Economists have long been fascinated by the roles and interactions of money, banking and payment systems in market economies. In order to understand why money is essential for trading and why financial intermediation can be welfare improving, one needs to examine trade and money from first principles. If there is no clear idea of why money and banking are essential, then there is no real understanding of the consequences or welfare effects of monetary policy experiments, such as Quantitative Easing (QE) or negative interest rates (NIR), or the need for banking regulation.

The lecture is composed of a theoretical and an applied part. For the theoretical part, the lecture is based on the book by Champ B., Freeman S., and J. Haslag, 'Modeling Monetary Economies', Cambridge University Press. The book is composed of three parts. In Part I of the book, Champ et al. construct environments in which money serves as a medium of exchange and a store of value. Various issues such as inflation, barter, commodity money and price surprises are studied within this framework. In Part II, the authors extend the model of the first section to see how financial intermediation affects the trading environment and the role of money in the economy. In this part of the book, Champ et al. study the conflict between money and capital as stores of value, the liquidity structure of capital, clearing house functions of central banks and bank runs. Finally, in Part III, they introduce fiscal policy to study how deficits, the national debt, open market operations and seigniorage affect the functioning of the economy.

In the applied part of the lecture, we will teach students the basics of programming in Python. At the end of the lecture, students will be able to program the simple model economies from the textbook by Champ et al., solve these models, and perform comparative statics numerically.

The assignment takes the form of a Python-programming homework which needs to be completed in groups of three students within 48 hours.

• Format: Python-programming homework
• Date: tbd (midnight to midnight)
• Group size: up to 3 students per group
• The assignment will count 1/3 towards the grade

The assignment should take around 3-6 hours to complete. Students are expected to form groups on their own. The assignment will be sent via e-mail to all students.

The lecture will be based on the following textbook:

• Champ, Bruce, Freeman, Scott, and Joseph Haslag (2016). Modeling Monetary Economies. 4th ed. New York: Cambridge University Press.

The following website provides useful resources for programming in Python:

• Quantitative Economics by Thomas Sargent and John Stachurski

General review of OLG models