Monetary and Fiscal Policy
Fall 2014
Jeffrey Parker
Course Outline and Reading List
All readings are required unless otherwise noted. Links are provided to most of the journal articles. Books are generally on print reserve in the library.
I. An Overview of Monetary and Fiscal Policy
A. Macroeconomic Framework (9/5 through 9/10)
- Parker, Jeffrey. Economics 314 Coursebook, 2014 edition, Chapter 2 "Aggregate Supply and Demand: A Simple Framework for Analysis," Sections A through F.
- For more detail, you may consult any intermediate macroeconomics text such as the ones by Burda and Wyplosz, Abel and Bernanke, Blanchard, etc.
B. Introduction to Issues in Monetary and Fiscal Policy (9/12)
- Parker, Jeffrey. Economics 314 Coursebook, 2014 edition, Chapter 17 "Monetary Policy," Section B, and Chapter 18 "Fiscal Policy," Section B.
- Blanchard, Olivier, Macroeconomics, 4th ed., Pearson Education, 2006, Chapter 26: "Fiscal Policy: A Summing Up."
II. The Nature and Institutions of the Monetary System
A. Evolution of Money
- Basic Principles (9/15)
- White, Lawrence H., The Theory of Monetary Institutions (Malden, Mass.: Blackwell, 1999), Chapter 1.
- Goodhart, Charles A. E., Money, Information and Uncertainty, 2nd edition, (Cambridge, Mass.: MIT Press, 1989), Chapter II.
- Radford, R. A., "The Economic Organization of a P.O.W. Camp," Economica 12(48), November 1945, 189-201.
- U.S. Monetary History (9/15)
- Davies, Glyn, A History of Money from Ancient Times to the Modern Day (Cardiff: University of Wales Press, 1994), Chapter 9.
- Optional resource: Hammond, Bray, Banks and Politics in America from the Revolution to the Civil War, Princeton, N.J.: Princeton University Press, 1957.
- Optional resource: Friedman, Milton, and Anna Schwartz, A Monetary History of the United States, 1867-1960, Princeton, N.J.: Princeton University Press, 1963. (These are both classics in U.S. monetary history. We shall read an important chapter from Friedman and Schwartz for our discussion of the Great Depression.)
B. Commodity Money and the Gold Standard (9/17)
- White, Chapter 2.
C. Banking, Money, and Central Banks
- Basic Principles (9/19 & 9/22)
- Croushore, Dean, Money and Banking: A Policy Oriented Approach, Boston: Houghton-Mifflin, 2007, Chapter 8.
- White, Chapters 3 through 5.
- Goodhart, Charles A.E., Money, Information and Uncertainty, 2nd ed., Cambridge, Mass.: MIT Press, 1989, Chapter V.
- Securitization and Financial Derivatives (9/24)
- Federal Reserve Bank of Boston, Tools of the Trade: A Basic Guide to Financial Derivatives, undated.
- Mengle, David, "Credit Derivatives: An Overview," Federal Reserve Bank of Atlanta Economic Review, 92(4), Fourth Quarter, 2007.
- Rosen, Richard J., "The Role of Securitization in Mortgage Lending," Chicago Fed Letter, Number 244, November 2007.
- Quigley, John M., "Compensation and Incentives in the Mortgage Business," The Economists' Voice, 5(6), Article 2, October 2008.
D. Bank Regulation and Financial Crises
- Fundamentals (9/26)
- White, Chapter 6.
- Spong, Kenneth, Banking Regulation: Its Purposes, Implementation, and Effects, 5th edition, Federal Reserve Bank of Kansas City, 2000. (An excellent overview of how financial institutions are regulated in the United States.)
- Issues in Bank Regulation (9/29)
- Flannery, Mark J., "Supervising Bank Safety and Soundness: Some Open Issues," Federal Reserve Bank of Atlanta Economic Review 92(1-2), 2007, 83-100.
- Akerlof, George A., and Paul M. Romer, "Looting: The Economic Underworld of Bankruptcy for Profit," Brookings Papers on Economic Activity 1993:2, 1-60. (Pay special attention to pp. 1-18 and 23-42.)
- Stern, Gary H., and Ron J. Feldman, "Too Big to Fail: The Hazards of Bank Bailouts," The Region (Federal Reserve Bank of Minneapolis) 22(1), 12-17, May 2008. (Excerpts from Brookings Institution Press book of the same title.)
