1 FINANCIAL MARKETS PAPERS Financial Markets, Money and the Real World, Davidson 1) What is the efficient market theory? 2) What is the role of the financial market in the orthodox approach and in Keynes‟s approach? 3) Why should noise traders be eliminated in an efficient market? 4) Why is liquidity not important in an efficient market? 5) Keynes‟s view – what is the nonergodic system? 6) What is necessary for a stable liquid market? 7) Does liquidity exist at the aggregate level? 8) Is Davidson for a tax on transaction? Why? Why not? The Efficiency of Financial Systems, Liberalization, and Economic Development, Rogerio Studart 1) What is the established view of the prior-saving argument? 2) How is the existence of banks justified by the prior savings argument? 3) What is the financial repression hypothesis? 4) What is the meaning of efficiency according to the author? 5) What is the role of capital markets 6) What is the primary stage of banks, what is the secondary stage of banks, and how is finance created? What Do Capital Markets Really Do? And What Should We Do About Capital Markets? Steve Pressman 1) What is the Neoclassical view of capital markets? 2) What are some problems with the Neoclassical view? 3) Why do people focus so much on financial markets? 4) Why should a transaction tax not be implemented? 5) What do capital markets do? 6) Why is there some much focus on the capital market? 2 CENTRAL BANK PAPERS Central Banks, Governments and Markets; and Examination of Central Bank Independence and Power, Bain, Arestis, Howells 1) What are the four justifications for an independent central bank 2) What are 4 possible criticisms of the central-bank-independence view? (the authors give more criticisms but 4 is enough) 3) Is sound money equivalent to low inflation? 4) How do the authors criticize empirical evidence? 5) How can you have a strong relationship between central bank independence and inflation? Central Bank Independence Revisited, Stanley Fisher 1) What are the different theoretical/empirical supports for central bank independence? 2) Can you have too much independence? 3) What are the types of independence? 4) Why is it better to have inflation targeting than nominal exchange rate targeting? 5) Inflation versus price targeting: what is the best? Reflections on the Current Fashion for Central Bank Independence, Jorg Bilbow 1) Was Friedman for central bank independence? 2) What was Keynes‟s definition of independence? 3) Was Keynes for independence? 4) How is the Time Inconsistency Argument flawed? 5) Does the time inconsistency argument take into account the lag argument of Friedman? 6) What is the risk of long-termism? Rules Rather than Discretion; The Inconsistency of Optimal Plans, Kydland, Prescott. 1) What is the time inconsistency argument? 2) What is a time consistent equilibrium? 3) Why would the government try to reach another equilibrium? 4) What is the hypothesis assumed about agents? what are they supposed to know? 5) Can you have discretion? 3 MONEY PAPERS Modern Money, LR Wray 1- What is the purpose of „exchange‟ in primitive societies? 2- What was the purpose of compensations in primitive societies? 3- What is the etymology of “to pay”? 4- Were compensations standardized? 5- When did a unit of account arise? For what purpose? 6- In Babylon, how were transactions recorded? 7- Were there any money-things circulating in the economy as medium of exchange? 8- What is a coin? 9- Are coins different from other tallies? 10- Why were the first coins made of precious metal? 11- What money-things are part of the state money? 12- According to Adam Smith, what is the necessary and sufficient condition to give value to paper money? 13- Was debasement a method practiced by King? Why was it not rational for them to debase? The Two Concepts of Money, CAE Goodhart 1- What is the M-View? 2- What is the C-View? 3- Is the M-View empirically verified? 4- Can you have some States that do not have their own monetary system? Why? 5- What is the impact of hyperinflation on the demand for State money? What are the substitutes used? The Origins of Money, K. Menger 1- What is the main function of money for Menger? 2- Describe the process of selection of the things that become medium of exchange? 3- What is the main characteristic that a medium of exchange must have? 4- What is saleableness? 5- What is the role of the state in the selection of the medium of exchange? 6- What is the adjective used by Menger to describe the emergence of the medium of exchange? What does it mean? 4 The Origins of Money, F.L. Pryor 1- Does the author make a clear difference between trade and exchange? 2- Does his definition of money include non-physical money-things, like bookkeeping entries? 3- Does he take into account the role of unit of account? If no, then can he talk about what happened in Babylon, and Egypt? The Semantics of Money-Uses, K. Polyani 1- What are the money-things in Polyani? Do they include bookkeeping? (Hint: read p. 193) 2- What are the functions of money? 3- What is the main function of money? 4- What is the difference between means of payment and medium of exchange? 5- Was the function of medium of exchange the first function? 6- What is “all purpose” money? What is “special-purpose money”? 7- How could compensation be made? What is a payment? Was a payment an economic phenomenon in primitive societies? 