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Table of Contents for Financial Macroeconomics Course

8. CENTRAL BANKS, POLICY RATES AND BANK RESERVES
PART A: The Mechanics of Monetary Policy
8.1 Various Interest Rates 1
8.2 The Basics of Bond Pricing 4
8.3 The Policy Rate and Open market Operations 5
8.3.1 The Mechanics and Economics of Open Market Operations 8
8.3.2 A Description of Actual Open market Operations 11
8.4 The Policy Rates in India 13

Part B Critiques of IS/LM 15

8.B.1 Basic Critique: FAQ’s on IS/LM 16
8.B.2 Detailed Critique: Why IS/LM is Irrelevant and Wrong: An Explanation 22
Data Appendix: LAF, MMS and Key RBI Interest Rates and Ratios 23-25

9. LINKING INFLATION, RATE AND OUTPUT : THE MONETARIST PARADOX

9.1 Introduction 1
9.2 The Classical Theory of Interest 2
9.3 Fisher Effect: Adding Inflation Expectations 4
9.3.1 Behavioural versus Tautological Fisher Equation 5
9.4 The Policy Rate and the Keynesian (Liquidity Preference) Theory of Interest and Chart 9
9.5 Combining the Policy Rate, the Fisher Equation and the EAPC 10
9.6 Empirical Evidence from the Volcker Deflation 14
9.7 Consequences of Pegging the Nominal Rate 15
9.7.1 Can the Stance of Policy be Judged by Interest Rates? (Advanced) 16
9.8 The Monetarist Paradox with Nominal GDP Growth Added 19
9.9 India’s Episode of Tail Chasing 20
9.10 Limited Monetarism versus the Quantity Theory 23
9.10.1 Evidence on the Fisher effect versus the Quantity Theory 25
9.11 Origins of the Quantity Theory and Phillips Curve: Hume’s Essay 30
End of Chapter Questions 31

10. CENTRAL BANK INDEPENDENCE, INFLATION BIAS AND THE MONETARIST PARADOX
10.1 The Political Business Cycle Based upon the EAPC 1
10.2 Absence of Inflation Bias under the Gold Standard 3
10.3 The Political Business Cycle and Inflation Bias in India 4
10.4 Central Bank Independence to Control Inflation Bias 5
10.5 Cross Country Evidence on Inflation Bias and the Monetarist Paradox 7
10.6 The Changing Independence of the Reserve Bank of India 9
10.7 Suitable Appointment Rules for Central Bank Independence 11
10.7.1 Suitable Appointment Rules for Central Bank (Update Sept 2020) 12
APPENDICES
10.A Letter to Friedman about flaw in Blinder-Solow Proofs on Debt Stability & his Reply 14
10.B Summary of Critique (VM) of Blinder-Solow Proofs 16
10.C Origins of the Monetarist Paradox 17
10.D Liquidity and the Economy 18

11. LOANABLE FUNDS APPROACH VERSUS KEYNESIAN MULTIPLIER

11.1 Introduction 1
11.2 The classical/loanable funds theory in a private closed economy 2
11.3 Keynes’ Approach to Savings, Investment and the Rate of Interest 4
11.4 The Keynesian Multiplier and the Paradox of Thrift: A Numerical 5
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11.5 Classical Critique of Keynes’ Paradox of Thrift and Chart 7

11.5.1 Critique of the expanded IS/LM Model 8
11.6 Relevance of Keynes’ Approach in Some Situations (Advanced) 10
11.6.1 Limitations of full Multiplier Process When Consumption Drops 11
11.7 Short Run Keynesian Outcomes Within a Classical Model (Optional/Advanced) 12
11.7.1 Labour Supply and Keynes’ Rejection of Loanable Funds Theory 16
11.8 Labour Supply, Hysteresis versus Natural Rate 18
11.8.1 Low Recent Unemployment in US: A Credit Based Explanation 20
APPENDICES
11.A Robertson on Supply and Demand for Loanable Funds 21
11.B The Non-Econometrician’s Lament (Robertson) 22

