Monetary Theory and Policy

| April 29, 2015

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Monetary Theory and Policy
Economics 518/418 Section B
First Short Paper : Spring 2015
Reports that the rate of unemployment is lower than expected is frequently (not always) treated
as bad news on Wall Street. In particular, bond and stock prices frequently fall in response to
unexpectedly low unemployment rates. In addition, the Federal Reserve and other market
participants seem to view news of low unemployment and robust growth as indicative of
inflationary pressures in the economy while rising unemployment and slowing growth seems to
indicate that inflation is under control.
Suppose you are an intern in the Senator Rand Pauls putative campaign for president. The
Senators campaign chairperson who knows that you are taking an advanced undergraduate course
in Monetary Theory and Policy has asked you to prepare a paper to brief the Senator on the
seemingly anomalous response of stock prices to good news. Given the considerable time
pressures the Senator must contend with, his chief of staff insists that the paper should not exceed
five (5) double spaced typed pages and should be written in a way that is accessible to the Senator.
In this regard, he reminds you that the Senator is an ophthalmologist whose formal training in
economics is probably limited to taking principles of micro and macroeconomics in college.
Write a short paper that carefully identifies, summarizes, and critically evaluates the theoretical
and empirical case for the view underlying the attitudes described above. To be complete, your
paper should explain why stock and bond prices sometimes fall in response to good economic
news. The articles by Cogley and by Boyd et. al. (listed below) should be very helpful on this
issue and contains clues as to why the other articles are germane to understanding why
unexpectedly low rates of unemployment lead to the expectation of higher inflation.
The articles listed below represent a list of articles you should consult in preparing your paper.
At a minimum your paper should leave me convinced that you thoroughly understand the issues
addressed in these articles. However, if the issues involved lead you to other literature, you are
strongly encouraged to follow such leads.
Your paper should not exceed 5 double-spaced type pages (including references) and should
be professional in both appearance and presentation. In particular, it should be typed and free
of spelling, gramatical, and other errors. Your paper should include a list of references.
While you are encouraged to rely on all relevant material you can find, the articles listed
below should be particularly informative.
You are required to submit your paper to me as a pdf file via e-mail. You should name your pdf
file lastname418FSP.pdf where lastname is your last name. Please note that I will not accept hard
copies. Your short papers are due by midnight on Sunday, April 5, 2015. Please make every
effort to submit your papers on time. I will deduct 10 points out of 50 for each day a paper is late.
After five days there will be no point to accepting your paper.
I will provide feedback on the areas in which your paper needs to improve. You are required to
revise the paper and resubmit the revised paper to me by the last day of class. I have posted a
rubric that is intended to inform you about the attributes of your paper I will focus on in providing
feedback and in determining your grade. I suggest that you review it carefully.
Finally, a cautionary note. University rules about plagiarism will be vigorously enforced. If you
have any doubt or questions about what constitutes plagiarism, I suggest that you visit the
following website: https://www.muohio.edu/integrity/student-resources.html . It is your
responsibility to avoid plagiarism. I will not accept claims of ignorance as a defense.
Example of in-text citation without quotes
Diamond (1996) argues that ..
Example of in-text citation involving quotes
Diamond (1996 pp. 53) observes that financial intermediaries are .
List articles cited using the following format
Diamond, Douglas, W.; Financial Intermediation as Delegated Monitoring: A Simple Example
Economic Quarterly 82 (Summer 1996): pp. 51-66, Federal Reserve Bank of Richmond.
Selected Literature
Boyd, John H., Jian Hu, and Ravi Jaganathan, The Stock Markets Reaction to Unemployment
News: Why Bad News is Usually Good for Stocks The Journal of Finance 60, (April
2005): 649-672.
Cogley, Timothy 1996, Why do Stock Prices Sometimes Fall in Response to Good Economic
News? Federal Reserve Bank of San Fransisco, Economic Letter No. 96-36; December
13, 1996.
Chang, Roberto, Is Low Unemployment Inflationary? Economic Review 82 (First Quarter,
1997): pp 4-13. Federal Reserve Bank of Atlanta.
Espinosa-Vega, M.A. and Russell, Steven, History and Theory of the NAIRU: A Critical
Review Economic Review 82 (Second Quarter, 1997): pp 4-25. Federal Reserve Bank
of Atlanta.

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