.H . , Macroeconomic Theory and Policy, 2nd Ed. (Harper and Row, 1979).
Silberberg, E., The Structure of Economics: A Mathematical Analysis,
(McGraw-Hill, New York, 1978).
Johnston, J., Econometric Methods, 2nd Ed., (McGraw-Hill, 1972).
Several general surveys of issues in monetary theory are available. These may be read
at your own initiative. These surveys are:
Brainard, W. and Cooper, R., "Empirical Monetary Macroeconomics: What Have We Learned
in the Last 25 Years?" AER, May 1975, pp. 167-175 and discussion by M. Friedman
and F. Modigliani, pp . 176-181.
Brunner, K., "A Survey of Selected Issues in Monetary Theory," in Schweizerische
Zeitschrift for Volkswirtschaft und Statistik, 1971, pp . 1-146.
Fischer, S., "Recent Developm~nts in Monetary Theory," AER, May 1975, pp. 157- 166.
Johnson, H., Essays in Monetary Economics, 196 7, Ch . 1, "Monetary Theory and Policy, "
Ch. 2, "Recent Developments in Monetary Theory".
,Johnson, H. Further Essays in Monetary Economics, 1973, Ch. 1, "Recent Developments
in Monetary Theory--A Commentary".
Meltzer, A., "Money, Intermediation and Growth," Journal of Economic Literature,
March 1969.
Smith, w., "On Some Current Issues in Monetary Economics: An Interpretation," Journal
of Economic Literature, September 1970.
The following text has been ordered as a general reference for this course:
Harris, L., Monetary Theory, 1981, (McGraw- Hill) .
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1.
-2Tne Definition of Money and Why Do We Care About Money Demand and Supply?
Introduction to the Issues
Holbrook, R., "The Interest Rate, the Price Level, and Aggregate Output,"
in Readings in Monetary Theory, Income and Stabilization Policy (Smith, w.
and Teigen, R. (eds.)) 3rd Ed., (Irwin) 1974.
Poole, W., "A Theory of Monetary Policy Under Uncertainty," in Smith and Teigen.
Laidler, D. , The Demand for Money, 2nd Ed., 1977.
Friedman, M. and Schwartz, A., Monetary Statistics in the United States:
Estimates, Sources, Methods, NBER, New York, 1970, pp. 89-146.
Laidler, D., "The Definition of Money: Theoretical and Empirical Problems,"
JMCB, August 1969, pp. 508-34.
Mason, W., "The Empirical Definition of Money: A Critique," Economic Inquiry,
December 1976, pp. 525-38.
"A Proposal for Redefining the Monetary Aggregates," Fed Bulletin, January 1979,
PP• 13-42.
Hester, D. , "On the Adequacy of Policy Instruments and Information When the
Meaning of Money is Changing," AER. May 1982, pp. 40-44.
2. The Demand for Money--Theory
Laidler, D., The Demand for Money, Chs. 3-6.
Baumol, w., "The Transaction Demand for Money--An Inventory Theoretic Approach,"
QJE, November 1952.
Tobin, J., "Liquidity Preference as Behavior Towards Risk," R. E. STUD, February
1958.
Friedman, M., "The Quantity Theory of Money--A Restatement," in M. Friedman (ed . )
Studies in the Quantity Theory of Money, pp. 8-21.
Boorman, J. and Havrilesdy, T. , Money Supply, Money Demand and Macroeconomic
Models, pp. 127-184.
Sprenkle, c., "The Uselessness of Transactions Demand Models," J. of Finance,
December 1969, pp. 835-847.
Orr, D., "A Note of the Uselessness of Transactions Demand Models: Comment, ..
J. of Finance, December 1974, pp. 1565-72 .
Spenkle, C., "The Uselessness of
J . of Finance, March 1977.
Transactions Demand Models: Comment,"
Tobin, J. "The Interest Elasticity of Transactions Demand for Cash, .. R.E . Stat,
August 1956, pp. 241-47.
Whalen, E., "A Rationalization of the Precautionary Demand for Cash," QJE .
May 1966, PP• 314-24.
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-3Sprenkle, c., and Miller, M., "The Precautionary Demand for Narrow and Broad
Money," Economica , May 1980.
Plessner, Y. and Reid, J., "The Precautionary Demand for Money: A Rigorous
Foundation," JME, July 1980.
