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Economics

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Monetary Thought and Policy

Module Code: EC4110

Module Name: Monetary Thought and Policy

  • ECTS weighting: 15
  • Semester/term taught: Michaelmas + Hilary Term
  • Contact Hours: 44 hours of lectures and 10 hours of tutorials
  • Module Personnel: Lecturer - Professor A. Murphy

Learning Outcomes

Having successfully completed this module, you will be able to:

  • Analyse monetary theory in greater detail
  • Outline the intellectual roots of monetary and macroeconomic theory
  • Use monetary theory to assess how it may be implemented as monetary policy

Module Learning Aims

The stance of monetary policy has a significant influence on financial markets which in turn may seriously impact on the real economy. The recent near meltdown in financial markets raises issues as to the monetary policies of the Federal Reserve System, the European Central Bank and the Bank of England. The US and Great Britain have recently experienced the type of banking runs and financial collapses that many commentators believed could no longer occur in a developed economy. In the European Monetary Union continuous crises have been marked by capital flight and financial bankruptcies. The investment banking sector at Wall Street has undergone dramatic bankruptcies, nationalizations and take-overs. In Ireland the financial system has witnessed a series of traumatic shocks since 2008 that have had enormous repercussions for the real economy. What is happening and why has there been so much intervention from governments, Central Banks and the International Monetary Fund?

Financial bubbles and bank runs have occurred since the eighteenth century. Over the centuries monetary theory has analysed these types of issues. The objective of this course is to link monetary theory to monetary policy by investigating the type of theories that evolved and the way in which they were recommended as policies across time. The time period stretches from the era of mercantilism to new classical macroeconomics. By analysing the different monetary theories applied through time it is hoped to evaluate the intellectual criteria on which current monetary policy is based. Are these criteria deeply influenced by the view that money matters or the opposing view that money does not matter? Is money neutral, super-neutral or does it have a real influence on the economy? In answering these questions one is better positioned to examine the type and impact of monetary policies implemented by the major central banks in the global economy.

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Module Content

  • Mercantilism – The Midas fixation of the early writers; 'the fear of goods and love of money' complex; the misinterpretation of Sir Thomas Mun by Adam Smith and John Maynard Keynes. Should countries run balance of payments surpluses? Is economic activity a zero sum game? Was mercantilistic monetary policy an aggressive or defensive strategy?
  • Sir William Petty and the creation of macroeconomics. Verbum Sapienti . National income measurement. The national income identity. The distinction between wealth and income. The introduction of the velocity of circulation into the quantity theory.
  • The monetary economics of John Law in the Essay on a Land Bank and Money and Trade . Money demand and money supply. Inflation in a money demand/money supply model. The circular flow of income. The law of one price. Intrinsically valuable money versus fiat money.
  • John Law's implementation of his monetary theory as monetary policy in France during the Mississippi System.
  • Financial bubbles. Were the Dutch tulipomania, the Mississippi System and the South Sea speculation examples of financial bubbles?
  • Macroeconomic model building in Richard Cantillon's Essay on the Nature of Trade in General . The discovery of the entrepreneur. The circular flow of income. The black box transmission mechanism. The monetary approach to the balance of payments. How to use monetary theory to make a fortune, the case of Richard Cantillon.
  • Sects and economics . The creation of a new sect called 'les économistes' by Gournay and Quesnay. François Quesnay and Physiocracy. How to zig-zag your way through the tableau économique? Economic activity no longer a zero sum game - the potential for economic growth.
  • The rise of monetarism. David Hume on the way money influences inflation and the balance of payments. Profits and the rate of interest. The link between Hume and Milton Friedman. Joseph Massie on the natural rate of interest.
  • Turgot on the role of savings and capital formation. The determination of the rate of interest.
  • Is there goodness in greed? Adam Smith and the Wealth of Nations. Smith's approach to monetary economics.
  • Henry Thornton's monetary theory. An analysis of the three Mr. Thorntons in The Paper Credit of Great Britain. Ricardo on money. The bullionist controversy.
  • The transformation of economics into the dismal science. Malthusianism and the iron law of wages. The rise of the invisible hand, the use of the Walrasian auctioneer and the demise of the entrepreneur.
  • The return of the Schumpeterian entrepreneur . Innovations, creative destruction, the link between entrepreneurs and bankers.
  • The equation of exchange. Irving Fisher on the quantity theory of money. The Cambridge approach.
  • 'In the long run we are all dead' . Keynes is certainly dead but what about his theory? Which theory? Fundamentalist, hydraulic or reconstituted reductionism?
  • Clower and Leijonhufvud's reinterpretation of Keynes. The new Keynesianism.
  • The Phillips Curve and its demise. Friedman and the role of monetary policy. Rational expectations.
  • New Classical Macroeconomics Mark 1 and Mark 2.
  • The macroeconomics big board. Monetary targets, inflation targets.
  • Current monetary policy. What are banks? Why did the sub-prime crisis occur? Securitisation of assets, pass the parcel and off balance sheet activities. The new world of finance. Moral hazard and the role of central banks.
  • The near collapse of the Irish financial system. Ireland's four crises – the property market crisis, the banking crisis, the fiscal crisis and the financial crisis.
  • The use of Minsky's financing phases to analyse the collapse of the banking system.
  • The events of September 29, 2008. Where there other policies that should have been introduced?
  • November 2010 – the arrival of the Troika.
  • The way forward.
  • Central Banks. The role of the European Central Bank, the Bank of England and the Federal Reserve System.

