EconS 420 Monetary Economics

Professor: Dr. Raymond G. Batina
Office: 203J Hulbert Hall
Office hours: MWF 10 - 11, and I sometimes eat lunch at my desk while I am working around 12 - 1230 on MW. Please send me an email if you want to meet during the lunch hour.
Prerequisites: Econs 301, Econs 302.
Textbook: "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," by Johnson and Kwak. This is by far one of the best books on the financial meltdown I have seen. It is well written and by top notch economists, rather than journalists. You should order this book from your favorite online textbook seller immediately so you can get started on it. We will be using it by the second week of class.
Optional books: There have been a number of books written about the recent financial crisis. Many are quite good. Some are by journalists, while others are by economists. Another great book, especially for econ majors, is "How Markets Fail: The Logic of Economic Calamities," by John Cassidy. A book that focuses on reforms and mechanics is "The Banker's New Clothes," by Admati and Helliwig, both financial economists. Finally, a very good book on the economics of the crisis is by Princeton economist Alan Blinder, "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead."

Here's a LEARNING SECRET: The best way to take notes

Warning: We know there are web sites on the net that allow students to post notes and outlines for a lot of classes including this one in order to make money. Greed is good right? Not always. None of these sites are authorized so rely on them AT YOUR OWN RISK. It is entirely possible that there are mistakes in such materials. A student will post their outlines/notes on a site hoping you download them for a fee. BUYER BEWARE. How do you know the student received an A in the class? How do you know their notes are accurate? I have had WSU students come to me with such materials asking questions and HAVE FOUND MISTAKES in them!!!!! So a word of caution: be very careful about spending your money on such materials.

Course Policies

Class Attendance
Attendance is mandatory. I will take attendance randomly and it will be 10% of your grade. You should keep up with the course and do the reading before class. This will help you understand what we are doing in class.

In class assignments
There will be a number of in class and homework assignments throughout the semester. Some will involve a simple math problem, while others will involve working with some data. Homework and In-class assignments will constitute 20% of your grade. I do not accept late assignments for any reason. "Late" means when I leave the room after lecture. Don't skip class, show up in my office later, and expect to hand in your assignment. This means that if something has to be printed off, you need to do it before class, maybe even the day before. The same is true about in class assignments. You're either in class or you're not. At the end of the semester I will drop your two lowest scores on these assignments.

Some of the assignments will involve running a regression equation. Here is some information on REGRESSIONS to refresh your memory. You can use any software you want to for the statistical analysis. Excel will work, although you may have to search for instructions on using Excel. These are designed to be quick empirical exercises, not definitive research. When searching for help, search on a phrase like "How do I run a regression in Excel on a PC." There will be dozens of videos and such that will answer that question. Most of you have had Econs 311 and use Stata. Great.

Group project
The class will be organized into groups. Each group will be responsible for working on a project that will be presented to the class the last week of class. EVERYONE must attend these lectures without fail. Here are the details of the Project.

There will be three exams. They each cover about 1/3 of the material. They are not comprehensive, however, the material tends to build on itself over time as we develop our knowledge and modeling skills. Here is my make up exam policy. So mark your calendars with the exam dates NOW. Get Siri etc. to help you with the scheduling and reminders. Please, don't come to an exam late. If students have been leaving the room, the security of the exam has been compromised. If you arrive after that, you won't be able to take the exam. So, be on time.

MidTerm Grade
A student receiving a C is passing the class. A student receiving an F is not passing the class and should see me to see how they can do better in the course.

Final grade
In calculating your grade I will have information on your attendance, homework performance, and three exam scores. I will drop the low exam score, no questions asked. For some of you this may be the third exam. I will also drop your two lowest in-class assignments as well. 

Attendance 10%
In class assignments 20%
Group Project 20%
Best two of three exams 50%

So your final grade will be given by the following formula: Final Grade = 0.1 x Attend + 0.2 x In-class + 0.2 x Group Project + 0.5 x 2 best exam.

A comment on senior-itis
Typically, about half of you are seniors and many of the seniors are graduating. I am well aware that some of you will have job offers or may have already accepted a job before the end of the semester. Please, do not expect a 15 week vacation ending in graduation! It is possible to flunk a class your last semester! Unfortunately, I have had students who did not finish the course and one such student had to come back for two classes in the fall.

