Economics 4334: Money and Banking

Course Objectives

The primary goal of Economics 4334 is to help students understand how financial systems function and how they interact with the macroeconomy. By the end of this course, students will be able to:

• Explain the functions of money and the evolution of payment systems.
• Analyze the behavior of interest rates and the term structure of interest rates.
• Understand the role of financial intermediaries, including banks and non-bank financial institutions.
• Evaluate the structure, goals, and policy tools of central banks, specifically the Federal Reserve.
• Examine the mechanics of monetary policy and its impact on inflation, output, and employment.

Core Topics

The Nature of Money and Financial Markets

We begin by defining money and its three essential functions: medium of exchange, unit of account, and store of value. We explore how money has evolved from commodity-based currencies to fiat money. This section also introduces the financial system, focusing on direct vs. indirect finance and the critical role of asymmetric informationspecifically adverse selection and moral hazardin shaping financial contracts.

Interest Rates and Asset Pricing

A central component of this course is understanding the determinants of interest rates. We will examine the theory of portfolio choice and the supply and demand for bonds. Students will learn how to calculate present value, yield to maturity, and understand the expectations, segmented markets, and liquidity premium theories regarding the term structure of interest rates.

Banking and Financial Regulation

Banking is the lifeblood of the financial system. We will explore the "asymmetric information" framework to explain why banks exist and how they manage risk. The course covers bank balance sheets, the management of liquidity and capital, and the rationale behind government regulations such as deposit insurance, reserve requirements, and capital adequacy standards intended to prevent bank panics.

The Federal Reserve and Monetary Policy

We dedicate a significant portion of the semester to the Federal Reserve System. This includes its structure, independence, and the tools it uses to influence the money supply and interest rates (such as open market operations, the discount rate, and interest on reserves). We will analyze the transmission mechanisms of monetary policy and the debate over policy rules versus discretion.

Why This Course Matters

Understanding money and banking is essential for anyone interested in careers in finance, government, or policy analysis. The 2008 financial crisis and the economic response to the COVID-19 pandemic have highlighted the importance of a stable financial system and the power of central bank intervention. Economics 4334 provides the theoretical and historical framework necessary to interpret these complex events and participate in current economic debates.

Required Prerequisites

Students are expected to have a solid foundation in Principles of Macroeconomics and Intermediate Macroeconomic Theory. Familiarity with basic algebra and the ability to interpret graphical economic models are essential for success in this course.