8- What are the obligations in primitive societies? 9- Why did a unit of account emerge? 10- What is a „treasure‟? Why did individual first accumulate treasure, i.e. to be able to pay what kind of obligations? What kind of social purpose did „treasure‟ reach? 11- What is the difference between staple finance and treasure finance? 12- What was the role of the first bank? Where were they located? INTEREST RATE PAPERS Liquidity Preference Theory as Behavior Toward Risks, Tobin 1- What is the aim of the paper? 2- Prior to Tobin, two reasons have been provided to justify L2 > 0 at equilibrium, what are they? 3- What are the two assets involved? What is the difference between them in terms of nominal value? 4- What is the opportunity curve? How is it derived? 5- What do individuals try to maximize? 6- How do individuals choose the structure of their portfolio? 5 7- For Tobin, is A1‟(r) < 0 (or A2‟(r) > 0) necessarily true? Why not? (hint: look page 79). 8- For Tobin, what is the main reason why people want to keep part of their portfolio in money at equilibrium? Incentives to Liquidity, Chicks 1- What is the speculative motive? What kind of behavior in the financial market does the speculative motive imply? 2- Do speculators try to hedge their position (by keeping L2 partly in money and partly in bonds)? 3- Is it irrational for bondholders not to take advantage of possible capital gains? (see note 13) 4- How is Tobin‟s paper criticized? (hint: see note 15 and appendix) General Theory, Chapter 13, Keynes 1- What is the “mistake” of the loanable funds theory? 2- What kind of reward does the interest rate provide? 3- What is money? 4- What are the two reasons to hold money as a store of wealth? 5- What are the two reasons why large changes in the quantity of money “may exert a comparatively small influence on the rate of interest” (p. 172)? 6- Why are there “several slips between the cup and the lips” (p. 173)? Does any decrease in interest rate will necessarily stimulate the economy? 7- What is the difference between hoarding and liquidity preference? General Theory, Chapter 17, Keynes 1- Is it necessary to choose money as the standard of measurement? 2- Explain what the different components of the own-rate of interest are. 3- When is the equilibrium reached? 4- Why does money have a money-rate that tends to fall more slowly as its quantity increases? 5- What does a zero-elasticity of production mean? What does a zero-elasticity of substitution mean? 6- Why is the liquidity premium on money high? (see p. 236-237, IV) 7- Why are expectations of money-wage stable? How does this affect the liquidity premium on money? (see p. 238). 6 8- What is a non-monetary economy? 9- Are the risk premium and the liquidity premium different? 10- What is the neutral rate of interest? Why is the notion of natural rate of interest irrelevant? INTEREST RATE STRUCTURE PAPERS Keynes, General Theory, Chapter 15 1- What would be the value of L1 if overdrafts were possible to get easily? 2- What are the two reasons given by Keynes for the negative slope of the L2-curve? 3- On what does the long-term rate depend? 4- Why does the reputation of the central bank matter? 5- How can the central bank influence the long-term rate by intervening only in the short- term market? 6- How could the central bank be sure to have a targeted term structure of rate of interest? 7- What are the limitations on the possibility for the central bank to set the term structure it wants? Hicks, Value and Capital, Chapter 11 1- Why do money-rates differ? 2- What is the meaning of “riskier” asset? 3- How does Hicks explain the relationship between long-term rate and short-term rate? 4- How does Hicks explain the interest-rate reversal given risk? 5- How does Hicks provide an implicit criticism of the Fisher‟s equation? (Hint: see p. 151) Robinson, The Rate of Interest, “The Rate of Interest” 1- How many financial assets (excluding money) are there in her system? What are their characteristics? 2- How many types of individual? What are their characteristics? 3- What is the usual term structure of interest rates? 4- Given expectations, what will be the effect of an increase in the money supply on the term structure of interest rates? 5- Why are long-term rates usually less volatile than short-term rates? 6- Explain how expectation of future interest rates can be self-fulfilling of expectations? (Hint: p. 19) 7 7- What will be the effect on an increase in investment on the term structure of interest rates? 8- Why does the credibility of the central bank matter for an interest-rate policy? 9- How does Robinson criticize the expectation theory of the term structure of interest rate as developed by Hicks? Kahn, “Some Notes on Liquidity Preference” 1- Knowing that the marginal rate of return on a bond can be written R = rlt + (E(p) – p)/p and that p = C/rrl, derive the marginal rate of return on bonds as written in Hicks‟s page 149? 2- Knowing that the return on short-term assets is rst, derive the indifference condition between bonds and bills when there is a prefect and unanimous conviction. 3- What is the horizon of investment for the Hicksian theory of the term structure of interest rates? Why is it not the relevant horizon? 4- Does Keynes‟s theory already take into account the role of expectation of short-term rate? 5- What are the relevant interest-rate expectations in Keynes‟s theory? 