Hodgman, D., Commercial Bank Loan and Investment Policy, Ch . 10, pp. 97-112.
Harris--Chs . 9-11, pp. 175-225.
Goldman, S. M., "The Demand for Certificate Accounts," IBER/CRMS Working Paper No.
247, U.C. Berkeley, 1977 .
Goldman, S.M., "Portfolio Choice and Flexibility," JME, November 1975.
Goldman, S.M., "Flexibility and the Demand for Money," JET, October 1974, p. 203.
Tsiang, S.C., "The Precautionary Demand for Money: An Inventory Theoretical
Analysis," JPE, 77, 1969, p. 99.
Brainard, W.C. and Tobin, J., "Pitfalls in Financial Model Building," AER, 1968 .
Sharpe, W., "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions
of Risk," J. of Finance, 19, September 1964.
Mossin, J., "Equilibrium in a Capital Asset Market," Econometrica, 34, 1966.
Lintner, J . , "The Valuation of Risk Assets and the Selection of Risky Investments
in Stock Portfolio and Capital Budgets," R. E. Stat, 47, 1965.
Bradley, M.G., " Inflation and Consumer Asset Choice," Ph.D. dissertation,
University of Illinois, 1982.
Bradley, M.G. and Lehman, D.E., "Instrument-dependent Randomness and Increases in
Risk," University of Colorado working paper, No. 169.
Akerlof, G., "The Short-Run Demand for Money: A New Look at an Old Problem,"
AER, May 1982, PP• 35-39.
Smirlock, M., "Inflation Uncertainty and the Demand for Money," Economic Inquiry,
July 1982, PP• 355-64.
Klein, B. , "The Demand for Quality-Adjusted Cash Balances: Price Uncertainty in
the U.S. Demand for Money Function," JPE, 1977, pp. 691-715.
Boonekamp, C.F . J., "Inflation, Hedging, and the Demand for Money," AER, December
1978, PP• 821-33.
Hamburger, M.J., "The Demand for Financial Assets," Econometrica, January 1968,
pp. 97-118 .
Sprenkle, C.M. , "On the Precautionary Demand for Assets," Mimeo University of
Illinois, 1983.
-4Leach, J . , "A Comment on the Foundations of the Precautionary Demand for Money,"
JME, 1983.
Kopcke, R.W. , "U .s. Household Sector Demand for Liquid Financial Assets,
1959-1970 , " JME, 1977, pp . 409-41.
Selden, L. , "A New Approach to the Joint Consumption-Portfolio Problem," JMCB,
1980, PP • 429-47.
Chitre,
3.
v.,
"Wealth Effect on the Demand for Money," JPE , 1975, pp . 615-31.
Demand for Money- -Empirical Results
Laidler, D. , The Demand for Money , Chs . 7- 9.
Goldfeld, S.M . , "The Demand for Money Revisited," BPEA , 1973-3, pp . 577-646.
Friedman, M., "The Demand for Money : Some Theoretical and Empirical Results, "
JPE, August 1959 .
Meltzer, A. , "The Demand for Money: The Evidence from the Time Series," JPE,
June 1963 .
Feige, E. and Pearce, D., "The Substitutability of Money and Near-Monies: A Survey
of the Time-Series Evidence," JEL, June 1977, pp. 439-69.
Goldfeld , S.M., "The Case of the Missing Money," BPEA, 1976-3, pp . 683-139.
Hamburger , M. , "Behavior of the Money Stock: Is There a Puzzle?, " JME, Vol. 3 , No .
July 1977, PP• 265-88.
Poole, w., "The Monetary Deceleration: What Does It Mean and Why is It Happening?,"
BPEA, 1979, No . , pp . 231-40 .
Bradley--handout.
Garcia, G. and Pak, S. , "Some Clues in the Case of the Missing Money,"
AER, May 1979 .
Laidler , D., "Some Evidence on the Demand for Money, " JPE, February 1966.
Laidler, D. , "The Rate of Interest and the Demand for Money," JPE , December 1966 .
Cooley, T. and LeRoy, s. , "Identifica tion and Estimation of Money Demand, " AER ,
December 1981, pp . 825-44.
Judd, J . and Scadding, J., "The Search for a Stable Money Demand Function: A Survey
of the Post-1973 Literature , " JEL , September 1982 , pp . 993- 1023.
