lecture_1_notes - Notes for Monetary Economics PhD Course...

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Notes for Monetary Economics PhD Course John H. Cochrane Fall 2004 1
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1 Preliminaries 1.1 Class management Review course outline, website. Bring namecards. The course is based on problem sets, exam, class participation. I will call on you, and may ask for 10 minutes w. chalk. Register somehow. Participate in class. Don’t get lost either on history and jargon or on equations. I will never be mean on a class question — but I will be mean if you ask it after class! Will we do makeup tues before Thanksgiving? 1.2 Big Picture Thefocuso fthecourseisthepr iceleve landhencein f ation. Money, monetary policy also associated with output f uctuations, but they will be a lesser concern here. First things F rst — we need to understand the price level before understanding its non neu- tralities. The F scal theory high on my agenda. I think it may replace MV=PY and shake the foundations of monetary theory. We will mix theory, empirical work, histori- cal experience. As reading Sargent and Velde shows, our forebears were much better at remembering long historical experience. We need to broaden our horizons past 20 years of US time series. Monetary economics is to be taken seriously, as an understanding of the world around us, not as a game for writing clever equations. You should take that attitude in your own work. Money is hidden, which is why monetary economics is cool. Some people say “Eco- nomics is obvious,” and this is a good counterexample. Imagine an investigative reporter trying to understand in f ation. He goes from the grocer to the wholesaler to the farmer to the seed supplier to the worker to the grocer. ..that (if!) money supply is the root cause is far from obvious! We’ll study lots of other far-from obvious things. 2 Overview: Theories of the price level 2.1 Commodity monies or standards. The most obvious theory of the price level derives from gold coins or a commodity standard. Gold nuggets, gold coins then fully redeemable tokens. The price level is obvious. It seems simple but. ..there is no real commodity use for money! Perhaps this is a commitment mechanism? Or perhaps we should understand it as an instance of the quantity theory (comes next), with nature giving us the limited supply? (Perhaps gold was worth a lot more when used as money than it would be in a F at money economy.) 2
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The same basic economics applies now in pegged exchange rate or currency boards. (Though where base country price level comes from still to be determined, and the option to devalue the peg or abrogate the board make it interesting. ) 2.2 Monetarism: 20th century from Fisher to Friedman. - MV = PY. Read this causally from M to P, Y. “ In f ation is always and everywhere a monetary phenomenon .” - Read Friedman: How does M a f ect Y then P. - Fiat money. Thus can apply to 20th century institutions in a way gold/commodity theory cannot.
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This note was uploaded on 11/27/2011 for the course ECON 101 taught by Professor Robert during the Fall '08 term at Montgomery College.

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lecture_1_notes - Notes for Monetary Economics PhD Course...

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