6- In Keynes‟s theory how can you have a divergence (e.g. Δrst > 0 and Δrlt < 0) even if expectations are given. MONEY CREATION PAPERS Brunner, “The Role of Money and Monetary Policy” 1- What is the Monetarist position? 2- Knowing that M = mR, which views argues that ΔM are mostly due to Δm? Which view argues that ΔM are mainly due to ΔR? How does Brunner justify the higher relevance of the second view? 3- Does correlation mean causation? How does Brunner deal with this criticism? 4- What are, for Brunner, the two main facts that should be recognized about the behavior of monetary authorities? 5- Did Brunner show that the central bank controls the reserve supply or did it show that R and M are closely related? Wray, “Money, interest rates, and Monetarist policy” 1- What is the Monetarist position regarding the relationship between money growth, inflation, and interest rate? 2- What is the Post Keynesian view about this relationship? 8 3- Which one seems more empirically relevant? 4- Did the decrease in inflation in the early 80s reflect a success of the Monetarist view? 5- Why was the Monetarist policy internally flawed? Moore, “Contemporaneous reserve accounting” 1- What is the Monetarist view of the monetary creation process? 2- What is the Post Keynesian view of the monetary creation process? 3- What does the stable multiplier say about the causality between M and R? 4- Can the central bank control the quantity of reserves it supplies? What are the two things it can control in the supply process? 5- Do banks base their current lending decisions on the actual amount of reserve they have? 6- What are, for Moore, the two reasons why the central bank must supply reserves “horizontally” (i.e. on demand)? MONEY DEMAND PAPERS -“Identification and Estimation of Money Demand”, Cooley/LeRoy 1- Why are previous studies that show that the elasticity of money demand is negative relative to the rate of interest flawed? How did the authors of those studies get their results? 2- Is there any good way to fix the simultaneity problem involved is measuring the supply or demand for money? 3- What is the difference between exogeneity in the control sense and exogeneity in the statistical sense? INFLATION PAPERS -“The Quantity Theory of Money”, Friedman 1- In the quantity theory of money, what are the assumptions behind the idea that M and P are closely related? (see page 3) 2- How does the adjustment between M/P and Md/P proceed? What is the first round effect? What is the second round effect? 3- What is the specie-flow mechanism? 4- For Friedman how can we measure the tightness or looseness of monetary policy? Is the interest rate an appropriate measure of the state of monetary policy? 5- For Friedman, what are the most important points in Keynes‟s General Theory and how does he contest them? 6- What is the main difference between Keynesians and Monetarists for Friedman? 9 7- Regarding empirical evidences: a. Is there a straight univocal relationship between inflation and monetary growth? b. What is the sign of the elasticity of the demand for money regarding interest rate? c. What is the „short-run‟? What is the „long-run‟? d. What is his main conclusion concerning the origins of inflation? e. Does this explain why there is an excess of money in the first place? -Money and Inflation” Wray 1- What are the two types of inflation? And what kinds of policy do they imply? 2- In the income-inflation type what are the two types of inflation? 3- How is the aggregate mark-up determined? What is the role of firm‟s mark up? MONEY AND FINANCIAL STABILITY PAPERS -“The financial instability hypothesis”, Minsky 1- What is the economic problem? 2- How are past, present, and future linked? 3- What are the three types of financial structures? 4- Big government may be good but also bad, why? 5- What are the two theorems of the financial instability hypothesis? 6- Does the FIH rely on external shock to generate instability? -“On the non-neutrality of money” Minsky 1- Each theory uses special concepts to derive a conclusion regarding the neutrality or non- neutrality of money. In Minsky theory, what are the concepts that replace: rational expectation? Asymmetry of information? Aggregation of individual agents? Independence of real and monetary variables? 2- What is the main consequence of 1- regarding the neutrality of money: can money ever be neutral? Explain. 3- What are the three types of financial structures used to measure financial fragility? 4- Can banks be in a hedge finance position? Explain. 5- What is the meaning of „robustness‟? 6- Why is the capitalist economic system inherently unstable? 7- Why does a free market economy require a big government? 10 -“Financial Fragility and economic performance” Benanke/Gertler 1- Why do some entrepreneurs not have the incentive to evaluate the quality of potential projects? 2- On what does financial fragility depend? 3- Explain why low net worth can lead to financial fragility. 4- What is the private information that borrowers have? How is it measured? Why can bankers not get this information? -“The debt-deflation theory of Great Depression” Fisher 1- What are the major causes of boom and depression? 2- What are the additional causes of boom and depression? 3- Explain the logical interaction between all those factors. 