Objectives: General Learning Objective: By the end of the semester the student will be able to understand financial markets,  how monetary policy affects those markets, and the limits of what government policy can achieve.

Specific Learning Goals

Outline of Topics and Articles

1. The controversy between Saltwater Economics and Freshwater Economics.
Topics: Can the government stimulate demand? Keynesian prescriptions. Ricardo's Neutrality Theorem. Krugman versus Cochrane.

This is really cool: Taming the Business Cycle

The following two papers provide contrasting views of how the economy functions and what kind of policy will work:
Friedman, M, 1968, The Role of Monetary Policy, American Economic Review, 58, 1-17.
Krugman, Paul, 1998, The Baby Sitter Economy, Slate Magazine.

The following papers contrast the Saltwater view with the Freshwater view regarding the economy.
Krugman, P,. How did economists get it wrong?
Cochrane, J., How did Paul Krugman get it so wrong?
Cochrane, J., Fiscal Stimulus

2. Are asset markets "efficient?"
Topics: Brief review of banking principles. Some monetary history. Risk, asymmetric information, and bank lending under uncertainty. The Invisible Hand Theorem, the Efficient Markets Hypothesis, bubbles, The financial meltdown.

House prices over time

A Bit of History
Solow, How to Understand the Disaster, New York Review of Books
Johnson, S., 2012, Breaking up four big banks, Economix
Cowan, T, 2012, The age of the shadow bank run,
13 Bankers, ch's 1 - 4

3. Asset markets
Topics: Basics on some of the "new" assets, e.g., MBSs, naked CDSs, synthetic CDOs. How did these assets perform in the financial crisis? Do they improve efficiency?

Case study: tulip mania
The S&P bubbles?
Federal funds rate after 2000
Historical federal funds rate

Brunnermeier, M., 2009, Deciphering the liquidity and credit crunch, 2007-2008, The Journal of Economic Perspectives.
Stulz, R, 2010, Credit default swaps and the credit crisis, The Journal of Economic Perspectives.
Kacperczyk, M., Schnabl, P., 2010, When safe proved risky: commercial paper during the financial crisis of 2007 - 2009, The Journal of Economic Perspectives.
Cowan, T., 2008, Three trends and a train wreck.


Exam 1
Check the course schedule at Blackboard.


4. Theories of asset accumulation
Topics: Life cycle model, bequests, precaution, behavioral models, models of temptation.

Browning, M., and T. Crossley, 2001, The life cycle model of consumption and saving, Journal of Economic Perspectives.
Bernatzi, S., Thaler, R., 2007, Heuristics and biases in retirement savings behavior,  Journal of Economic Perspectives.
The Economics of Saving

5. A model of the credit market with and without money

Topics: Borrowers and lenders. Credit market and inside (backed) money. Monetary equilibrium. Quantity Theory, Money as an asset. Inside money and outside money. Optimality of competition. Transactions costs.

Worked example: Transfers of money

Samuelson, P.A., 1958, An exact consumption loan model of interest with or without the social contrivance of money, Journal of Political Economy, 66, no. 6, 467-482. (Stable URL:

6. Two propositions in monetary economics and inflation
Topics: Does bad money drive out good, or will they both be used for transactions? Why did no one in Russia want to hold Rubles in the 1990s? Why will no one hold the Zimbabwean trillion dollar Z$ note, which can be used to buy a loaf of bread? How does a unit change in the currency affect the economy?, Growing money supply. Inefficiency of inflation, cashless economy?

Rolnick , A., and Weber, W., 1986, Gresham's law or Gresham's fallacy, Journal of Political Economy, 94, no. 1, 185-199. (Stable URL:
Smith, B., 2002, Money and inflation in colonial Massachusetts, Federal Reserve Bank of Minneapolis Quarterly Review, 8, no. 1, 1-14.
Lucas, R.E., 1996, Nobel lecture: Monetary Neutrality, Journal of Political Economy, 104, No. 4, 661-682.
A reader's guide to Lucas' paper
Sargent, T., 1986, The ends of four big inflations, In Rational Expectations and Inflation, New York: Harper and Row.
History Lessons.
Sweden: The world's first cashless economy


Exam 2
Check the course schedule at Blackboard.


