Central Banking 2400-FiR3BCa
The lecture aims at:
• provide students theoretical knowledge about the main problematic areas of central banking • provide basic models currently operating in central banking including ESCB, with particular reference to the role of the ECB and examples of national central banks from countries outside the monetary union
• develop the abilities, by providing appropriate tools to analyze, evaluate and interpret the basic information provided by modern central banks, including reports on inflation, inflation forecasts, growth rates and interest rates, etc..
The lecture will be discussed include the following problems:
• objectives, legal and organizational basis for central banks
• concepts of money, its supply and demand - with particular reference to the impact (the problem of exogenous / endogenous) and the instruments of central banks
• decision-making bodies of central banks and their functioning, the Monetary Policy Council • theoretical and practical problems of measuring inflation, the concept of core inflation
• basic transmission mechanisms of monetary policy
• the concept of direct inflation targeting
• models of monetary policy with particular emphasis on optimal control
• a rule of discretion in monetary policy, Barro-Gordon model,
• The concept of monetary policy, the application
• the problem of the effectiveness of central banks, including monetary policy, the importance of transparency, credibility and independence of central banks, the issue of measurement
• the principle of central bank communication
• problems of central banking in the context of globalization, integration, etc..
The student knows and understands the basic tasks of central banks in market economies, the legal basis of trim their operations in Poland - the Polish Constitution and the Law on the National Polish Bank.
Student knows and understands the basic conceptual model of the central bank - Tinbergen-Theil, including the concept of the objective function of the central bank. Student understands the importance of dynamic models and forecasts for the construction of appropriate behavior in the central bank. Student knows the role of a variety of economic models played in the creation of the monetary policy.
Student knows the main decision-making at the central bank and understand the functioning of its decision-making bodies such as the management board and the monetary policy.
Student understands the nature of inflation and its main economic and social consequences. Student understands the consequences of extreme inflation, and hyperinflation and also deflation. Student knows and understands the concept of core inflation.
Student knows the central bank's balance sheet. Student has knowledge of the monetary aggregates, the mechanism of money creation, the basic types of demand for money, monetary union with nominal and real variables in different time horizons. Student knows the model of St. Louis. Student understands the concept of neutrality of money.
The student understands the essence of inflation expectations and their role in monetary policy. Student knows the adaptive expectations model and its application in modeling hyper-inflation with the Cagan model.
Student has knowledge about triangular model of inflation. Student knows the concept of monetary policy transmission mechanism and understand the basic broadcast channels, including the interest rate channel.
Student has knowledge of the central bank's objectives and possible instruments to achieve them. Student understands the concept of direct inflation targeting, and how to determine the benefits and weaknesses of such a strategy. Student understands the importance of Lucas critique in the evaluation of central bank actions.
Student knows and understands the problems of discretion and rules in monetary policy. Student has knowledge about ways to communicate with the environment of the central bank. Student knows and understands the concept of credibility, transparency and central bank independence
Student is able to assess the intensity of inflation processes in the economy.
Student is able to identify the macroeconomic factors affecting the intensity of inflation processes. Students can make a basic analysis of the extent to which the inflation target. Student knows how to explain the differences between core inflation and the inflation rate.
Student is able to directionally assess the outlook for inflation in the near future (several quarters) based on actions taken by the monetary authorities.
Student can make an overall analysis of the key messages of the central bank, such as monetary policy guidelines, a description of discussion at meetings of the monetary policy, inflation reports
C. Social competence:
The student is aware of the economic and social harm is too high inflation. Student understands the impact of redistributive effects, second-round effects, price distortion on economy. The student is aware that the threat of inflation is a permanent phenomenon, requiring a permanent concern for monetary authorities.
Student knows the historical examples, including the most recent past, showing that high inflation is a persistent phenomenon, difficult to eradicate, and the social costs of disinflation policy under such conditions is high.
Student understands the nature and mechanisms of the inflation tax, and is aware that inflation requires public attention and control.
Student understands the need for social sensitivity and response to the economic authorities' actions, which may lead to excessive inflation. Student understands the need to deepen the knowledge on the phenomena of inflation, especially in an increasingly globalized and integrated financial world. Student understands the Constitutional importance of central bank independence, including the role of guarantor of the value of money. Student is able to work in the institutions and entities for whom it is important to understand the basic principles of monetary policy and the ability to interpret measures of central bank
Written exam - multiple choice, containing 50 questions with four possible answers. Time of writing test - 50 min.
Bofinger, P., Monetary Policy. Goals, Institutions, Strategies, and Instruments Oxford University Press, 2001
Cukierman, A., Central Bank Strategy, Credibility and Independence. Theory and Evidence. The MIT Press. 1992 Chapters: 2-7, 13, 18-20
Walsh, C.E., Monetary Theory and Policy, The MIT Press, 2003 Chapters: 1,2,7, 9-11
Arnone, M., Bandirea, L., Monetary Policy, Monetary Areas, and Financial Development with Electronic Money, IMF Working Papers 122/2004
Berger, H., Ehramann, M., Fratzscher, M., Monetary Policy in the Media, ECB Working Paper Series 679/2006
Blinder, A., Goodhart, Ch., …How Do Central Banks Talk?, Geneva Report on the World Economy, July 2001
Blinder, A.S., Monetary Policy Today: Sixteen Questions and about Twelve Answers, Princeton University 2006
Blinder, A.S., Wyplosz, Ch., Central Bank Talk: Committee Structure and Communication Policy,
Bordo, M.D., Jeanne, O., Monetary Policy and Asset Prices: Does ‘Benign Neglect’ Make Sense? International Finance 2002
Bank of England Inflation Reports
Cateau, G., Monetary Policy under Model and Data-Parameter Uncertainty, Working Paper 2005-6, Bank of Canada
Christl, J., Regional Currency Arrangements: Insights from Europe. Working Paper 125, Oesterreichische Nationalbank, 2006
Ehrmann, M., Fratzscher, M., Central Bank Communication: Different Strategies, Same Effectiveness?, ECB November 2004
Fracasso, A., Genberg, H., Wyplosz, Ch., How Do Central Banks Write? CEPR 2003
Hamilton, J.D., Oil and Macroeconomy, University of California, August 2005
Mankiw, N.G., Reis, R., What Measure of Inflation Should a Central Bank Target? 2003
Kilian, L., Manganelli, S., Quantifying the Risk of Deflation, ECB 2005,
Lebow, D.E., Rudd, J.B., Measurement Error in the Consumer Price Index: Where Do We Stand? FED December 2001
Rogoff, K., Impact of Globalization on Monetary Policy, Harvard University, August 2006
Svensson, L.E.O., Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets, NBER 1996
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