January 26, 2017
Central Banking: Theory and Policy
Econ 173a
Professor Browne
Mondays and Wednesdays: 2 p.m. – 3:20 p.m.
Office Hours: Before or after class; e-mail to arrange
E-mail: or
Course Overview
For the past 100 years, and in some cases longer, most countries have looked to central banks to protect their financial systems and moderate fluctuations in prices and output. As the recent financial crisis highlights, the record of central banks in this regard has been mixed. The purpose of this course is to provide an understanding of the purposes and functions of central banks and the challenges they confront. What is a central bank? What is it trying to do and how does it do? How have central banks’ activities changed over time – and why? Are central banks really necessary?
We will devote considerable attention to the actions of central banks’ in the 2007-2009 financial crisis and to current debates over the policies that central banks followed in its aftermath. We will consider the degree to which the crisis has changed thinking regarding central banks’ responsibilities and capabilities.
This is a writing intensive course and a large part of the evaluation is based on 9 short essay assignments. Students will be asked to revise two essays in response to comments received from the instructor and to resubmit these essays. Comments will address organization and writing style, as well as substantive issues.
Learning Goals and Outcomes
Among the topics we will address are the following:
What are the origins of banks and central banks?
What are the purposes and functions of central banks?
What does “independence” mean for a central bank?
How do central banks affect the banking system and the economy?
What tools do they use?
Is communication a policy tool?
What is the debate over rules versus discretion?
What rules might a central bank follow?
Should central banks have an inflation target?
How should we measure inflation?
Why is deflation worrisome?
Should central banks react to rising asset prices?
What does “lender of last resort” mean?
What is a “bank run”?
What is quantitative easing and why is it controversial?
What are the lessons of the 2007-9 financial crisis and the associated global recession?
How might central banks be different in the future?
At the end of the course, students should understand the goals and functions of central banks and the current policy debates surrounding them.
Course description
The course is a combination of seminar and lecture. The instructor will generally provide an overview of key issues and points of debate, with illustrations based on developments in the United States. However, students will contribute actively to the group learning experience by discussing what they learned from the assigned readings and by becoming “experts” on central banks they have selected.
Readings will be assigned for each class. Students are expected (a) to have read these materials in advance and (b) to talk about what they learned. Most weeks, students will prepare a short essay (2-4 pages single space) addressing the topic just covered. These short essays account for 60 percent of the grade for the course.
An important part of the course is learning about central banks in different countries. Each student will select a central bank to study. Students will become the “experts” on these banks and share their insights with the group in the general discussion. Many of the essays refer to the selected central banks. Towards the end of the semester, students will make 10-15 minute presentationson their central banks.
Pre-requisites
Students should have a practical understanding of intermediate macroeconomics, including the money supply process, as well as the basics of banking and financial markets.
Evaluation
Grades will be based on the short papers prepared each week, class participation and the presentation at the end of the course on their central bank.
Grading:
Short weekly papers60 percent
Class participation15 percent
Central bank presentation25 percent
The topics for the short essays and due dates are listed in the syllabus.
Issues to be covered in central bank presentations include but are not limited to the following:
Central bank history, governance, functions (especially any supervisory role), monetary policy objectives, monetary policy tools, exchange rate regime, how the country was affected by the 2007-9 crisis and how the central bank responded, current challenges and debates.
Dates for students’ presentations will be scheduled in February.
Class dates:WMWMWMWMW
January18232530
February168131527
March168131520222729
April35192426
May13
Short essays are assigned each Wednesday and are due the following Wednesday.
Presentations will take place April 19, 24 and 26.
Communications: Outside of class, most communications with the instructor will be by e-mail, not LATTE. Essays should be submitted by e-mail ( or ) and essay evaluations will be provided by e-mail.
Things you should do
Attend all classes.
Actively participate in discussions.
Complete all weekly assignments on time. If you have questions about assignments, ask in advance of submission.
Cite others’ work in your essays and presentation. (You may do so with footnotes or more informally, but do list your sources.)
Things you should not do
Quote others without attribution.