7. Banking,  liquidity, and Central banking
Topics: rate of return dominance, Tobin effect, Fisher effect, risk, intermediation and arbitrage, Legal restrictions. Reserve requirements. Credit controls. Paying interest on reserves.

Notes: Impact of monetary policy, risk, intermediation, and liquidity
When Uncle Sam is a Banker
Paying on Greek Swaps
Bernanke and future inflation
Wallace, N., 1980, Integrating micro and macroeconomics: an application to credit controls, Federal Reserve Bank of Minneapolis Quarterly Review, vol 4, no 4. (Don't worry about the math on page 24 of the article. Concentrate on the diagrams. Also, Wallace puts c1 on the vertical and c2 on the horizontal axes!)
Wallace, N., 1983, A legal restrictions theory of the demand for "money" and the role for "monetary" policy, Federal Reserve Bank of Minneapolis Quarterly Review, vol 7, no 1.

8. Government debt, open market operations, and the fiscal theory of the price level
Topics: The consolidated government budget constraint, fiscal policy, OMOs, what determines the price level with and without money?

Surpluses - data for US

Sargent, T, Wallace, N, Some unplesasant monetarist arithmatic, Minneapolis Fed
SW use an OGE to study some issues in how monetary policy can be constrained by fiscal policy.

Notes: Government Debt
Notes: The Fiscal Theory of the Price Level
Bartlett, B., 2013, Tax increases and bull markets.
The True Federal Debt
Our culture of debt

9. Financial regulation
Topics: How should we regulate the financial sector?

Too big to fail
Bank Stress Tests
Cohen, W., 2010, Make Wall Street risk it all
Hart, O., Zingales, L., 2012, Curbing risk on Wall Street, National Affairs
Calomiris, C., 2012, How to regulate bank capital, National Affairs.
Cohen, W., 2010, How Wall Street hid its mortgage mess
Mortgage Morass
Regulators are Worried
13 Bankers, ch 5 - 7

Exam 3
Check the course schedule at Blackboard.

Group  Presentations

WSU Academic Honesty Statement
As an institution of higher education, Washington State University is committed to principles of truth and academic honesty. All members of the University community share the responsibility for maintaining and supporting these principles. When a student enrolls in Washington State University, the student assumes an obligation to pursue academic endeavors in a manner consistent with the standards of academic integrity adopted by the University. To maintain the academic integrity of the community, the University cannot tolerate acts of academic dishonesty including any forms of cheating, plagiarism, or fabrication. Academic integrity is the cornerstone of the university and will be strongly enforced in this course. I encourage you to work with classmates on assignments. However, each student must turn in original work. No copying will be accepted. Any student caught cheating on any assignment or exam will be given an F grade for the course, will not have the option to withdraw from the course, and will be reported to the Office of Student Standards and Accountability. Cheating is defined in the Standards for Student Conduct WAC 504-26-010 (3). It is strongly suggested that you read and understand these definitions: You will find the Academic Integrity Statement and link to WSU’s policy at this website:, and an explanation of plagiarism at this one:

Disability Statement
Reasonable accommodations are available for students with a documented disability. If you have a disability and may need accommodations to fully participate in this class, please either visit or call the Access Center (Washington Building 217; 509-335-3417) to schedule an appointment with an Access Advisor. All accommodations MUST be approved through the Access Center.

WSU Safety Procedures
Classroom and campus safety are of paramount importance at Washington State University, and are the shared responsibility of the entire campus population.  WSU urges students to follow the “Alert, Assess, Act” protocol for all types of emergencies and the “Run, Hide, Fight” response for an active shooter incident. Remain ALERT (through direct observation or emergency notification), ASSESS your specific situation, and ACT in the most appropriate way to assure your own safety (and the safety of others if you are able). It is highly recommended that you review the Campus Safety Plan and visit the Office of Emergency Management web site for a comprehensive listing of university policies, procedures, statistics, and information related to campus safety, emergency management, and the health and welfare of the campus community. Here are the links: