THE UNIVERSITY OF THE WEST INDIES
ST. AUGUSTINE
Faculty of Social Sciences
Department of Economics
Course Outline
COURSE TITLE:
COURSE CODE:
LEVEL:
SEMESTER:
NO. OF CREDITS:
PRE-REQUISITE(S):
Summer Lecturer:
Email address:
Lecturer’s Office:
Office Hours:
Monetary Theory and Policy
ECON 3005
III
III (May – July 2013)
3
ECON 2000 and ECON 2002
Ms. Cassandra Rattan
Cassandra.Rattan@sta.uwi.edu
Room 214
Old Social Sciences / Humanities Building
To be announced in class
COURSE DESCRIPTION
This course examines the basic workings of the financial system and monetary policy
primarily in developing countries. There is an emphasis on understanding the issues
relating to interest rates, the tools of monetary policy, and the role of the Central Bank in
Trinidad and Tobago. The general economics and structure of the financial system is also
discussed. Furthermore, the main monetary and financial issues confronting the Trinidad
and Tobago and the CARICOM region as a whole are examined. For example, possible
monetary union, intra-Caribbean investment and exchange rate systems are discussed.
LEARNING OUTCOMES
It is expected that students completing this course will be able to:
 Clearly understand the role and function money and the financial system and various
views on monetary policy
 Appreciate the meaning and functions of monetary policy, and the evolution of the
current system of payments
 Understand the working of the financial system and monetary policy in Trinidad and
Tobago and the wider Caribbean
 Understand the basic tools of monetary policy, and the role and function of the Central
Bank
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 Appreciate the main pros and cons of forming a Caribbean Monetary Union, and the
benefits and pitfalls of the participation in agreements such as the EPA, and the WTO
TEACHING METHODOLOGY
This will take the form of a weekly 3-hour Lecture supported by a weekly 2-hour tutorial.
Tutorial sheets will be accessed on myeLearning. Readings will also be made available on
myeLearning. Lectures would be facilitated via use of PowerPoint presentations on most
occasions.
Lecture Hours:
Fridays 1-4pm
Lecture Room:
FSS103
Tutorial Hours: Information on signing-up for classes and tutorial sheets will be available
via myeLearning
COURSE ASSESSMENT
Your grade will be based on
Final Exam
: 100%
CONTENT
1. The functions of money, the evolution of the payments system and the structure of
financial markets.
2. Theories of Monetary Policy
3. Monetary Policy and financial institutions in Developing Countries
4. Finance, Growth and Development in the Caribbean
5. Financial Liberalization in Developing Countries –Trinidad and Tobago
6. Global Financial Crisis and its Impact on the Caribbean Region
7. The Financial System and Monetary Management
8. Caribbean Monetary Issues
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LECTURE SESSIONS AND DESCRIPTIONS:
1.
INTRODUCTION AND OVERVIEW OF THE COURSE
In this section we review the meaning of money, functions of money, modern types
of money, and the evolution of the payments system. In addition we consider the
function of financial markets, the structure of financial markets, and instruments of
financial market. Asymmetric Information (adverse selection and moral hazard) and
Exchange-rate targeting, inflation targeting and monetary targeting is also
examined.
Readings:
 Mishkin (2010), Chaps. 1, 2, 3 and 8.
2.
THEORIES OF MONETARY POLICY
Here we look at the various views on monetary policy, namely, Classical, Monetarist,
Keynesian, Post-Keynesian views. We also compare and contrast the Orthodox and
Post-Keynesian approach to monetary policy. Finally, we will discuss stabilization
policy briefly.
Readings:
 Tcherneva, P. (2001) “Money: A Comparison of the Post-Keynesian and
Orthodox Approaches:, Oeconomicus, Volume IV, Winter.
 Mankiw (Chapter 14: Stabilization Policy)
3.
MONETARY POLICY IN DEVELOPING COUNTRIES
In this section we examine the tools of monetary policy in small open developing
countries. The main features of these types of economies will be explained and we
will consider the problems associated with the implementation of monetary
policies.
Readings:
 Ghatak, Chapter 2
 Robinson, John. “Independent Monetary Policy In A Very Open Economy Challenges,
Costs
and
Benefits”
Bank
of
Jamaica
http://www.boj.org.jm/uploads/pdf/papers_pamphlets/papers_pamphlets_ind
ependent_monetary_policy_in_a_very_open_economy__challenges__costs_and_benefits.pdf
FINANCIAL INSTITUTIONS IN DEVELOPING COUNTRIES
Here we will discuss the characteristics and structure of financial institutions in
developing countries.
Readings:
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


4.
Fry, M. J. (1988) Money, Interest, and Banking in Economic Development
Chapter 11:” Financial Institutions and Markets in Developing Countries”,
Hein, Scott; Stewart, Jonathan (2002) Reserve Requirements: A Modern
Perspective. Federal Reserve Bank of Atlanta ECONOMIC REVIEW Fourth
Quarter 2002
Birchwood, Anthony (2003) Banking in Small States: The Case of Caribbean
Commercial Banks, St. Augustine: Caribbean Center for Monetary Studies.
Chapters 2 and 3
FINANCE, GROWTH AND DEVELOPMENT
Here we look at the link between financial development and economic growth,
financial deepening.
Readings:
 Bennett, Karl (2006) Rethinking the role of the Financial Sector in Economic
Growth in CARICOM, Journal of Business, Finance and Economics in Emerging
Economies, Volume 1, Number 1, 2006
 Birchwood, Anthony (2003) Banking in Small States: The Case of Caribbean
Commercial Banks, St. Augustine: Caribbean Center for Monetary Studies.