Skip an essay. Better a weak essay than no essay.
Collaborate on the weekly essays or final presentation, unless the instructor explicitly approves. However, you are encouraged to talk with your colleagues about the general issues and policy questions.
Disability: If you are a student with a documented disability on record at Brandeis University and wish to have a reasonable accommodation made for you in this class, please see me at your earliest opportunity.
Academic Integrity is central to the mission of educational excellence at Brandeis. You are expected to be familiar with and to follow the University’s policies on academic integrity (see Instances of alleged dishonesty will be forwarded to the Office of Campus Life for possible referral to the Student Judicial System. Potential sanctions include failure in the course and suspension from the University.
Success in this 4 credit hour course is based on the expectation that students will spend a minimum of 9 hours study time per week in preparation for class (readings, papers, discussion sections, preparation for exams, etc.)
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Course Materials and Readings
Most of the readings are on the web; links are provided in the Course Plan.
A recurring reference is
Bank for International Settlements (BIS), Issues in the Governance of Central Banks, A report from the Central Bank Governance Group, Chair: Guillermo Ortiz, May 2009
This will also be of value in preparing presentations on central banks.
BIS Annual Reports are another valuable resource.
Readings from two books have been assigned. These are relatively inexpensive.
Charles Goodhart, The Evolution of Central Banks. (1988MIT Press, Cambridge, MA)
Edwin M. Truman, Inflation Targeting in the world economy. (2003 Institute for International Economics, Washington, D.C.)
A useful but optional reference is
Howard Davies and David Green, Banking on the Future: The Fall and Rise of Central Banking. (2010 Princeton University Press) This is a very practical discussion of the implications of the recent economic and financial crisis for central banks.
There are a lot of readings, but many of the online readings are short and non-technical. In the case of long or more technical readings, the key sections are usually indicated. You may skip over models and regressions.
With respect to the books, particularly Goodhart, you should focus on the main points rather than read every word.
Optional readings are just that – optional. If interested, take a look.
The goal in all cases is to extract the main message, not to absorb all the details.
Course Plan
andAssociated Readings
January 18- Organizational Meeting
Introductions. Discuss course format and what is expected of students (readings, papers, class participation, presentations).
Assignment: For next class, review your former macro text on money multiplier
OR look at Schwartz, Anna J. “Money Supply,” Library of Economics and Liberty,
For Jan 25 pick a central bank (and your 2nd and 3rd choices) that you will study and about which you will become the class expert. In April, students will give presentations on their central banks.
January 23 & 25 – History of Money and Banking
Schwartz, Anna J. “Money Supply,” Library of Economics and Liberty,
Bordo, Michael David, “The Classical Gold Standard: Some Lessons for Today,” Federal Reserve Bank of St. Louis, May 1981
or
theshorter version inBordo, Michael D., “Gold Standard,” Library of Economics and Liberty,
Bernanke, Ben S. “Money, Gold, and the Great Depression,” Remarks, March 2, 2004. and
“Chapter 1. The Macroeconomics of the Great Depression,” Essays on the Great Depression, Princeton University Press
Norman,Ben, Rachel Shaw and George Speight, “The history of interbank settlement arrangements: exploring central banks’ role in the payment system, Bank of England Working Paper No. 412 June 2011
Skim pages 3-16. Read balance for next week.
Dolan, Ed, “Whatever Became of the Money Multiplier,” Ed Dolan’s Econ Blog
Explains criticisms of the money multiplier.
Optional: Officer, Lawrence H., “Gold Standard,” EH.net.
Detailed information about the workings of the gold standard.
Assignment: Write a short paper that briefly summarizes how the Gold Standard worked in the Classical Era (1880-1914) and discussesthe pros and cons of the gold standard compared to the pros and cons of a fiat money system.
Short means 2-4 single-space pages. Due Feb 1.
January 30 & February 1– History and Functions of Central Banks
The BIS material is the most important; Bordo is short and interesting. Look at DincerEichengreen’s rankings of independence.
