December 28, 2015
Central Banking: Theory and Policy
Econ 173a
Professor Browne
Tuesdays and Fridays: 11 a.m. – 12:20 p.m.
Office Hours: Before or after class; e-mail to arrange
E-mail: lebrowne@brandeis.edu or lynnelainebrowne@gmail.com
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 the 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?
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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-minute presentations on 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 papers
Class participation
Central bank presentation
60 percent
15 percent
25 percent
The topics for the short essays and due dates are listed in the syllabus.
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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:
January
February
March
April
T
2
1
F
15
5
4
1
T
19
9
8
5
F
22
12
11
8
T
26
F
29
15
12
18
15
T
F
23
22
19
26
T
29
21(Th)
Short essays are assigned each Friday and are due the following Friday.
Presentations will take place April 5, 8, 12 and 15.
Communications: Outside of class, most communications with the instructor will
be by e-mail, not LATTE. Essays should be submitted by e-mail
(lebrowne@brandeis.edu or lynnelainebrowne@gmail.com) 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 http://www.brandeis.edu/studentlife/sdec/ai). Instances of
alleged dishonesty will be forwarded to the Office of Campus Life for possible
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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.)
----------------------------
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
http://www.bis.org/publ/othp04.pdf
This will also be of value in preparing presentations on central banks.
BIS Annual Reports are another valuable resource.
http://www.bis.org/publ/arpdf/ar2011e.htm
Readings from two books have been assigned. These are relatively inexpensive.
Charles Goodhart, The Evolution of Central Banks. (1988 MIT Press, Cambridge, MA)
Edwin M. Truman, Inflation Targeting in the world economy. (2003 Institute for
International Economics, Washington, D.C.)
Two useful but optional references are
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.
Lawrence H. White, The Theory of Monetary Institutions. (1999 Blackwell
Publishers, Malden, MA)
There are a lot of readings, but many of the online readings are short and nontechnical. 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.
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Course Plan
and Associated Readings
January 15 - 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,
http://econlib.org/library/Enc/MoneySupply.html
January 19 – History of Money and Banking
Schwartz, Anna J. “Money Supply,” Library of Economics and Liberty,
http://econlib.org/library/Enc/MoneySupply.html
Optional: White, Lawrence. Skim Chapter 1, pp. 1-14, 18-19; Chapter 2, pp. 37-42,
48-49; Chapter 7, pp. 138-142.
Assignment: For Jan 22 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 22 – More History of Money and Banking
Bordo, Michael David, “The Classical Gold Standard: Some Lessons for Today,”
Federal Reserve Bank of St. Louis, May 1981
http://research.stlouisfed.org/publications/review/81/05/Classical_May1981.pdf
or
the shorter version in Bordo, Michael D., “Gold Standard,” Library of Economics and
Liberty, http://www.econlib.org/library/Enc/GoldStandard.html
Bernanke, Ben S. “Money, Gold, and the Great Depression,” Remarks, March 2, 2004.
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.ht
m and
“Chapter 1. The Macroeconomics of the Great Depression,” Essays on the Great
Depression, Princeton University Press
http://press.princeton.edu/chapters/s6817.html
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
http://www.ecb.europa.eu/home/pdf/research/Working_Paper_412.pdf
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Skim pages 3-16. Read balance for next week.
Dolan, Ed, “Whatever Became of the Money Multiplier,” Ed Dolan’s Econ Blog
http://www.economonitor.com/dolanecon/2013/09/23/whatever-became-of-themoney-multiplier/
Explains criticisms of the money multiplier.
Optional: Officer, Lawrence H., “Gold Standard,” EH.net.
http://eh.net/encyclopedia/gold-standard/
Detailed information about the workings of the gold standard.
Assignment: Write a short paper describing the 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 Jan 29.
January 26 & 29 – History and Functions of Central Banks
The BIS material is the most important; Bordo is short and interesting. Look at
Dincer & Eichengreen’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
http://www.bis.org/publ/othp04.pdf
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
http://www.ecb.europa.eu/home/pdf/research/Working_Paper_412.pdf
Read Section 4 (p.19) and Conclusions.
