TOPICS IN MONETARY ECONOMICS
Spring Quarter 2010
Prof. Michael G. Hadjimichalakis
Office: Savery 339
Email address: email@example.com
Home Page: http://www.econ.washington.edu/user/mhadjimi/
Class Hours: Tue & Th., 1:30 - 3:20, SAV 264
Office Hours: Tue & Thu 3:30 - 4:30
1. Michael G. Hadjimichalakis, Topics in Monetary Economics: Course
Pack Vol. 1. This course pack, available at the University Book Store,
reproduces the five required chapters from Hadjimichalakis and
Hadjimichalakis, Contemporary Money, Banking, and Financial Markets:
Theory and Practice. If you have a copy of this book, do not buy course
2. Michael G. Hadjimichalakis, Topics in Monetary Economics: Course
Pack Vol. 2. This course pack, available at the University Book Store,
contains all other readings on the syllabus: four chapters of course notes,
3. Michael G. Hadjimichalakis, Economic Commentary
4. Professor’s Web Site. http://www.econ.washington.edu/user/mhadjimi/
This site contains resources for the course, including NARRATED
PRESENTATIONS that are coordinated with the textbook, and previous
exams. Also, access to the Economic Commentary.
Narrated Slides by Karma Hadjimichalakis to Accompany Selected
Chapters of the Textbook:
Accessed from http://www.econ.washington.edu/user/mhadjimi/
Following Money and Financial Markets in the Financial Press and on the
World Wide Web:
The Wall Street Journal. The "Credit Markets" column, a daily column
appearing in Section C of The WSJ, is relevant for this course. For other
pertinent articles, check the daily summary, "What's News -- Business
and Finance" that appears on page A1. The url for the online edition is
http://news.ft.com/home/us/ Home page of The Financial Times,
Great Britain and the United States.
http://www.economist.com/ The Economist, the business news weekly
published in Great Britain that covers the globe, is of a high quality, and is
World Wide Web. This class incorporates reports and data from the Federal
Reserve's web sites (as well as other sites) www.federalreserve.gov. The
web site of the Board of Governors of the Federal Reserve System contains
an introduction to the Federal Reserve System, speeches and testimony of
the chairman and other governors, the semiannual monetary policy reports to
Congress, other policy statements, and the Fed's statistical releases. It also
has links to the web sites of the 12 district Federal Reserve Banks, such as
the Federal Reserve Bank of San Francisco (http://www.frbsf.org/), and to
foreign central banks, such as the Bank of Japan (http://www.boj.go.jp/en/
Additional Recommended Web Sites. See the recommended list accessed
from my home page at http://www.econ.washington.edu/user/mhadjimi/
Exam Schedule and Grading:
1. Midterm Exam: Tuesday, May 4, 2010, Weight = 40%.
2. Final Exam: Friday, June 11, 2010, 2:30-4:20. Weight = 50%
3. Discretionary Factor: Class participation may count for up to 10% of your grade.
Course Outline and Readings
1. Monetary Policy and Financial Markets
a. The Market for Reserves
(1) FRBSF Economic Letter, “U.S. Monetary Policy: An Introduction, Parts 1-4,
February 2004, http://www.frbsf.org/publications/economics/letter/index.php
(2) Course Notes, Chapter 1, “The Market for Reserves,” Vol.2.
(3) Course Notes, Chapter 2, “The Policies and Practices of the Federal Reserve
and the Money Supply Process,” Vol.2
(4) William Dudley, “The Economic Outlook and the Fed’s Balance Sheet: The
Issue of “How” versus “When,” Federal Reserve Bank of New York, July
29, 2009, Vol. 2
(5) Ben Bernanke, “Federal Reserve’s Exit Strategy,” Board of Governors of the
Federal Reserve System, February 10, 2010, Vol. 2
b. A Five-Asset Model
1. Hadjimichalakis and Hadjimichalakis, Chapter 23, “The Structure of Rates
of Return,” pages 509-14 , Vol. 1.
2. Ben S. Bernanke and Vincent R. Reinhart, “Conducting Monetary Policy at
Very Low Short-term Interest Rates,” Federal Reserve Board, January 3, 2004.
c. The Term and Default Structure of Interest Rates
Hadjimichalakis and Hadjimichalakis, Chapter 23, pp. 496-509, Vol. 1.
2. The Transmission Mechanism of Monetary Policy to the Real Sector: I
a. The Quantity Theory of Money and the Velocity of Circulation
(1) Course Notes, Chapter 3, “The Laws of Asset Demand,” Vol. 2.
(2) Hadjimichalakis and Hadjimichalakis, Chapter 16, Targeting Monetary
Aggregates: Theory and Experience, pp. 329-341, Vol. 1.
b. The Behavior of the Velocity of Circulation across Time
(1) Hadjimichalakis and Hadjimichalakis, Chapter 16, pp. 341-350, Vol 1.
