The Economics of Money and Banking

Introduction to the principles of money and banking, the intermediary institutions of the American economy and their historical development, current issues in monetary and financial reform.

Readings: The required text is Frederic S. Mishkin, The Economics of Money, Banking and Financial Markets 6th ed. (Addison Wesley 2001). You may also wish to purchase Marcia Stigum, The Money Market, 3rd edition (Irwin Professional Publishing 1990), and one of the reading period assignment books, either Bob Woodward, Maestro, Greenspan's Fed and the American Boom (Simon and Schuster 2000) or Martin Mayer, The Fed, The Inside Story of How the World's Most Powerful Financial Institution Drives the Markets (Free Press 2001). All are available at the Columbia Bookstore.
In addition a packet of supplemental readings is available at Village Copier on 115th St. Regular reading of the financial press (for example, The Financial Times) is recommended as an invaluable aid for developing familiarity with the structure and function of modern banking institutions.

Prerequisite: Intermediate Macroeconomics (BC3033 or W3213)

Grading: Work will be assessed by means of two exams with the following weights

Midterm 40%
Final 60%

TA: The teaching assistants for this course--Goetz von Peter and Toshi Ichida--will be holding weekly discussion sessions focused around the supplemental readings: Tuesday 6-7, 8-9 in Milbank 328. They will also be available in office hours for help with the lecture material.

Goetz von Peter, gv43@columbia.edu Th 9:30-10:30 Lehman 1
Toshi Ichida, ti44@columbia.edu Th 2-3 Lehman 1

Reading Period Assignment: The final exam will contain the following essay question, worth 20% of the course grade:
A) Adopt the perspective of the course and review the book of your choice (Woodward or Mayer), or
B) Adopt the perspective of the book of your choice (Woodward or Mayer) and review the course.

Lecture Schedule

Introduction
1. The Four Prices of Money Mishkin Ch. 1-7
2. Natural Hierarchy of Money
3. US Monetary History Young
4. The Balance Sheet Approach
5. The Central Bank as a Clearinghouse Beginnings
6. The Central Bank as a Market Maker

Banking as a Clearing System
7. Final Settlement, Fed Funds Stigum 12 on Fed Funds Minsky
8. Postponing Settlement, Repo Stigum 13 on Repo
9. Reserves and the Money Standard Stigum 21 on BA Mundell
10. International Money Stigum 18 on Euro

Banking as Market Making
11. Dealers: Liquid Security Markets Stigum 10 on Dealers Hicks [Drop]
12. Banks: The Market for Liquidity Stigum 6 on Banks
13. The Fed: Foreign Exchange Stigum 7 on Banks LTCM
14. Liquidity Crises and Discount Policy Stigum 9 on Fed

15. MIDTERM, October 22

Banking as Intermediation
16. Financial Intermediation Mishkin Ch. 8-12
17. Banks as Intermediaries
18. Bank Lending
Election Day Holiday

Monetary Policy
19. The Development of Orthodoxy Mishkin Ch. 14-20 Black
20. The Challenge from Finance
21. A Money View Response Whither [PDF]
22. Guest Lecture: Laurence Meyer

Banking as Advance Clearing
23. Futures and Forwards Stigum 15 on Futures Brimmer
24. Interest Rate Swaps Stigum 19 on Swaps
Thanksgiving Holiday
25. Life in Swap Land
26. Conclusion and Review

FINAL EXAM (Tuesday December 17, 9-12)

Supplemental Readings:

Young = Chaps. 31-34 in "Commerce: The Marketplace of the World", 1924. Reprinted as pp. 265-321 in Mehrling and Sandilands, ed. Money and Growth, Routledge 1999.

Beginnings = "Economists and the Fed: Beginnings" by Mehrling, Journal of Economic Perspectives

Minsky = "Central Banking and Money Market Changes." Quarterly Journal of Economics 71 No. 2 (1957)

Mundell = "A Reconsideration of the Twentieth Century." American Economic Review (June 2000): 327-340.

Hicks = "The Nature of Money", "The Market Makes its Money", and "Banks and Bank Money". Chapters 5-7 in A Market Theory of Money (Oxford 1989): 41-63.

LTCM = "Minsky and Modern Finance, The Case of Long Term Capital Management", by Mehrling. Journal of Portfolio Management 26 No. 2 (Winter 2000): 81-88.

Black = "Banking and Interest Rates in a World without Money: The Effects of Uncontorlled Banking. Chapter 1 in Business Cycles and Equilibrium (Basil Blackwell 1982): 83-95.

Whither = "Whither Macro?", by Mehrling. Mimeo, May 2002.

Brimmer = "Central Banking and Systemic Risks in Capital Markets". Journal of Economic Perspectives 3 No. 2 (Spring 1989): 3-16.