This course analyzes the operation and regulation of financial institutions and the impact of Central Bank actions on securities markets and the economy, with particular emphasis on the financial crisis and the response by the Federal Reserve. The first half of the course focuses on how financial innovation and regulatory reform is dramatically changing the role of banks and other intermediaries in the financial system and how the banking and financial system will likely adapt to these reforms in the future. We analyze whether various regulatory reform proposals are likely to enhance or reduce the stability and soundness of the financial markets and the economy, drawing on examples from the recent and historical crises worldwide.
The second half of the class builds on the understanding of the banking system from the first half to investigate the macroeconomic consequences of Central Bank activities. Topics include how the Federal Reserve and banks create money, how the Fed intervenes in securities markets and attempts to affect interest rates, the impact of Fed policy on inflation and the boom-and-bust cycle, and the causes and consequences of inflation and deflation. In particular, we study the response to the crisis by the Fed and central banks around the globe and the exit strategies from extraordinary monetary policy. We also evaluate what the Central Bank should or should not do and the political pressures it faces in its decision-making process.
