DePaul University by i8D420cV

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									                               DePaul University
                              School of Commerce
                              Money and Banking
                                 Finance 320


Winter Session - 2002                         Dr. William J. Hocter
Loop Campus                                   DePaul Center-Room 6120
DePaul Center-Room 7601                       Phone: 1.312.362.5151
Class Meets: Tuesday & Thursday               Fax: 1.312.362.6566
11:50 a.m. to 1:20 p.m.                       Office Hours: By Appointment

Textbooks:

The Economics of Money, Banking and Financial Markets,     Sixth Edition 2000
Frederic S. Mishkin                                        [Mishkin]

Supplementary Readings- to be distributed in class

U.S. Monetary Policy and Financial Markets                 1998
Ann-Marie Meulendyke                                       [Meulendyke]

Understanding Open Market Operations                       1997
M. A. Akhtar                                               [Akhtar]

The Foreign Exchange Market in the United States           1998
Sam Y. Cross                                               [Cross]

Supplementary Readings-to be downloaded

“Monetary Policy Report to Congress: July 2001”
Federal Reserve Board of Governors
http://www.federalreserve.gov --Speeches                   [Policy]

Other readings as available


Course Objective:

The educational objective of Finance 320, Money and Banking, is to provide
undergraduate business students with the opportunity to acquire a thorough
understanding of the theoretical and applied concepts that determine the
formulation and implementation of monetary policy.

Course Administration:
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Finance 320 is designed to achieve maximum student involvement in order to
add the greatest amount of value to this undergraduate educational experience.
Accordingly, the course is structured to include extensive reading, written
assignments, individual presentations, and class discussions that are based on
the readings assigned and written work.

1. Reading Assignments:

   Specific reading assignments for the textbooks and supplementary readings
   are listed in each Class Session segment of this syllabus. The remaining
   readings are for enrichment purposes in accordance with individual student’s
   interests or needs.

   The preliminary objective of the reading materials is to provide background
   information for the Class Discussion Papers. [See 2 below]. Students are
   expected to have read and prepared the reading assignments in sufficient
   detail to write the assigned paper and present and discuss the material in
   class. Students are also expected to be prepared to discuss in class all of the
   reading material assigned.

2. Class Discussion Papers:

   The Class Discussion Papers constitute the core element of this course.
   Nineteen Class Discussion Papers are assigned for the quarter. Each student
   is required to complete fifteen of the nineteen papers. The papers have three
   objectives: To make sure that the reading material has been absorbed in full
   measure; to serve as the foundation for class presentations and discussions;
   and, to provide students with the opportunity to demonstrate their
   understanding of the substantive class material and ability to apply this
   material in “real world” situations.

   Each paper should be two pages in length using single-spacing between lines
   and double spacing between paragraphs. Papers over this size or significantly
   under will not be accepted.

   The objective of the Class Discussion Papers should be to present a complete
   response in an executive-report format to the topic. In evaluating the paper, I
   will be looking for the following elements: (1) A statement of the issue under
   consideration; (2) Sufficient text background material to support your
   analysis of the issue; and (3) a policy-type conclusion that incorporates your
   conclusions of the analysis and is the equivalent of an “action plan”; My
   evaluation [grade] will be based on the strength of your analysis, clarity and
   value of your “action plan”. Please remember: The class Discussion Papers
   should be prepared in such a manner that they can be used as the basis for
   individual or group presentations and class discussions.




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3. Class Discussions:

  Active and involved class discussions that revolve around the Class Discussion
  Papers are an essential element of the Finance 320 experience. The ability to
  engage in a professional-level presentation and active discussion regarding
  specific subject matter is convincing evidence of in-depth comprehension. All
  students will be expected to participate in an active and aggressive manner in
  each class meeting.

  Our class structures will follow a reasonably common format. Several
  students will be asked to present their Class Discussion Papers in a formal
  manner. Then, the entire class will engage in a discussion of the papers. In
  addition, we will discuss a group of questions related to all of the reading
  materials assigned for the specific class session.

