EC243: THE FEDERAL RESERVE
May 2002
Instructor: Scott Fullwiler, Ph.D. Email: fullwiler@wartburg.edu
Time and Place: Daily 9-12, WBC 214 Office: WBC 109
Office Hours: by appointment
Phone:
352-8452
COURSE
DESCRIPTION:
From the catalog: Guiding principles,
strategies, and tactics of the Federal Reserve’s monetary policy within
political, historical, and theoretical contexts. Includes trip to a regional
Federal Reserve Bank.
Prerequisite: EC 141.
Monetary policy has during the past 20 years become (for
better or worse) the primary tool of macroeconomic stabilization in many
countries, including the
As with any course that lasts only 3-4 weeks, the pace of
the course will be brisk. Each day of
class should be considered to be analogous to nearly one full week in a normal
semester (probably a bit less, but you get the idea). In order to keep up, you will need to do 2-3
hours of reading or other work—at least—EACH DAY. Likewise, missing class will set you
substantially behind very quickly—do not expect to earn a good grade if you
miss more than one or two classes.
A note on
prerequisites: You are expected to have a
basic understanding of EC 141. If you do
not recall some of this material when it arises, then it is your responsibility
to bring yourself up to date, not mine.
There is a natural progression to the material covered throughout the
business curriculum, and it simply must be expected that you have taken basic
knowledge with you from these courses (just as in progressions through a
foreign language or a math curriculum, for instance).
REQUIRED
MATERIALS:
1. Carolyn
Clark. Monetary Policy in Theory and Action. Unpublished manuscript.
2. Ann-Marie
Meulendyke.
3. M.A. Akhtar. Understanding Open Market
Operations. Federal Reserve Bank of
4. Several
other readings will be distributed in class or can be found on the Internet.
COURSE
GRADES:
The following table lists the course work and weighting for
the term:
Item Weight
Participation 15%
Article
Write-Ups (5) 21%
Essay
Questions (5) 21%
Final
Exam 25%
100%
All decimals on final grades in each category
listed above will be rounded up (e.g., a score of 79.3% will be rounded up to
80%). However, your cumulative grade for
the course will not be rounded up or down (e.g., a course average of 79.999%
will receive a final grade of C+).
The following scale will be used in assigning grades:
93% and above A 80%
to 82.9% B- 67% to 69.9%
D+
90% to 92.9%
A- 77% to
79.9% C+ 63% to 66.9%
D
87% to 89.9%
B+ 73% to
76.9% C 60% to 62.9%
D-
83% to 86.9%
B 70% to
72.9% C- Below 60%
F
All decimals on final grades in each category
listed above will be rounded up (e.g., a score of 79.3% will be rounded up to
80%). However, your cumulative grade for
the course will not be rounded up or down (e.g., a course average of 79.999%
will receive a final grade of C+).
PARTICIPATION:
Participation grade in the course will be
determined from the following sources:
· Attendance
will be taken each day in class and at all events in
· Certain
class activities (May 3, for example) will require substantial class
participation for success—the quality of your participation in these activities
will affect your participation grade.
· Your
level of preparation for each day of class.
· The
quality AND quantity of your overall participation in class—through asking
questions, providing answers to questions posed, and contributing to
discussions.
Excused
absences are given at my discretion and include Wartburg
athletic and other official
ASSIGNED
WORK:
Final
Exam: The final exam will
take place on the last day of class. I
will give you a study guide in advance to alert you to what will be covered on
the exam. The final exam will be open
note, though not open book.
Essay
Questions: I have attached a list
of questions that pertain to the material in the course and due dates. There are many questions there, and some more
may be added. You are to choose five (5)
of these to answer as completely as possible.
You must choose at least 2 from material before and 2 from material
after the
Regarding both Clark Questions and Essay
Questions, there is quite a bit of detail involved in the material for the
course; therefore, it cannot possibly be completely comprehended if effort is
not forthcoming. This, however, does not
mean that the longest answer is the best answer—it is VERY difficult to
qualitatively improve economic analysis simply by adding words.
Article
Write-ups: There are many
articles that we will read to get an understanding of theoretical debates or
the Fed’s views. You are required to do
write-ups of five (5) articles listed on the course outline. Those items with a star (*) next to them are
possible for write-ups. Write-ups MUST
be typed and ready to be handed in during class on the date that the material
is covered (grammar, spelling, etc., count).
