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431 Monetary Theory and Policy Reference #16635 Fall 1999 Class meets in Rm 305 Royall Hall at 11:00 TTr
Dr. Karen Vorst
Office: 202H Geosciences Bldg.
Office Phone: 816-235-2838
Office Hrs: 2:00-3:00 p.m., Tuesdays and Thursdays and by appointment
Required Text: Money and Banking and Financial Markets, by Frederic S. Mishkin, Scott-
Foresman Publishing, Fifth Edition, 1997.
Supplemental Readings: Supplemental readings listed below are on reserve at the library. In
addition, there will be occasional articles from The Wall Street Journal.
Course Design: This course is designed to build upon the student's knowledge of monetary
theory and Federal Reserve policy through classroom discussion of textbook reading
assignments and outside readings. For 431 students: Grades will be based upon the outcome
of four tests (three during the semester and one final), one ten-page (minimum) term paper.
For 531 students: Grades will be based upon the outcome of four tests (three during the
semester and one final), one twenty-page (minimum) term paper and one 20-minute
presentation describing the banking and financial system of a country other than the
U.S. The presentation will be during the last three days of the semester.
Reading Assignments:
Chapters 1, 2, 3, 20, 8
Required Readings: Bacon, Wessel and Sesit (1994)
Jacobson (1990)
Other Readings: Pollard (1994)
Kumar and Whitt (1992)
Chapters 15, 18
Required Readings: McNeil and Reicter (1980)
Pollard (1993)
Barrett (1991)
Kaufman (1994)
Other Readings: Starobin (1994)
Auerbach (1991)
McCrackin (1994)
Goodfriend and Whelpley (1986)
Chapters16, 17, 19
Required Readings: Sellon and Teigen (1981)
Morgan (1992)
Bernanke (1988)
Becketti and Morris (1992)
Brash (1995)
Gilbert (1994)
Other Readings: King (1986)
Friedman and Kuttner (1992)
B. Friedman (1977)
Kane (1982)
Laurent (1988)
Darby, et al (1989)
McCallum (1985)
Poole (1982)
Walsh (1982)
B. Friedman (1988)
Chapters 21, 25, 26, 12, 11, 27
Required Readings: M. Friedman (1956)
Laidler (1990)
Goldfeld (1973)
Barth, et al (1991)
Other Readings: M. Friedman (1959)
Tobin (1958)
Miller (1991)
Hafer and Jansen (1991)
Brumbaugh, et al (1991)
Paper: One research paper is required. A list of topics from which you may choose is
attached, or you may choose your own topic, subject to the instructor's approval. All topics
must be described in typed paragraph form (including subject, references, intentions, etc.) and
submitted for approval no later than September 28, 1999. The paper will be 20 pages in
length. It must be typewritten and will have at least six (6) references. The due dates for
typewritten rough drafts are November 1 for those whose student number ends in 0-3,
November 3 for those whose student number ends in 4-6 and November 8 for those whose
student numbers end in 7-9. The final draft will be due within two weeks of the return of your
rough draft. The paper will be downgraded one letter grade for every day it is late.
Tests: For 431 Students: Tests will constitute 80% of your total grade, while the research
paper will be 20%. For 531 Students: : Tests will constitute 75% of your total grade, while
the research paper will be 20% and the presentation will be 5%.
Test 1: September 23
Test 2: October 28
Test 3: November 23
Final Examination: To be announced
Make-up Examinations: December 2, 1999, 2:00-3:15 p.m., Room TBA
LIST OF ARTICLES FOR ECONOMICS 431/531
Auerbach, Robert D. "Institutional Preservation at the Federal Reserve," Contemporary Policy
Issues, July, 1991, pp. 46-58.
Bacon, Kenneth H., David Wessel and Michael R. Sesit. "Biggest Show of Force in a Decade
Halts Slides of the Dollar--For Now," Wall Street Journal, May 5, 1994, pp. A1, A7.
Reprinted in '95 Reader by James W. Eaton and Frederic Mishkin, pp. 50-54.
Barrett, Anthony. "Reforming the Fed: Its Independence and Lesson from Humphrey-
Hawkins," Contemporary Policy Issues, July, 1991, pp. 76-81.
