Unit Outline econ2210

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Unit content

This is a self-contained, introductory unit in monetary economics. Topics covered include money demand; the determination of interest rates; inflation; monetary policy; central banking; debts and deficits; international monetary economics; and the economics of financial crises.

The goal of the unit

After successfully completing this unit, you will be able to assess the determinants, and the impacts on the economy, of changes in monetary policy and interest rates. You will also be able to discuss intelligently the role of the world economy on monetary conditions within a country, and be exposed to debate on current account deficits and foreign debt, as well as financial crises


Teaching and learning evaluation

You may be asked to complete two evaluations during this unit. The Student Perception of Teaching (SPOT) and the Students’ Unit Reflective Feedback (SURF). The SPOT is optional and is an evaluation of the lecturer and the unit. The SURF is completed online and is a university wide survey and deals only with the unit. You will receive an email from the SURF office inviting you to complete the SURF when it is activated. We encourage you to complete the forms as your feedback is extremely important and can be used to make changes to the unit or lecturing style when appropriate


Participation in class, whether it be listening to a lecture or getting involved in other activities, is an important part of the learning process. It is therefore important that you attend classes. More formally, the University regulations state that ‘to complete a course or unit students shall attend prescribed classes, lectures, seminars and tutorials’.


We strongly advise students to regularly access their student email accounts. Important information regarding the unit is often communicated by email and will not be automatically forwarded to private email addresses.

Unit coordinator/lecturer


Kenneth W. Clements


6488 2898



Consultation hours:

Mondays 15.00 pm – 17.00 pm
and immediately after lectures. The discussion board is also a recommended tool for posting any questions.

Lecture times:

Please check: http://www.timetable.uwa.edu.au

Lectures will be recorded on Lectopia.

Lecture venues:

Please check: http://www.timetable.uwa.edu.au/Curr/activities.asp?identifier=400&dispstyle=A&optSem=1&optVenue=2


Please check http://www.olcr.uwa.edu.au/

Commence in the week beginning Monday March 14th.

Friday April 22nd is a University holiday (Good Friday). Students in the one tutorial held on Fridays should go to another tutorial earlier in the week.


Unit website

Web CT: Some lecture notes, handouts, etc. will be available from WebCT. You can access your WebCT from http://webct.uwa.edu.au.

Recommended/required text(s)

There is no textbook.

The book Readings in Monetary Economics contains copies of the key articles referred to in lectures and those needed for tutorials. It is recommended that you purchase this book which is available at the UWA Bookshop.

Lecture notes

The book Lecture Notes in Monetary Economics contains the PowerPoint slides, as well as some additional material. It is recommended that you also purchase this book.

Discussion board

There is a discussion board on WebCT which can be used by students to resolve any issues that may arise during the semester. This will be particularly useful in discussing issues relating to the debate, the quiz and the final exam.

Reading List

This reading list is extensive for some topics and I do not expect everything to be read. I will give detailed guidance to the readings in lectures. Copies of articles marked with an asterisk (*) are available in the book Readings in Monetary Economics.
Material of longer-term value

“Autobiography of Milton Friedman.” Available at:


“Autobiography of Robert E. Lucas Jr.” Available at:



Barro, R. (2006). “Milton Friedman: Perspectives, Particularly on Monetary Policy.” Unpublished paper, Harvard University.

Bell, S. (2004). Australia’s Money Mandarins: The Reserve Bank and the Politics of Money. Cambridge: Cambridge University Press.

Fisher, I. (1907). The Rate of Interest. New York: The Macmillan Company. Available at: http://socserv.mcmaster.ca/econ/ugcm/3ll3/fisher/RateofInterest.pdf.

Friedman, M and A. J. Schwartz (1963). A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press.

Friedman, M. (1987). “Quantity Theory of Money.” The New Palgrave Dictionary of Economics Vol 4, Houndmills, Basingstoke: Macmillan Press. Pp. 3-20.

Homer, S. and R. Sylla (1991). A History of Interest Rates, Third Edition. New Brunswick and London: Rutgers University Press.

“John Maynard Keynes. (1883-1946).” Available at:


Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London: Palgrave Macmillan. Available at:


Lucas, R. E., Jr. (1996). “Nobel Lecture: Monetary Neutrality.” Journal of Political Economy 104: 661-82.