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Recommended Reading List

  • 'Bubble Symposium' Journal of Economic Perspectives, vol. 4. no.2, Spring 1990.
  • Garber, Peter M. Famous First Bubbles (Massachusetts Institute of Technology, 2000)
  • Donovan, Donal, and Antoin E. Murphy. The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis (OUP, 2013)
  • *Hutchison, Terence. Before Adam Smith. The Emergence of Political Economy 1662-1776 (Blackwell, 1988)
  • Kindleberger, C. Manias, Panics and Crashes – A History of Financial Crises (Macmillan, 1978, 1996)
  • Leijonhufvud, A. On Keynesian Economics and the Economics of Keynes (OUP, 1968)
  • Middleton, Roger Charlatans or Saviours? Economists and the British Economy from Marshall to Meade (Edward Elgar, 1998)
  • Milne, Alistair The Fall of the House of Credit (Cambridge University Press, 2009)
  • Murphy, Antoin E. Richard Cantillon : Entrepreneur and Economist (OUP, 1986)
  • Murphy, Antoin E. John Law Economic Theorist and Policy-Maker (OUP, 1997)
  • Murphy, Antoin E. Monetary Theory 1601-1758. (Routledge, 1997).
  • *Murphy, Antoin E. The Genesis of Macroeconomics (OUP, 2009).
  • Rotwein, Eugene (ed.). David Hume.Writings on Economics (University of Wisconsin Press, 1970)
  • *Schumpeter, Joseph. A History of Economic Analysis (1954, re-print Routledge, 1997).
  • *Snowdon, Brian, and Howard Vane, Modern Macroeconomics (Edward Elgar, 2005)
  • *Spiegel, Henry. The Growth of Economic Thought (Duke University Press, 1983)
  • Vickers, D. Studies in the Theory of Money (Kelley, 1968)

Reading Germane to the Current Financial Crisis

  • Akerlof, George and Robert Shiller (2009) Animal Spirits (Princeton University Press)
  • Carswell, Simon (2011). Anglo Republic (Penguin)
  • Ferguson, Niall (2008) The Ascent of Money (Allen Lane, London)
  • Kindleberger, Charles (1989) Manias, Panics and Crashes (Basic Books)
  • Lewis, Michael (2010) The Big Short (Allen Lane, London)
  • Morris, Charles R. (2008) The Two Trillion Dollar Meltdown (Public Affairs, Books)
  • Roubini, Nouriel and Stephen Mihm (2010) Crisis Economics (Allen Lane, London)
  • Sorkin, Andrew Ross (2009) Too Big To Fail (Allen Lane, London)
  • Reinhart, Carmen M. and Kenneth S. Rogoff (2009) This Time Is Different (Princeton University Press)
  • Shiller, Robert (2000) Irrational Exuberance (Princeton University Press)

Journal articles will be recommended in lectures.

Internet Sites

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Module Pre Requisite

EC2010

Assessment Details

A Michaelmas Term assignment is worth 20% of the overall grade and the annual exam is worth 80% of the overall grade.

Module Website

TBC

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