Money and banking reading


 

Money and banking tutorial reading

 

James Forder

 

In each case, use the faculty reading list. What follows are additional notes on it.

1. Models of aggregate price and output fluctuations

This topic builds on what you know from core macroeconomics. Start with Mankiw (2001)and the relevant parts of Carlin and Soskice (2006), and perhaps Romer (2006). Then I should think Mankiw and Reis (2002), Fuhrer and Moore (1995), Driscoll and Holden (2003). And whatever you do, don’t miss Roberts (1995). Sims (2003)might add something to otherwise good essays

“Do models incorporating nominal rigidities add little to the Lucas model, and should other accounts of aggregate fluctuations be considered? What sort of accounts might they be?”

2. Credibility and its relation to central bank independence

Note that there are lectures by Richard Mash and James Forder on this

The ‘time consistency problem’ (or one of them – beware: that precise expression is used in a variety of quite different ways in economics and to make matters worse, a lot of people haven’t noticed) comes from Kydland and Prescott (1977). Have a look if you dare. Later authors tend to say that Barro and Gordon (1983a)is the key development in bringing ‘reputation’ to the rescue of the policymaker. It seems to me that is a mistake since the intuitive sense of reputation arises much better from Backus and Driffill (1985). Then there is Rogoff (1985), to which various ideas are misattributed with some frequency, perhaps because the abstract is so misleading. Still, you might read it, but if you do, concentrate on the bit about central bank independence. The rest of it may well be interesting, but I don’t think it is leading anywhere for finals purposes. Much of this becomes remarkably clear to readers of Forder (2001b), which is unfortunate, because you surely would not want to stoop to reading things like that. That paper does, perhaps, place too much weight on the problem of distinguishing the ‘time consistency’ from the ‘credibility’ problem, but I don’t suppose it hurts to get that clear. Forder (1998)takes the same sort of account a bit further.

What is the case here for central bank independence? What is the empirical relevance of the ideas from Barro and Gordon, Backus and Driffill, and Rogoff? Walsh (1995)is one of those papers which is important because people keep citing it, and because quite a lot of exam questions are about it. Relate his argument to that of Rogoff (1985). Points from Barro and Gordon (1983b)could fill out the argument to some benefit. But while you are there, what do you learn from Lohmann (1992)?

If you can’t stand the thought that the case for central bank independence is so hard to make – and there are such people – get the sense of Nordhaus (1975). What do you notice about that? What is the relevance the credibility problem to the argument of Taylor (1993)? Or to the arguments of Vickers (1998), or King (2002)?

On the empirical side, which is now de-emphasized in the exam, Alesina and Summers (1993)is in my view a shocking piece that all well-educated economists should have read, and I doubt you need Forder (1996)or (alternatively) Forder (2001a)to point out someof the problems, anyway.

How should the policy making regime be designed in the light of the ‘credibility problem’? (that is supposed to invite you to consider whether the central bank should be ‘independent’, and if so in what sense and how matters of reputation should be tackled, etc.).

 3. Monetary transmission mechanism

I think it is a good idea to start with Farag, Harland and Nixon (2013), which is partly background on banking generally. Then I think you can do worse than read Carlin and Soskice (2014)chs 5-7, and Radia (2010)piece is pushed quite hard on the website, so you might expect it to provide the basis and perhaps structure of many answers – but don’t expect that lot to deliver the highest marks. So, then it is Bernanke and Gertler (1995)and after that I suggest Ashcraft (2006)and Bernanke, Gertler and Gilchrist (1996), Kashyap and Stein (2000)and anything else you fancy from the weblearn reading list.

It seems to me that Bernanke and Blinder (1988)and Kuttner and Mosser (2002)are both perfectly reasonable pieces, but add rather little if you have understood the others.

Does theory provide an adequate account of the macroeconomic impact of interest rate changes?

4. The optimal rate of inflation

The literature contains numerous arguments about the optimal rate of inflation. The readings challenge the simple view that inflation merely distorts market signals and that price stability is therefore optimal. There is a certain amount of argument about the quantification of particular effects, but in the main different authors have introduced different considerations. The task, which has real policy implications, then, is sifting through the various sorts of argument to determine which are of salience in  determining an inflation goal.