- Fitzpatrick, Thomas J., IV, and James B. Thomson, "An End to Too Big to Let Fail? The Dodd-Frank Act's Orderly Liquidation Authority," Federal Reserve Bank of Cleveland Economic Commentary, 2011.
- Hanson, Samuel G., Anil K. Kashyap, and Jeremy C. Stein, "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives 25(1), Winter 2011, 3-28.
- Jaffee, Dwight M., and Mark Perlow, "Investment Banking Regulation After Bear Stearns," Economists' Voice, 5(5), September 2008, Article 1.
- Shy, Oz, and Rune Stenbacka, "Rethinking the Roles of Banks: A Call for Narrow Banking," Economists' Voice 5(2), June 2008, Article 6.
E. Financial Crises through History
- Theories of Financial Crises (10/1)
- Kindleberger, Charles, and Robert Z. Aliber, Manias, Panics, and Crashes: A History of Financial Crises, 5th edition, Hoboken, N.J.: John Wiley & Sons, 2005, Chapters 1 and 2.
- Reinhart, Carmen M., and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton, N.J.: Princeton University Press, 2009, Chapters 1, 2, 4, 6, 10, and 12.
- Reinhart, Carmen M., and Kenneth S. Rogoff, Recovery from Financial Crises: Evidence from 100 Episodes. American Economic Review 104(5), May 2014, 50-55.
- The Great Depression and Other Early Crises (10/3)
- Federal Reserve Bank of Boston, "Panic of 1907," undated.
- Strouse, Jean, "The Brilliant Bailout," The New Yorker, November 23, 1998, 62-77.
- Friedman, Milton, and Anna Schwartz, A Monetary History of the United States, 1867-1960, Princeton, N.J.: Princeton University Press, 1963, Chapter 7: The Great Contraction, 1929-33. (This chapter is 121 pages long and has been published separately as a book called The Great Contraction. Although there is a lot of detail that is relatively unimportant, there are no sections that can be omitted completely. Extract as much as you can of F&S's interpretation of the events and the Fed's policy response during each of the sub-periods they analyze. Skim past the gory minutia about month-to-month changes in monetary stocks.)
- Bernanke, Ben, "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review 73(3), June 1983, 257-276.
- U.S. Financial Crises of the 1980s and 1990s (10/6)
- "Third-World Debt: The Disaster That Didn't Happen," Economist, September 12, 1992, 21-23.
- Optional: Sachs, Jeffrey, and Harry Huizinga, "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers on Economic Activity, 1987(2), 555-606. (A detailed look at the severe exposure to developing country debt among leading U.S. banks in the 1980s. Too lengthy to warrant requiring, but very informative.)
- Jaffee, Dwight M., "Symposium on Federal Deposit Insurance for S&L Institutions," Journal of Economic Perspectives 3(4), Fall 1989, 3-9. (This is a very brief summary of the financial crises associated with depositories in the Southwest in the 1980s. Read the following two optional papers for more details.)
- Optional: Kane, Edward J., "The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital," Journal of Economic Perspectives 3(4), Fall 1989, 31-47.
- Optional: Curry, Timothy, and Lynn Shibut, "The Costs of the Savings and Loan Crisis: Truth and Consequences," FDIC Banking Review, 13(2), 2000, 26-35.
- Recent U.S. Financial Crisis (10/8 & 10/10)
- Brunnermeier, Markus K., "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives 23 (1), Winter 2009, 77-100.
- Mishkin, Frederic S., "Over the Cliff: From the Subprime to the Global Financial Crisis," Journal of Economic Perspectives 25(1), Winter 2011, 49-70.
- Reinhart, Carmen M., and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly, Princeton, N.J.: Princeton University Press, 2009, Chapters 13, 14 and 15.
- Taylor, John B., "Economic Policy and the Financial Crisis: An Empirical Analysis of What Went Wrong," Critical Review 21 (2), 2009, 341-364. (An excellent analysis that places blame on the Fed's lax monetary policy in the early 2000s.)
- Claessens, Stijn, Ayhan Kose, and Marco E. Terrones, "What Happens During Recessions, Crunches, and Busts?" Economic Policy 24 (60), October 2009, 653-700.