An exception is made for those covered during the first week of
class—one of these must be handed in by the end of the first week, while any
others from this material can be handed in Monday, May 13 by
The basic requirement of the write-up is to
explain the logic of the argument being made in the article. More points will be given if you can explain
how and where the author’s arguments fit into what is being covered in class
(note: this entails more than simply
explaining “that” it is related).
Write-ups must be typed and should be about 500 words in length (one
side of one page, single-spaced). Please
note that these are not opinion pieces—you do not know enough about this
material to have an opinion yet (in some cases, neither do I)—you are simply
explaining the author’s arguments.
NOTES
ON MY POLICY/VIEWS ON ASSIGNED WORK:
1. Regarding late work, it is not possible to grade
consistently, or be fair to people who take trouble to do assignments on time,
if I am absorbing a continual stream of late work. Therefore, late assignments will be penalized
20% (of the total possible grade) up to the first 24 hours they are late; 40%
thereafter. However, once I have either provided the class with answers or have
returned an assignment, late work
will no longer be accepted. It is
your responsibility to organize your life so work can be done on time—if you
leave it until the last minute and then something breaks down, that’s your
problem. Please do not tell me about
malfunctioning disks, printers, and so forth.
2. All work is due in class at the moment that I choose to collect it (which
could be the beginning, middle, or end of class). An assignment is considered late if it is not
handed in at such time, unless other arrangements have already been made. If you have an excused absence on a day that an assignment is due, it will be
accepted without penalty only on the first class you attend after the absence,
unless other arrangements have already been made.
3. ALL assignments are done by
you (and nobody else) with no help or collaboration whatsoever unless
EXPLICITLY allowed in writing by me.
This means that you cannot defend yourself after the fact by claiming
that I did not explicitly prohibit such activity on any assignment.
4. When doing homework, writing
that you do not understand something is completely unacceptable and receives no
points. After college, doing a report or
a project without finding out what is expected can result in termination of
employment. Better to learn how to ask
questions now. Many assignments are
purposely geared to require extensive thought and organization. There will always be time available for
questions in class if you have them—take advantage of this. Of course, just like real world employment,
you will also be expected to put things together yourself without needing to be
hand fed every detail, so there will be limits to how much help I will give in
order to encourage you to work things out yourself.
So, NEVER write (at
least in this class) “the article was confusing” or “I did not completely
understand” or some variant thereof.
There are certainly times to point out that you do not understand
something (i.e., well before an assignment is due is most appropriate) and
sometimes during your career things you must read will not be very
coherent. However, in this class every
assigned reading WILL be coherent (whether you recognize it or not).
IMPORTANT HOUSEKEEPING
ITEMS:
1. Academic Integrity/Honesty: Academic
integrity is one of the basic principles of a college community. By attending
2. Commitment to Students with Disabilities:
3. Harassment: Everyone in the class will
conduct themselves in a mature and professional manner. I will not, nor will
4. Incompletes: Incompletes will be given only in rare cases of
extreme personal or familial difficulties that prevent a student from
completing the semester’s work, and in those cases only if the student has a
passing grade (C- or better) and has
completed a substantial percentage of the course.
5. Extra Credit: You should expect that there will be no
opportunities for extra credit during the semester. In particular, there will be absolutely NO
opportunities for extra credit on an individual basis, as this would be unfair
to others in the class. Rather than
hoping for extra credit opportunities, take responsibility for your performance
in the course throughout the semester by following the advice provided above.
REACHING YOUR POTENTIAL IN
THIS COURSE:
Your grade is your responsibility; I only assign a
grade—you earn the grade yourself.
Though I have substantial responsibilities as instructor of the course
that I take very seriously,
your success in this class is far more a function of
your effort than mine. It is
imperative that you honestly assess your
own performance and determine where improvements can be made throughout the
semester. Your performance will derive
from a combination of (1) your own aptitude for the course material, and (2)
the quantity and quality of effort
you expend learning the course material.
Regarding the latter, what follows is my best advice to you on your
approach to this class.
1. Attend Class: Those who frequently miss my
class almost always do poorly. Notes
copied from other students are most often not a good substitute for class time
missed.
2. Be Prepared:
Keep up with the coursework.
