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Roberto Perotti

20297 MONETARY POLICY

February 6, 2017

Goals and structure of the course


The first goal of this course is to discuss some of the key problems of monetary policy out times, using
a rigorous framework but with an emphasis on facts and problems as opposed to complicated theoretical
models. The experience of many years has taught me that in many cases our students leave Bocconi without a
clear understanding of basic terms and facts. Hednce, the course is radically different from the course I taught
in previous years: there will be no models, and very few equations (with the exception of the first few classes,
we we will introduce the main concepts).
This, however, does NOT mean that we can just talk about problems as in newspapers or talk shows.
We want to make sure that we handle all the tools needed to study a problem in a rigorous manner; we want
to make sure that we use all the terms correctly and precisely; we want to make sure that we have the right
intuitions, besides knowing the formulas and the models. In particular, the financial crisis has taught us, among
many other things, that in order to understand the working of monetary policy we need to understand the
instruments and working of the money market ---something that is just totally absent from the macro models
of monetary policy now in use.
The second goal of this course is methodological. Most, if not all, macroeconomic problems do not
have an obvious, black-or-white solution: there are pros and cons in any solution we might think of. And in
virtually all cases reasonable and competent individuals will have very different views of the same issue. I will
therefore strive to present all the main sides of the debate, instead of presenting a simple model with a simple,
one-sided solution. Of course, it is impossible to ensure 100 percent neutrality, and in many cases my own
personal opinions will probably come through at the end; but this is unavoidable.
The third goal of this course is simpler. The course tries to give the instruments to discuss the current
problems, where current means problems that are being debated right now. Ideally, at the end of the course,
the student will have the tools to evaluate critically the different positions on the main issues being debated.
To do so, we will also look at several case studies.
The fourth goal of the course is to give a correct feel for figures and numbers. Without this, it is
impossible to have a serious critical position on any issue.

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Class teaching
The plan of the course is quite intense as it is, hence there will be no time for students presentations.
However, all students are strongly encouraged to actively participate in class. You can interrupt me at any
time, to ask for clarifications, make comments, express agreement or disagreement, and the like,
There is no textbook for the course. Before each class, I will post a handout for that class. This handout
will contain all the information you need. However, your physical presence in class is fundamental. I might
emphasize and expand on some parts of a handout and instead skip on other parts. If you do not come to class,
you will not be able to understand what is important and what is less important, and might miss important
discussions. At the end of the course, I cannot provide a list of the paragraphs we have skipped or downplayed
and of those that we have emphasized and expanded.

Structure of the exam


There will be one final exam, non partial midterm exam. The fina exam will last between one hour and
one hour and a half.
It will consists of three types of questions
1. True, False or Uncertain. You will be asked to state whether a certain statement is true, false or
uncertain. You will have to justify your answer in a concise but comprehensive manner. You will
have to provide the explanation, formal or intuitive or both, of the main arguments, using the exact
and precise terminology.
2. A short essay. This must be a short but exhaustive essay on a question that we have studied in class
3. A short formal problem. There could be a question that asks you to solve a formal problem, among
the few formal problems (meaning: a model with equations) that we study in class. This could be
exactly the model we have studied in class or a very small variation on it
A few weeks into the course I will post some examples of these three types of questions

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This is the tentative program for the course. Additional items will be added along the way

Part 1: Preliminaries
1. Nominal and real interest rates
2. The monetary base and the money supply process
3. The Fed and the Ecb

Part 2: the money market


4. The money market
5. The repo market
6. Securities lending
7. The commercial paper market
8. Money market mutual funds
9. The Eurodollar market
10. Certificates of deposits
11. The federal funds market

Part 3: The conduct of monetary policy


12. Monetary policy at the Fed
13. Monetary policy at the Ecb

Part 4: The evolution of the banking system and money markets before the crisis
14. The economics of structured finance
15. Credit default swaps
16. The emerging importance of dealer banks
17. Shadow banking

Part 5: The crisis


18. The debate on monetary policy before the crisis
19. A brief chronology of the crisis
20. Putting it all together: explanations of the crisis

Part 6: After the crisis


21. Unconventional monetary policies and the zero lower bound at the Fed
22. . And at the Ecb

Part 7: The debate on monetary policy and the banking system in Europe
23. Some terminology: Tier 1 and Tier 2 capital, and the rest
24. The zero lower bound and bank profitability
25. The problem of nonperforming loans
26. Non performing loans in Europe
27. Case study: Non performing loans in Italy

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28. Banking union and bank resolution
29. Case study: Spain and the cajas
30. Case study: Monte Paschi di Siena
31. Is equity expensive? The bankers new clothes