The Secretary of the Treasury has proposed a major overhaul of the financial regulatory environment.

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1 Economics 301 Money & Banking Spring 2009 Dr Raymond Stone NJ Hall 201-A or Office Hours: 3:15-4:00 Tuesdays and Thursdays Class meets Tuesdays/Thursdays 4:30pm to 5:50pm Room A-7 Hardenbergh Hall CAC Prerequisites: Eco 102 & 103 Money & Banking The Financial Crisis of 2007/2008 has resulted in significant innovation on the part of the Federal Reserve. New tools have been added to the policy tool-kit. The Secretary of the Treasury has proposed a major overhaul of the financial regulatory environment. Large financial institutions have suffered big losses requiring major capital infusions. The Federal Reserve invoked Depression Era aspects of the Federal Reserve Act to facilitate the acquisition of Bear Stearns by JP Morgan Chase in hope of forestalling a systemic meltdown. Welcome to Money & Banking. These topics and more will be discussed in class. We will study core topics addressed in the text, as well as, more current topics, which will be covered in textbooks not yet published. Grading Policy First Exam 40% Final Exam 50% Assignments 10% Make-Up Exams will only be given under extraordinary circumstances. Students should check with me before missing an exam to see whether their particular circumstances meet my very limited definition of extraordinary. Attendance Policy Students are expected to attend every class. While I understand that such is not always possible, students should be aware that I will not provide individual review sessions. We will be using "iclickers", so I will have a good idea of your attendance record. Moreover, students should understand that it is impossible to pass this course without regular attendance.

2007/2008 has resulted in significant innovation on the part of the Federal Reserve. New tools have been added to the policy tool-kit.

2 Other The University has established rather severe penalties for cheating. For example, "Copying from or giving others assistance on an hourly or final examination..." is a Level Three violation. A Level Three violation carries with it "Suspension from the University for one or more terms." Textbooks Money, Banking, and Financial Markets, Frederic S. Mishkin, 8th edition (7th edition also acceptable) The Federal Reserve System Purposes & Functions (FRSPF) (Free) i>clicker Required Available from Rutgers bookstore, or from Amazon.com System/dp/ /ref=pd_bbs_sr_1?ie=UTF8&s=books&qid= &sr=8-1 To register I>clicker go to: Homework Assignments There will be a number of homework assignments. These assignments are designed to get your "hands dirty" with economic and financial market data. You will be required to download data from Federal Reserve and other websites, manipulate the data in an Excel spreadsheet, compile graphs using these data, and reflect upon the underlying story captured in these graphs. Students should be aware that I am not looking for perfection; each assignment should take only about 1/2 hour. Your mission is an attempt at some basic level of economic research. My thinking is that you will understand the concepts better by actually playing with the data. Assignments are due by noon the Tuesday after assigned. Students should use the "Assignments" function on Sakai to turn in assignments. Full credit will be given to all "goodfaith" attempts at completing assignments. Thus, make sure you turn in all assignments on time. This is an easy way of securing the full 10% contribution to your final grade. Class Notes I will use Power-Point presentations in class. I will make these available to you in advance (via Sakai). I recommend that you use print-outs of these presentations to take class notes. Some students have found it useful to compile these presentations in a binder.

Mishkin, 8th edition (7th edition also acceptable) The Federal Reserve System Purposes & Functions (FRSPF) http://www.federalreserve.gov/pf/pf.

3 Week 1 (Jan 20/22) Introduction/Payments System FRBPF; Chapter 7 Mishkin: Chapters 1 & 2 Assignment 1: Update using daily data (Jan 1, 2007 to present) Figure 1 p4 Mishkin Week 2 (Jan 27/29) Money & Interest Rates Mishkin: Chapters 3 & 4 Milton and Money Stock Control, William Poole (FRBSL July 30, 2007) Do Monetary Aggregates Help Forecast Inflation? Galina Hale, Oscar Jorda (FRBSF April 13, 2007) Assignment 2: Graph the following (1) Real Federal Funds Rate---Monthly effective funds rate minus 12-month % chg in Core CPI (CPI less food & energy) 1980 to present. (2) Real 10-yr Treasury Yield--Monthly 10-yr constant maturity yield minus 12-month chg in Core CPI 1980 to present (3) Inflation Expectations--5-yr Constant maturity Treasury yield minus 5-yr constant maturity Treasury Inflation Index, 2003 to present These data can be found on the St Louis Fed's FRED Database: Week 3 (Feb 3/5) Interest Rates--Determination, Term-Structure and Risk Mishkin: Chapters 5 & 6 The Yield Curve as a Leading Indicator, Arturo Estrella (FRBNY October 2005) - Main week 3 continued on next page

org/news/speeches/2007/07_31_07.html Do Monetary Aggregates Help Forecast Inflation? Galina Hale, Oscar Jorda (FRBSF April 13, 2007) http://frbsf.org/publications/economics/letter/2007/el2007-10.

