Archive for the ‘335 – Spring 2009’ Category

Administrative Alert (335-402): Email answers

May 10, 2009

Professor Vaughan is out of the country. He will reply to emails sent to him when he gets back.

Posted at 7:56 am CST

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Class News (335): Final Exam Aids

May 5, 2009

I have received a number of emails about time-inconsistency and monetary policy.  Accordingly, I dug up an old lecture and updated it: central-bank-independence-and-rules_money-and-banking_spring 2009.

I have also had some questions about why Fed independence may come under attack (and why should we care if it does).  Well first off, the Fed has become one of the largest (if not the largest) financial institution in the world.  At year-end 2008, total Fed assets were $2.2 trillion.  The largest U.S. bank holding company at that time was JPMorgan Chase ($2.175 trillion).  Since the beginning of the financial crisis, the Fed has pumped more than $1 trillion in liquidity into the System – more than either TARP 1 (originally passed at $700 billion) or the stimulus package ($787 billion).  Here is a related article from THE ECONOMIST: Federal Reserve: The Hedge Fund of Foggy Bottom.

Finally, all this matters because of the combination of (1) record excess reserves in the banking system and (2) record projected budget deficits.  As of March 2009, the monetary base was $1.64 trillion, and M2 was $8.32 billion – implying a M2 multiplier of 5.06.  The average M2 multiplier from January 2000 to September 2008 was 8.54.  So if the multiplier were to “mean revert,” M2 would rise to $14.03 trillion (an increase of 68.7%).  The Fed stated in the most recent FOMC statement (4/29/09):

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Fed is obviously confident the supply of excess reserves can be drained from the banking system as demand for those reserves declines, so M2 will not spike.  Foreign demand for U.S. financial assets (like Treasury debt) depends on expectations about the Fed’s likely success.  This particularly matters given the record budget deficits projected by the Congressional Budget Office (which will put pressure on the Fed to monetize the budget deficit to keep interest rates low).

Posted at 4:46 pm Eastern

Class News (335): Error on Quiz #10

May 5, 2009

The key to quiz #10 contained an error.  Question #6 was:

According to F&S, the most distinctive feature of the postwar (1948-1960) period was a sharply rising trend in velocity.  Correct answer: True

The key says false — clearly a mistake (see page 639).  Indeed, the whole point of the chapter was attempting to explain why the secular trend from 1869 to 1960 (taken as a whole) was a decline averaging 1% per year — yet velocity rose from 1948 to 1960.

I will give everyone who took the quiz credit for the question (irrespective of his answer), so the maximum score is now 9/8 (113%).

Sorry for inconvenience/anguish caused.  HT to Marcus Walton for pointing out the error.


Class News (335): More Final Exam Info

May 4, 2009

A typo on the Study Tips sheet has been brought to my attention.  We discussed chapter 23 (Monetary Tranmission Mechanisms) in class, but I left this off the list of fair-game material.  Chapter 23 should have been there. Sorry for the omission.

One other item — if you have finished your extra-credit essay, you may send it electronically to Luiggi.  This will earn “brownie points” by reducing the grading crunch at the end.  Electronic copies will not be accepted once the final exam begins.

Posted at 11:15 am Eastern

Class News (335): Final Exam Info

May 1, 2009

In class and prior posts, I said the final exam would have 2 major essays, rounded out with objective questions.  I have reconsidered.  The exam will now contain only one major essay (the F&S essay), several short-answer questions (to be answered in a few sentences ), and objective questions.  Nothing else will change (allocation of points, coverage, etc.).  Indeed, I will use the candidate essays I provided on the study sheet as a guide when making up short answer questions and objective questions.

I apologize for inconvenience caused/stress induced.  Final grades are due 36 hours after the exam. After conferring with my teaching assistants, I have concluded this will not provide enough time to grade an exam containing a substantial essay component with an appropriate degree of accuracy.

Posted at 5:17 pm Eastern

Further Study (335/402): Barro vs. Krugman

April 30, 2009

In case you want to revisit the Barro vs. Krugman debate as a study break, here is a debate between them on the Charlie Rose show.  It is old — 2004 — but they cover the same issues — growth vs. fairness, etc.   The clip is about 20 minutes long: Krugman vs. Barro.

HT to Kiro Yovkov.

Posted at 9:23 am, Eastern

Further Study (335): Fed Independence

April 28, 2009

The Becker-Posner blog has an interesting back-and-forth on Fed Independence that might be useful in thinking about the related question on your final-exam study sheet.  Immediately prior to these posts is a back-and-forth on stock-market efficiency.  You can get to the blog by clicking on the link under “Favorite Econ Blogs.”

Posted at 9:40 am Eastern

Class News (335): More Final Exam Info

April 24, 2009

Study Tips
A study guide for the final exam is now in the 335 Exam Locker.

Causes of the Financial Crisis
On the last day of class, I spent about 20 minutes trying to tie what we learned this semester into a coherent list of causes of the financial crisis.  I  have gotten emails from a number of students (who missed class or lost me in class) asking for references.  A few are linked below to get you started.  I will add to the list over the next week.

  1. Housing Policy: THE ECONOMIST – Home Ownership: Shelter or Burden?
  2. Politics/U.S. Housing Policy: WSJ – Roberts: How Government Stoked the Mania.
  3. Monetary Policy: WSJ-Taylor: How Government Created the Financial Crisis.
  4. Bank Supervision: THE ECONOMIST – Rajan: Cycle-Proof Regulation

Here is a PowerPoint slideshow (cartoon) explaining the subprime meltdown.  Warning: It is funny but very vulgar.  For example, if the “f” word bothers you, please don’t look at it.  I link it because it accurately captures what happened:  subprime-meltdown.

Financial Crisis and Recession

  1. Here is a New York Times graphic tracing the crisis in terms analagous to Figure 2, p. 209 (Miskhin): NYT – Primer on the Financial Crisis.
  2. The presentation I gave at the examiner conference on April 14th also includes discussion of the causes of the current recession.  Here it is: vaughan_ffiec-presentation_april-2009.
  3. Op-Ed by Steven Gjerstad and Vernon Smith, tracing the role of household leverage in bringing on the recession: WSJ – Gjerstad-Smith: From Bubble to Depression

Updated at 12:02 pm EDT

Further Study (335/402): Friedman in Action

April 24, 2009

Here is a short clip (2.5 minutes) of Phil Donahue sparring with Milton Friedman.  The discussion concerns the virtues of capitalism — not monetary economics — but it still shows Friedman’s legendary debating skills.  Enjoy!  (HT to Ted Matwijec for the clip.)

Posted at 7:48 pm EDT

Class News (335/402): Extra Credits

April 23, 2009

Extra credit assignments for both classes are in the Exam Lockers.  Previous End-of-Term posts have also been updated.

Posted at 12:18 am EDT