Fall 2005 Course Description

Advanced Policy Economics

Section Title: Economics and Politics of Banking
Instructor(s): Robert Auerbach
Course: P A 393L - Advanced Policy Economics
(previously Political Economy II)
Unique Number: 64193
Day & Time: Tuesdays, 9:00 AM - 12:00 PM
Room: SRH 3.101
Waitlist Information:For LBJ Students: UT Waitlist Information

Description: How does the central bank of the United States, the Federal Reserve, change the country's money supply each weekday? The answer to this question is discussed with descriptions of the mechanics and effects of Federal Reserve open market operations. Also, the monetary policy options of countries without well-developed financial markets are discussed. The first third of this course will focus on the these subjects and other areas of the field of money and banking including money expansion by the private banking system and the determinants of nominal and real interest rates.

The course will also cover monetary policy and other operations of central banks with emphasis on the Federal Reserve, the central bank of the United States. The politics and economic effects of oversight of government banking regulators by the United States Congress will be discussed. The history and current practices evolving around the semi-annual Humphrey Hawkins Hearings on Federal Reserve Monetary policy will be described.

The independence and preservation hypothesis will be discussed. The effects on banking and the economy of central bank participation in non-monetary functions such as bank supervision and check clearing will be discussed.

The course will include discussions of the 1993 investigation and hearings that led to the release of transcripts of the Federal Reserve's policy-making committee (the Federal Open Market Committee, FOMC) and the immediate publication of monetary policy changes. The shredding of Federal Reserve transcripts and recent developments will be discussed. The effects of prime rate pricing of bank loans will also be discussed.

The "Bank Modernization" legislation of 1999 that allowed banks and other financial firms to organize into a single financial services holding company will be studied. New legislation in 2001 to broaden the Federal Reserve's authorization to pay interest on reserve will be described. Changes in control of the U.S. Senate will bring forth a new consumer agenda will be described.

What is the future of private sector banks and central banks with the widespread use of digital technology for sending information? Will the characteristics of money change and will a particular set of commodities (as now defined as money) be used as money? The answers to these questions are not known. However, it is essential for good research that they be asked and examined. First, the student should have a good understanding of the present institutional arrangements and their limitations in the digital age. Then we will discuss the prospects for the future.

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