Lucas, R.E., Jr. (2001). “Professional Memoir.” Available at


Macfarlane, I. F. (2006) The Search For Stability: Boyer Lectures 2006. Sydney: ABC Books.

Tobin, J. (1993). “Money.” In P. Newman, M. Milgate and J. Eatwell (eds) The New Palgrave Dictionary of Money and Finance. London: MacMillan. Pp. 771-79.

1. Introduction to monetary economics


Bar ro, R. (2006). “Milton Friedman: Perspectives, Particularly on Monetary Policy.” Unpublished paper, Harvard University.

Eslake, S. (2009). “The Global Financial Crisis of 2007-09, An Australian Perspective.” Economic Papers 28: 226-38.

Friedman, M. (1992). “The Mystery of Money.” Chapter 2 in M. Friedman Monetary Mischief: Episodes in Monetary History. New York: Harcourt. Pp. 8-50.


Macfarlane, I. (1999). “Australian Monetary Policy in the Last Quarter of the Twentieth century.” Economic Record: 75: 213-24.


Mankiw, G. (2006). “The Macroeconomist as Scientist and Engineer.” Journal of Economic Perspectives: 20: 29-46

2. The importance of the demand for and supply of money



Laidler, D. E. W. (1985). The Demand for Money: Theories, Evidence and Problems. Third edition. New York: Harper and Row. Chapter 2.


Yiannopoulos, N. (2006). “IS-LM Summary.” Unpublished notes, Business School, University of Western Australia.

Viswanath, G. (2009). “Comparative Statics in the IS-LM Model.” Unpublished notes, Business School, University of Western Australia.

3. Money demand

Laidler, D. E. W. (1985). The Demand for Money: Theories, Evidence and Problems. Third edition. New York: Harper and Row. Pp. 50-54, 59-64, 69-77.

4. Monetary policy and central banking


Battellino, R. (2009). “Global Monetary Developments.” Reserve Bank of Australia Bulletin June: 45-53. Available at: http://www.rba.gov.au/publications/bulletin/2009/jun/pdf/bu-0609-5.pdf

Bell, S. (2004).”New Challenges in a World of Asset Inflation.” Chapter 9 in his Australia’s Money Mandarins: The Reserve Bank and the Politics of Money. Cambridge: Cambridge University Press.

Bernanke, B.S. and F.S. Mishkin.(1997). “Inflation Targeting: A New Framework for Monetary Policy?” Journal of Economic Perspectives 11: 97-116.


Cagliarini, A., C. Kent and G. Stevens (2010). “Fifty Years of Monetary Policy: What Have we Learned?” Unpublished paper, Reserve Bank of Australia. Available at: http://www.rba.gov.au/publications/confs/2010/cagliarini-kent-stevens.pdf

Campbell, F. (1997). “The Implementation of Monetary Policy: Domestic Market Operations.” Reserve Bank of Australia, available online at: http://www.rba.gov.au/mkt-operations/resources/implementation-mp.html.



Castello-Branco, M and Swinburne, M. (1992). “Central Bank Independence.” Finance & Development March: 19-21.


Cukierman, A. (1992). Central Bank Strategy, Credibility and Independence: Theory and Evidence. Cambridge, Mass.: MIT Press. Pp. 48-49.

Edey, M. (1998). “Monetary Policy in Australia.” RBA teachers seminar, Sydney.

Fischer, S. (1994). “Modern Central Banking.” In F. Capie, C. Goodhart, S. Fischer and N. Schnadt (eds). The Future of Central Banking: The Tercentenary Symposium of the Bank of England. Cambridge: Cambridge University Press. Pp. 262-308.

Fischer, S. (1996). “Why are Central Banks Pursuing Long-Run Price Stability?” In Achieving Price Stability. Jackson Hole, Wyoming. Federal Reserve Bank of Kansas City. Pp. 7-34.


Friedman, M. (1968a). “The Role of Monetary Policy.” American Economic Review 58: 1-17.


Issing, O. (2005). “Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century.” Federal Reserve Bank of St. Louis Review March/April: 65-83.