Hamburger, M., "The Demand for Money by Households , Money Substitutes and Monetary
Policy , " JPE, December 1966 .
Wilbratts, B., "Some Essential Differences in the Demand for Money by Households
and by Firms, J . of Finance, September 1975 .
Frazer , w. , "The Financial Structure of Manufacturing Corporations and the
Demand for Money," JPE, April 1964.
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-5Chetty, V., "On Measuring the Nearness of Near-Moneys," AER, June 1969,
PP• 270-81.
Harris--Chapter 20, pp. 397-409 and 412-414.
4.
The Supply of Money--Theory
Jordan, J., "Elements of Money Stock Determination," Fed Review (St. Louis),
October 1969, reprinted in Havrilesky and Boorman.
Brunner, K . , "A Schema for the Supply Theory of Money,' IER, January 1961, 2,
PP• 79-109.
Tobin, J., "Commercial Banks as Creators of Money," Essays in Economics, Vol. 1,
Ch. 16. Also in Smith and Teigen.
Burger, A. , The Money Supply Process, Wadsworth, 1971. Ch. 8-9.
Modigliani, F. and Rasche, R. and Cooper, J.P., "Central Bank Policy, the Money
Supply and the Short-Term Rate of Interest," JMCB, May 1970.
Tobin, J. and Brainard, w.c., "Financial Intermediaries and the Effectiveness of
Monetary Control," AER, May 1963, pp. 383-400 .
Hamburger, M., "Indicators of Monetary Policy: The Arguments and the Evidence," AER
May 1970, PP• 32-39.
Hodgeman, D., National Monetary Policies and International Monetary Cooperation,
Ch. 8, "The Effectiveness of Monetary Policy: A Comparative Analysis," pp. 197- 223.
Starleaf, D., "Nonmember Banks and Monetary Control," J. of Finance, September 1975
LeRoy, s. and Lindsay, D., "Determining the Monetary Instrument: A Diagrammatic
Exposition," AER, December 1978, pp. 929-34.
Mccallum, B., "Price Level Determinacy with an Interest rate Policy Rule and
Rational Expectations," JME, November 1981, pp. 319-30.
Wood, J, "Financial Intermediaries and Monetary Control: An Example,"
JME, September 1981, pp. 145-64.
Cagan, P., "Economic Developments and the Erosion of Monetary Controls," in
w. Fellner (ed . ), Contemporary Economic Problems, AEI, 1979, pp. 117-51.
Hester, D., "Innovations and Monetary Control," BPEA, No. 1, 1981, pp. 141-83.
Farley, D. and Simpson, T., "Graduated Reserve Requirements and Monetary Control, "
J. of Finance, September 1979.
Davis, R., "Implementing Open Market Policy with Monetary Aggregate Objective, "
in Havrilesky and Boorman, Current Issues in Monetary Theory and Policy, pp.
444-65.
Havrilesky, T., Sapp, R., and Schweitzer, R. , "Tests of the Federal Reserve's
Reaction to the State of the Economy, 1964-74," in Havrilesky and Boorman, pp. 466-83 .
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-6Sherman, L., Stanhouse, B., and Sprenkle,
the Money Supply," JMCB, November 1979.
c.,
"Reserve Requirements and Control of
Dewald, w., "Free Reserves, Total Reserves, and Monetary Control," JPE,
April 1963.
Scott, I., "The Availability Doctrine," R.E. Stud, October 1957.
Kaminow, I., "Required Reserve Ratios, Policy Instruments, and Money Stock
Control, JME, October 1977.
Saving, T., "Money Supply Theory with Competitively Determined Deposit Rates and
Activity Changes," JCMB, February 1978.
Knobel, A., "The Demand for Reserves by Commercial Banks," JCMB, February 1977.
Cagan, P., "Why Do We Use Money in Open Market Operations," JPE, February 1958,
pp. 34-46 .
Guttentag, J., "The Strategy of Open Market Operations," QJE, February 1966,
PP• 1-30 .
5.
Supply of Money--Empirical Results
Kopecky, K., "Nonmember Banks and Empirical Measures of the Variability of
Reserves and Money," J. of Finance, March 1978.
Fand, D., "Some Implications of Money Supply Analysis," AER, May 1967, pp. 380-400
and Meltzer's di s cussion, pp. 427-28, and Kane's discussion, pp. 432-33.
