Embedding employability in Monetary Economics

Monetary Economics is an optional module taught in year three. It starts with traditional topics such as money supply and money demand and then delving into monetary transmission mechanism specially emphasising the role played by depository institutions. This is followed by causes of financial crisis and effectiveness of monetary policy during the period. This is followed by inflation targeting, time inconsistency, optimal choice of monetary policy instruments under uncertainty and policy rules.

As one of the mandatory assessment criteria of the module, students write a 1500 word essay. The assignment caries 30% weight. This year, the assignment was on, “comparing the effectiveness of the balance sheet channel of the transmission mechanism during 2008 crisis in the United States and in the United Kingdom." Students need to know what policy tools were used. Students need to go through peer reviewed articles to find empirical evidence to support their views. One essential marking criterion was to provide data (and give appropriate explanation) in support of their views. Data included common macro variables such as GDP, credit, asset prices, house prices, interest rates and spreads. They had to write the essay in a concise structured manner.

For the assignment, a plan of the essay, a set of core papers (5-6 papers to give a guidance and then students have to do their own reading) and interactive data sets such as St Louise Fed data set and BoE interactive data set were provided. Students are told beforehand about the difference between variables in levels and variables in difference or percentage change form and when to use which form (examples of this are also provided in the plan). A brief content of the topic, structure of the essay, data source and data analysis were also discussed in a seminar session. Besides a generic feedback, each student got a detailed feedback.

The assignment/essay writing improves their academic writing skills. Also as students have to use both micro (moral hazard, adverse selection,loss aversion) and macro concepts (transmission mechanism channel, downward price rigidity) to draw their conclusion, the assignment certainly expands their analytical skills. Finally, incorporation and analysis of appropriate data to support their economic view increases their quantitative analytical skills.

When teaching money supply, detailed information is also provided about banks’ and central banks' balance sheet structure. Also, explanation is given about how securitization process works. This enables students to understand banking concepts and how banks work in real world to policy changes (Balance sheet of US banks are shown –obtained from FDIC).

During teaching monetary policy rules, students are taught about different kinds of Taylor rules and how to calculate them. In seminars, they are being asked to give their opinions of different Taylor rules and choose one that would be best for a small open economy like the UK. They are also shown how to use extract trends and cycles using HP filters. Also in the seminar, they are asked to find the Taylor Gap and then determine the stance of monetary policy in the economy and what consequence that will have on inflation, credit supply, output, and banks’ risk taking. These sorts of exercise expand the students' analytical and independent thinking ability.

Topics like time dynamic time inconsistency, conservative central banker, inflation targeting, Phillips curves, monetary policy under uncertainty included mathematical models. Some mathematical problem solving was done in seminars. For example, in time inconsistency model students where taught the model with a quadratic loss function. In the seminar, the questions were set using a different type of loss function and students were asked to solve the model. This sort of exercise would tend to help those students more who would choose academia as their preferred career path.

One major problem which I faced during teaching this module is the students' lack of time series econometric concepts, mainly serial correlation, AR processes, and stationarity. Time was allocated to introduce these concepts. My personal view is that a year two econometric module should be incorporated in the syllabus so that students are aware of these concepts.

Skills developed by this activity