Macfarlane, I.F. (1996). “Making Monetary Policy: Perceptions and Reality.” RBA Bulletin October: 32-37.

Macfarlane, I.F. (1999). “Australian Monetary Policy in the Last Quarter of the Twentieth Century.” Economic Record 75: 213-24.

Macfarlane, I.F. (2002). “What does Good Monetary Policy Look Like?” RBA Bulletin September: 8-12.


Maddock, R. and M. Carter. (1982). “A Child’s Guide to Rational Expectations.” Journal of Economic Literature 20: 39-51.

Mankiw, N.G. (2009). “It May be Time for the Fed to go Negative.” New York Times, April 19.


Mishkin, F. S. (2000). “What Should Central Banks Do?” Federal Reserve Bank of St Louis Review November/December: 1-13.

Mishkin, F. S. (2007). Monetary Policy Strategy. Cambridge, MA: MIT Press.


Mishkin, F. S. (2007). “Will Monetary Policy Become More of a Science?” Finance and Economics Department Series, Divisions of Research and Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.

Poole, W. (1999). “Monetary Policy Rules?” Federal Reserve Bank of St. Louis Review March/April: 3-12.


Taylor, J. (1993). “Discretion Versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39: 195-214.


The Economist (1994). “A Cruise around the Phillips Curve.” February 19.

The Economist (2003). “Still Bubbling.” January 18.


The Economist (2006). “Curve Ball.” September 30.



The Economist (2006). “A Heavyweight Champ, at Five Foot Two-Milton Friedman.” November 25.

The Economist (2007). “Heroes of the Zeroes: Central Bankers are Acclaimed for their Part in Taming Inflation.” October 20.

5. Inflation

Bailey, M.J. (1956). “The Welfare Cost of Inflationary Finance.” Journal of Political Economy 64: 93-110. Reprinted in K.J.Arrow and T.Scitovsky (eds) Readings in Welfare Economics. Homewood, Ill.: Richard D. Irwin, Inc. Pp. 434-55.


Cagan, P. (1956). “The Monetary Dynamics of Hyperinflation.” In M. Friedman (ed) Studies in the Quantity Theory of Money. Chicago: The University of Chicago Press. Pp. 25-117.


Clements, K. W. (2006). “Notes on Measuring Inflation.” Unpublished notes, Business School, University of Western Australia.

Fisher, I. (1913). The Purchasing Power of Money. New York, Macmillan. Pp 21-24.


Fischer, S., R. Sahay and C.A. Végh (2002). “Modern Hyper and High Inflations.” Journal of Economic Literature 60:837-80.

Friedman, M. and R. (1980). Free to Choose. Melbourne: Macmillan. Chapter 9.

Harberger, A. C. (1978). “A Primer on Inflation.” Journal of Money, Credit and Banking 10: 505-21.


Lucas, R.E. (1980). “Two Illustrations of the Quantity Theory of Money.” American Economic Review 70: 1005-14.

Lucas, R.E. (1988). “What Economists Do.” Unpublished paper, University of Chicago.


Mankiw, N.G (2010). “Bernanke and the Beast.” New York Times January 16.

Reserve Bank of Australia (1997). “Measuring Profits from Currency Issue.” RBA Bulletin July: 1-4.


Solow, R. M. (1975). “The Intelligent Citizen's Guide to Inflation.” The Public Interest 38: 30-66.


The Economist (1992). “A Short History of Inflation.” February 1992.


The Economist (2010). “A Winding Path to Inflation.” June 5.


The Economist (1999). “Loads of Money.” December 16.


The Economist (2001). “On Target.” September 1.

The Economist (2009). “Money’s Muddled Message.” March 21.

6. Interest rates



Bernanke, B. (2010). “Monetary Policy and the Housing Bubble.” Speech delivered at the American Economic Association Meetings, January 3, Atlanta.

Carlstrom, C. and T. Fuerst (2003). “The Taylor Rule: A Guidepost for Monetary Policy?” Federal Reserve Bank of Cleveland Economic Commentary, July.



Friedman, M. (1968b). “Factors Affecting the Level of Interest Rates.” Reprinted in J. T. Boorman and T. M. Havrilesky (eds) Money Supply, Money Demand and Macroeconomic Models. Boston: Allyn and Bacon, 1972. Pp. 200-18.