Reading

There is an overview of a number, though not all, of the relevant issues in Schmitt-Grohé and Uribe (2010). Considering issues separately, one finds arguments based on not much more than common sense, that any stable rate of inflation is about as good as any other –Friedman (1968)makes one, although it needs to be read without preconceptions that it is all about the Phillips curve. That view might be rejected or modified by the idea that inflation ‘lubricates’ the labour market:Akerlof, Dickens and Perry (1996), but also a challenge as to how the lubrication effects should be compared to the ‘sand in the wheels’ inflation causes: Groshen and Schweitzer (1999). It is sometimes said that questions of public finance make a case for inflation. That argument can be found, for example, in Phelps (1973). Later authors have added the thought that inflation particularly taxes cash-based activities, of which criminal ones may well be a large part. There is, though, a clever, little noticed, challenge or modification to the Phelps-type view in Friedman (1971).

Other specific issues in optimization of firm behaviour have been raised by Sinclair (2003)and Other sorts of specific reasons for favouring limited inflation have been suggested. Ideas on the general lines that some aspect of economic activity is improved by some inflation can be found in Tobin (1965)and Fischer (1974). Looking at the same matter from a different angle, one might consider the statistical relationship between inflation and growth, on which there was much attention in the 1960s and 1970s, but Sarel (1996)offers a later analysis. A more esoteric thought arises from Barro and Gordon (1983b)in the context of designing credible policy commitments. And the question of optimizing policy in the light of the risks raised by the zero lower bound have recently been thought to make a case for higher rates of inflation by Ball (2014), although you might like to consider Ascari and Sobordone (2014)as well, the first author being at Oxford. On the other hand, it has been argued that falling prices generate benefits in increasing liquidity: Friedman (1969).

Finally, and on a slightly different tack, it should perhaps be noted that there is a question about the measurement of inflation and the welfare effects of different rates of measured inflation: Moulton (1996),Boskin, Dulberger et al. (1998). Those considerations might for example affect the chosen target rate of measured inflation once the principles of what is optimal are resolved. There are, though, contrary arguments, such as in Gilbert (1961).

What target rate of inflation should central banks be told to achieve? Which are the decisive considerations in reaching your conclusion?

5. Why did American inflation rise in the 1970s

I reckon it is best to start with Clarida, Gali and Gertler (2000), then Orphanides (2003)and Nelson (2005)but in that last case, don’t get stuck taking detailed notes. You need Blinder and Rudd (2013)to be able to see the range of issues. Chowdhury and Shabert (2008)raises a point that should be noted, but then one is left wondering whether it is interest rates of money growth that we care about, and indeed, just why exactlyis it that we care? Then to see even more of the range of issues: Barry (1985),Keohane (1978)and Gordon (1975). Perry is a interesting as a serious attempt to understand what was going on at the time. What do you think about Campillo and Miron (1997)?

6. The conduct of monetary policy: Policy instruments and targets

Read the lecture notes and textbook as indicated on weblearn, of course. I hope no one is writing about this without an appreciation of the money supply determination process as described in McLeay, Radia and Thomas (2014)or Bianco and Sardoni (2017). Supposing we are all ok on that, I think Friedman (1990)is a good place to start. That, the textbook and the lectures, surely tell you all you want to know about Poole (1970). What is the relevance of Poole’s argument to current debates?

As this topic is presented, it seems to take its life from Woodford (2008)versus the rest. There the experience of the 1980s to think about – targeting the money supply was tried and abandoned. If you get the general sense from Goldfeld and Sichel (1990)you will appreciate that the problem was that if the demand for money (or velocity of circulation) were unpredictable, perhaps because of the effect of financial innovation, there was not much point in controlling the supply. The first half of Hendry (1980)is on this too, and if you have not read it, you might have a laugh.

Still, with the case against monetary targeting in mind: Berger, Harjes and Stavrev (2010)and Aksoy and Piskorski (2006). I supposeDale, Proudman and Westaway (2010)and particularly Blanchard, Dell’Ariccia and Mauro (2010)are useful papers, much to be recommended, so go ahead and work them in. I think you will work harder to make much useful out of Burgess and Janssen (2007)and Janssen (2009).

I would be interested to know how helpful you find Bernanke (2008). It is a gentle stroll through what I regard as well known history, but the young might find it fills a lot of gaps.