Bordo,Michael, “A Brief History of Central Banks”, Federal Reserve Bank of
Cleveland
https://www.clevelandfed.org/en/newsroom-and-events/publications/economiccommentary/economic-commentary-archives/2007-economic-commentaries/ec20071201-a-brief-history-of-central-banks.aspx
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
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http://www.voxeu.org/article/central-bank-independence-and-transparency-notjust-cheap-talk-part-1?quicktabs_tabbed_recent_articles_block=1
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.
http://www.ijcb.org/journal/ijcb14q1a6.pdf
Optional: White, Lawrence, Chapter 4.
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 (about 2007)?
How? A summary table may be helpful in depicting the balance sheet and its
changes. Due Feb 5.
February 2 & 5 – 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
http://www.bis.org/publ/othp04.pdf
Meyer, Laurence H., “Inflation Targets and Inflation Targeting,”
http://research.stlouisfed.org/publications/review/01/11/1-14Meyer.pdf
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
http://www.newyorkfed.org/research/EPR/08v14n2/0809keis.pdf
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
www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100404.p
df
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.
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http://www.bis.org/publ/bppdf/bispap47.pdf
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
http://www.ijcb.org/journal/ijcb14q1a6.pdf
Optional: Hoover, Kevin D. “Phillips Curve,” Library of Economics and Liberty,
http://www.econlib.org/library/Enc/PhillipsCurve.html
Short review of the Phillips curve.
Optional: BIS Markets Committee, MC Compendium: Monetary policy frameworks and
central bank market operation, March 2009.
http://bis.org/publ/mktc03.pdf
Skim information on 2-4 central banks to get a sense of similarities and differences.
If your bank is one of those covered in this compendium, you may find it a valuable
reference. However, some central banks have changed procedures in response to
the 2007-9 financial crisis.
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 might want to consult
Gill Hammond in next week’s references.) Due Feb 12.
The instructor will provide comments on this paper and students are expected to make
revisions and re-submit, responding to the comments (by March 25.)
February 9 & 12 – 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.
http://www.stlouisfed.org/publications/re/articles/?id=426. 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.p
df
First five pages (up to response to the 2008/09 crisis.)
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Taylor, John “Discretion versus Policy Rules in Practice” in Carnegie-Rochester Series
on Public Policy, December 1993
http://www.stanford.edu/~johntayl/Papers/Discretion.PDF
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,”
http://research.stlouisfed.org/publications/review/01/11/1-14Meyer.pdf
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: www.bankofengland.co.uk/education/ccbs/handbooks/pdf/ccbshb29.pdf
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.
http://www.bis.org/events/cbcd06.pdf?noframes=1
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.
http://www.imf.org/external/np/res/seminars/2004/calvo/pdf/mishki.pdf
Exchange rates
Obstfeld, Maurice and Kenneth Rogoff, “The Mirage of Fixed Exchange Rates”
http://www.nber.org/papers/w5191.pdf
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 Feb 26.
Note that the next assignment focuses on the importance of price stability and on
inflation measures.
February 23 & 26 - Inflation
Hellerstein, Rebecca,“The Impact of Inflation” Regional Review
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http://www.bos.frb.org/economic/nerr/rr1997/winter/hell97_1.htm.
Short readable summary.
Shiller, Robert J., “Why Do People Dislike Inflation?”
http://cowles.econ.yale.edu/P/cd/d11a/d1115.pdf
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
http://www.independent.co.uk/news/business/comment/davidblanchflower/forget-inflation--what-hurts-the-most-is-unemploayment8556261.html
Bullard James, “Measuring Inflation: the Core is Rotten” Speech, May 18, 2011
http://research.stlouisfed.org/econ/bullard/pdf/Measuring_Inflation_May_18_201
1_FINAL.pdf . Arguments for headline vs. core inflation.
