Module Directory

This module is designed as a self-contained introduction to the study of monetary economics and policy. It is aimed at students with a strong interest in understanding how central banks go about setting monetary policy, the empirical evidence that guides them, and the mathematical and computational tools that go along with building models to answer policy questions.

The course is split into three broad themes. These will be introduced in lectures, and will be developed in class. Classes will be split between computer labs, where students will learn how to solve the models presented in the lectures through coding, and traditional classes where problem sets will be discussed.

The aims of this module are:

• To equip students with the basic tools needed to start employment at a central bank or public institution, or to continue academic research in monetary economics.


• To teach students the empirical research and modelling that motivates modern monetary policy and introduce them to the computer programming skills used in this area.

By the end of this module, students be expected to be able to:

1. Understand variations of the basic New Keynesian model and apply it to study monetary aspects of the business cycle and pertinent policy implications.


2. Become acquainted with the relevant methodology used in applied theoretical and empirical research in the field and be able to critically assess its limitations.

Skills for your Professional Life (Transferable Skills)

By the end of this module, students will be expected to develop key employability skills including:

1. Numeracy and ICT skills.


2. Research, information and communication skills.


3. Self-awareness, target setting, time management.


4. Reflection and evaluation.

The first theme covers the basics of monetary policy analysis. Evidence on the short- and long-run effects of money on prices and the real economy is discussed, focusing on the tension that money appears to be "neutral" on the real economy in the long run, but have powerful effects in the short run. The "Money in Utility" model is introduced, and used to discuss the neutrality of money and the "Taylor Principle" underpinning how modern central banks conduct monetary policy through the setting of interest rates.

The second theme covers monetary theory and policy using the "New Keynesian" model, which has been a workhorse of macroeconomic research in academia and central banking for nearly two decades. This is a modern sticky-price model which is used to explain how money can have real effects in the short run. Optimal policy is derived, allowing students to understand when and how central banks should respond to economic shocks to maximise welfare.

The third and final theme covers applied topics in monetary economics: (1) The crucial extension of the above framework to situations where the economy is at the Zero Lower Bound, and whether the central bank can still boost the economy using forward guidance or quantitative easing. (2) Financial frictions, and whether quantitative easing may work better if it helps alleviate financial frictions. (3) Structural Vector Autoregression (SVAR) methods where we revisit the empirical evidence on the effects of monetary shocks on the economy using modern econometric tools.

This module will be delivered via:

• One 2-hour lecture per week.
• One 2-hour class/lab session per week.

Lecture notes, class exercises and supporting materials can be accessed via Moodle.