ECN8620

Economics 8620

Monetary Institutions and Policy

Sanford 204

T, Th 2-3:15

 

George Selgin

Terry College Room 525

Selgin@uga.edu

 

Summary: This course is designed to complement my class on “Fundamentals of Monetary and Banking Theory.”  The focus of the course is on the workings of alternative monetary institutional arrangements, the ultimate aim being that of determining what sorts of arrangements are most capable of contributing towards economic stability and growth.

            The course is in five parts.  Part I examines "Macroeconomic Consequences of Monetary Disturbances."  It is aimed at showing why the choice of monetary institutions and policies matters.  Part II looks at "Monetary Laissez Faire." It treats the development and workings of monetary arrangements in the absence of government intervention.   Although the approach is unorthodox, I consider the study of laissez-faire monetary arrangements to be crucial to a proper understanding of the workings of actual, centralized monetary arrangements, in the same way that the theory free trade is crucial to a proper understanding of the effects of trade restrictions.   Part III, "The Positive Theory of Government's Role in Money," investigates the origins, motives behind, and consequences of, government regulation of money.  Part IV treats various options for "Managing Fiat Money" in a closed-economy setting.  Part V, finally, addresses "Monetary Policy Options for an Open Economy."

            The required reading materials consist of five books and various supplemental articles.  The books are Gordon Wood, ed., Money, Prices, and the Real Economy (London: Institute of Economic Affairs, 1998) (henceforth Wood); my own The Theory of Free Banking (Totowa: Rowman and Littlefield 1988) (henceforth, TFB) and Less Than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs 1997) (henceforth LTZ); Lawrence White’s Theory of Monetary Institutions (London: Blackwell 1999) (henceforth, White), and Vera Smith’s The Rationale of Central Banking (Indianapolis: Liberty Press 1990) (henceforth Smith). 

             Do not panic!  You won't be asked to purchase all of these books or to read them all in their entirety.  Wood and Smith are both available online, while TFB is available from my own hard drive.  Just click on the lecture reading links for these.  You are thus responsible for tracking down and purchasing copies of LTZ and White only. 

 

           

Class Format: The course uses a seminar format.  Students are expected to read all assigned readings prior to attending the associated seminar, where they will be expected to participate in an in-depth discussion of the reading topics.  Each student is asked to prepare no fewer than three questions to be raised during each session (where a session evolves around several readings, at least one question should be aimed at each).  It would be best for students to coordinate their questions, so as to avoid duplication; I will set-up an e-mail list-serve account to make this easy and to allow us to carry on discussion after actual class sessions.  Although I will lead most discussions, I also ask that every student lead at least one discussion.   Students are also expected to take part in several "debates" during the latter part of the course, as noted on the lecture schedule below, with half the class assigned to either side of a debate..

           Grades will be based on participation and on mid-term and final essay-type take home exams where these carry the following potential point scores: participation, 30 points (of which a good presentation counts 10 points); mid-term exam, 30 points; final exam, 40 points.

Lectures and Assigned Readings   (Links to assigned readings are supplied wherever possible):


Part I : Macroeconomic Consequences of Monetary Disturbances

1. Money and Prices.  Wood 2.

"The Quantity Theory of Money" (from the History of Economic Thought Website)
James Tobin, "Money and Income: Post Hoc Ergo Propter Hoc?"

2. Money and Interest Rates.  Wood 6.

Lastrapes and Selgin, "The Liquidity Effect: Identifying Short-Run Interest-Rate Dynamics Using Long-Run Restrictions"

David Laidler, "Woodford and Wicksell on Interest and Prices"

3. Money and Output.  Wood 7.

L. Albert Hahn, "Compensating Reactions to Compensatory Spending"

Milton Friedman, "Tradeoffs in Monetary Policy"

Judd and Rudebusch, "Taylor's Rule and the Fed: 1970-1997"

4. The Costliness of Monetary Disturbances

Leijonhuvfud, "Costs and Consequenes of Inflation"

Prescott, "Efficiency of the Natural Rate"

