Brief Outline of Topics Covered in Lecture 7
Chapter 15 Tools of Monetary Policy
The Market for Reserves and the Federal Funds Rate
- Supply and Demand in the Market for Reserves
- Tools of monetary policy: Open Market Operations, Discount Policy, and Reserve Requirements
Chapter 19 Money Demand
Quantity Theory of Money
- Velocity of Money and Equation of Exchange
- Quantity Theory
- Quantity Theory of Money Demand
The Cambridge Approach
Is velocity a Constant?
Keynes’s Liquidity Preference TheoryFurther Developments in the Keynesian Approach
- Transactions Motive
- Precautionary Motive
- Speculative Motive
- Putting the Three Motives Together
Video:
Additional Reading:
- Holding Off Disaster - The Race to Save Lehman - NYTimes.com
- Oliver Williamson, a gentleman. - Virulent Word of Mouse
- How Moody's sold its ratings -- and sold out investors - McClatchy
- The September CPI with all the trimmings - macroblog
- Greenspan Says U.S. Should Consider Breaking Up Large Banks - Bloomberg.com
- Federal Contractors Report 30,000 Stimulus Jobs - washingtonpost.com
- Understanding a systemic banking crisis - voxeu.org
- Why the US dollar may strengthen in 2010 - voxeu.org
Application:
Ben Bernanke:
Fed Chief Cites Trade Imbalances’ Role in Crisis, by Edmund Andrews, NY Times: Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday that global trade imbalances played a central role in the global economic crisis and warned that the both the United States and fast-growing Asian nations needed to do more to prevent them from recurring.
“We were smug,” Mr. Bernanke said of the United States, saying the American financial regulatory system was “inadequate” at managing the immense inflows of cheap money from China and other countries that had huge trade surpluses.
Though the Fed chairman acknowledged that trade imbalances have declined sharply as a result of the crisis, mainly because trade itself plunged, he warned that American foreign indebtedness will aggravate the imbalances once again unless the United States reduces its soaring federal budget deficit.
“The United States must increase its national saving rate,” he said. “The most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.” ...
By the same token, he said, Asian countries needed to rely less on exports and more on their consumption at home for their economic growth. One way to increase Asian household consumption, he said, would be for countries like China to increase social insurance programs and reduced the uncertainty that currently hangs over many consumers. ...
With the Asian economy expanding at an annualized rate of 9 percent in the second quarter of this year, and China’s economy expanding at rates of more than 10 percent, Mr. Bernanke said, “Asia appears to be leading the global recovery.”
But the Fed chairman warned that the United States-led crisis was fueled in large part by huge inflows of cheap money to the United States from countries like China that were trying to recycle dollars from their huge trade surpluses.
The Fed chairman noted that global trade and financial imbalances have narrowed considerably since the crisis began... But he cautioned that the imbalances could widen out again as economic growth revives. While the United States has to tighten its belt by saving more and consuming less, China and other Asian countries need to increase their consumer spending in order to promote faster domestic economic growth.
Mr. Bernanke avoided what was in many ways the elephant in the room: the value of the United States dollar. The dollar has dropped sharply in recent weeks against the euro and the Japanese yen, which has helped increase American exports by making them cheaper in some foreign markets. But the dollar has not budged in more than a year against China’s renmimbi...
