Course Outline

Topic 1: Introduction

  • An Overview of the Financial System: Financial intermediaries vs. financial markets, the bond market, the stock market, foreign exchange markets, banks and other financial institutions.
  • What is Money?: How money is defined, functions of money, current measures of the money supply, review of monetary policy and inflation, business cycles, and interest rates.

Readings: Mishkin Chapters 1, 2, 3


Topic 2: Financial Markets

  • Introduction to Interest Rates: Determining and measuring interest rates, rates of return, yield to maturity, present value.
  • Asset and Money Markets: Asset demand, supply and demand in the bond market, equilibrium interest rates, supply and demand in the market for money, liquidity preferences.
  • Risk in Financial Markets: Risk structure and term structure of interest rates, default risk.
  • The Stock Market: Financial market efficiency and the Efficient Market Hypothesis, theory of rational expectations, pricing common stock.

Readings: Mishkin Chapters 4, 5, 6, 7


Topic 3: Financial Institutions

  • Management of Financial Institutions: Basics of banking, bank balance sheet, asset management, liability management, managing credit risk and interest rate risk.
  • Banking Regulation and Structure: Deposit insurance, FDIC, consumer protection, regulation on asset holdings and competition, bank capital requirements, international banking regulation.
  • Financial Crises: Factors causing financial crises, financial crises in advanced economies vs. emerging market economies.

Readings: Mishkin Chapters 8, 9, 11, 12


Topic 4: Central Banks and Monetary Policy

  • Central Banks and the Federal Reserve System: Origins and structure of the Federal Reserve, Board of Governors and the Federal Open Market Committee, structure and independence of other central banks.
  • Money Supply Process: Open market operations, factors affecting the monetary base, the deposit creation process, money multiplier, reserve requirements.
  • Tools of Monetary Policy: The Federal Funds rate, market for reserves, lender of last resort, advantages and disadvantages in discount policy vs. open market operations.
  • Monetary Policy Goals and Strategies: Price stability goal and the nominal anchor, economic growth and employment vs. price stabilization, stability of financial markets and interest rates.

Readings: Mishkin Chapters 13, 14, 15, 16