Module Code and Title:         CET205          Monetary Economics

Programme:                          BA in Development Economics

Credit Value:                         12

Module Tutor:                       Tshering Lhamo Dukpa

General objective: Principal objective of this module is to examine monetary policy in a closed economy. It aims to develop greater understanding of the role of money and monetary system, financial structures, relevant theories and polices.

Learning outcomes – On completion of this module, learners should be able to:

1. Discuss money demand functions, especially with reference to income and interest elasticities.
2. Describe the goals and tools of monetary policy.
3. Explain the effectiveness and limitation of monetary policies.
4. Explain and analyse the role of monetary authorities in controlling the money supply.
5. Assess the importance of the monetary base in monetary management.
6. Make an economic analysis of financial structures.
7. Trace the channels of monetary transmission.
8. Define term rates and yield curve.

Learning and Teaching Approach: This module will be taught by means of lectures, tutorials, case studies and self-directed study. Lectures will aim at explanation of various concepts and theories, aided by tutorials. In classroom workshops, groups of 4-5 students will be given articles to critically review and discuss their opinions on with other groups.

Assessment Approach:

A. Individual Assignments: Portion of Final Marks: 15%

Two assignments will be given based on Bhutan relevant articles on monetary policy and financial structures; one each before and after the midterm examination (7.5%). Each assignment should have a maximum limit of 250 words.

• 3.5%    Summary of the article
• 2%       Identification of major issues raised in the article
• 2%       Key lessons learnt

B. Class Test: Portion of Final Marks: 10%

One written test will be conducted of 45 min duration and covering 4-5 weeks of material from the beginning of the module; the assessment will test learners’ understanding of the basic concepts of the module.

C. Case Study (group work): Portion of Final Mark: 20%

Each group of 4 will prepare a report based on a case study on monetary management. The report shall have a maximum limit 600 words, with individual contributions of 150 words.

• 2%       Identification of the problem addressed in the case study
• 2%       Effective group work plan
• 6%       Individual reports
• 2%       Review of individual work by the group members
• 8%       Overall analysis in the joint report

D. Midterm Examination: Portion of Final Mark: 15%

Students will take a written exam of 1.5 hr duration covering topics up to the mid-point of the semester.

Pre-requisites: CET103 Introductory Macroeconomics

Subject matter:

1. Introduction to money and monetary economics
   • Nature and functions of money
   • Introduction to cash in advance (CIA)
   • Money in the utility (MIU) functions
2. Money demand and supply
   • Microeconomic determinants of the demand for money, demand for money functions
   • Quantity theory of money
   • Transaction theory of demand for money
   • Friedman’s restatement of quantity theory of money
   • Monetary base; credit creation; movements in monetary base
   • Monetary aggregates
   • Velocity of money and its variability
3. The Classical school
   • Neutrality of money and the Quantity theory
   • The Classical dichotomy
   • Walras’ Law
   • Introduction to money in a general equilibrium setting
4. Central Banking and the Conduct of Monetary Policy
   • Role of Central Banks
   • Central banks in global perspectives
   • The Money Supply Process: High powered money, credit creation and money multiplier, narrow and broad money
   • The Tools of Monetary Policy: Goals, targets, fractional reserve system, open market operation, bank rates and credit control
   • The Conduct of Monetary Policy: Strategy and Tactics
   • Transmission mechanism of monetary policy
   • Flexible price economies and monetary policy
   • Lucas supply functions and the effects of monetary policy
5. Commercial Banks
   • Functions of commercial banks and non-banking financial institutions
   • Money market, instruments of money market- treasury bills, commercial bills, certificates of deposits, call money market, money market derivatives, analysis of bonds
   • Capital market and its functions
6. Financial Institutions
   • An Economic Analysis of Financial Structure
   • Banking and the Management of Financial Institutions
   • Economic Analysis of Financial Regulation
   • Structure and Competition of Banking Industry
   • Current State of Financial Sector in Bhutan
   • Financial Crises in Advanced Economies
7. Term structure of interest rates
   • Yield curve
   • Expectations hypothesis
   • Segmentation hypothesis

Reading List

1. Essential Reading
   • Bhole, H.M. (2004). Financial Institutions and Markets: Structure, Growth and Institutions. Tata McGraw Hill.
   • Mishkin, F.S. & Eakins, S.G. (2009). Financial Markets and Institutions. Pearson Education.
2. Additional Reading
   • Baye, M.R. & Jansen D.W. (1996). Money, Banking and Financial Markets. AITBS.
   • Fabozzi, F.J., Modigliani F., Jones F.J. & Ferri M.G., (2009). Foundations of Financial Markets and Institutions. Pearson Education.
   • Goodhart, C.A.E. (1989). Money, Information and Uncertainty. London: Palgrave Macmillan.
   • Handa, J. (2009). Monetary Economics. Routledge.
   • Kojo, N.C. (2005). Bhutan: Power Exports and Dutch Disease. Centre for Bhutan Studies, Thimphu.
   • Lewis, M.K. & Mizen P.D. (2000). Monetary Economics. Oxford University Press
   • Rashid, H. (2014). “Understanding the Causes of the Rupee Shortfall: A Macroeconomic Policy Challenge for Bhutan and the Way Forward. Unpublished draft retrieved at www.gnhc.gov.bt/wp-content/uploads/2012/06/Rupee-analysis-by-DESA.pdf

Date: July 1, 2016