Barth, James R., Carl D. Hudson and Daniel E. Page. "The Need to Reform the Federal
Deposit Insurance System," Contemporary Policy Issues, Vol. 9, No. 1, January, 1991, pp.
24-35.
Becketti, Sean and Charles Morris. Are Bank Loans Still Special?" Federal Reserve Bank of
Kansas City Economic Review, Vol. 77, No. 3, 1992, pp. 71-84.
Bernanke, Ben S. "Monetary Policy Transmission: Through Money or Credit?" Business
Review of the Federal Reserve Bank of Philadelphia, November-December, 1988, pp. 3-11.
Boorman, John T. "The Evidence on the Demand for Money: Theoretical Formulations and
Empirical Results" in Current Issues in Monetary Theory and Policy, edited by Thomas M.
Havrilesky and John T. Boorman, Harlan Davidson, Inc., Arlington Heights, Illinois, pp. 315-
360.
Brash, Donald T. "The Role of Monetary Policy: Where Does Unemployment Fit In?"
Federal Reserve Bank of Kansas City Economic Review, First Quarter, 1995, pp. 23-30.
Brumbaugh Jr., R. Dan and Robert E. Litan. "Ignoring Economics in Dealing with the Savings
and Loan and Commercial Banking Crisis," Contemporary Policy Issues, Vol. 9, No. 1,
January, 1991, pp. 36-53.
Darby, Michael, R., Angelo R. Mascaro and Michael L. Marlow. "The Empirical Reliability of
Monetary Aggregates as Indicators: 1983-1987" Economic Inquiry, Vol. 27, No. 4, October,
1989, pp. 555-585.
Friedman, Benjamin M. "Lessons on Monetary Policy from the 1980s" Journal of Economic
Perspectives, Vol. 2, No. 3, Summer, 1988,
pp. 51-72.
and Kenneth N. Kuttner. "Money, Income, Prices, and Interest Rates,"
American Economic Review, Vol. 82, No. 3, June, 1992, pp. 472-492.
Friedman, Milton. "The Demand for Money: Some Theoretical and Empirical Results," The
Journal of Political Economy, Vol. 67, No. 4, August, 1959, pp. 327-351.
. "The Quantity Theory of Money--A Restatement" in Studies in the
Quantity Theory of Money, edited by Milton Friedman, University of Chicago Press
(1956): pp. 3-21.
Gilbert, R. Alton. "A Case Study in Monetary Control: 1980-82," Federal Reserve Bank of
St. Louis Review, September/October, 1994, pp. 35-55.
Goldfeld, Stephen M. "The Demand for Money Revisited," Brookings Papers on Economic
Activity, Vol. 3, 1973, pp. 577-638.
Goodfriend, Marvin and William Whelpley. "Federal Funds: Instrument of Federal Reserve
Policy," Federal Reserve Bank of Richmond Economic Review, September/October, 1986,
pp. 3-11.
Hafer, R. W. and Dennis W. Jansen. "The Demand for Money in the United States: Evidence
from Cointegration Tests" Journal of Money, Credit and Banking, Vol. 23, No. 2, May, 1991,
pp. 155-168.
Jacobson, Kristina. "U.S. Foreign Exchange Operations," Federal Reserve Bank of Kansas
City Economic Review, September/October, 1990, pp. 37-50. Reprinted in '95 Reader by
James W. Eaton and Frederic Mishkin, pp. 335-350.
Kane, Edward J. "Selecting Monetary Targets in a Changing Financial Environment," in
Monetary Policy Issues in the 1980s, Federal Reserve Bank of Kansas City, August, 1982,
pp. 181-206.
Kaufman, Henry. "Structural Changes in the Financial Markets: Economic and Policy
Significance," Federal Reserve Bank of Kansas City Economic Review, Second Quarter, 1994,
pp. 5-15.
King, Stephen R. "Monetary Transmission: Through Bank Loans or Bank Liabilities?"
Journal of Money, Credit and Banking, Vol 18, No. 3, August, 1986, pp. 290-303.
Kumar, Vikram and Joseph A. Whitt, Jr. "Exchange Rate Variability and International Trade,"
Federal Reserve Bank of Atlanta Economic Review, May/June, 1992, pp. 17-32.
Laidler, David. "The Legacy of the Monetary Controversy," Federal Reserve Bank of St.