- Goodman, Peter S., and Gretchen Morgenson, "By Saying Yes, WaMu Built Empire on Shaky Loans," New York Times, December 28, 2008.
- Acharya, Viral V., and Matthew Richardson, "Causes of the Financial Crisis," Critical Review 21 (2), June 2009, 195-210.
- Gorton, Gary, "Some Reflections on the Recent Financial Crisis," National Bureau of Economic Research Working Paper 18397, September 2012.
III. Money in the Macroeconomy
A. Theories of Money Demand (10/15 & 10/17)
- McCallum, Bennett T., Monetary Economics: Theory and Policy, New York: Macmillan, 1989, Chapter 3.
- Teles, Pedro, and Ruilin Zhou, "A Stable Money Demand: Looking for the Right Monetary Aggregate," Federal Reserve Bank of Chicago Economic Perspectives 29(1), First Quarter 2005, 50-63.
- For more details on money demand:
- Laidler, David E.W., The Demand for Money: Theories, Evidence, and Problems, 3rd edition, New York, Harper & Row, 1985.
- Goodhart, Charles A.E., Money, Information, and Uncertainty, 2nd edition, Cambridge, Mass.: MIT Press, 1989, Chapters III and IV.
B. Alternate Channels of Monetary Policy (10/27)
- Bernanke, Ben S., and Mark Gertler, "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives 9(4), Fall 1995, 27-48.
- Gambacorta, Leonardo, and David Marques-Ibanez, "The Bank Lending Channel: Lessons from the Crisis," Economic Policy 26(66), April 2011, 135-182.
C. Unconventional Monetary Policy and the Recent Financial Crisis (10/29)
- Bernanke, Ben. 2013. The Federal Reserve and the Financial Crisis. Princeton: Princeton : Princeton University Press, Lectures 3 and 4.
- Taylor, John B. 2014. The Role of Policy in the Great Recession and the Weak Recovery. American Economic Review 104 (5):61-66.
- Friedman, Benjamin M. 2014. Has the Financial Crisis Permanently Changed the Practice of Monetary Policy? Has It Changed the Theory of Monetary Policy? Cambridge, Mass.: National Bureau of Economic Research. NBER Working Papers, No. 20128.
C. Empirical Evidence on Monetary Policy (10/31)
- Nagel, Aviel, and Jeffrey Parker, "Empirical Macroeconomics: The Effects of Monetary Policy," unpublished manuscript, Reed College, 2002.
- Romer, Christina D., and David H. Romer, "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Macroeconomics Annual, 1989, 121-170.
- Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans, "Monetary Policy Shocks: What Have We Learned and to What End?" in Handbook of Macroeconomics, Volume 1A, edited by J. B. Taylor and M. Woodford, Elsevier Science, 1999.
IV. Monetary Policy and Inflation
A. Seigniorage (11/3)
- White, Chapter 7.
- Buiter, Willem H., "Seigniorage," Economics: The Open-Access, Open-Assessment E-journal, 1(2007-10), July 2007. (This is a bit laborious and mathematical, but covers essential ground.)
- Click, Reid W., "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking 30(2), May 1998, 154-71.
B. Inflation, Disinflation, and Deflation (11/5 & 11/7)
- Optional: Cagan, Philip, "The Monetary Dynamics of Hyperinflation," in Studies in the Quantity Theory of Money, ed. by Milton Friedman, Chicago: University of Chicago Press, 1956, 25-117. (This is the classic paper on hyperinflation, but it is quite long and emphasizes a number of issues that don't concern us.)
- Fischer, Stanley, Ratna Sahay, and Carlos A. Vegh, "Modern Hyper- and High Inflations," Journal of Economic Literature 40(3), September 2002, 837-880.
- Sargent, Thomas J., "The Ends of Four Big Inflations," in Inflation: Causes and Effects, ed. by R. E. Hall, Chicago: University of Chicago Press and NBER, 1982, 41-97.
- Ball, Laurence, "What Determines the Sacrifice Ratio?" in Monetary Policy, ed. by N. G. Mankiw, Chicago: University of Chicago Press and NBER, 1994, 155-182.
- Bullard, James, "Seven Faces of 'The Peril,'" Federal Reserve Bank of St. Louis Review 92(5), September/October 2010, 339-352.