Kohn, D. (2007). “John Taylor Rules.” Speech delivered at “Conference on John Taylor's Contributions to Monetary Theory and Policy.” Federal Reserve Bank of Dallas, Dallas, October 12. 


Macfarlane, I. F. (2001). “The Movement of Interest Rates.” Reserve Bank of Australia Bulletin, October: 12-18.


Monnet, C. and W.E. Weber (2001). “Money and Interest Rates.” Federal Reserve Bank of Minneapolis Quarterly Review 25: 2-13.


Taylor, J. (1998). “Monetary Policy and the Long Boom.” Federal Reserve Bank of St. Louis Review November/December: 3-11.

Taylor, J. (2010). “The Fed and the Crisis: A Reply to Ben Bernanke.” Wall Street Journal, January 12.


Taylor, J. (1993). “Discretion Versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39: 195-214.

The Economist (1996). “Monetary Policy, Made to Measure.” August 10.

Tobin, J. (1990). “Irving Fisher.” In J. Eatwell, M. Milgate and P.Newman (eds). The New Palgrave: Capital Theory. New York: Macmillan Press. Pp. 161-77.

7. Debts and deficits

Barro, R.J. (1989). “The Ricardian Approach to Budget Deficits.” Journal of Economic Perspectives. 4: 37-54.

Belkar, R., L. Cockerel and C. Kent. (2007). “Current Account Deficits: The Australian Debate.” Research Discussion Paper, Reserve Bank of Australia.

Bernanke, B. (2005). “The Global Savings Glut and the U.S. Current Account Deficit.” The Homer Jones Lecture, South-Illnois University, March 10th. Available at:



Clements, K.W. (1995). “The Current Account Deficit: Myths and Realities.” Paper presented at the Economic Teachers’ Association of WA “Year 12 Economic Student Conference.”

Corden, W.M. (2007). “Those Current Account Imbalances: A Sceptical View.” World Economy 30: 363-82.

Corden, W.M. (2008). “The World Credit Crisis: Understanding it, and What to Do.” Melbourne Institute Working Paper No. 25/08, University of Melbourne.


Cottarelli, C., Forni, L., Gottschalk, J., Mauro, P. (2010). “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely.” IMF Staff Position Notice September 1, 2010.

Di Marco, K., M. Pirie and W. Au-Yeung. (2009). “A History of Public Debt in Australia.” Australian Government Treasury. Economic Roundup, Issue 1 2009. Available at: http://www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf

Elmendorf, D. W. and G.N Mankiw. (1999). “Government Debt.” In J.B. Taylor and M.Woodford (eds) Handbook of Macroeconomics. Vol. III. Amsterdam: North Holland.


Fisher, I. (1907). The Rate of Interest. New York: Macmillan Company. Available at: http://socserv.mcmaster.ca/econ/ugcm/3ll3/fisher/RateofInterest.pdf.

Friedman, M (1975). Milton Friedman in Australia 1975. Sydney: Clarendon Press.


Garton, P., Sedgwick, M and Siddharth, S. (2010). “Australia’s Current Account Deficit In A Global Imbalances Context.” Australian Treasury, Economic Roundup Issue 1, 2010


Labonte, M. and G.E. Makinen (2008). “The National Debt: Who Bears Its Burden?” CRS Report for Congress, 28 February 2009, Available at: http://assets.opencrs.com/rpts/RL30520_20080228.pdf

Ostry, J., Ghosh, A., Kim, J., Qureshi, M. (2010). “Fiscal Space.” IMF Staff Position Note: September 1, 2010


Sjaastad, L.A. (1989). “The Deficit: A Crisis of Minor Proportions.” Economic Papers 8: 19-24.

Sjaastad, L.A. (1991). “Debt, Deficits and Foreign Trade.” Economic Papers 10:64-75


The Economist (1995). “In Defence of Deficits.” December 16.

8. International monetary economics


Berg, A., E. Borensztein and P. Mauro (2003). “Monetary Regime Options for Latin America.” Finance and Development 40: 24-27.


