UNIVERSITY OF ILLINOIS
FALL 2013
ECON 564: Theory of Monetary Policy
Tuesday, Thursday: 3:00-4:40 pm, Room 119 DKH
Prof. Pedro Elosegui: elo@illinois.edu
Office hour: Tu 1-2 PM and by appointment.
Office: 205 DKH
Course Objectives. The purpose of this course is to introduce you to current theoretical and policy
problems in monetary economics and macro policy. The goal is to help you understand developed
financial systems and how the financial system is connected to the macroeconomy. We will learn some
basic finance and I will emphasize international aspects of the material whenever possible. We will
discuss recent events in financial markets, including the global financial crisis, recession and ongoing
Euro problems. We will analyze the role of Central Banks and monetary policy implementation. By the
end of this course, students should understand: what determines bond prices, equity prices, price
volatility, time value of money, financial regulation, and what can/should a Central Bank do.
Course Requirements and Evaluation Procedure. The course grade will be determined by your
performance on two mid-term examinations and a comprehensive final examination. In addition, there
will be homework to assist you in mastering the material. The homework will also be used to determine
final course grades for scores that fall “on the margin.” The exam dates are:
Mid-term Exam I: Thursday, October 10 (25 points)
Mid-term Exam II: Tuesday, November 21 (25 points)
Homeworks (6) (10 points)
Final Exam Dates: 7:00-10:00PM, Thursday, December 19 (40 points)
Note: Requests for re-graded exams must be handed in no later than one week after the exam is
returned.
Text & Readings: R. Glenn Hubbard and Anthony O'Brien, Money, Banking and the Financial System, 1st
edition, 2011, Pearson Prentice Hall Publishing, lecture notes, and web links (see urls below). The lecture
notes, homework and other material will be posted on the course website: http://compass.illinois.edu
Please follow current events, e.g. http://www.nytimes.com, http://www.economist.com, etc.
Other Issues. If you have any problems with the course, please let me know as soon as possible.
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Tentative Schedule
Session 1: August 27. Overview & Intro
READ: chap 1, 2
Session 2: August 29. Interest rates and rates of return
READ: chapter 3
HW 1: chapter 3, questions 1.8, 1.9, 1.10, 1.11, 1.12 on p. 81; 3.6, 3.7, 3.8, 3.9, 3.10 on p. 82-83; 4.7,
4.8 on p. 84; 5.3, 5.5, 5.6, 5.7 on p. 85; 6.5 on p. 86. Also, plot GDP, the civilian Unemployment rate
and the Monetary Base for the last 4 years. Use the data at:
http://www.richmondfed.org/research/national_economy/national_economic_indicators/index.cfm#ta
bview=tab3
Session 3: September 3. Determining Interest Rates
READ: read chapter 4
Session 4: September 5. The risk and term structure of interest rates
READ: chapter 5. HW1 due
HW2: Chapter 4, questions 3.3, 4.5 on pp. 120-121 chapter 5, questions 2.4, 2.5, 2.6, 2.11, 2.16 on
pp. 153-155.
Session 5: September 10. The risk and term structure of interest rates
READ: chapter 5.
Session 6: September 12. Financial market policy lecture: overview
READ: lecture note.
Session 7: September 17. The stock market, information and financial market efficiency
READ: chap 6 and lecture note. HW2 due
Session 8: September 19. Formal approach to Asset pricing, TSIR & efficient markets
READ: lecture note
Session 9: September 24. The market for foreign exchange
READ: chapter 8 HW3: Posted on Compass
Session 10: September 26. Transaction costs, asymmetric information & financial system structure
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READ: chapter 9.
Session 11. October 1. The economics of banking. Review and Problem Session. HW3 due.
READ: chapter 10
Session 12: October 3. Field Trip
Session 13. October 8. Review and Problem Session.
Session 14: October 10. Midterm Exam I (in class)
Session 15: October 15. Investment banks, mutual funds, hedge funds & the shadow banking system
READ: chapter 11. HW4: Posted on Compass
Session 16: October 17. Financial crises and financial regulation
READ: chapter 12.
Session 17. October 22. The FED and Central Banking
READ: chapter 13
Session 17: October 25. The FED's balance sheet and the money supply process
READ: chapter 14
Session 18: October 29. Framework for Financial and Monetary Statistics. Monetary policy. HW4 Due
READ: chapter 15. Monetary and Financial Statistics Manual (selected chapters). HW5 posted on
Compass
Session 19: October 31. Banking Industry Regulation and Banking in Three Countries
READ: Lecture notes
Session 20: November 5. The international financial system and monetary policy
READ: chapter 16
Session 21: November 7. The international financial system and monetary policy (continued) HW5 due
READ: chapter 16
Session 22: November 12. Review
Session 23: November 14. Exam II (in class)
Session 24: November 15. Policy lecture
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Thanksgiving Break: No Class Nov. 26 or 28
Session 25: December 3. "Chronic Sovereign Debt Crises in the Eurozone, 2010-12,: Arellano, Conesa,
Kehoe
READ: http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4877
Session 26: November 5. Euro Reforms
READ: Lecture Notes
Session 27: December 10: Monetary and Fiscal Policy, HW6 posted on Compass
Session 28: December 12. Inflation and Deflation. HW6 due
READ: Lecture Notes
Session 29: December 14: Course summary and review
Session 30: Final Exam. 7:00-10:00PM, Thursday, December 19
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