Economics 420: Monetary Theory and Policy
Prerequisites: Economics 220; Economics 251 or Business Administration 410; Economics 252 or Business Administration 411; Economics 350.

Prof. Lawrence H. White                 lwhite@umsl.edu

This is a specialized course in the theory of monetary institutions and monetary policy "regimes." We will explore:

• how monetary institutions have evolved, leading to the monetary policy regime that we presently have (a fiat standard operated by a government central bank at its own discretion), and may continue to evolve in the future
• what are the rationales for government involvement in money and banking
• how a central bank in a discretionary fiat regime might be expected to behave
• how some alternative regimes might work.

Requirements:
Two midterm exams and a final exam, each weighted 20%; two short (5-6 pp.) papers, each weighted 20%.  The final exam is non-cumulative (will cover only material after the second midterm).

Fine print:
The following policies are stated as a matter of record. (1) The content of your papers must be exclusively your own work., free from plagarism, and not submitted to any other course. (2) Late papers will be penalized as follows: an "A" paper received on due date Monday becomes an "A-" on Tuesday, "B-" on Wednesday, "C+" on Thursday, etc. (3) In both your papers and your exams you are bound by the University's academic honesty policies.  A plagiarized paper will result in a failing grade for the course.  (4) Failure to take a midterm or the final exam at the scheduled time will result in an exam score of zero (absent a valid medical excuse or certified final exam conflict). You may not take an exam at a different time from the rest of the class. Please don't ask. (5) No one will be permitted to enter a midterm (final) exam more than 15 (30) minutes late, or to leave before 20 (35) minutes have elapsed.  (6) Performance on the above-listed exams and papers, and participation in class discussions, will be the only bases for grading (no other "extra credit" will be assigned or allowed).

Required reading:
Vera C. Smith, The Rationale of Central Banking (Indianapolis: Liberty Press, 1990)
Lawrence H. White, The Theory of Monetary Institutions (Oxford: Blackwell, 1999), abbreviated "TMI" below.

Optional reading:
James A. Dorn, ed., The Future of Money in the Information Age (Washington, DC: Cato Institute, 1997)

There may also be class handouts. All three books will be on reserve (2 hr./overnight) at the library and for sale in the campus book store.

Sequence of Topics, Exams, and Readings

(*Readings marked by an asterisk are recommended but optional.)

A. Money, the Market, and the State

1. The Evolution of Market Monetary Institutions
Read: TMI, ch. 1; Smith, chs. 3, 5; Dorn, ch. 2

2. Commodity Money
TMI, ch. 2

3. Money Issue by Unrestricted Banks
TMI, ch. 3; Smith, chs. 7, *8-10, 12; *Dorn, ch. 18

4. The Evolution and Rationales of Central Banking
TMI, ch. 4; Smith, chs. 1-2, *4, *6, 11

First midterm exam

5. Fiat Money, the Price Level, and Inflation: Review
(dig out your old Money and Banking text)

6. Should Government Play a Role in Money?
TMI, ch. 5; Dorn, chs. 13, 16

7. Should Government Play a Role in Banking?
TMI, ch. 6; Dorn, ch. 6, 10

B. Models of Central Bank Behavior

1. Seignorage
TMI, ch. 7; Dorn, ch. 9

2. Bureaucracy
TMI, ch. 8

Second midterm exam

3. Political Business Cycles
TMI, ch. 9

4. Discretion and Time-inconsistency
TMI, ch. 10

C. Alternative Monetary Regimes

1. Monetary Rules
TMi, ch. 11; Dorn, ch. 13, 15, *16

2. Private Fiat-type Money
TMI, ch. 12

3. A Competitive Payments System with a Multi-commodity Standard
TMI, ch. 13; Dorn, ch. 19

Final exam