12. CONSUMPTION, SAVINGS, INVESTMENT, AND INTEREST RATES

12.1 The Two Main Components of GDP 1
12.2 Determinants of Consumption: Alternative Theories 2
12.3 Components of Investment 6
12.4 Growth Contributions of Components of GDP for India 2009-10 8
12.5 Determinants of Investment 9
12.6 Impact of Interest Rates: The Transmission Mechanism of Monetary Policy 14
12.7 Interest Rates and Bank Loan Officers Survey for USA 16
12.8 Savings data and issues for India 18
12.9.1 Article: Money and Currencies: High rates hit home loans growth 21
12.9.2 Article: SBI capex loan crash mirrors investment strike at India Inc 22

13. FISCAL POLICY, TAXES, DEFICITS AND DEBTS (PART A)

13.A.1 Fiscal policy in U.K. in the 19th century 1
13.A.2 Fiscal policy: An Introductory libertarian perspective 3
13.A.3 Trends in tax rates and taxes in USA 4
13.A.4 Postwar US Fiscal Expansion 5
13.A.5 The Financing of Government Spending 6
13.A.6 Assessing the Economic Impact of Taxes 7
13.A.7 The Full Employment Budget Deficit 8
13.A.8 Components of U.S. Government Debt& Ownership of US Treasury Securities Table 12
13.A.9 Charts and Tables : Fiscal Policy, Deficit and Debt 13-19
13.A.10 Keynesian multiplier with taxes question 20
13.B LINKING SHORT RATES, LONG RATES & OUTPUT (PART B)
13B.1 Bringing in the Government Sector 1
13B.2 Government Expenditure and Types of Crowding Out: 2
13B.3 Debt versus deficit as the Determinant of Interest Rates 4
13B.4 Interest rate Determination with Non-Tradable Debt 6
13B.5 The Vital Yield Curve GDP Nexus 7
13B.6 A Wicksellian Loanable funds approach to the yield Curve GDP Nexus and Table 8
13B.7 Towards a more realistic yield curve based approach 12
13.B.8 APPENDIX: Charts and Tables (Yield Curve, GDP, Bond Yields, Debt ratios, Leading Indicators) 14-20
13.B.9 Yield Curve Model Numerical Question 21
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14. FISCAL ISSUES IN INDIA & MONETRAY NEXUS

14.1 Linkages between Fiscal and Monetary Policy (FISCMONSCHEMATIC) 1
14.1 Important Fiscal variables and Definitions 2
14.2 Fiscal Accounts Concepts & Data 3
14.3 Fiscal Concepts, Trends and Outlook 4-11
14.4 Article on Fiscal Policy Rewards of Profligacy (2000) & Don’t Panic Over Delhi’s Deficit (2005)
14.5 Simulation Results of Debt-GDP Outcomes (DRG Study Sec 1.4) 22-25
14.6 Debate with ex RBI Governor Economic Times (1995) 28-40
Part 1 Some Unpleasant Monetary Arithmetic/ Print Bonds, Not Money/
Part 2 Should we Prefer Bonds or Money/ Why Gentlemen Still Prefer Bonds (2003)
14.7 Small Savings Interest Rates and Taxes Article & Table 26-27
14.8 Summary Table: All Major Fiscal Ratios & Interest Rates for India 41

17. POSTWAR EVOLUTION OF MONETARY POLICY

17.1 Introduction to Friedman’s Role of Monetary Policy Speech 1
17.2 What Monetary policy Can Do, Cannot Do & How it Should be Conducted 2
17.3 Evaluating Friedman’s recommendations based on 1970s & 1980s 5
TABLE: MONETARY POLICY PROCEDURES SCHEMATIC 6
17.4 Sir Alan’s Day of Judgment (VM) Critique of Greenspan 7
17.5 The Taylor Rule (St Louis Fed Summary & VM handwritten note) 11
17.6 Greenspan Taylor debate on the Housing Bubble & VM Article 13
17.7 How (Direct) Inflation Targeting Evolved (VM article) 15
17.8 Current Federal Reserve Policy 16