C. Dynamic Inconsistency in Monetary Policy (11/12)
- White, Chapter 10.
- Optional: Kydland, Finn E., and Edward C. Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy 85(3), June 1977, 473-491. (The paper that won the Nobel prize for this pair.)
- Optional: Barro, Robert J., and David B. Gordon, "A Positive Theory of Monetary Policy in a Natural-Rate Model," Journal of Political Economy 91(4), August 1983, 589-610. (Our treatment follows this paper more closely than Kydland and Prescott.)
D. Operating Targets and Rules for Monetary Policy (11/14, 11/17)
- White, Chapter 11.
- Blinder, Alan, Central Banking in Theory and Practice, (Cambridge, Mass.: MIT Press, 1998), Chapters 1 and 2. (This book is also available as an e-book through the Reed Library catalog.)
- Bernanke, Ben S., and Frederic S. Mishkin, "Inflation Targeting: A New Framework for Monetary Policy?" Journal of Economic Perspectives 11(2), Spring 1997, 97-116.
- Levin, Andrew T., Fabio M. Natalucci, and Jeremy M. Piger, "The Macroeconomic Effects of Inflation Targeting," Federal Reserve Bank of St. Louis Review 86(4), July/August 2004, 51-80.
- Gonçalves, Carlos Eduardo, and João M. Salles, “Inflation Targeting in Emerging Economies: What Do the Data Say?” Journal of Development Economics, 85(1-2), February 2008, 312–18.
- Clarida, Richard, Jordi Galí, and Mark Gertler, "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," Quarterly Journal of Economics 115 (1), February 2000, 147-180.
V. Fiscal Policy
A. Theories of Fiscal Policy (11/19)
- Blanchard, Olivier, Macroeconomics, 4th ed., Pearson Education, 2006, Chapter 26: "Fiscal Policy: A Summing Up."
- Blinder, Alan S., "The Case Against the Case Against Discretionary Fiscal Policy," in The Macroeconomics of Fiscal Policy, edited by R. W. Kopcke, G. H. B. Tootell, and R. K. Triest, MIT Press, 2006.
- Barro, Robert J., "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives 3(2), Spring 1989, 37-54.
- Bernheim, B. Douglas, "A Neoclassical Perspective on Budget Deficits," Journal of Economic Perspectives 3(2), Spring 1989, 55-72.
B. Empirical Effects of Fiscal Policy (11/21, 11/24)
- Mountford, Andrew, and Harald Uhlig, "What Are the Effects of Fiscal Policy Shocks?" Journal of Applied Econometrics 24(6), 2009, 960-992.
- Romer, Christina D, and David H. Romer, "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review 100(3), June 2010, 763-801.
- Shapiro, Matthew D., and Joel B. Slemrod, "Did the 2008 Tax Rebates Stimulate Spending?" National Bureau of Economic Research Working Paper No. 14753, February 2009.
- Ilzetzki, Ethan, Enrique G. Mendoza, and Carlos A. Végh, "How Big (Small?) Are Fiscal Multipliers?" National Bureau of Economic Research Working Paper No. 16479, October 2010.
- International Monetary Fund, World Economic Outlook: Recovery, Risk, and Rebalancing, October 2010, Chapter 3: "Will It Hurt? Economic Effects of Fiscal Consolidation."
- Christiano, Lawrence, Martin Eichenbaum, and Sergio Rebelo, "When Is the Government Spending Multiplier Large?" Journal of Political Economy 119(1), February 2011, 78-121.
- Auerbach, Alan J., and Yuriy Gorodnichenko. 2013. Fiscal Multipliers in Recession and Expansion. In Fiscal Policy after the Financial Crisis, edited by A. Alesina and F. Giavazzi. Chicago: University of Chicago Press. Available as Auerbach, Alan J., and Yuriy Gorodnichenko. 2011. Fiscal Multipliers in Recession and Expansion. Cambridge, Mass.: National Bureau of Economic Research. NBER Working Papers, No. 17447. Focus on the results, not the methodology.
- Romer, Christina D., and David H. Romer. 2014. The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era. American Economic Journal: Economic Policy 6 (3):242-81.
C. Government Debt and Deficits (11/26)
- Hilscher, Jens, Alon Raviv, and Ricardo Reis. 2014. Inflating Away the Public Debt? An Empirical Assessment. National Bureau of Economic Research Working Paper Series No. 20339.