4. Grades:

  Finance 320 grades are based entirely on performance related to the quality of
  the work demonstrated in the fifteen Class Discussion Papers and in the
  instructor’s evaluation of the value added to class presentations and
  discussions. Please consider this evaluation of your work in the same sense
  that you would consider your performance review at work.

  The grade of A is reserved for those students who achieve a combined total of
  90 to 100 points on their papers and who perform significantly above average
  in terms of in-class presentations and contributions.

  The grade of B is given to those students who achieve a combined total of 80-
  90 points on their Papers and who make above-average in-class contributions
  from their presentations and discussions.

  The grade of C is given to those students who achieve a combined total of 70-
  80 points of their Papers and who make average contributions to in-class
  activities through their presentations and discussions.

  Other grades will be determined in a proportional manner.

5. Administrative Understandings:

  A. Assignments must be handed in on the date specified. Late assignments
     will not be accepted. Students who are absent from a Class Session must
     fax [not email] their Class Discussion Paper to me by class time on the due
     date. The only exceptions to the “no late paper” rule are the birth or death
     of an immediate family member or a major illness.


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   B. Handwritten assignments are not acceptable.

   C. Special note: On-time class attendance is an important part of the Finance
      320 experience, which is based, in large measure on written papers, class
      presentations and discussions. Students who miss two or more class
      sessions will be required to complete an extra research project to receive a
      grade above C for the course. Class attendance records will be taken at the
      beginning of each class and maintained.


Course Structure:

                               Class Session I
                          Tuesday, January 8, 2002

Lecture-Discussion Subject Matter

       A. Review of class syllabus
       B. Nations economic budget-savings and investment
       C. Transmission mechanism of monetary policy

Reading Assignments:

NONE

Written Assignment-Class Discussion Paper:
Due: January 8, 2002

NONE


                              Class Session II
                         Thursday, January 10, 2002

Lecture-Discussion Subject Matter

       A. Financial Institutions
       B. Financial Markets
       C. Money

Reading Assignments:

Mishkin: Chapters 1,2 and 3
Meulendyke: Chapters 1 and 2

Written Assignment-Class Discussion Paper I:


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Due: January 10, 2002

Topic:         Financial intermediation involves the actions of a financial
               institution borrowing from surplus-funds units and lending to a
               funds-deficit unit. Use the balance sheet of a financial intermediary
               to explain this fundamental financial process.


                               Class Session III
                           Tuesday, January 15, 2002

Lecture-Discussion Subject Matter

         A. Interest Rates: Understandings
         B. Interest Rates: Behavior

Reading Assignments:

Mishkin: Chapters 4 and 5
Meulendyke: Chapter 3

Written Assignment-Class Discussion Paper II:
Due: January 15, 2002

Topic:         Analyze and compare the following: “…the loanable funds
               framework provides one theory of how interest rates are
               determined…”

               “…The liquidity preference framework…analyzes the supply and
               demand for money. …Interest rates will change when there is a
               change in the demand for money…”


                                Class Session IV
                           Thursday, January 17, 2002

Lecture-Discussion Subject Matter

         A. Risk concepts
         B. Term structure of interest rates

Reading Assignments:

Mishkin: Chapter 6
Meulendyke: Chapter 4

Written Assignment-Class Discussion Paper III:


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Due: January 17, 2002

TOPIC:       Explain the three major theoretical frameworks that attempt to
             describe the behavior of the term structure of interest rates:
             Expectations theory, Segmented Markets Theory and Liquidity
             Premium Theory. What does the empirical evidence derived from
             the tests of these theories have to contribute?



                              Class Session V
                         Tuesday, January 22, 2002

Lecture-Discussion Subject Matter

      A. Foreign exchange markets
      B. Foreign exchange theoretical concepts

Reading Assignments:

Mishkin: Chapter 7
Cross: Chapters 1,2,3 and 4

Written Assignment-Class Discussion Paper IV:
Due: January 22, 2002

Topic: Analyze the following important points describing the factors that
       influence the behavior of foreign exchange:

      “…Long-run changes in the exchange rate between two countries are
      determined by changes in the relative price levels in the two countries…”

      “Exchange rates are determined in the short-run by the interest rate parity
      condition…”



