Princeton University Department of Economics ECO 342 Money and Banking fall 2010 September 14 2010 Instructor Ana Babus ababus princeton edu BCF 305 258 0126 Office Hours W 4 30pm 5 30pm Preceptor Constantinos Kalfarentzos kkalfare Princeton EDU Fisher Hall B08 Office Hours T 2 20pm 3 20pm location TBD Lecture T Th 10 00 10 50 am Guyot 10 Precepts T 11 00 11 50 am T 1 30 2 20 pm W 7 30 8 20 pm This course studies the role that financial markets institutions and money play in resource allocation We explore these questions analytically using tools of economic theory We begin with an overview of the main concepts and ideas Then we analyze prices and allocations in a frictionless environment The main goal is to be able to evaluate state contingent goods at different future dates In the first half we follow relatively closely the textbook In the later half of the course we introduce the frictions of private information limited enforcement sticky nominal wages and product prices in order to examine financial institutions money and government policy Here the students are expected to read assigned articles in addition to the textbook There will be three weekly precepts Precepts will have three main functions First they will review background necessary to understand the lectures second they will occasionally cover new material including illustrative cases third they will answer questions about lectures and assignments 1 Prerequisites Econ 300 or 310 and Econ 301 or 311 Those who have background of only 100 level micro and macro economics can take this course on their own responsibility 2 Grading Midterm 30 closed book Final Examination 50 closed book Homework 20 3 Textbook The required textbook for the course is Money and Banking by Robert Wright and Vincenzo Quadrini 2008 Flatworldknowledge com The students can read the textbook at http www flatworldknowledge com The book will NOT be available for purchase through Labyrinth Books Students who wish to buy the hard copy need to order it themselves at Flatworldknowledge In addition to the textbook the second half of the course uses research articles The references provided below are indicative and may change in due course The articles will be available electronically at the blackboard of this course and or E Journals of Princeton Library 4 Course Outline I II An Overview Flow of funds and System of National Accounts Time and Resource Allocation in a Frictionless Economy 2 Households Choice of Consumption and Saving 3 Firms Investment Choice 4 A General Equilibrium Model of a Two Period Economy under Certainty Valuation Models 5 Valuation of Bonds 6 Valuation of Common Stocks Financial Institutions and Monetary System 7 The Role of Money 8 The Role of Financial Intermediaries V Monetary Policy and Financial Crisis 9 Monetary Policy 10 Financial Crisis and Policy Reaction III IV 5 References T Adrian and H Shin Money Liquidity and Monetary Policy American Economic Review May 2009 600 605 B Bernanke The Macroeconomics of the Great Depression A Comparative Approach Journal of Money Credit and Banking 1995 257 276 B Bernanke and M Gertler Inside the Black Box the Credit Channel of the Monetary Policy Journal of Economic Perspectives Fall 1995 27 48 M Brunnermeier Deciphering the 2007 08 Liquidity and Credit Crunch in Journal of Economic Perspective 2008 77 100 N Kiyotaki and R Wright Acceptability Means of Payments and Media of Exchange Quarterly Review Federal Reserve Bank of Minneapolis Summer 1992 Available at http www minneapolisfed org research qr D Diamond and P Dybvig Bank runs Deposit Insurance and Liquidity Journal of Political Economy 1983 401 419 Available at E Journal of Princeton Library G Gorton Slapped in the Face by the Invisible Hand Banking and the Panic of 2007 mimeo Yale University 2009 G Gorton and A Metrick Securitized Banking and the Run on Repo Yale ICF Working Paper 09 14 2009 Available at the author s webpage N Kiyotaki and J Moore Credit Cycles Journal of Political Economy 1997 211 N Kiyotaki and J Moore Balance Sheet Contagion American Economic Review N Kiyotaki and J Moore Evil is the Root of All Money American Economic Review 248 May 2002 46 50 May 2002 62 66 T Sargent and Neil Wallace Some Unpleasant Monetarist Arithmetic Quarterly Review Federal Reserve Bank of Minneapolis Fall 1981 S Williamson Recent Development of Modeling Financial Intermediation Quarterly Review Federal Reserve Bank of Minneapolis Summer 1987