Bank for International Settlements (BIS), Issues in the Governance of Central Banks, A report from the Central Bank Governance Group, Chair: Guillermo Ortiz, May 2009
Chapter 1, pp. 5-16. (Note definition in introduction.) Skim.
Chapter 2, esp. pp. 18-20 and 28-37. Skim the rest.
Chapter 6, pp. 103-105. Note the differences in the assets held by different central banks.
Norman,Ben, Rachel Shaw and George Speight, “The history of interbank settlement arrangements: exploring central banks’ role in the payment system,” Bank of England Working Paper No. 412 June 2011
Read Section 4 (p.19) and Conclusions.
Bordo,Michael, “A Brief History of Central Banks”, Federal Reserve Bank of Cleveland
Goodhart, Charles, The Evolution of Central Banks, Chapter 1
For rankings of central bank independence and transparency, see
Crowe, Christopher and Ellen E. Meade, “Central bank independence and transparency: Not just cheap talk,” VOX, July 27, 2008
and
Dincer, N. Nergiz and Barry Eichengreen “Central Bank Transparency and Independence: Updates and New Measures,” International Journal of Central Banking, March 2014, Tables 1 and 8.
Assignment: Write a short paper (about 4 pages single space) describing your central bank: when created, why created, primary functions, and the degree to which it is independent.Explain your reasoning about your central bank’s independence.
On your central bank’s balance sheet, what are the most important asset categories?What are the most important liabilities? Have the size and composition of the balance sheet changed substantially since before the financial crisis (2006 or 2007)? A summary table may be helpful in showing the most important assets and liabilities and highlighting major changes. Focus on the big picture. Due Feb 8.
February 68 – Monetary Policy (Objectives and Tools)
Ortiz, Issues in Governance,Chapter 2, esp. pp.18-25,28-33 and Chapter 4, pp.77-78 and 85-90
Meyer, Laurence H., “Inflation Targets and Inflation Targeting,”
Pages 1-4 are relevant to Monetary Policy Objectives; balance to Rules vs. Discretion.
Keister, Todd, Antoine Martin and James McAndrews, “Divorcing Money from Monetary Policy” Economic Policy Review, September 2008
Describes open market operations and how they change if the central bank pays interest on reserves. Be sure to look at Section 2 (pages 43-45) and Exhibit 1.
OR
Clews, Roger, Chris Salmon and Olaf Weeken, “The Bank’s money market framework,” Bank of England Quarterly Bulletin Money Market Articles, 2010Q4
Both discuss the market for reserves, the Keister article from the Fed’s perspective and the Clews article from the view of the BoE. Read one.
BIS Communication of monetary policy decisions by central banks: What is revealed and why. BIS Papers No. 47, May 2009.
For transparency rankings look at table 1 in Dincer, Nergiz and Barry Eichengreen, “Central Bank Transparency and Independence: Updates and New Measures, International Journal of Central Banking, March 2014
Optional: Hoover, Kevin D. “Phillips Curve,” Library of Economics and Liberty,
Short review of the Phillips curve.
Assignment: Write a short essay summarizing your central bank’s monetary policy objectives and key tools for implementing monetary policy. What is the overall monetary policy objective? If multiple objectives, are they prioritized? Are there specific targets? How is policy implemented? Does your bank engage in open market operations (if so, what does it buy/sell) or rely on other tools? Assess your bank’s transparency.
(If your bank is an inflation targeting bank, you should look at Gill Hammond in the next topic’s readings.)Due Feb 15.
The instructor will provide comments on this paper and students are expected to make revisions and re-submit, responding to the comments (by March 29.)
February 13& 15– Monetary Policy (Rules vs. Discretion)
Hammond provides a good summary of inflation targeting and information on 27 central banks using this approach.
Buol, Jason L. and Mark D. Vaughan, “Rules vs. Discretion: The Wrong Choice could Open the Floodgates, The Regional Economist, Federal Reserve Bank of St. Louis. Conceptual discussion of case for rules.
Jevcak, Anton, “Monetary policy frameworks: gradual implementation of steadily evolving theory,” ECFIN Economic Brief, Issue 29, January 2014.