Garrison, 'The Austrian Theory of the Bueiness Cycle in Light of Modern Macroeconomics"


Part II: Monetary Laissez Faire

1.  The Evolution of a Laissez-Faire Monetary System.  White 1; TFB 2.
2.  Commodity Money,  White 2.

Robert Barro, "Money and the Price Level under a Gold Standard"

Roger Garrison, "The 'Costs' of a Gold Standard"

3.  Free banking.  White 3; TFB 3, 4, 5, and 6.

Selgin, “Free Banking and Monetary Control”

idem., "In-Concert Overexpansion and the Precautionary Demand for Bank Reserves."

4.  Scotland as a Free-Banking System.  Smith 3;

White, “Scotland as a Free Banking System”
5.  Private Fiat Monies?  White 12;

Selgin and White, "How Would the Invisible Hand Handle Money?"
Selgin, “On Ensuring the Acceptability of a New Fiat Money”

Berentsen, "Time-Consistent Private Supply of Outside Fiat Money"

Araujo and Camargo, "Private Supply of Fiat Money."

DEBATE:  Is Private Fiat Money Feasible?

Part III: The Positive Theory of Governments' Role in Money

1. The Market Failure View I: Natural Monopoly and Public Goods Arguments.  White 5. 

           Friedman and Schwartz, "Has Government Any Role in Money?"

           Selgin, "Milton Friedman and the Case Against Currency Monopoly"
2.  The Market Failure View II:  Inherent Instability and the Need for a Lender of Last Resort.  White 6; Wood 3. 

Goodhart, "Why do Banks Need a Central Bank?"

Selgin, “Legal Restrictions, Financial Weakening, and the Lender of Last Resort”
Bordo and Schwartz, "The Performance and Stability of Banking Regimes under Self-Regulation"

Selgin, "Bank Self-Regulation: Comment on Bordo and Schwartz"

DEBATE: Do Banks Need a Central Bank?

3.   A Fiscal Theory. 
Selgin and White, "A Fiscal Theory of Governments' Role in Money"
Giovaninni and de Melo, “Government Revenue from Financial Suppression"
4.  The Historical Development of Central Banking.  White 4; Smith, especially 2, 5, and 9.
(Optional) Selgin, "The Suppression of State Banknotes"

5.  The Economics of Seignorage.  White 7

6.  The Political Business Cycle.  White 9.

Part IV: Managing Fiat Money

7. Central Banks as Monetary Central Planners. White 8; TFB 7.

8. The Case for a Monetary Rule.  White 10-11; Wood 4

Bordo and Kydland, "The Gold Standard as a Rule"

(Optional) Bordo and Rockoff, “The Gold Standard as a “Good Housekeeping Seal of Approval”
9.  Alternative Monetary Rules:  Price-Level and Nominal Income Targetting and the "Productivity Norm"  Wood 5;  LTZ.

Stephen L. Neal, “The Case for Zero Inflation”

Liejonhufvud, "The Perils of Inflation Targetting"

(Optional) Aiyagari, "Deflating the Case for Zero Deflation"

Dowd, “Deflating the Productivity Norm”
Selgin, “The Case for a Productivity Norm: Comment on Dowd”

(Optional) Selgin, “The Price is Right"

DEBATE: Is Deflation Desirable?

Part V: Monetary Policy Options for an Open Economy

1. Fix or Float?

Obstfeld and Rogoff, “The Mirage of Fixed Exchane Rates”

Carmen Reinhart, “The Mirage of Floating Exchange Rates"

Schuler, “The Problem with Pegged Exchange Rates”

2. Currency Boards

Humpage, “An Introduction to Currency Boards”

Roubini, “The Case Against Currency Boards”

Zarazaga, "Building a Case for Currency Boards"

Hanke, "The Disregard for Currency Board Realities"

DEBATE: Are Currency Boards Worthwhile?

3.  Dollarization.

Schuler, “Basics of Dollarization”

Fischer, “Seignorage and the Case for a National Money”