Louis Review, Vol. 72, No. 2, March/April, 1990, pp. 49-64.
Laurent, Robert D. "An Interest Rate-Based Indicator of Monetary Policy" Economic
Perspectives, Federal Reserve Bank of Chicago, January/February, 1988, pp. 3-14.
McCallum, Bennett T. "On Consequences and Criticisms of Monetary Targeting" Journal of
Money, Credit and Banking, Vol. 17, No. 4, November, 1985, Part 2, pp. 570-597.
McCrackin, Bobbie H. "Federalism and the Fed: The Role of Reserve Bank Presidents,"
Federal Reserve Bank of Atlanta Economic Review, September/October, 1994, pp. 12-23.
McNeil, Charles R. and Denise M. Rechter. "The Depository Institutions Deregulation and
Monetary Control Act of 1980" Federal Reserve Bulletin, June, 1980, pp. 444-453.
Miller, Stephen M. "Monetary Dynamics: An Application of Cointegration and Error-
Correction Modeling" Journal of Money, Credit and Banking, Vol. 23, No. 2, May, 1991,
pp. 139-154.
Morgan, Donald P. "Are Bank Loans a Force in Monetary Policy? Federal Reserve Bank of
Kansas City Economic Review, Second Quarter, 1992, pp. 31-41.
Pollard, Patricia S. "Central Bank Independence and Economic Performance," Federal
Reserve Bank of St. Louis Review, July/August, 1993, pp. 21-36.
. "Trade Between the United States and Eastern Europe," Federal Reserve Bank
of St. Louis Review, July/August, 1994, pp. 25-37.
Poole, William. "Federal Reserve Operating Procedures: A Survey and Evaluation of the
Historical Record since October, 1979," Journal of Money, Credit and Banking, Vol. 14,
No. 4, November, 1982, Part 2, pp. 575-596.
Sellon, Gordon and Ronald Teigen. "The Choice of Short-Run Targets for Monetary Policy,"
Federal Reserve Bank of Kansas City Economic Review, April, 1981, pp. 3-16.
Starobin, Paul. "Bankers' Dozen," National Journal, November 26, 1994, pp. 2772-2777.
Tobin, James. "Liquidity Preference as Behavior Towards Risk" Review of Economic Studies,
Vol. 25, February, 1958, pp. 65-86.
Walsh, Carl E. "The Federal Reserve's Operating Procedures and Interest Rate Fluctuations,"
Federal Reserve Bank of Kansas City Economic Review, May, 1982, pp. 8-18.
PAPER TOPICS -- ECONOMICS 431/531
1. Has Federal Reserve policy changed significantly from one Fed chairman to another?
2. Are bank loans still important in the monetary policy transmission mechanism?
3. Can an interest rate spread variable be a good indicator or target of monetary policy?
4. Interest Rate Smoothing (2 papers possible)
- Method and consequences of such a policy
- Compare the 1970s to the latter 1980s or 1990s
5. Explain the Federal Reserve's actions in the most recent recession (1990-1992)
- Actions taken, expectations, consequences,
extenuating circumstances (e.g., federal government debt restraints)
6. Has Federal Reserve policy changed significantly in the presidential election years?
Compare1976, 1980, 1988 and 1992.
7. What is the consensus (if indeed there is one) regarding the 1979 major policy change?
Was it necessary? Was it effective? Was it a kind of policy ploy used to achieve
some other end?
8. Compare the monetary causes of the Great Depression with those of subsequent
recessions, most notably the recession of 1990-1992 or the recession of 1981-1982.
9. Discuss the pricing of Federal Reserve services that began in the early 1980s and
continues.
- How has the market for bank services changed since the Fed started this policy?
- Is there any information on pricing of Fed services in 1914 plus two or three years?
Investigate.
10. Investigate the financial market development in a transitioning economy in Central
Europe. Pick one country (there are several to choose from; e.g., Poland, Hungary, The
Czech Republic, The Slovak Republic, Bulgaria, Rumania and even the former East
Germany and its integration into Germany) and investigate the development
of its stock markets, bond markets, and credit markets.
11. Examine how the financial markets and Federal Reserve actions may have been affected
by the political developments.
12. Other topics, subject to approval.
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