Ec.europa.eu/economy_finance/publications/economic_briefs/2014/pdf/eb29_en.pdf
First five pages (up to response to the 2008/09 crisis.)
Taylor, John “Discretion versus Policy Rules in Practice” in Carnegie-Rochester Series on Public Policy, December 1993
Influential article. “Taylor rule” is used widely in evaluating monetary policy.Rule is on p.202.
Inflation targeting
Meyer, Laurence H., “Inflation Targets and Inflation Targeting,”
Truman, Edwin M., Inflation Targeting in the World Economy. Chapters 1 through 3. Skip the regression analysis.
Hammond, Gill, State of the art of inflation targeting – 2012, Centre for Central Banking Studies, Bank of England
http:
Summarizes key features of inflation targeting; describes how individual countries implement.
Optional (if interested in Africa): Masson, Paul, “Anchors for Monetary Policy” in Central Banks and the Challenge of Development discusses anchors, particularly inflation targeting, for African countries on pp. 89-104.
Optional (if interested in Latin America): Mishkin, Frederic S., “Can Inflation Targeting Work in Emerging Market Countries?” Festschrift in Honor of Guillermo A. Calvo April 15-16 2004.
Exchange rates
Obstfeld, Maurice and Kenneth Rogoff, “The Mirage of Fixed Exchange Rates”
Why exchange rates are not a good anchor today. Skim.
Assignment: Write a short assessment of the advantages and disadvantages of an inflation-targeting regime in general and for your central bank in particular. If your bank does not use an inflation-targeting approach, why not? Should it? If it does, is performance satisfactory or would another approach be superior?Due Mar 1.
Note that the next assignment focuses on the importance of price stability and on inflation measures.
February 27March 1 - Inflation
Hellerstein, Rebecca,“The Impact of Inflation” Regional Review
Short readable summary.
Shiller, Robert J., “Why Do People Dislike Inflation?”
Survey of public attitudes towards inflation.Skim. Note strength of opinions about inflation and differences between public and economists.
Blanchflower, David, “Forget inflation – what hurts the most is unemployment,” The Independent, Tuesday, April 2, 2013
Bullard James, “Measuring Inflation: the Core is Rotten” Speech, May 18, 2011 Arguments for headline vs. core inflation.
BernankeBen, “Deflation:Making sure “it” doesn’t happen.” Speech, November 2002
Famous speech. Foreshadows events in 2007- crisis.
Optional: Anwar, Sarah and Iyanatul Islam, “Should Developing Countries Target Low, Single Digit Inflation to Promote Growth and Employment?” International Labor Organization Employment Working Paper No. 87, August 5, 2011
Focus on the summary of the literature on pages 8 and 9.
Optional:Cechetti and Moreno papers in BIS, Monetary and Economic Department, “ Monetary policy and the measurement of inflation: prices, wages and expectations,” BIS Papers No. 49, December 2009
The Cecchetti paper provides an overview of issues for developed as well as emerging market economies. The Moreno paper has lots of data on EMEs and may be useful for your presentation if you have one of these central banks.
Asset prices
Bernanke, Ben and Mark Gertler “ Monetary Policy and Asset Price Volatility,”
Influential paper defining mainstream academic thinking. Skip model. Focus on pp.77-86, especially 78-79.
Mishkin, Frederic, “How should we respond to asset price bubbles?” Speech, May 15, 2008.
“Should or can central banks target asset prices?” The International EconomyFall 2009
Collection of opinions from academics, business economists and business journalists. Skim.
Assignment: Write a short paper addressing the following issues. Why do banks care about price stability? Briefly summarize the arguments for and against using headline and core inflation as inflation targets. Which measure of inflation does your central bank emphasize? How (if at all) does your central bank respond to supply shocks, such as a large change in food or energy prices? Due Mar 8.
March 68 – Lender of Last Resort; Central Banks as Financial Supervisors
Be sure to read the articles by Humphrey and the selections from the BIS Re-thinking the lender of last resort.
Humphrey, Thomas “Lender of Last Resort: the Concept in History” Federal Reserve Bank of Richmond Economic Review