ECONOMICS 3215: MONEY, BANKING AND FINANCIAL MARKETS

Instructor: Mike Shannon Winter 2014Office: Regional Centre RC3016D e-mail: mshannon@lakeheadu.caOfficial Office Hours: Tuesday 1:00-2:30pm, Wednesday 11:30am-1:00pm

Required Text:S. Cecchetti and A. Redish. Money, Banking and Financial Markets. McGraw-Hill Ryerson,

2010, 1st Canadian edition. Paper copies of the text are available from the bookstore. Alternatively, you can buy access to an electronic version of the text at:

http://www.coursesmart.com/0070386315 This gives you access to an electronic version for 6 months.

Overheads and Course WebsiteElectronic copies of the text overheads will be made available through the course web page: http://flash.lakeheadu.ca/~mshannon/ec3215.html. The overheads will be in Word format. Other electronic sources and reference materials will also be made available from the web page.

Marking Scheme:Midterm 30% (February 13)

Assignments 20%Final 50%

There will be at least two assignments. These will expose you to some data sources and have you read some sources (including textbook chapters) not covered in class.

Course Outline (sources may be updated as the course progresses)

1. Introduction to Money and the Financial SystemSource: Cecchetti and Redish, Ch.1 (read this on your own)

2. The Roles and History of Money and the Payments System- What is money? What forms does it take? Its history.- Money and macroeconomics: Quantity theory; recessions and money. Sources: Cecchetti and Redish, Ch. 2, also pp. 466-468, p. 471 on the Quantity theory. Money Supply Data from the Bank of Canada website. J. Powell A History of the Canadian Dollar (see course page link to the Bank of Canada website: provides additional detail on the evolution of money in Canada). P. Krugman (1998) “The Babysitting the Economy” Slate August, 1998 (see website)

3. The Financial System: an Overview- What does the financial system do? - Instruments (assets), markets, institutions, borrowers and lenders.- The national balance sheet: a snapshot of the Canadian financial system.- An economy's flow of funds constraint. Source: Cecchetti and Redish, Ch.3

Statistics Canada, National Balance Sheet Accounts (see CANSIM website:

Financial and Wealth Accounts tables)VoxEu Debates feature “Why do we need a financial sector?” various lead

articles (http://www.voxeu.org/ and class website)

4. Present Value, Yields and Interest Rates- What is an asset? - Present value- Calculating yields and rates of return - Nominal and real interest rates.Source: Cecchetti and Redish, Ch.4 and Ch.6, pp. 107-113.

5. Basic Economics of Risk- Economic definitions and measurement of risk.- Risk aversion- Reducing risk in a portfolio: diversification via hedging and risk spreading.Source: Cecchetti and Redish, Ch. 5

6. A Supply-Demand Model of a Financial Market- Supply-demand applied to financial markets. - What determines asset prices and yields? A supply-demand perspective.

Source: Cecchetti and Redish, Ch.6, also handouts for applications.

7. The Structure of Interest Rates and Yields: - Risk structure of interest rates- Term structure of interest rates: the “Yield Curve”- Linkages between international interest rates (Cecchetti and Redish, Ch. 10)

Source: Cecchetti and Redish, Ch. 7 Bank of Canada Financial System Review., Bank of Canada rates and statistics.

8. Stock Markets and Asset Market Bubbles- Stocks as financial assets: basic models of stock valuation- The Theory of Efficient Markets: - Bubbles: what? do they exist? how rational are financial markets? - Behavioral Approaches: Shillers model of a bubble. Sources: Cecchetti and Redish, Ch.8

B. Malakiel, B. A Random Walk Down Wall Street. (e-book of 1999 version is available from the library website)

R. Shiller Irrational Exuberance (book and website data)K. Lansing (2007) “Asset Price Bubbles” Federal Reserve Bank of San

Francisco Economic Letters (see course website)R. Shiller (2003) “From Efficient markets to Behavioral Finance” Journal of

Economic Perspectives (see pp. 91-101)P. Garber (1990) “Famous First Bubbles” Journal of Economic Perspectives,

35-54. C. Noussair, S. Robin and B. Ruffieux (2001) “Price Bubbles in Laboratory

Asset markets” Experimental Economics, 87-105. J.M. Keynes (1936) The General Theory of Employment, Interest and Money,

Ch. 12 (online -- see link from course website)

9. The Economic Analysis of Financial Intermediaries- Roles of financial intermediaries (FIs). - Adverse selection and moral hazard: implications for financial structure.- Economics of banks and banking.

2

- Financial crises and information problems (mainly in section 11). Source: Cecchetti and Redish, Ch.11, 12

10. Financial Intermediaries in the Canadian Financial System- Banks and Near Banks in Canada- Other FIs in Canada. Cecchetti and Redish, Ch. 13Office of the Superintendent of Financial Institutions

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=3

11. Financial Crises and the Role of Government - Financial crises: Causes? Effects? Examples. - Government responses to financial crises. - Subprime Crisis: What happened and why? - Government debt: a problem? possible source of crises? Sources: Cecchetti and Redish, Ch.14, 23

Bank of Canada Financial System Review (issues since Dec. 2007).B. Bernanke (2010) Statement to the Financial Crisis Inquiry Commission

(website)O. Blanchard (2009) “The Crisis: Basic Mechanisms and Appropriate Policies”

MIT Economics Working Paper 09-01 (on course website).R. Shiller (2008) The Subprime Solution. Princeton University PressS. Cechetti, M. Kohler and C. Upper (2009) Financial Crises and Economic

Activity. Presented at Federal Reserve Bank of Kansas City Jackson Hole Symposium August, 2009.

L. Summers (2008) Okun Lecture: Learning from and Responding to the Financial Crisis (Yale University Speech April 2008) – transcript on website.L. Ball and G. Mankiw (1995) “What do government deficits do?” C. Reinhart and K. Rogoff (2009) This Tine is Different: Eight Centuries of

Financial Folly. MIT Press.

Money Creation, Central Banking and Monetary Policy

12. Central Banks - Roles of a Central Bank- Bank of Canada: a Brief History.

Sources: Cecchetti and Redish, Ch. 15-16 Bank of Canada website. M. Bordo and A. Redish (2006) “70-Years of Central Banking: the Bank of

Canada in an International Context”. Bank of Canada Review Winter 2005-06.

13. Money Creation: Roles of Banks and Central Banks- Reserves and Deposit Expansion. Cecchetti and Redish Ch. 20- The Bank of Canada's balance sheet and money creation. Cechetti and Redish, Ch. 17

14. Monetary Policy and Economic Activity- The Effect of the Money Creation on Financial Markets and Interest rates, Ch. 17- Macroeconomic models and money Ch. 18, 19- Money and Aggregate Demand: the Transmission Mechanism: the channels by which

3

monetary policy affects the economy. - Is money neutral?

Sources: Cecchetti and Redish, Ch. 21Christensen, Fung and Meh “Modelling Financial Channels for Monetary

Policy Analysis” Bank of Canada Review Autumn 2006.Fenton and Murchison ToTem: the Bank of Canada's New Projection and

Policy Analysis Model" Bank of Canada Review Autumn 2006.

15. What should monetary policy do? (assignment)- Objectives of Monetary Policy: Price Stability and/or Stabilization?- Monetary policy and bubbles: another role?Ceccheeti and Redish, Ch. 21C. Ragan (2006) Why Monetary Policy Matters?: a Canadian Perspective (Bank of

Canada website).

4