Bernanke Ben, “Deflation: Making sure “it” doesn’t happen.” Speech, November 2002
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
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
http://www.ilo.org/employment/Whatwedo/Publications/workingpapers/WCMS_160448/lang--en/index.htm
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
http://www.bis.org/publ/bppdf/bispap49.pdf
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,”
http://www.kansascityfed.org/publicat/sympos/1999/S99gert.pdf
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.
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http://www.federalreserve.gov/newsevents/speech/mishkin20080515a.htm
“Should or can central banks target asset prices?” The International Economy Fall
2009
http://www.international-economy.com/TIE_F09_AssetPriceSymp.pdf
Collection of opinions from academics, business economists and business journalists.
Skim.
Assignment: Write a short paper (2-4 pages single space) 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 does your central bank emphasize? How (if at all) does your central bank
respond to supply shocks, such as a large change in food prices? Due Mar. 4.
March 1 & 4 – Lender of Last Resort; Central Banks as Financial Supervisors
Be sure to read the articles by Humphrey and the selections from the BIS Rethinking the lender of last resort.
Humphrey, Thomas “Lender of Last Resort: the Concept in History” Federal Reserve
Bank of Richmond Economic Review
http://www.richmondfed.org/publications/research/economic_review/1989/pdf/
er750202.pdf
BIS, Re-thinking the lender of last resort, BIS Papers No 79, September 2014
http://www.bis.org/publ/bppdf/bispap79.htm
Tucker paper (pages 10-21 and 34-38) and the paper by Domanski, Moessner and
Nelson (pages 43-48 and 59-61.)
Goodhart, Charles, The Evolution of Central Banks, Chapters 2, 4, 7 esp. pp.96-102,
and 8. Skim. Do NOT read word-by-word but focus on the broad arguments and
whether the debates over history have implications for banks and central banks
today.
Optional: Paul De Grauwe, “The European Central Bank as lender of last resort”
August 2011
http://www.voxeu.org/index.php?q=node/6884
We will discuss this later under “current policy debates.”
Optional: White, Lawrence, Chapter 4, pp. 71-79
Central banks as financial supervisors
Ortiz, Issues in Governance, Chapter 2, Sections 3.2 and 4.2
Note the varied approaches.
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UK shifted responsibility for banking regulation from the Bank of England to a single
Financial Services Authority in 1998 but is now shifting responsibility back. The
Briault paper summarizes the arguments for the FSA; the Treasury piece discusses
the post crisis change.
Briault, Clive, Revisting the rationale for a single national financial services regulator.
FSA Occasional paper series No. 16, February 2002
http://www.fsa.gov.uk/pubs/occpapers/op16.pdf. See pp.6-9 and 27-31.
HM Treasury A new approach to financial regulation: building a stronger system,
February 2011
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/
81411/consult_newfinancial_regulation170211.pdf
Look at pp. 3-6 and 35-36; you may want to skim pp.15-30.
Assignment: Write a short essay on why the banking industry needs a lender of last
resort and how central banks play this role. Does your central bank have regulatory
or supervisory responsibility for banks or other financial institutions? Express your
views – and reasoning - on the desirability (or not) of central banks in general and
your bank in particular having regulatory and supervisory responsibilities. Due Mar
11.
The instructor will provide comments on this paper and students are expected to make
revisions and re-submit (by April 15.)
March 8 & 11 – Challenges facing Developing and Emerging Market Countries
The optional pieces are relevant for certain countries. If you have a Latin American
central bank, you should look at Mishkin and Savastano. If your country has a fixed
exchange rate, look at Yagci and Ho. If capital flows are a problem, look at Ostry.
Mishkin, Frederic S., “Can Inflation Targeting Work in Emerging Market Countries?”
