Central banking 2400-FiR3BC
The lecture covers the following problems:
• Concepts and origins of money, Kyotaki model.
• High inflation – social and economic consequences. Hyperinflation episodes – lecture for today.
• Theory of seigniorage. The value of central bank.
• Short history of central banking – different goals and missions.
• National Bank of Poland. History and legal framework.
• Banking panics – definition, history, mechanism and modeling.
• Bagehot formula, lender of last resort, Goodhart’s model.
• Supply of money – traditional and modern approach. Balance sheet of central bank. Monetary aggregates and aggregation theory. Divisia index.
• Theoretical and practical problems of measuring inflation, the concept of core inflation, costs of inflation/deflation. McCallum-Goodfriend Model. Optimal inflation?
• Basic transmission mechanisms of monetary policy.
• Models of monetary policy and optimal control theory. Tinbergen-Theil approach. Effectiveness of monetary policy – controlling supply of money or interest rates?
• Triangle model of inflation. The concept of direct inflation targeting.
• Rules vs. discretion in monetary policy, Barro-Gordon model.
• Decision-making bodies of central banks. Monetary Policy Council – information pooling.
• Effectiveness of central banks, transparency, credibility and independence of central banks
• Principles of central bank communication.
Type of course
Prerequisites (description)
Course coordinators
Learning outcomes
Student is familiar with Kyotaki model of money and arguments for necessity of money in modern economies. Student understands the nature of inflation and its main economic and social consequences. Student understands the outcomes of extreme inflation or hyperinflation and also deflation. He understands the sources and consequences of banking panics. Student understands the redistributive effects of inflation, second-round effects, price distortion. The student is aware that the threat of inflation is a permanent phenomenon, requiring everlasting concern.
Student knows and understands the basic tasks of central banks in market economies. 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 with nominal and real variables and in different time horizons. He 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’s model.
Student knows and understands the basic conceptual models of the central bank -including its objective function. He is familiar with the theory of seigniorage. Student understands the importance of dynamic models and forecasts for the appropriate monetary policy. Student knows the main decision-making bodies in the central bank.
Student has knowledge about triangular model of inflation. Student knows the concept of monetary policy transmission mechanism and understand the basic channels, including the interest rate channel. Student has knowledge about 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 communication of the central bank. Student knows and understands the concept of credibility, transparency and central bank independence. Student can make an overall analysis of the key messages of the central bank: monetary policy guidelines, minutes, inflation reports etc.
KU05, KU06, KK01, KK03, KU04, KU03. KU02, KU01, KW03, KW02, KW01
Assessment criteria
Written exam - multiple choice test, containing 45 questions with four possible answers. And two open questions. Time of writing - 50 min.
Bibliography
Books:
Bindseil, U. Monetary policy operations and the financial system, Oxford 2018
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
Suggested articles:
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
Additional information
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