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Macroeconomics III

Macroeconomics III

En pratique :

Volume horaire de cours : 36
Volume horaire global de TD : 16
Langue principale : Anglais

Description du contenu de l'enseignement

The course is aimed at giving students a strong theoretical background and practical framework about monetary policy. It lays the foundations of the practice of monetary policy necessary for students to develop their analytical skills.
The course starts with an overview of what money, monetary policy and financial market are in order to understand why it is important to study money, bank and monetary policy. In chapter 1, the course provides an in depth analysis of what money is and why is it important for efficiency of the economy. It starts with a formal definition of money by recognizing that money is not only currency (pieces of paper and coins we have in our pockets). Afterwards, through the evolution of payments system, it describes the important role of money in reducing transaction costs and, thus, making the economy more efficient.
The chapter 2 introduces the basic function of banks and the money supply creation. The first part of the chapter summarizes the features of a bank's balance sheet and identifies ways in which banks can manage their assets and liabilities to maximize profit and meet their legal requirements. In turn, the second part of the chapter describes the role of the central bank in the money supply creation process. It identifies the factors that affect the monetary base and discuss their effects on the central bank’s balance sheet. Moreover, it explains and illustrates the deposit creation process and the basic principles of the money supply creation process.
The chapter 3 examines the tools used by the Central Bank to control the money supply and interest rates. It also examines the goals of monetary policy and then considers one of the most important strategies for the conduct of monetary policy, the inflation targeting. Concerning monetary policy tools, this chapter illustrates the market for reserves and demonstrates how changes in monetary policy can affect the interest rate target of the central bank. Moreover, it summarizes how conventional monetary policy tools are implemented and explains the key monetary policy tools that are used when conventional policy is no longer effective. Concerning the conduct of monetary policy, this chapter identifies the six potential goals that monetary policymakers may pursue, defines and recognizes the importance of a nominal anchor such as inflation, and describes and assesses the four criteria for choosing a policy instrument. A special focus is given to the Taylor rule at the end of the chapter.
With the knowledge of the conduct of monetary policy acquired in previous chapters, the chapter 4 focuses on monetary theory that links changes in money supply to changes in economic activity. To start with, this chapter examines the demand for money as explained by the quantity theory of money, the liquidity preference theory (LM curve) and the portfolio theory. Thereafter, a formal derivation of the aggregate demand (Investment-Saving curve and Monetary Policy curve derived from the Taylor principle) and aggregate supply curves (long and short-run Phillips curve and Okun’s law) is then addressed. Finally, Using the AD-AS analysis, this chapter describes the equilibrium of the economy and analyzes the responses of monetary authority in case of demand and supply shocks.
The chapter 5 examines the analysis behind the rational expectations revolution (Lucas critique) and the transmission mechanisms of monetary policy to better understand the role that monetary policy plays in the economy. The first part of the chapter focuses on the importance of agents’ expectations for the effectiveness of monetary policy. Namely, it shows the benefits of a credible central bank and identify the ways in which central banks can establish and maintain their credibility. The second part of the chapter presents different transmission mechanisms, beyond the traditional interest rate channel, through which monetary policy affects the economy.



Chapter 1: Definition and measure of money

Chapter 2: Banking and the money supply process

Chapter 3: Conduct of monetary policy

Chapter 4: Macroeconomic impacts of monetary Policy

Chapter 5: Transmission mechanism of monetary Policy


  • Mishkin F., « The Economics of Money, Banking, and Financial Markets », Tenth Edition, édition Pearson.
  • Mishkin F., Bordes C., Hautcoeur P., Labarthe D., Ragot X., « Monnaie, Banque et marchés financiers », 9è édition, édition Pearson.
  • Daniels J.P., Van Hoose D.D., « International Monetary and Financial Economics », 2014, édition Pearson
  • Carlin W. and Soskice D., « Macroeconomics: Imperfections, Institutions and Policies », 2006, Oxford University Press