- Eichengreen, Barry, and Ugo Panizza. 2014. A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem? National Bureau of Economic Research Working Paper Series No. 20316.
- Panizza, Ugo, and Andrea F. Presbitero. 2014. Public Debt and Economic Growth: Is There a Causal Effect? Journal of Macroeconomics 41:21-41. (Don't worry about the complicated econometrics unless you want to.)
- Optional reading: Plosser, Charles I., "Government Financing Decisions and Asset Returns," Journal of Monetary Economics 9, May 1982, 325-352.
- Optional reading: Barro, Robert J., "Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918," Journal of Monetary Economics 20, 1987, 221-247.
VI. Political Systems and Economic Policy (to the extent we have time)
A. Electoral Cycles and Economic Policy (12/1, 12/3)
- White, Chapters 8 and 9.
- Alesina, Alberto, and Nouriel Roubini, Political Cycles and the Macroeconomy, (Cambridge, Mass.: MIT Press, 1997), Chapter 1 through 4.
- Blinder, Alan S., and Mark W. Watson. 2014. Presidents and the U.S. Economy: An Econometric Exploration. National Bureau of Economic Research Working Paper Series No. 20324. (Published version: Blinder, Alan S., and Mark W. Watson. 2016. Presidents and the U.S. Economy: An Econometric Exploration. American Economic Review 106 (4):1015-45.
B. Central Bank Independence (12/5)
- Alesina, Alberto, and Lawrence H. Summers, "Central Bank Independence and Macroeconomic Performance," Journal of Money, Credit and Banking 25(2), May 1993, 151-162.
- Acemoglu, Daron, Simon Johnson, Pablo Querunin, and James A. Robinson, "When Does Policy Reform Work? The Case of Central Bank Independence," Brookings Papers on Economic Activity 2008(1), Spring 2008, 351-417.
- Blinder, Alan, Central Banking in Theory and Practice, (Cambridge, Mass.: MIT Press, 1998), Chapter 3.
- Loungani, Prakash, and Nathan Sheets, "Central Bank Independence, Inflation, and Growth in Transition Economies," Journal of Money, Credit and Banking 29(3), August 1997, 381-99.
C. Politics and Fiscal Policy Decisions (12/8, 12/10)
- Optional: Rogoff, Kenneth, "Equilibrium Political Budget Cycles," American Economic Review 80(1), March 1990, 21-36. Reprinted in T. Persson and G. Tabellini, Monetary and Fiscal Policy, Volume 2: Politics, pp. 47-70.
- Persson, Torsten, and Lars E. O. Svensson, "Why a Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences," Quarterly Journal of Economics 104(2), May 1989, 325-345. Reprinted in T. Persson and G. Tabellini, Monetary and Fiscal Policy, Volume 2: Politics, pp. 47-70.
- Tabellini, Guido, and Alberto Alesina, "Voting on the Budget Deficit," American Economic Review 80(1), March 1990, 37-49. Reprinted in T. Persson and G. Tabellini, Monetary and Fiscal Policy, Volume 2: Politics, pp. 47-70.
- Grilli, Vittorio, Donato Masciandaro, Guido Tabellini, Edmond Malinvaud, and Marco Pagano, "Political and Monetary Institutions and Public Financial Policies in Industrial Countries," Economic Policy 6(13), October 1991, 341-392. Reprinted in T. Persson and G. Tabellini, Monetary and Fiscal Policy, Volume 2: Politics, pp. 47-70.
- Optional: Grilli, Vittorio, Donato Masciandaro, and Guido Tabellini, "Erratum: Political and Monetary Institutions and Public Financial Policies in Industrial Countries," Economic Policy 7(14), April 1992, 265. (Corrects an error in Table 4. You need not read unless you are a stickler for details.)
- Manacorda, Marco, Edward Miguel, and Andrea Vigorito, "Government Transfers and Political Support," London: Centre for Economic Policy Research. CEPR Discussion Papers, No. 7163, February 2009.
D. Economics and the Choice of Political System
- Acemoglu, Daron, and James A. Robinson, Economic Origins of Dictatorship and Democracy, Cambridge University Press, 2006, selected chapters to be announced. (More or less, depending on how much time we have.)