Festschrift in Honor of Guillermo A. Calvo April 15-16 2004
http://www.imf.org/external/np/res/seminars/2004/calvo/pdf/mishki.pdf
Lee, Jang-Yung Lee, “Sterilizing Capital Inflows”
http://www.imf.org/external/pubs/ft/issues7/index.htm
Explains why countries may need to sterilize capital movements and the challenges
of doing so.
Knight, Malcom, “Central banks and the challenge of development: an overview of a
roundtable debate” in BIS Central Banks and the Challenge of Development, pp. 11-17,
http://www.bis.org/events/cbcd06.pdf?noframes=1
Hammond, Gill, Ravi Kanbur, and Eswar Prasad “Monetary Policy Challenges for
Emerging Market Economies” Brookings Global Economy and Development
Working Paper 36 August 2009
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http://prasad.dyson.cornell.edu/doc/Monetary_policy_prasad_Hammond_Kanbur.p
df
Optional: Frederic S. Mishkin and Miguel A. Savastano “Monetary Policy Strategies
for Emerging Market Countries: Lessons from Latin America” January 2002
http://cdi.mecon.gov.ar/biblio/docelec/dp3505.pdf
Focus on the “bottom lines,” rather than the country details – unless one of the
countries is your central bank.
Optional: Ostry, Jonathan and others, “Capital Inflows: The Role of Controls” IMF
staff position note, February 2010
http://www.imf.org/external/pubs/ft/spn/2010/spn1004.pdf
Figure 1 is a useful illustration of options.
Optional: Ho, Corrinne, “A Survey of the institutional and operational aspects of
modern-day currency boards,” BIS Working Papers No 110, March 2002
http://www.bis.org/publ/work110
How currency boards work.
Assignment: Write a short paper on the distinctive challenges facing central banks
in developing and emerging market countries. Due Mar 18.
March 15 & 18 – Financial Crisis of 2007-2008 and Great Recession: Causes
Olivier Blanchard, “The Crisis: Basic Mechanisms and Appropriate Policies” IMF
Working Paper April 2009
http://economics.mit.edu/files/6312
Strongly recommended. Good and short.
BIS 79th Annual Report 2008/2009, Chapter I Rescue, Recovery and Reform pp. 4-15
http://www.bis.org/publ/arpdf/ar2009e1.pdf and Chapter II The Global Financial
Crisis. http://www.bis.org/publ/arpdf/ar2009e2.pdf
Chapter 1 provides an overview of the crisis; chapter 2 provides a chronology.
Table 1.1 on p.15 highlights key stages and developments in industrial and
emerging market countries.
Clarida, Richard, “What has – and has not- been learned about monetary policy in a
low inflation environment? A review of the 2000s.”
http://www.bostonfed.org/economic/conf/conf55/papers/Clarida.pdf
Pages 1-10, especially pp. 2-3 on the pre-crisis consensus. Also p.13 and discussion
at the bottom of whether federal funds rate was too low.
Gorton, Gary, “Questions and Answers about the Financial Crisis,” NBER Working
paper 15787, February 2010
http://www.nber.org/papers/w15787.pdf
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Why the crisis was like a bank run.
Optional: Claudio Borio and William White “Whither monetary and financial
stability? The implications of evolving policy regimes” BIS Working Papers No. 147,
February 2004 http://www.bis.org/publ/work147.pdf
Prescient. “Great moderation” was not so moderate in terms of financial cycles.
They suggest that financial liberalization and monetary policy’s focus on price
stability increased the vulnerability to financial instability. The essentials of the
argument are on pages 1, 12-15 and 32-33.
Assignment: Revise and re-submit your paper on your central bank’s monetary
policy objectives and tools based on the comments received from the instructor. Due
Mar 25.
March 22 & 29 – Response to Financial Crisis and Aftermath
BIS 79th Annual Report 2008/2009, Chapter VI Policy Responses to the crisis
http://www.bis.org/publ/arpdf/ar2009e6.pdf
Esp. 91-102.
Look at the interactive depiction of the FRS balance sheet at
https://www.clevelandfed.org/en/our-research/indicators-and-data/crediteasing.aspx
Play around with it and see how the importance of different strategies changed.
