EC230
EC230
SUMMARY LENT TERM
,Table of Contents
Topic 0: Revision of basic concepts 4
IS-LM Model 4
AD-AS Model 6
Philips Curve 8
Week 1: Class questions and answers 9
Topic 1 – Central banks 11
Why does political control of monetary policy harm long-run economic performance? 11
Why did the UK govt. grant independence to the BoE in 1997? 12
Why do many developed countries have inflation targeting? 13
What are the recent developments in the Philips curve? 14
Week 2: Readings 15
Bernanke, B. and Mishkin, F. (1997) ‘inflation targeting: a new framework for monetary policy’ in Journal of
Economic Perspectives 11(2) 97-116 15
Week 2: Class questions and answers 16
Topic 2 – Global financial crisis of 2007-09 22
Financial Crises – Causes 22
Interplay between credit boom & speculative house price bubbles 22
Anatomy of an asset price bubble 22
The role of banks – the interplay of credit and asset boom 23
Role for policy 24
Price Stability -Financial Stability model 26
Week 3: Readings 27
Bean, C. (x) The Future of monetary policy – Speech 27
Week 3 – class questions 28
Financial Crises – Consequences 33
What caused the subprime mortgage crisis? 33
Consequences of subprime mortgage crisis on banks 34
Consequences for the real economy 35
How has financial regulation been reformed in the aftermath of the crisis? 36
Week 4 readings 37
The Economists (2013) Calling to Accounts: Making Banks Safe 37
Week 4 class questions 38
Unconventional Tools of Monetary Policy 42
Quantitative Easing 42
Forward guidance 45
Readings 46
The Economists: QE, or not QE?; Quantitative Easing 46
2
,Topic 3 – Exchange rates and currency crises 47
Fixed and Floating exchange rates 47
Week 6 class questions 50
Currency crises 51
Topic 4 – Currency unions 53
Currency unions – Euro VS the dollar 53
What makes a good currency union? 53
Why has the US been a more successful currency union than the Eurozone? 56
What were the causes of the European debt crisis?57
How did it influence the Brexit vote? 58
Topic 5 – Greek debt crisis 60
Topic 6: Growth Policy Error! Bookmark not defined.
All figures Error! Bookmark not defined.
3
, Topic 0: Revision of basic concepts
IS-LM Model
Assumes closed economy.
Helps understand the effects of macroeconomic shocks and how fiscal
monetary policy can stabilise the economy in the face of these shocks
I = investments L = Liquidity
S = savings M = money
= goods market = money market
ð Equilibrium income (Y) ð Equilibrium interest rate (r)
Shows how income, consumption and investment behave after a shock,
moving back to the short-term equilibrium.
The money-market (LM curve) equilibrium requires a situation where money
supply = money demand, where:
Money supply is all money circulating in the economy, which is a fixed amount,
set by the Central Bank (CB).
Money demand is derived from Keynes’ liquidity preference theory, which
theorises the equilibrium between interest rate and the amount of money
demanded:
4
EC230
SUMMARY LENT TERM
,Table of Contents
Topic 0: Revision of basic concepts 4
IS-LM Model 4
AD-AS Model 6
Philips Curve 8
Week 1: Class questions and answers 9
Topic 1 – Central banks 11
Why does political control of monetary policy harm long-run economic performance? 11
Why did the UK govt. grant independence to the BoE in 1997? 12
Why do many developed countries have inflation targeting? 13
What are the recent developments in the Philips curve? 14
Week 2: Readings 15
Bernanke, B. and Mishkin, F. (1997) ‘inflation targeting: a new framework for monetary policy’ in Journal of
Economic Perspectives 11(2) 97-116 15
Week 2: Class questions and answers 16
Topic 2 – Global financial crisis of 2007-09 22
Financial Crises – Causes 22
Interplay between credit boom & speculative house price bubbles 22
Anatomy of an asset price bubble 22
The role of banks – the interplay of credit and asset boom 23
Role for policy 24
Price Stability -Financial Stability model 26
Week 3: Readings 27
Bean, C. (x) The Future of monetary policy – Speech 27
Week 3 – class questions 28
Financial Crises – Consequences 33
What caused the subprime mortgage crisis? 33
Consequences of subprime mortgage crisis on banks 34
Consequences for the real economy 35
How has financial regulation been reformed in the aftermath of the crisis? 36
Week 4 readings 37
The Economists (2013) Calling to Accounts: Making Banks Safe 37
Week 4 class questions 38
Unconventional Tools of Monetary Policy 42
Quantitative Easing 42
Forward guidance 45
Readings 46
The Economists: QE, or not QE?; Quantitative Easing 46
2
,Topic 3 – Exchange rates and currency crises 47
Fixed and Floating exchange rates 47
Week 6 class questions 50
Currency crises 51
Topic 4 – Currency unions 53
Currency unions – Euro VS the dollar 53
What makes a good currency union? 53
Why has the US been a more successful currency union than the Eurozone? 56
What were the causes of the European debt crisis?57
How did it influence the Brexit vote? 58
Topic 5 – Greek debt crisis 60
Topic 6: Growth Policy Error! Bookmark not defined.
All figures Error! Bookmark not defined.
3
, Topic 0: Revision of basic concepts
IS-LM Model
Assumes closed economy.
Helps understand the effects of macroeconomic shocks and how fiscal
monetary policy can stabilise the economy in the face of these shocks
I = investments L = Liquidity
S = savings M = money
= goods market = money market
ð Equilibrium income (Y) ð Equilibrium interest rate (r)
Shows how income, consumption and investment behave after a shock,
moving back to the short-term equilibrium.
The money-market (LM curve) equilibrium requires a situation where money
supply = money demand, where:
Money supply is all money circulating in the economy, which is a fixed amount,
set by the Central Bank (CB).
Money demand is derived from Keynes’ liquidity preference theory, which
theorises the equilibrium between interest rate and the amount of money
demanded:
4