Chong, P. (1987). “Does Interest Parity Hold for Australia?” Bulletin of Money, Banking and Finance 3: 79-96; errata 1 (1988).

Clements, K.W (1981). “The Monetary Approach to the Balance of Payments.” Unpublished notes.


Corden, W.M. (2008). “The World Credit Crisis: Understanding it, and What to Do.” Melbourne Institute Working Paper No. 25/08, University of Melbourne.

Crosby, M. (2001). “Currency Unions, Currency Boards and other Fixed Exchange Rate Arrangements.” Australian Economic Review 34: 367-72.

Dornbusch, R. (1976). “Expectations and Exchange Rate Dynamics.” Journal of Political Economy 84: 1161-76.

Dornbusch, R. (2001). “Fewer Monies, Better Monies.” American Economic Review 91:238-42.


Frenkel, J. A. and Mussa, M. (1980). “The Efficiency of Foreign Exchange Markets and Measures of Turbulence.” American Economic Review 70: 374-81.

Gruen, D. (2001). “Some Possible Long-Term Trends in the Australian Dollar.” Reserve Bank of Australia Bulletin, December: 30-41.


Mundell, R. (1961). “A Theory of Optimum Currency Areas.” American Economic Review 51: 657-65.

Mussa, M. (1979). “Empirical Regularities in the Behaviour of Exchange Rates and Theories of the Foreign Exchange Market.” Journal of Monetary Economics, Supplement (Carnegie-Rochester Conference Series on Public Policy) 22: 9-57.


Ong, L.L. (1997). The Big Mac Index: Application of Purchasing Power Parity. London: Palgrave MacMillan.

Royal Swedish Academy of Social Sciences (1999). “The Royal Swedish Academy of Social Sciences has awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Noble to Professor Robert A Mundell…” Press Release 13 October, RSASS.


The Economist (1990). “Why Currencies Overshoot.” December 1.


The Economist (1998). “One World, One Money.” September 26.


The Economist (2005). “Yuan Step at a Time.” January 22.

The Economist (2005). “Putting Things in Order.” March 19.


The Economist (2009). “Cheesed Off.” July 18.

9. The economics of financial crises

Barro, R. J. and J.F. Ursua. (2009). “Stock-Market Crashes and Depressions.” NBER Working Paper No. 14760.

Blanchard, O., G. Dell’Ariccia and P. Mauro (2010). “Rethinking Macroeconomic Policy.” IMF Staff Position Note, available at: http://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf

Corden, W.M. (2008). “The World Credit Crisis: Understanding it, and What to Do.” Melbourne Institute Working Paper No. 25/08, University of Melbourne.

Ferguson, N. (2008). The Ascent of Money. New York: The Penguin Press HC.

Kindleberger, C.P. (2005). Mania, Panics and Crashes. 5th Ed. Basingstoke: Palgrave Macmillan.

Rogoff, K. and C. Reinhart. (2009a). “The Aftermath of Financial Crises.” American Economic Review 99: 466-72.

Rogoff, K. and C. Reinhart. (2009b). This Time is Different: Eight Centuries of Financial Folly. New Jersey: Princeton University Press.

Rogoff, K and C. Reinhart. (2009c). “Growth in a Time of Debt.” Unpublished paper, available at:


Samuelson, P. A. (1966). “Science and Stocks.” Newsweek, September 19.


Shiller, R. J. (2005). Irrational Exuberance. 2nd ed., New Jersey: Princeton University Press.

Stevens, G. (2010). “The Role of Finance.” The Shann Memorial Lecture, August 17.

Van Wel, C. (1998). “Recent Australian Business Cycles.” Economic Papers 17:1-12.


The following are the broad topics of the unit and the approximate timetable:








28 February



7 March

The Importance of Money Supply and Money Demand


14 March

Money Demand


21 March

Monetary Policy; Central Banking


28 March



4 April



11 April

Interest Rates


18 April

Interest Rates / Debt and Deficits

25 April

Study-break, no lectures or tutorials this week


2 May

Debts and Deficits

Wednesday 11th May – Quiz (worth 20% of total mark)


9 May

Debts and Deficits


16 May

International Monetary Economics


23 May

International Monetary Economics


30 May

The Economics of Financial Crises

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