Do at least two hours of study outside of class for every hour in class
(this is a College-wide minimum expectation and translates to 6 hours of study per week outside of class
for this course alone). The material
in this course is cumulative, and most are not able to “catch up” later in the
semester. Go over your notes and
relevant reading shortly after each class to make sure you understand
them. If you don’t understand something,
then you have a good question to ask me!
Do homework conscientiously and in a timely manner.
3. Learn to Solve Problems: More than
just the study of the economy or businesses, economics and finance are ways of
thinking that involve logical reasoning and attention to detail. This is difficult for many to pick up at
first. If you are unfamiliar with this
method, you will need to practice (a lot!) if you expect to be successful. It is extremely important that you practice solving problems covered in
class or in the book, in addition to
studying concepts and facts. Most
problems have obvious variations, which you should also practice since you are
more likely to see these on an exam.
4. Ask Questions Often, and Be Receptive to the Answers: You will have questions—but I don’t know if
you don’t ask them. I encourage you to
contribute your comments and questions during class time—they will help all of
us. If you are not comfortable doing
that, be sure and find some other avenue to regularly (e.g., office hours, email) have your questions answered
(don’t wait until the last minute!). If
you never have questions, the quantity and/or quality of your studying is probably lacking.
5.
Be Specific When You Ask
Questions: “How do I do #4?” is a passive question that
implies that I should do the work for you.
Take extra time preparing to be more specific in your questions—find out
what part you do not understand, or tell me what you do know and work your way
to what you do not know. If you are
specific, my help will help more; you will retain and understand better. If you don’t prepare well enough to ask a
specific question, my help won’t help as much as it could.
COURSE
OUTLINE:
The following is, to the best of my ability, the
order of material we will follow during the term. Any deviations will be announced in class.
Monday,
April 29: The Transmission Mechanism for Monetary Policy
The Basics (much of this is review
from EC141 and/or EC342)
·
The Federal Funds Market (R. Glenn Hubbard, Money, the Financial System, and the Economy, p. 532-537)
·
The Yield Curve (Frederic Mishkin, The Economics of Money, Banking, and
Financial Markets, p.137-148)
Tuesday, April 30: The
Natural Rate of Unemployment and the Nature of Inflation
The
Basics (continued)
·
The Money Supply Process (notes from EC141)
A Bit More Detail
·
Mishkin, (p. 651, 654-659)
·
·
·
Defining Policy, Strategy, and
Tactics (Class Notes)
Wednesday, May 1: Expectations
and the Fed’s Monetary Policy Goals in Review
The Self-Regulating Economy
·
Aggregate Demand-Aggregate Supply Analysis (notes from EC141)
·
Mishkin (p. 620-627)
·
The Federal Reserve View
·
*William Poole. “Inflation
Hawk=Employment Dove.” Speech given
“Persistent
Inflation is a Monetary Phenomenon”
·
·
Mishkin (p. 665, 667, 672-675)
The Federal Reserve View
·
*Gerald Dwyer and Ric Hafer. “Are Money Growth and Inflation Still
Related?” Federal Reserve Bank of
Theoretical Views on Inflation
Expectations and Monetary Policy (Class Notes)
The Federal Reserve View
·
*Felix Brayton et al. “The Role of Expectations in the FRB/US
Macroeconomic Model.” Federal Reserve Bulletin (April
1997): 227-245. Read 227-230, try 235 and 238, and then read
243-245 (this is the most important part) (email).
Thursday, May 2: Case Study of
Fed Policy and the FOMC Meeting
THE Case Study of the Current Worldview and Policy Goals of the Fed: The 1980-1982 Fight Against Inflation
·
Mishkin, p. 629-631
·
The FOMC Meeting
·
Brief Overview of the Federal Reserve’s Structure (Class Notes)
·
·
·
Examples of Past FOMC Statements
·
Video on FOMC Meeting
Friday, May 3: Mock FOMC
Meeting and Preparation for
·
One Essay Question and one Write-up due today in class if not already
handed in
·
·
Ch.1 (terms beginning with “long run aggregate supply schedule” and #5)
·
Ch. 2 (terms plus #2-5)
·
Another
·
Ch. 4 (terms plus #1, 2, 4)
Mock FOMC Meeting
·
State of The Economy
·
Discussion and Vote
·
Policy Statement
Presentations for
**** May 6 through May
10:
Preliminary
Itinerary Follows Below After Course Outline
Monday, May 13:
·
Remember: assignments due today
by
Preparing Monetary Policy Objectives
·
·
The Fed’s Monetary Policy Report to Congress from
·
*Alan Blinder. “Central Banking
in a Democracy.” Federal Reserve Bank of
Alternative Views of the Fed’s
·
Miller and VanHoose. Macroeconomics. 2nd Ed., 2001, p. 480-483.