4- Why does overindebtedness not always lead to deflation? 5- Why does deflation not always lead to depression? 6- How is overindebtedness measured? 7- What is the macroeconomic paradox induced by a debt-deflation process? Explain. 8- When does the debt-deflation process stop? 9- What are the origins of overindebtedness? 10- What kinds of policy are necessary to avoid and cure debt-deflation processes? TOOLS OF MONETARY POLICY -Toole, “Optimal choice of monetary policy instruments” 1- Which instruments is the best when there are no stochastic shocks on the income equilibrium (IS)? on the monetary equilibrium (LM)? 2- What is the method of selection when these shocks exist? Under what conditions is a monetary target better? An interest rate target better? 3- Which conditions are related to the Monetarist position? To the Keynesian position? 4- What is a combination policy? Is it better than a simple targeting? Why is it more difficult to implement? 5- What is the position of Friedman regarding the role of monetary policy in a dynamic context? Why? 6- For Poole is a passive or an active monetary policy better? Why? 11 CONDUCT OF MONETARY POLICY -Meltzer, “Money and Monetary Policy” 1- Is it good for a central bank to ignore a variable like monetary growth? 2- What was the role of the central bank in the Great Inflation and in the Great Depression? Why does the author think the central had this role? 3- What is the Real Bill Doctrine? 4- Does the current model of the Fed give a particular role to the variable “monetary growth” for the determination of inflation? What does Meltzer think about that? 5- For the author, are interest rates good indicators of the stand of monetary policy? Why? 6- For the author, is the monetary growth a good variable to determine the stand of monetary policy (make a difference between short-term and long-term and explain)? 7- What should be the main intermediate and operating instrument of monetary policy? 8- “If they had paid attention to the monetary base, or followed gold standard rules, they would have allowed money and credit to increase” (28). Critically comment. -Davidson, “The role of monetary policy in the overall economic policy” 1- What are the four possible goals of monetary policy? Which ones are compatible? 2- Which one does the author prefer as policy goals? Why? 3- Why is a coordination of fiscal and monetary policies necessary? 4- Why can monetary and fiscal policies not control inflation? What are the difference sources of inflation? 5- Why is an income policy necessary in addition to the two preceding polices? 6- What are the potential limits on an implementation of an income policy? -Fazzari and Minsky, “Domestic Monetary Policy” 1- Describe the theoretical framework of Monetarists: a. What is the name of this theoretical framework? b. What are the three characteristics of the equilibrium reached? c. What are the two main characteristics attributed to individuals? d. How is money added to the Walrasian framework? e. What is the main concern of the Walrasian system? i.e. what is the purpose of the economic system? f. What is the conclusion in terms the stability of a market economy? 12 2- Describe the theoretical framework of Keynesians: a. What is the name of this theoretical framework? b. What are the characteristics of the equilibrium? c. What are the characteristics attributed to individuals? d. How is money added to the system? e. Is Money different from debt? Is money different from credit? f. Which variable is at the heart of the economic system? How is it financed? What does this financing imply in terms of financial relation? g. What is the main concern of a monetary production economy? h. What is the conclusion in terms of the stability of a market economy? 3- What are the monetary policy implications of these two theoretical frameworks? 4- How do they analyze past financial instability? 5- Explain why you may have a positive relationship between the demand for loans and interest rate? -Wray, “Government deficit and appropriate monetary policy” 1- What is the conventional wisdom on the impact of government deficit? What are the two channels through with the nominal interest rate is affected? 2- What are the criticisms that the author makes about the crowding out effect? (Hint: look also at p. 278-279) 3- What are the empirical results of the author regarding the crowding out or governmental- led inflation? The effects of monetization on inflation? The effect of inflation on nominal rates? 4- What are, for the author, the effect of higher interest rate on: a. Inflation. Explain. b. Money supply growth. Explain. c. Investment. Explain. d. Net worth. Explain. e. Public deficit. Explain (also include the affect of c., and d. on income and so the deficit). 5- “The surest method to increase deficits and debt ratios may be to impose austerity in the form of tight monetary policy and fiscal retrenchment designed to increase primary surpluses.” (289). Explain. 6- What is the best monetary policy for the author concerning: a. Interest rate. 13 b. The term structure of interest rates. c. The relation with the Treasury d. The stability of the financial system. 7- Is the author for a fine-tuning of the economy in order to maintain a “sustainable growth”? Why or why not?
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