                             Class Session VI
                        Thursday, January 24, 2002

Lecture-Discussion Subject Matter

      A. Economic analysis: Financial structure
      B. Banks as a firm

Reading Assignments:



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Mishkin: Chapters 8 & 9

Written Assignment-Class Discussion Paper V:
Due: January 24, 2002

Topic: Effective risk management is an essential ingredient in a bank’s profitable
       management. Discuss the cause and management of the following types of
       risk for a financial intermediary:

             A.   Credit Risk [individual loan and portfolio]
             B.   Interest Rate Risk
             C.   Technological/Operational Risk
             D.   Off-Balance Sheet Risk
             E.   Foreign Exchange Risk




                              Class Session VII
                          Tuesday, January 29, 2002

Lecture-Discussion Subject Matter

      A. Banking Industry: Structure and connection
      B. Economic Analysis: Banking regulation

Reading Assignments:

Mishkin: Chapters 10 & 11

Written Assignment-Class Discussion Paper VI:
Due: January 29, 2002

Topic: “The concepts of asymmetric information, adverse selection and moral
       hazards help to explain the seven types of banking regulation that we see
       in the U.S. and other countries…” Explain.


                              Class Session VIII
                          Thursday, January 31, 2002

Lecture-Discussion Subject Matter

      Non-bank financial institutions

Reading Assignments:



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Mishkin: Chapter 12

Written Assignment-Class Discussion Paper VII:
Due: January 31, 2002

Topic: Describe the major differences and growing similarities between
       commercial banks and the following non-bank financial institutions using
       a sources-and-uses of funds analytical framework:

             A.   Insurance companies
             B.   Pension funds
             C.   Finance Companies
             D.   Mutual funds
             E.   Securities brokers and dealers
             F.   Government agencies



                              Class Session IX
                          Tuesday, February 5, 2002

Lecture-Discussion Subject Matter

      Financial derivatives

Reading Assignments:

Mishkin: Chapter 13

Written Assignment-Class Discussion Paper VIII:
Due: February 5, 2002

Topic: Managers of financial intermediaries use financial derivatives to reduce
       risk. Explain.



                              Class Session X
                         Thursday, February 7, 2002

Lecture-Discussion Subject Matter

      A. Federal Reserve System
      B. Deposit creation
      C. Money supply

Reading Assignments:


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Mishkin: Chapter 14, 15 & 16
Akhtar: Chapters 1,2 & 3

Written Assignment-Class Discussion Paper IX:
Due: February 7, 2002

Topic: Mishkin presents a model of the money supply process in which all four of
       the players—the Federal Reserve System, Depositors, Banks and
       borrowers from banks—Directly influence the money supply. Explain.


                             Class Session XI
                        Tuesday, February 12, 2002

Lecture-Discussion Subject Matter

      A. Monetary policy formulation
      B. Monetary policy implementation

Reading Assignments:

Mishkin: Chapter 17 & 18
Meulendyke: Chapters 5, 6, 7 & 8
Akhtar: Chapters 4, 5 & 6

Written Assignment-Class Discussion Paper X:
Due: February 12, 2002

Topic: Explain how the Federal Reserve System’s open market committee
       formulates monetary policy and how the New York trading desk
       implements policy through open market operations.


                            Class Session XII
                       Thursday, February 14, 2002

Lecture-Discussion Subject Matter

      A. Monetary policy formulation (continued)
      B. Monetary policy implementation (continued)

Reading Assignments:

Mishkin: Chapter 17 & 18 (continued)
Meulendyke: Chapters 5, 6, 7 & 8
Akhtar: Chapters 4, 5 & 6


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Written Assignment-Class Discussion Paper XI:
Due: February 14, 2002

Topic: Assume that you are a newly appointed member of the Board of Governors
       and you have to secure the approval of the Senate Banking Committee and
       the full Senate prior to talking your seat. The Committee Chair has asked
       for your views on the following:

              A. Your priority ranking of monetary policy goals.
              B. Your opinion on the appropriateness of monetary policy
                 positions in the last 3 years.
              C. Has the effectiveness of monetary policy declined?