·
*Thomas Palley. “The Triumph of Wall Street.” In Plenty
of Nothing,
Tuesday, May 14: Rules vs.
Discretion
·
Rules vs. Discretion: Lags and Uncertainties
·
Quick Review of the Traditional View of Money/Monetary Base Control
(Class Notes)
·
·
*Milton Friedman. “The Role of
Monetary Policy.” American Economic Review (March 1968): 1-17.
Read pages 11-17 (email).
Rules vs. Discretion: Time Inconsistency and Credibility
·
Abel and Bernanke. Macroeconomics. 4th Ed., 2001, p. 548-556.
Federal Reserve Reactions to Recent Crises
·
1998, Y2K (Class notes and handouts)
·
9/11: *Federal Reserve Bank of
Chicago 2001 Annual Report (http://www.chicagofed.org)
Wednesday, May 15: Money Supply
vs. Interest Rate Targets
·
Terms: rule, discretion, model and policy uncertainty, constant growth rate rule, nonreactive rule, reactive rule, discretionary reactive tactics, fine tune
#1, 3, 4, 5
Targets: Operating, Intermediate, Policy Goals (Class
notes and Clark, p. 91-95)
The Money Supply vs. Interest Rate
Targets Debate
·
Thursday, May 16: Experience
with Money Supply Targets
·
Ch. 6, terms plus #2, 3, 5
The Fed’s 1979-1982 “Experiment with Monetarism”
·
·
*Milton Friedman.
“Monetarism: Lessons from the
Post 1979 Experiment.” American Economic Review (May 1984): 397-400 (email).
·
*Benjamin Friedman. “Lessons
from the 1979-1982 Monetary Policy Experiment.”
American Economic Review (May
1984): 382-387 (email).
Friday, May 17: The Tactical
Move to Flexible Targeting
·
Ch. 7, terms plus #2, 3
(explain why), 5
Flexible Targeting
·
·
M2 growth and targets since 1988
The Behavior of Velocity
·
The Quantity Theory of Money (Class notes)
·
Meulendyke, p. 12-16
·
Akhtar, p. 4-5
·
Federal Reserve Report to Congress on Velocity (current and/or past)
Monday, May 20: Crafting a
Strategy with Flexible Targeting
·
Why is a Systematic Strategy Necessary?
·
Abel and Bernanke, p. 545
·
David Wessel.
“Could One Little Rule Explain Economics?” The New
York Times (
The True Believers
·
·
·
*Bennett McCallum. “Monetarist
Rules in Light of Recent Experience.” American Economic Review (May
1984): 388-391 (email).
·
McCallum’s Rule from St. Louis Fed’s Monetary Trends
Federal Reserve Views on Strategy under Flexible
Targeting:
·
*Edward Gramlich. “Monetary Rules.” Speech given
·
*Laurence Meyer. “The Strategy
of Monetary Policy.” Speech given
·
How the Fed sends “signals” to achieve transparency (Handouts)
Tuesday, May 21: Soft Landings
Theory and the First Attempt in the
Late 1980s
·
·
Video
Soft Landings in 1994-1995 (video) and 1999-2000
(Handouts and Video)
Alternative View
·
*L. Randall Wray. “Why Does the
Fed Want Slower Growth?” Jerome Levy
Economics Institute Policy Note 2000/7 (email).
·
Ch. 9, terms plus the questions (1) under
what circumstances would the Fed attempt a soft landing? (2) what
is a soft landing?
Handouts on the FOMC and the economy
during the late 1990s
9am Leave Wartburg
1-800-227-7850
Please note that for all visits there will be security checks and ID will be required. No cameras or cell phones
9am
312-435-3590
11am
1-877-843-2263 (Janice Calvin)
312-322-2331 (Maggie)
330pm Art
Institute of
Recommended Tuesday because of free admission
9am
312-930-1000
Wrigley Field
830am- Federal
Reserve Bank of
140pm and Competition
Fairmont
Hotel,
Registered for entire conference (including reception), so feel free to stay rest of day