Rasche, R.H., "A Review of Empirical Studies of the Money Supply Mechanism,"
Fed Review (St. Louis), July 1972, reprinted in Havrilesky and Boorman.
Meltzer, A.H., "Money Supply Revisited: A Review Article," JPE, April 1967,
pp. 169-82.
6.
Money and Money Substitutes
Tobin, J. and Brainard w., "Financial Intermediaries and the Effectiveness of
Monetary Controls," AER, May 1963, pp. 383-400.
Yeager, L., "Essential Properties of the Meeium of Exchange," Kyklos, Vol. 21, No . I
pp. 45-68; reprinted in Clower (ed.), Monetary Theory, Ch. 3, pp. 37-60 (Penguin
Mod Economic readings).
Harris--Ch. 1.
Chetty, V., "On Measuring the Nearness of Near-Moneys," AER, June 1969, pp. 270-81
Laidler, D., "The Definition of Money," JCMB, August 1969, pp. 508-25.
7.
Money and Monetary Policy in the Closed Economy
Poole, w. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic
Macro Model," QJE, May 1970.
Friedman, B.M., "Targets, Instruments, and Indicators of Monetary Policy,••
JME, 1975.
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-7Freedman, c . , "Monetary Aggregates as Targets: Some Theoretical Aspects,"
Technical Report 27, Bank of Canada , 1981.
Jonson, P.D. and Trevor, R.G., "Monetary Rules: A Preliminary Analysis,"
Economic Record, 1981.
Tinbergen, J., On the Theory of Economic Policy, Amsterdam, 1952, pp. 1-42.
Theil, H., Optimal Decision Rules for Government and Industry, Amesterdam, 1964.
Brainard,
w. ,
"Uncertainty and the Effectiveness of Policy, " AER, May 1967, pp . 411
Chow, G., "Problems of Economic Policy from the Viewpoint of Optimal Control,"
AER, December 1973, pp . 825-37.
Sargent, T.J . and Wallace, N., "Rational Expectations and the Theory of Economic
Policy," JME, 1976.
Muth, J.F., "Rational Expectations and the Theory of Price Movements," Econometrica
July 1961, pp. 315-35.
Barro, R.J., "Rational Expectations and the Role of Monetary Policy," JME, 1976.
Sargent, T. and Wallace, N., "Rational Expectations, the Optimal Monetary Instrument
and the Optimal Money Supply Role," JPE, April 1975.
Santomero, A. and Seater, J., " the Inflation-Unemployment Trade-Off: A Critique
of the Literature," JEL, June 1978, pp. 499-544.
Maddock, R. and Carter, M., "A Child's Guide to Rational Expectations, " JEL,
20, (1982).
Harris--Ch. 21, pp. 455-63 .
Friedman, M., "Monetary Policy in Theory and Practi ce," JMCB, 1982.
Tobin, J., "Money, Capital and Other Stores of Value," AER, May 1961, pp. 26-37 .
To bin, J . , "A General Equilibrium Approach to Monetary Theory," JMCB,
February 1959, pp. 15-29.
Tobin, J., "A Dynamic Aggregative Model," JPE, April 1955, pp. 103-115.
Tobin, J . , "An Essay on Principles of Debt Management, in commission on Money
and Credit," Fiscal and Debt Management Policies, pp. 143-162 only.
Modigliani, A., "The Monetary Mechansim and Its Interaction with Real Phenomena , "
R.E. Stat, February 1963.
Friedman, M., "A Theoretical Framework for Monetary Analysis, JPE,
March/April 1970.
"Symposium on Friedman's Theoretical Framework," articles by Brewer, Meltzer,
Tobin, Davidson, Patinkin and Friedman, JPE, September/October 1972.
Tobin, J. , "Money and Income: Post Hoc Ergo Propter Hoc?," QJE, May 1970.
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-8Taylor, D., "A Simple Model of Monetary Dynami cs," JMCB, 1977 .
Carlson, K.M., "Does the St. Louis Equation Now be lieve in Fiscal Policy?,"
Fed Review (St. Louis), 1978.
7.
Money and Monetary Policy in the Open Economy
Dornbusch, R., Open-Economy Macroeconomics, Ch. 9-12, 1980, (Basic Books) .
Mundell, R., "The Appropriate Use of Monetary and Fiscal Policy for Internal
and External Stability," IMF Staff Papers, 1962 .