                             Class Session XIII
                         Tuesday, February 19, 2002

Lecture-Discussion Subject Matter

       A. The international financial system
       B. Monetary Policy Strategy: International Experience
       C. Money supply

Reading Assignments:

Mishkin: Chapter 19 & 20
Meulendyke: Chapter 9
Cross: Chapters 9, 10, 11 & 12

Written Assignment-Class Discussion Paper XII:
Due: February 19, 2002

Topic: A central feature of monetary policy strategies in all countries is the use of
       a nominal anchor…Describe this concept and discuss in terms of three
       basic types of monetary policy strategy: Exchange-rate targeting, monetary
       targeting and inflation targeting…



                             Class Session XIV
                        Thursday, February 21, 2002

Lecture-Discussion Subject Matter

       A. The international financial system (continued)


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      B. Monetary policy strategy: International experience (continued)

Reading Assignments:

Mishkin: Chapter 19 & 20
Meulendyke: Chapter 9 (continued)
Cross: Chapters 9, 10, 11 & 12

Written Assignment-Class Discussion Paper XIII:
Due: February 21, 2002

Topic: Explain how an easing of domestic monetary policy influences financial
       and economic conditions in other countries, conditions that in turn, affect
       the U. S. economy.


                             Class Session XV
                        Tuesday, February 26, 2002

Lecture-Discussion Subject Matter

      A. Demand for money
      B. Kensian Framework: ISLM Model

Reading Assignments:

Mishkin: Chapter 21 & 22

Written Assignment-Class Discussion Paper XIV:
Due: February 26, 2002

Topic: Explain: “The ISLM model determines aggregate output and the interest
       rate for a fixed price level using the IS an LM curves.


                             Class Session XVI
                        Thursday, February 28, 2002

Lecture-Discussion Subject Matter

      A. Monetary and Fiscal Policy: ISLM Model
      B. Aggregate demand and supply analysis

Reading Assignments:

Mishkin: Chapter 23 & 24



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Written Assignment-Class Discussion Paper XV:
Due: February 28, 2002

Topic: “Equilibrium in the short-run occurs at the point where the aggregate
       demand curve in intersects the aggregate supply curve. Although this is
       where the economy heads temporarily, it has a self-correcting mechanism,
       which leads it to settle permanently at the long-run equilibrium where
       aggregate output is at is natural rate level.” Explain.


                            Class Session XVII
                          Tuesday, March 5, 2002

Lecture-Discussion Subject Matter

      Transmission Mechanism of Monetary Policy

Reading Assignments:

Mishkin: Chapter 25
Meulendyke: Chapter 8

Written Assignment-Class Discussion Paper XVI:
Due: March 5, 2002

Topic: Analyze the various channels through which monetary policy influences
       aggregate demand:
             A. Interest rates
             B. Exchange rates
             C. Bank lending
             D. Wealth
             E. Tobin’s q Theory
             F. Balance Sheet
             G. Cash Flow
             H. Price-Level
             I. Household Liquidity



                           Class Session XVIII
                         Thursday, March 7, 2002

Lecture-Discussion Subject Matter

      Money and Inflation

Reading Assignments:


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Mishkin: Chapter 26

Written Assignment-Class Discussion Paper XVII:
Due: March 7, 2002

Topic: Explain the similarities and differences in the Freidman and Keynesian
       view of the inflation process.



                              Class Session XIX
                           Tuesday, March 12, 2002

Lecture-Discussion Subject Matter

      A. Rational Expectations: Theory
      B. Rational Expectations: Implications for policy

Reading Assignments:

Mishkin: Chapter 27 & 28

Written Assignment-Class Discussion Paper XV:
Due: March 12, 2002

Topic: Explain: “The theory of rational expectations has caused a revolution in
      the way that most economies now think about the conduct of monetary
      and fiscal policies and their effect on economic activity.



                             Class Session XX
                         Thursday, March 14, 2002

Lecture-Discussion Subject Matter

      Current policy issues

Reading Assignments:

To be assigned

Written Assignment-Class Discussion Paper XIX:
Due: March 14, 2002




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Topic: In July of 2002, the Chairman of the Federal Reserve System has to
       present testimony about current and future monetary policy issues to the
       Senate and House Banking Committees. Develop an analytical framework
       for you view on his testimony.




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