(2) Milton Friedman, “The Fed’s Thermostat,” The Wall Street Journal,
August 23, 2003
(3) Michael Hadjimichalakis, “The New Financial Environment: The
End of Monetarism?” from The Federal Reserve, Money, and
Interest Rates: The Volcker Years and Beyond (in course pack
(4) Ben Bernanke, “Monetary Aggregates and Monetary Policy at the
Federal Reserve: A Historical Perspective,” Federal Reserve
Board, November 10, 2006, Vol. 2
(5) Milton Friedman, “Why Money Matters,” The Wall Street Journal,
November 17, 2006, Vol. 2.
3. The Transmission Mechanism of Monetary Policy to the Real Sector:
Tobin’s Q in a 5-Asset Model
Hadjimichalakis and Hadjimichalakis, Chapter 23, pp. 514-516, Vol. 1.
MIDTERM EXAM: Tuesday, May 4, 2010
4. The Dynamics of Monetary Policy
a. Liquidity Effect, Income Effect, Price Level Effect, Inflation Effect
1. Course Notes, Chapter 4, “The Effects of Monetary Policy in
the IS-LM Model” Vol. 2
2. Hadjimichalakis and Hadjimichalakis, Chapter 10, “A
Framework for the Economy: The Real and Financial
Sectors” Vol. 1.
b. The Trajectory in an IS-LM Model
5. Monetary Policy Under Fixed vs. Flexible Exchange Rates
a. The IS-LM-BP Model
1. Course Notes, Chapter 5, “The Foreign Exchange Market,” Vol. 2.
2. Hadjimichalakis and Hadjimichalakis, Chapter 30, “Economic Policy in an
Open Economy,” Vol. 1
Ben S. Bernanke, “The Global Savings Glut, and the U.S. Current Account
Deficit,” Federal Reserve Board, March 10, 2005
c. Application of the Model Across Countries
6. Inflation and Monetary Policy
a. Inflation Targeting
1. William Poole, “Inflation Targeting,” Federal Reserve Bank of St. Louis
Review, May/June 2006, Vol. 88, No. 3, Course Pack Vol.
2. Ben Bernanke, “A Perspective on Inflation Targeting,” Federal Reserve
Board, March 25, 2003, Vol. 2
b. The Bernanke Fed
1. Ben S. Bernanke and Vincent R. Reinhart, “Conducting Monetary Policy at
Very Low Short-term Interest Rates,” Federal Reserve Board, January 3,
2. Ben S. Bernanke, “Federal Reserve Programs to Strengthen Credit Markets
and the Economy,” Federal Reserve Board, February 10, 2009
7. The Four Major Central Banks and their Policies: The Fed; the
European Central Bank (ECB); Bank of Japan (BOJ); The People’s Bank
of China (PBOC)
Current articles from the financial press to be assigned
Economics 425, TOPICS IN MONETARY ECONOMICS
Objectives and Expected Outcomes
This is a course on monetary theory and policy, using a variety of models and real-world
settings. It is both analytical and factual.
Upon completion of the first topic, you will have learned (a) the policies and practices of
the Federal Reserve as it operates in the market for reserves, and (b) how the Fed’s
actions affect financial markets, including the stock market.
Upon completion of the second topic, you will have learned how monetary policy is
transmitted via the financial sector to the real sector, affecting inflation and output
growth. You can contrast the approaches followed by two Nobel Prize winners: Milton
Friedman—transmission via velocity of circulation, and James Tobin—transmission via
Upon completion of the third topic, you will have learned the dynamics of monetary
policy in two ways: first by seeing the liquidity effect, the income effect, and the inflation
effect, of monetary policy; and, second, by drawing the trajectory, the path, that the
economy follows after monetary policy disturbs an initial equilibrium.
Upon completion of the fourth topic, you will have learned how monetary policy also
affects the foreign exchange market, in addition to interest rates, inflation and growth.
And you will have learned it in two settings used across time and across countries: fixed
exchange rates and flexible exchange rates.
Upon completion of the fifth topic, you will have learned about Fed Chairman Ben
Bernanke’s preferred approach to monetary policy, inflation targeting, and how the
ongoing financial crisis led the Fed to traditional and nontraditional tools and programs.
Upon completion of the sixth topic, you will know about the practices and policies of the
world’s four major central banks: the Fed; the European Central Bank, ECB; the Bank of
Japan, BOJ; and the People’s Bank of China, PBOC.
This is a rigorous course, yet accessible to students with different backgrounds.
Econ 425 Student Vita Spring 2010
Course Name/Number Professor's Name