Course Outline/VM

Financial Macroeconomics

5 Feb 2010

FINANCIAL MACROECONOMICS
(abbreviated FINMAC) Proposed 4th term PGP Elective Course Outline and Content, and Aim and Scope Professor Vivek Moorthy, E Block, Ist Floor. Phone Numbers to contact: Office x 3283 Res x 3173 mail: vivek.moorthy@iimb.ernet.in I prefer being phoned at any number at any reasonable time to email. It is always a strain to read or write an email, but seldom to talk or listen on the phone. Grading: A midterm 30%, two quizzes (10% each), and a final 50%. OR just midterm 40% and final (60%). Most questions (whether requiring conceptual or numerical answers) will typically require 3-5 line answers and/or fill in the blanks.) However, I cannot guarantee any specific type of question. Enrollment Issues: Open upto 70 open enrollment. (Note: there is a related fifth term course). I plan to teach only one PGP section. Course requirement (minimum B in Macroeconomics and/or other criteria) will be imposed just in case potential enrollment is more than 70. If needed, this can be discussed later. Course Outline and Content (Refer to the attached Table of Contents as and when needed). The title of this course is Financial Macroeconomics. It will be mainly based on portions of a textbook that I am writing titled Contemporary Macroeconomics. The text draft deals both with principles of economics and its applications, with a strong emphasis on explaining the data. The text material will be supplemented by discussion of ongoing macroeconomic developments, as warranted. The text (draft) so far comprises twenty chapters in six modules. The course will cover chapters (or sections within chapters) from the first five modules. The main subject matter for this course will be Module III The Financial Macroeconomy, Module IV Fiscal Policy and its Impact, and Module V Monetary Policy. The subject matter of Modules I and II are largely dealt with in Core Macroeconomics. But some topics from Chapter 2 in Module I, not dealt with at all in any textbook will be covered in depth here. One such topic: should inflation (or GDP) measured year over year with raw data, or month over month (or quarter over quarter) with seasonally adjusted data? For policy purposes and for financial markets analysts, this is a very important issue, but is completely missing from all textbook discussions. Another important sub section (from Chapter 6 in Module II) on reconciling the Expectations Augmented Phillips Curve with demand based approach to inflation will be covered in this course. The subject matter of the final Module VI (The Open Economy) I plan to cover in a follow up elective in 5th term titled Global Financial Markets, with real time applications. To enroll in GFM, this course FINMAC will be a prerequisite. While all Modules of this text have a strong policy orientation, the material in Chapter 19 of Module V (The News Approach to Exchange Rates and Financial Markets) has a

Course Outline/VM

Financial Macroeconomics

5 Feb 2010

financial market orientation. Chapter 19 will be taught in the GFM course with a focus on equity markets, which is not covered in this text. Some of the Chapter 19 material builds on my published journal articles, based on writing reports (weekly etc) on currency movements and financial market developments, while working at the Foreign Exchange Desk of the Federal Reserve Bank of New York. Aim and Scope of the Text and this Course Strictly speaking, Module III which is the analytical core of this course, should be taught in Core Macroeconomics. Unfortunately, the main textbooks for core macro are mainly based on the IS/LM model (Dornbusch and Fischer, and to a lesser extent Mankiw) in which the central bank fixes the money supply. However, in reality central banks fix the interest rate and hence it is not possible to apply this IS/LM model to real world situations. Some new textbooks follow a new approach (Taylor and Weerapana, Bernanke and Frank) and make the interest rate, not money supply, the policy variable. Nevertheless, the framework in these new books is incomplete since it leaves out the long term interest rate, as distinct from the short rate, from the analysis. My text draft develops a model linking the short rate, long rate and GDP in Chapter 12, building upon the simple model of Chapter 9, to explain why the yield curve (long minus short rate) normally predicts GDP growth, a vital fact in developed country macroeconomics. No other text does this. Modules IV and V deal with fiscal and monetary policy -- theory and applications -- based on the analytical framework developed in Module III. Module IV applies the Domar model of debt to policy episodes, in particular India s Fiscal Responsibility and Budget Management Act of 2003 with its revenue deficit target. Module V goes into current controversies in monetary policy, such as whether using the Taylor rule for setting interest rates would have helped avoid the current economic depression . With regard to pedagogy, there are several differences between this and other texts. To mention one, this text draft develops history through theory, not the other way around. The historical and detailed empirical analysis of Chapter 5 through 7 is used to construct the crucial model of Chapter 9. There is a Chapter section by section outline that I can forward if necessary. For now, I hope this should suffice. Any questions, please contact me. Note: the number of Chapters and sequence below has been slightly changed since teaching it last year fourth term. Attachment: Dec 2009 Table of Contents