The first seventy pages of Papademos and Stark (2010)look to be a useful round up of ideas, but I doubt there is much finals-benefit in reading more than that. Reichlin and Baldwin (2014), I’m afraid I regard as lightweight.

Can a reasonable case be made for targeting the money supply? Or possibly ‘Does the American experience of the 1970s show that policymakers should target the money supply?’

7. Assess unconventional monetary policy

The key topic here is how to respond to the ongoing fall out of the crisis. You need to have an idea about what caused it, and you probably have one already, but I reckon Dimsdale (2009)gives a good enough outline, and Shin (2009)brings an important insight. In you want more than that, then its Gorton and Metrick (2012). Quantitative easing is obviously a big story so make sure to read Joyce, Tong and Woods (2011), and then Bowdler and Radia (2012)and Goodhart and Ashworth (2012), and Borio and Didyatat (2010). The other recommended ones from that Oxrep issue are Beedon, Chadha and Waters (2012)and Martin and Milas (2012). Kimball (2015)and {Bulow, 2015 #15964} have interesting ideas, yet to make a bit impact, I think. Yates (2003)is interesting for being so sceptical about the danger of hitting the zero bound,  as well as for the ideas about what to do about it.

8. The nature of money

Classically, there are said to be three, or sometimes four functions of money – means of payment, store of value, unit of account, and possibly ‘standard of deferred payment’. But there are issues as to which (if any, I suppose) is primary either in the sense that without that there could be no money, or historically prior in that in fact the emergence of money is attributable to it. Menger (1892)is the classic statement of an often-repeated story supposing that an evolutionary development of a means of payment explains the historical emergence of money, and presumably also makes that role logically primary. The argument is given a modern form by Kiyotaki and Wright (1989), but what, exactly, do they add to Menger? The view that the ‘unit of account’ role is primary was advanced by Innes (1913)and Innes (1914)and then adopted by Keynes (1930)chs 1 & 2. and in more recent versions can be found in, for example, Ingham (2004)ch 3 (or chapters 2 and 3) orTymoigne and Wray (2006)orWray (2004)ch 2 (or a lot of other places). These place emphasis on the importance of credit as emerging prior to money, Knapp (1924/1973)varies that slightly, seeing the state as playing an essential role. The debate continues with Melitz (1974), especially the introduction and chapter ‘General theory’. And the store of value function is emphasized by the treatment of Wallace (1980), and criticised by Tobin (1980). Ostroy and Starr (1990)has been widely read and may be worth a look for that reason alone, although parts of it become heavy going, one might think. Goodhart (1998)and Flandreau and Jobst (2009)are somewhat broader discussions which relate to these debates.

Explain Kiyotaki and Wright. Is anything essential to the emergence of money?

references

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McLeay, M., A. Radia and R. Thomas (2014). “Money creation in the modern economy.” Bank of England Quarterly Bulletin(1): 14-27 http://tinyurl.com/MRTBoE2014.

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Morrison, A. (2011). “Systemic risks and the ‘too-big-to-fail’ problem.” Oxford Review of Economic Policy27(3): 498-516

Moulton, B. (1996). “Bias in the consumer price index: What is the evidence?” Journal of Economic Perspectives10: 159-177 http://www.jstor.org/stable/2138559.

Nelson, E. (2005). “The great inflation of the seventies: What really happened?” Advances is macroeconomics5(1): Article 3 http://www.bepress.com/bejm/advances/vol5/iss1/art3/.

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Orphanides, A. (2003). “The quest for prosperity without inflation.” Journal of Monetary Economics50: 633-663

Ostroy, J. M. and R. M. Starr (1990) The transactions role of money in Handbook of monetary economics, volume 1ed B. M. Friedman and F. H. Hahn Amsterdam North-Holland 3-62.  BAL: 0775 b 035/01; SSL: HG221.HAN. http://www.sciencedirect.com/science/article/pii/S1573449805800049.

Papademos, L. D. and J. Stark (2010). Enhancing monetary analysis. Frankfurt, European Central Bank.  http://tinyurl.com/zy2r57r.

Phelps, E. S. (1973). “Inflation in a theory of public finance.” Swedish Journal of Economics75(1): 67-82 http://www.jstor.org/stable/3439275.

Poole, W. (1970). “Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model.” The Quarterly Journal of Economics84(2): 197-216 http://www.jstor.org/stable/1883009

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