Make sure you go back to Jan. 2007.
Fawley, Brett W. and Christopher J. Neely, “Four Stories of Quantitative Easing,”
Federal Reserve Bank of St. Louis REVIEW, January/February 2013
https://research.stlouisfed.org/publications/review/13/01/Fawley.pdf
Describes the monetary policies of the Fed, BOE, BoJ and ECB from September 2008
through 2012, focusing on quantitative easing. Figures 3A,B, C and D show the
balance sheets of the central banks; Table 2 shows the magnitude of the programs.
Papadia, Francesco, Central Bank Cooperation during the Great Recession,” Bruegel
Policy Contribution, June 2013,
http://www.bruegel.org/publications/publication-detail/publication/782-centralbank-cooperation-during-the-great-recession
About swaps. Read Truman’s comment as well as the paper.
Michael Dooley “Central Bank responses to financial crisis” BIS papers no. 51
http://www.bis.org/publ/bppdf/bispap51g.pdf
Short and provocative: the problem was ineffective supervision.
Assignment: Provide a summary of your central bank’s response to the financial
crisis in the period 2007-2009 and the global economic slowdown (about 20092012). In summarizing your bank’s response, you should make reference to the
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economic and financial developments that were taking place at the time and that led
to these actions. Were unconventional tools used? How successful were the central
bank’s actions? If the country of your central bank was not affected by either the
financial crisis or the subsequent global slowdown, explain why not? Did it face
other monetary or financial policy challenges in the 2007-2012 period? Due Apr. 8.
April 1 & 5 – Current Policy Debates
April 5 may be used for student presentations.
General
Blanchard, Olivier, Giovanni Dell’Ariccia, Paolo Mauro, “Rethinking Macro Policy II:
Getting Granular,” IMF Staff Discussion Note, April 2013
http://www.imf.org/external/pubs/ft/sdn/2013/sdn1303.pdf
An earlier, shorter version is “Rethinking macro policy,” Feb 16, 2010
http://www.voxeu.org/article/rethinking-macro-policy
Optional: Jordan, Thomas J., “Monetary policy in the financial crisis – Measures,
effects, risks,” November 2012.
http://www.snb.ch/en/mmr/speeches/id/ref_20121116_tjn/source/ref_20121116
_tjn.en.pdf
Inflation targeting and alternatives
Reichlin, Lucrezia and Richard Baldwin, editors, Is Inflation Targeting Dead? Central
Banking after the Crisis, Centre for Economic Policy Research (CEPR), 2013.
http://www.voxeu.org/sites/default/files/file/P248%20inflation%20targeting%20
7%20may.pdf
Read the introduction and the pieces by Posen, Frankel and Whalen (and any others
that intrigue you.)
Large Scale Asset Purchases (QE)
Bernanke, Ben, “Monetary Policy since the Onset of the Crisis,” speech, August 31,
2012
http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm
Focus on the discussion of Balance Sheet Tools and Cost-Benefit
Turner, Adair, “Debt, Money and Mephistopheles: How do we get out of this mess?”
February 6, 2013. Section 6 (p.22 ) on. Focus on the discussion of overt money
finance (OMF) or “helicopter money.”
www.fsa.gov.uk/static/pubs/speeches/0206-at.pdf
Optional: Stein, Jeremy, “Evaluating Large-Scale Asset Purchases,” October 29, 2012
http://blogs.law.harvard.edu/corpgov/2012/10/29/evaluating-large-scale-assetpurchases/
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Should the Fed be required to follow a policy rule?
“Examining Federal Reserve Reform Proposals,” Testimony, House Committee on
Financial Services, Subcommittee on Monetary Policy and Trade, July 22, 2015.