4 Assignment 3: Graph the following (1980 to present monthly) (1) Yield Curve Slope--10-yr constant maturity Treasury minus effective Fed Funds rate (2) Compare Yield Curve Slope series with 12-month % chg in Industrial Production These data can be found on the St Louis Fed's FRED Database: Week 4 (Feb 10/12) Interest Rates--Determination, Term-Structure and Risk (continued) Banking and the Management of Financial Institutions Mishkin: Chapter 9 & 10 FRBPF Chapter 5 Assignment 4: Graph the following (1) Delinquency Rates--Residential Real Estate Loans, and Consumer Credit Cards (Q1:91 to present) (2) Treasury & Agency Securities on bank balance sheets (3) Commercial & Industrial Loans (4) Real Estate Loans (5) Large Time Deposits These data are available from the Fed's H.8 Assets and Liabilities of Commercial Banks. Graph weekly from January 2006 to present Week 5 (Feb 17/19) Banking and the Management of Financial Institutions (continued) Bank Regulation and Supervision Who is the FDIC?

org/fred2/ Week 4 (Feb 10/12) Interest Rates--Determination, Term-Structure and Risk (continued) Banking and the Management of Financial Institutions Mishkin: Chapter 9 & 10 FRBPF Chapter 5

5 Week 6 (Feb 24/26) The Federal Reserve System FRSPF: Chapter 1 Mishkin: Chapter 12 A Brief History of Central Banks, Michael Bordo, FRB Cleveland (December 2007) Come with Me to the FOMC, Laurence Meyer (April 2, 1998) Transcript of October 2, 2001 FOMC Meeting [skim] Week 7 (Mar 3/5) First Exam Money Supply Creation and Determinants Mishkin: Chapter 13 Assignment 5: Graph the following: (Monthly 1978 to present) (1) Total Bank Reserves, along with M1 and M2, use 12-month % changes in the seasonally adjusted versions of all series (2) Money Supply Multipliers Total Reserves: Money Supply: Week 8 (Mar 10/12) Monetary Policy and The Economy/Tools of the Fed FRSPF Chapter 2 Mishkin Chapter 15 Supplemental reading: Donald Kohn: John Taylor rules Assignment 6: Graph the following (Quarterly 1992 to present) Effective Funds Rate and Taylor Rule estimate of Funds Rate

htm Transcript of October 2, 2001 FOMC Meeting [skim] http://www.federalreserve.gov/fomc/transcripts/2001/20011002meeting.

6 Transmission of Monetary Policy Supplemental reading: The Monetary Transmission Mechanism: Some Questions and Further Answers, Kenneth Kuttner and Patricia Mosser, FRBNY Economic Policy Review, May The Financial Accelerator and the Credit Channel, Ben Bernanke, June 15, The Role of Financial Conditions in the Transmission of Monetary Policy, Michael Rosenberg, Financial Conditions Watch, Bloomberg, August 14, 2008 (to be available on Sakai) Week 9 (Mar 24/26) The Implementation of Monetary Policy FRBPF Chapter 3 Credit Market Crisis of 2007/2008 Forms of Federal Reserve Lending Chart: The Federal Reserve's Term Auction Facility, Current issues in Economics and Finance, FRBNY, July Week 10 (Mar 31/Apr 2) Managing the Fed's Balance Sheet Key Issues for Monetary Policy Makers, Raymond Stone, December 9, Interest on Reserves and Monetary Policy, Marvin Goodfriend, FRBNY Economic Policy Review Divorcing Money from Monetary Policy, Keister, Martin and McAndrews Economic Policy Review, FRBNY, August

gov/newsevents/speech/bernanke20070615a.

7 Week 11 (Apr 7/9) Housing and the Transmission of Monetary Policy Mortgage-Backed Security About Fannie Mae About Freddie Mac Structured Investment Vehicles House Prices and Subprime Mortgage Delinquencies, Mark Dorms, Frederick Furlong, and John Krainer (FRBSF June 8, 2007) House Prices and Monetary Policy, Charles Plosser (FRBPHILA 7/11/07) Assignment 6: Graph the following (Monthly 1995 to present) Case-Shiller House Price Index--Composite for 10 major metro areas. (1) 12-month % chg (2) Index level Week 12 (Apr 14/16) What Should Central Banks Do? Mishkin: Chapter 16 The Benefits of Price Stability, Ben Bernanke (2/24/06) Asset-Price "Bubbles" and Monetary Policy, Ben Bernanke (10/15/02) Taking About Monetary Policy: The Virtues (and Vices?) of Central Bank Communication,, Alan Blinder, CEPS Working Paper No. 166 (May 2008). Practical Problems and Obstacles to Inflation Targeting, Laurence Meyer (October 2003)

net/knowledge/article.asp?id=326&aid=2449 House Prices and Subprime Mortgage Delinquencies, Mark Dorms, Frederick Furlong, and John Krainer (FRBSF June 8, 2007) http://frbsf.

8 Week 13 (Apr 21/23) Productivity and Monetary Policy What About Productivity? Stone (8/16/2007) Power Point presentation from "In the Shoes of a Fed Policy-Maker", Federal Reserve Bank of New York Productivity, Alan Greenspan (10/23/2002) International Finance FRBPF Chapter 4 Mishkin: Chapter 17 & 18 Week 14 (Apr 28/30) International Finance (Continued) --Current Account and US Financial Markets The Global Saving Glut and the U.S. Current Account Deficit Ben Bernanke (4/14/2005) U.S. Monetary Policy in the Global Financial Environment, Tim Geithner (FRBNY 3/9/2006)

gov/boarddocs/speeches/2002/20021023/default.

Lecture 16: Financial Crisis

Lecture 16: Financial Crisis What is a Financial Crisis? A financial crisis occurs when there is a particularly large disruption to information flows in financial markets, with the result that financial