Introductory description

The aims of this module are:

• to provide a rigorous discussion of the role of money, and banks and other financial
  institutions in a modern economy
• to explore the fragilities in fractional reserve banking, the role of the central bank, and the
  weaknesses caused by the shadow banking sector
• to explore the causes of historic bank failures and systemic crises
• to provide the analytical tools from macroeconomics to understand the role of monetary policy in the macroeconomy

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

• Stylised facts on financial crises and procyclicality of credit; refresher on 2008 crash.
• Money, its origins and the source of its value, and Fractional Reserve Banking
• Financial system: an overview and its functions in financing and risk-sharing (risk aversion)
• Market friction (moral hazard and adverse selection) and the need for intermediaries Diamond Dybvig and banks role in liquidity provision.
• Lender of last resort (Bagehot’s principles) and rationales for deposit insurance.
• The three-equation model in the open economy
• Parity conditions and exchange rate overshooting
• The trade balance and the balance of payments constraint
• Monetary policy making in the three-equation model
• What is the role of central banks in monetary policy?
• Is an independent central bank important/desirable?
• Inflation targeting issues
• Holmstrom and Tirole (1997): credit constraints, bank loans as certification and intermediation
• Capital crunch - link to 2008 crash
• Macroeconomic implications and procyclicality (developing Holmstrom and Tirole model)
• Financial Contagion across the Interbank network – Allen and Gale JPE (2000).
• Amplification of shocks and so systemic risk.
• Gorton and Pennacchi (1990): Tranching and securitization
• Importance and size of insurance market.

Learning outcomes

By the end of the module, students should be able to:

• Demonstrate an in depth understanding of money and macroeconomics, financial systems, and systemic risk in central banking
• Demonstrate a systematic understanding of the role and importance of monetary policy in theory and in practice
• Demonstrate an understanding of the functions of financial institutions, and their advantages as well as disadvantages as compared with financial markets
• Demonstrate an understanding of risk-taking incentives in the financial industry and how banking micro- and macro-prudential regulations help to maintain financial stability
• Demonstrate an ability to consume and understand detailed investigation and research into relevant central banking and financial regulation issues
• Integrate theory and practice relevant to a wide range of central banking and financial regulation practices and relevant functions in different contexts
• Provide the economic andanalytical tools from macroeconomics to understand the role of monetary policy and of banks in the macroeconomy
• Demonstrate a critical awareness of research and advanced scholarship in the area of money, banks and macroeconomics
• Reflect on and learn from some prior experience and thus be able to integrate new knowledge with past experience and apply it to a new situation
• Make sound judgments whilst understanding the limitations on judgments made in the absence of complete data

Indicative reading list

Carlin, W. and Soskice, D. (2015)
Macroeconomics: Institutions, Instability, and the Financial System
Oxford: Oxford University Press
Macroeconomics and the Financial System (2010)
N. Gregory Mankiw; Laurence Ball
Blinder, A. (1997) 'Is There a Core of Practical Macroeconomics That We Should All Believe?' American Economic Review, 87, 2,
pp. 240-43
Broadbent, B. (2013) Forecast Errors Speech delivered at The Mile End Group of Queen Mary, University of London, 1 May
Fischer, S. (2016) Reflections on Macroeconomics Then and Now Speech delivered at National Association for Business
Economics Economic Policy Conference, Washington DC, 7 March
Yellen, J. (2015) Inflation Dynamics and Monetary Policy Speech delivered at the Philip Gamble Memorial Lecture, University of
Massachusetts, Amherst, 24 September
Allen, Franklin. Comparing Financial Systems. New Ed edition. MIT Press, 2001
Arnoud Boot, Stuart Greenbaum and Anjan Thakor, Contemporary FinancialIntermediation, 3rd ed. Academic Press, 2015
Freixas, Xavier and Jean-Charles Rochet. Microeconomics of Banking 2nd ed. MIT Press, 2008
Tirole, Jean. The Theory of Corporate Finance. Princeton University Press, 2006
Selected sections of academic papers (Examples)
Fama, Eugene F. "What's Different about Banks?" Journal of Monetary Economics 15, no. 1 (January 1985): 29-39.
James, Christopher. "Some Evidence on the Uniqueness of Bank Loans." Journal of Financial Economics 19, no. 2 (Dec 1987):
217-35.
Caballero, Ricardo J., Takeo Hoshi, and Anil K. Kashyap. “Zombie Lending and Depressed Restructuring in Japan.” American
Economic Review 98, no. 5 (2008): 1943–77.
Schenone, Carola. “Lending Relationships and Information Rents: Do Banks Exploit Their Information Advantages?” Review of
Financial Studies 23, no. 3 (March 1, 2010): 1149–99.
Allen, Franklin, and Douglas Gale. "Financial Markets, Intermediaries, and Intertemporal Smoothing." Journal of Political Economy
105, no. 3 (June 1, 1997): 523-46. Page 523-525
Pozsar, Zoltan. "The Rise and Fall of the Shadow Banking System." Regional Financial Review 44 (2008): 1-13.
Bank of England and European Central Bank, "The Case for a Better Functioning Securitisation Market in the European Union",
Discussion Paper, May 2014.

Subject specific skills

• Demonstrate the ability to use data and econometric methods to understand monetary policy.
• Demonstrate the ability to apply knowledge of money and macroeconomics to other areas of central banking
• Demonstrate an ability to acquire and analyse data and information, and to evaluate its relevance and validity to topics in monetary policy.
• Demonstrate an ability to use econometric software to understand and aid the implementation of monetary policy at central banks.
• Draw on a range of concepts, information, techniques and perspectives in the area of money, banks and macroeconomics

Transferable skills

• Written communication
• Independent learning