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Centre for Financial and Management Studies (CeFiMS)

Macroeconomic Policy & Financial Markets

Course Code:
C225|C325
Unit value:

Introduction

This course has been specially designed to increase the depth of your understanding of macroeconomics by focusing on the relation financial markets have to macroeconomics. We place the subject in a real-world context, aiming to show how theoretical and empirical knowledge of macroeconomics and financial markets provides ways to analyse the salient problems faced by modern macroeconomic policy makers.

Resources

Study Guide

You will receive a looseleaf binder containing eight 'course units'. The units are carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the further assigned readings. The unit files are also available to download from the Online Study Centre.

Textbooks

David Miles and Andrew Scott, (2004) Macroeconomics: Understanding the Wealth of Nations, Second Edition, John Wiley and Sons

Readings

You will receive three volumes of Readings, which are a compilation of recently published articles or seminal writings which augment and illustrate the main text.

DVD resources

You will also receive a DVD as part of the course materials, on which leading policy-makers talk to CeFiMS about their experiences. All the decision makers and advisers on the DVD have dealt with difficult macroeconomic problems in a range of countries and they explain how they approached the problem and considered alternative policies.

They include:

  • Paul Volcker, looking back on his experience as Chairman of the Federal Reserve
  • Sir Alan Budd, as Economic Adviser in the British Treasury (Ministry of Finance)
  • Guillermo Ortiz, as the Governor of Mexico’s central bank
  • Professor Lord Richard Layard, as advisor to the Russian government
  • Benno Ndulu, of the World Bank
  • Professor Rudiger Dornbusch, on experience of Latin American macroeconomic policy
    Professor Sakakibura, on Japan’s recent policy problems

The interviews were recorded by CeFiMS for the International Monetary Fund and designed for officials studying macroeconomics with the IMF Institute. They are reproduced here with kind permission of the IMF. They show case studies intended to enable students to link their study of principles to actual macroeconomic policy making in the complex real world.

Online Study Centre

You will have access to the OSC, which is a web-accessed learning environment. Via the OSC, you can communicate with your assigned academic tutor, administrators and other students on the course using discussion forums. The OSC also provides access to the course Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.

Objectives and learning outcomes of the course

When you have completed your study of this course, you will be able to:

  • Outline and discuss the connection between financial markets, real saving by households, and real investment by firms
  • Analyse how monetary policy can affect real macroeconomic activity through its interaction with financial markets
  • Explain the relation between financial markets and governments’ fiscal policies
  • Discuss the effect that expectations of future inflation and interest rates can have on macroeconomic policy and financial markets
  • Analyse the connection between foreign exchange markets, imports and exports
  • Examine the possibility of instability arising from interaction between international capital flows and financial markets
  • Evaluate theories in the light of empirical evidence
  • Use theory and evidence to analyse actual problems facing macroeconomic policy makers.

Scope and syllabus

Course Content
Unit 1: Macroeconomics and the World of Finance
  • 1.1 Introduction
  • 1.2 Getting Macroeconomics in Perspective
  • 1.3 Long-Run and Short-Run Macroeconomics
  • 1.4 Aggregate Demand and National Income Accounts
  • 1.5 Alternative Windows on Macroeconomics
  • 1.6 Macroeconomics and Financial Markets
  • 1.7 Macroeconomics and Finance in Subsequent Units
Unit 2: Saving and Finance
  • 2.1 Introduction: Real and Financial Saving
  • 2.2 Life Cycle Theory of Saving
  • 2.3 Flow of Savings to Financial Markets - Demographic Fundamentals
  • 2.4 Impact of Financial Markets on Saving - Interest Rate Effect
  • 2.5 Impact of Financial Markets on Saving - Wealth Effect
Unit 3: Investment and Financial Markets
  • 3.1 Capital Accumulation
  • 3.2 Interest Rates and Investment - the Basic Model
  • 3.3 Beyond the Basic Model
  • 3.4 Investment and the Stock Market
  • 3.5 Financing Hierarchy and the Role of Internal Funds
  • 3.6 Conclusion - Investment and Monetary Policy
Unit 4: Monetary Policy and the Central Bank
  • 4.1 Central Banks and Macroeconomic Policy - Inflation Targeting
  • 4.2 Policy's Intermediate Targets - Money Supply and Interest Rate
  • 4.3 Taylor Rules
  • 4.4 Transmission Mechanisms of Monetary Policy
  • 4.5 Monetary Policy in Context
Unit 5: Fiscal Policy and Government Finances
  • 5.1 Effects of Fiscal Policy - Aggregate Demand and Financial Markets
  • 5.2 Fiscal Policy and Monetary Policy
  • 5.3 Discretionary Fiscal Policy - Effective and Desirable?
  • 5.4 An Application of Theory of Fiscal Policy
  • 5.5 Fiscal Policy Rules
  • 5.6 Fiscal Policy in Perspective
Unit 6: Expectations, Inflation, and Interest Rates
  • 6.1 Markets Reflect the Expected Future Today
  • 6.2 Macroeconomic Expectations and Financial Markets
  • 6.3 Inflation Expectations and the Inflation Output Trade Off
Unit 7: Foreign Exchange Markets and Foreign Trade
  • 7.1 Foreign Exchange Markets and the Economy
  • 7.2 Case Study - China's Macroeconomic Policy Choices
  • 7.3 Exchange Rates, Inflation and Aggregate Demand
  • 7.4 Exchange Rates and Monetary Policy
Unit 8: International Capital Flows and Financial Markets
  • 8.1 International Capital Flows - Balance and Shocks
  • 8.2 Interest Rates, Expectations and Currency Crises
  • 8.3 Currency Crises and Exchange Rate Systems
  • 8.4 Is There a Case for Controls on International Capital Flows?

Method of assessment

You will complete two assignments, which will be marked by your course tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 5, and the second assignment at the end of the course, on the Tuesday after Week 8. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Online Study Centre. You will also sit a three-hour examination on a specified date in October, worth 70% of your total mark. An up-to-date timetable of examinations is published in April of each year.