ECO 367R • MONETARY ECONOMICS-W
2:00 PM-3:00 PM
Most of this course is about monetary theory, not monetary practice. Students will learn that much of what they know about money derives from how a rational agent attempts to maximize utility under budget constraints. This leads, for example, to a deeper understanding of the meaning of money as a store of value and as a medium of exchange. Specifically, the course is a study how an economy that uses fiat money achieves a higher level of economic welfare than one that does not. Some questions to be addressed are the following. How efficient is the raising of government revenues from printing money (called seigniorage) in comparision to taxation? What is the optimum quantity of money in a growing economy? How is the demand for money affected by real capital? What is the impact of liquidity on financial inter-mediation? What are some important implications of bank risk? To answer these questions and others we employ the overlapping generations (OLG) model of the monetary economy. This model permits us to examine monetary dynamics in a very simple way. Learning and applying the OLG model will consume about one-half of the course. Next on the agenda is a more detailed study of some of the topics encountered in developing the OLD model. In this part of the course students will be required to study some famous economics journal articles. Unlike a textbook, these articles were written for the economics profession. Some of them are highly technical and require even more concentration than the texbook material studied in the first part of the course; and to understand these articles a student will need to draw on his or her knowledge of calculus. The articles deal with money as a store of value, money as a medium of exchanges, inflationary finance, risk and the demand for money. This section of the course will consume about 1/3 of the course. The final part of the course will deal with monetary transmission mechanisms and an unresolved issue in monetary economics. Does money have an effect on real variables in the economy? If so, what are the channels through which a change in the money supply affects, say, real income in the economy in the short run? Traditional and more recent (nontraditional) channels will be investigated. An unresolved issue is called the "equity premium puzzle." Can theory rationalize the big gap between the returns on risky assets (stocks) and risk-free assets (treasury bills)?