Boyer, R. S., "Sterilization and the Monetary Approach to the Balance of Payments
Analysis," JME, 1979.
Dornbusch, R., "PPP Exchange-Rate Rules and Macroeconomic Stability,"
JPE, 1982.
Boyer, R. S ., "Optimal Foreign Exchange Market Intervention," JPE, 1978.
Mundell, R., "Capital Mobility and Stabilization Policy Under Fixed and Flexible
Exchange Rates," Canadian Journal of Economics, 1963.
Mussa, M., "The Exchange Rate, Balance of Payments, and Monetary and Fiscal
Policy Under Controlled Floating," Scandavian Journal of Economics, 1976 .
Cooper, R., "Monetary Theory and Policy in an Open economy," Scandavian Journal
of Economics, 1976.
Branson, W., "The Dual Roles of the Government Budget and the Balance of Payments
in the Movement from Short Run to Long Run Equilibrium," QJE, August 1976 .
Branson, W., Macroeconomic Theory and Policy, 2nd ed . (Harper and Row 1979), Ch .IS
15 .
Johnson, H., "The Monetary Approach to Balance of Payments Theory, " in Johnson's
Further Essays in Monetary Economics, pp. 229-49.
Whitman, M., "Global Monetarism and the Monetary Approach to the Balance of
Payments, BPEA, No. 3 , 1975, pp. 491-555 (including discussion by Branson, Fand
and Salant_)___
8.
Eurodollar Markets
McKinnon, I., "The Eurocurrency Market," Essays in International Finance,
(Princeton University) 1977 .
Freedman, C., "A Model of the Eurodollar Market," JME, 1977 .
9.
Common Currency Areas, Monetary Integration and Macroeconomic Policy Coordination
Mundell, R., "A Theory of Optimum Currency Areas," AER, September 1961, pp. 657- 65 .
Grubel, H.G., "The Theory of Optimum Currency Areas," CJE, 1970.
Fisher, S., "Seigniorage and the Case for a National Money," JPE, 1982.
McKinnon, R., "Optimum Currency Areas," AER, September 1963, pp. 717-25.
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-9Swoboda, A., "Policy Conflict, Inconsistent Goals, and the Coordination of Economic
Policies," in H. Johnson and A. Swoboda (eds.) The Economics of Common Currencies,
pp. 133-42.
Hodgman, D. , National Monetary Policies and International Monetary Cooperation,
Ch. 9, "European Monetary Integration".
Gorden, M. , "Monetary Integration," Essays in International Finance, (Princeton
University) 1972.
Aliber, R.Z., "Uncertainty, Currency Areas and the Exchange Rate System,"
Economica, November 1972.
10. Bank Behavior
Hodgman, D., "Credit Risk and Credit Rationing," QJE, May 1960, pp. 258-78.
Morrison, G., Liquidity Preferences of Commercial Banks, Ch. 1-4.
Orr and Mellon, W.G., "Stochastic Reserve Losses and Expansion of Bank Credit,"
AER, September 1961.
Porter, Richard, "A Model of Bank Portfolio Selection," Yale Economic Essays,
Fall 1961, pp. 323-59.
Kane, E., and Malkiel, Bl, "Bank Portfolio Allocation, Deposit Variability,
and the Availability Doctrine," QJE, February 1965, pp . 113-34.
Jaffe, D. and Modigliani, F. , "A Theory and Test of Credit Rationing," AER,
December 1969, pp . 850-72.
11. Interest Rate Theory
Meiselman, D., The Term Structure of Interest Rates.
Culbertson, J., "The Term Structure of Interest Rates," QJE, November 1957, pp .
485-517.
Friedman, M., "Monetary Factory Affecting the Level of Interest Rates," reprinted in
Havrilesky and Boorman, Current Issues in Monetary Theory and Policy.
Roll, R., "Interest Rates on Monetary Assets and Commodity Price Index Changes,"
J. of Finance, May 1972, pp. 251-77.
Friedman, B., "The Determination of Long-Term Interest Rates," in Havrilesky and
Boorman, Current Issues in Monetary Theory and Policy, pp. 379-401.
Harris--Ch. 17, pp. 322-45.
Sanders, G. The Term Structure of Interest Rates. Ph.D. dissertation, University of
Colorado, Boulder, 1983.