Testimony by Paul H. Kupiec (focus on section 2.1) and Donald Kohn. The
perspectives are very different.
http://financialservices.house.gov/uploadedfiles/hhrg-114-ba19-wstate-pkupiec20150722.pdf
http://financialservices.house.gov/uploadedfiles/hhrg-ba19-wstate-dkohn20150733.pdf
Lender of Last Resort to Countries
DeGrauwe, Paul, “The European Central Bank as a lender of last resort” August 2011
http://www.voxeu.org/index.php?q=node/6884
Discussion of lender of last resort to sovereign governments.
Optional (if you are interested in Greece): Kashyap, Anil, “A Primer on the Greek
Crisis: the things you need to know from the start until now,” June 29, 2015
http://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-theGreek-Crisis_june29.pdf
Assignment: Revise and re-submit your paper on the Lender of Last Resort function
and the desirability of the central bank having a supervisory role, based on the
comments received from the instructor. Due Apr 15.
April 8, 12 & 15 – Students’ Central Bank Presentations
These sessions are devoted to central bank presentations.
Assignment: Write a medium-length paper (about 5 single-space pages) on what
you think are the key monetary policy and/or financial stability challenges facing
central bankers today. Focus on the main issues and sources of contention. Think
broadly; do not limit yourself to issues facing “your” central bank. Are central banks
likely to be different in the future because of the economic and financial crisis and
its aftermath? Should they be? Discuss the issue in general and with respect to your
central bank. Consult the references under Future Challenges (below) as well as
under Policy Debates. Due Friday Apr 29. This is a hard deadline.
April 19 & 21 (Thurs = Brandeis Friday) – Future Challenges
What challenges will central banks face in the future? How are central banks likely
to be different?
On general lessons and financial stability
IMF, “Central Banking Lessons from the Crisis”
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http://www.imf.org/external/np/pp/eng/2010/052710.pdf
Fischer, Stanley, “What have we learned from the crises of the last 20 years?” June 1,
2015
http://www.federalreserve.gov/newsevents/speech/fischer20150601a.htm
Mishkin, Frederic, “Central Banking after the Crisis,” November 2012
https://www0.gsb.columbia/faculty/fmishkin/papers/12chile.pdf
Focus on main points; skip the details.
Claessens, Stijn, “An Overview of Macroprudential Policy Tools,” IMF Working Paper,
WP/14/214
www.imf.org/external/pubs/ft/wp/2014/wp14214.pdf
Look at Tables 1 and 2 (at the end of the paper but described in Section IV.) Read
sections II and IV.
Squam Lake Working Group on Financial Regulation, “A Systemic Regulator for
Financial Markets,” May 2009.
www.squamlakegroup.org
Scroll down website to find this article. It is an early article.
On independence
Kohn, Don, “Central banking after the Great Recessions: Lessons Learned and
Challenges Ahead,” January 16, 2014
http://www.brookings.edu/events/2014/01/16-central-banking-after-the-greatrecession-bernanke
You can download Kohn’s paper from the conference site.
On rising debt burdens in long term
Cecchetti, Stephen, MS Mohanty and Fabrizio Zampoli, The future of public debt:
prospects and implications” BIS Working Papers, No 300, March 2010.
http://www.bisorg/publ/work300.pdf
Especially section after p.6 on future debt outlook and implications for central banks.
On the challenges facing the ECB:
All these readings are optional.
European Commission, “The financial and economic crisis” website
http://ec.europa.eu/economy_finance/explained/the_financial_and_economic_crisis
/responding_to_the_financial_crisis/index_en.htm
Whelan, Karl, “Sovereign Default and the Euro,” July 2013
www.ucd.ie/t4cms/WP13_09.pdf
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Readable overview of reasons for sovereign debt crisis.
Klein, Ezra, “Greece’s debt crisis explained in charts and maps,” July 6, 2015
www.vox.com/2015/7/1/8871509/greece-charts
Interesting explanation of Greece’s difficulties. Some of the links are also interesting
(especially Yglesias, “11 things about the Greek crisis you need to know”.)
Because of Passover and spring recess, April 21 is the last central banking
class. There are no exams. The last essay is due April 29.
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