Chapter 4
5.
FINANCIAL LIBERALIZATION IN DEVELOPING COUNTRIES
We will examine financial liberalization, financial repression and the McKinnonShaw hypothesis. The main reasons for the use of these policies, its advantages and
disadvantages.
Readings:
 Fry, M.J. (1997) “In Favour of Financial Liberalisation”, The Economic Journal,
May, pp 754-770
 Henry, L. (2000) “Aspects of Financial Liberalization: The Case of Trinidad and
Tobago”, the Faculty of Social Sciences Working Paper Series, University of the
West Indies, St. Augustine
 Ghosh, Jayati (2005) “The Economic and Social Effects of Financial
Liberalization: A Primer for Developing Countries”, UN/DESA Working Paper
No. 4, October,
http://www.un.org/esa/desa/papers/2005/wp4_2005.pdf?utm_source=OldRe
direct&utm_medium=redirect&utm_campaign=OldRedirect
6.
GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON THE CARIBBEAN REGION
We discuss the reasons for the recent the global financial crisis and what are the
effects on the Caribbean economies in terms of growth rates, tourism, remittances,
etc.
Readings:
 Mishkin (2010), Chapter 21
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


7.
Henry, Lester (2009) One Huge “Minsky Moment”: Lessons from the Financial
Crisis, Social and Economic Studies, V58. No2, June 2009
William te Velde, Dirk (2008) “The global financial crisis and developing
countries: Which countries are at risk and what can be done?” Overseas
Development
Institute
(ODI)
http://www.odi.org.uk/resources/download/2462.pdf
Williams, Ewart (2010) “Impact of financial crises on the Caribbean”
http://www.bis.org/review/r100305d.pdf
THE FINANCIAL SYSTEM AND MONETARY POLICY IN TRINIDAD AND
TOBAGO
Here we look specifically at the structure of the Financial System in Trinidad and
Tobago. We will provide a description of the payments system, recent reforms in
the system and, the competitiveness of the financial institutions in the country.
Readings:
 CBTT Financial Stability Report (2008, 2009, 2010)
 CBTT. The Payments System in Trinidad and Tobago. Public Education Pamphlet
Series No. 5.
 Nicholls, Garth and Seerattan, Dave (2004) The Regulation of Non-Bank
Financial Institutions in the Eastern Caribbean, St. Augustine: Caribbean
Center for Monetary Studies.
 CBTT Monetary Policy Reports,
 Ministry of Finance (2004) The Reform of the Financial System
 Central Bank Website: http://www.central-bank.org.tt/
MONETARY MANAGEMENT, REGULATION AND SUPERVISION IN THE
REGION
The role of the Central Bank as regulator; how the Bank conducts monetary policy
and exchange rate stability; regional regulatory agencies (Caricris, .
- A comparison between our regional credit rating agency and international
agencies such as S&Ps and Moody’s
Readings:
 Henry, L. (2002) “Financial Liberalization and Exchange Rate Inertia: The Case
of Trinidad and Tobago”, Caribbean Center for Monetary Studies Conference,
Georgetown, Guyana, September.
 Central Bank of Trinidad and Tobago: Monetary Policy Reports
8.
CARIBBEAN MONETARY ISSUES
Caribbean Monetary Integration, Potential Impact of the CSME, the EPA and the
WTO on the monetary systems in the Caribbean
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Readings:
 Henry, L. (2004) “Monetary Integration in Beautiful Places: Prospects for the
Caribbean”, in Michelis and Lovewell eds., Exchange Rates, Economic Integration, and
the International Economy, Toronto: APF Press, pp.293-310.
 M. Anthony and A. H. Hallett (2000) Is the Case for Economic and Monetary
Union in the Caribbean Realistic? World Development, Vol. No.
 Worrell, DeLisle (1997) “Bank Behaviour and Monetary Policy in Small Open
Economies with Reference to the Caribbean”, Social and Economic Studies,
Vol. 46: No. 2 &3, University of the West Indies: Kingston: Jamaica.
 Worrell, DeLisle (2006) “A Currency Union for the Caribbean”, in Birchwood and
Seerattan eds. Finance and the Real Development in the Caribbean,
Caribbean Centre for Monetary Studies, UWI St. Augustine, pp. 313-345.
**Additional readings may be provided during the tenure of the course.
Useful Texts
Mishkin, Frederic S. (2010) The Economics of Money, Banking and Finance, 9th Edition,
New York: Addison-Wesley
CARICOM (2010) Trade and Investment Report,
Central Bank of Trinidad and Tobago, Monetary Policy Reports and Financial Stability
Reports
http://www.central-bank.org.tt/
Fry, M. (1995), Money, Interest, and Banking in Economic Development, 2nd ed., London:
The Johns Hopkins University Press
Ghatak, Subrata (1995) Monetary Economics in Developing Countries,
2nd Edition, New York: St. Martin’s Press.
REGULATIONS:
Students are advised to adhere to UWI Examination Regulation No. 19:
Any candidate who has been absent . . . . or whose attendance at prescribed lectures,
classes, ... tutorials, ... has been unsatisfactory . . . . or who has failed to submit essays
or other exercises . . . . may be debarred by the relevant Academic Board, on the
recommendation of the relevant Faculty Board,. . . . from taking any University
examinations . . . . “
Please note that the Department of Economics//Faculty of Social Sciences requires
students to attend and participate in at least 75% of tutorials for a course to
avoid being debarred from taking the final exam.
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