Class notes

Full Lecture Notes for Monetary Macroeconomics

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Course
Monetary Macroeconomics (EBB130A05)

Institution
Rijksuniversiteit Groningen (RuG)

These documents contain full lecture notes on Monetary Macroeconomics, complete with graphs. The notes highlight the points that you need to know for the finale exam.

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Uploaded on November 6, 2022
File latest updated on November 6, 2022
Number of pages 47
Written in 2022/2023
Type Class notes
Professor(s) Dr. c.g.f van der kwaak
Contains All classes

inflation
is lm
uip
uncovered interest parity
trade deficit
trade surplus
monetary policy
medium term
short term
long term
pc

Institution
Rijksuniversiteit Groningen (RuG)
Education
BSc Economics & Business Economics
Course
Monetary Macroeconomics (EBB130A05)

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Monetary Macro-Economics | Lecture 1
Expected discounted - Importance future expectation
present value - Present value  discount using interest rates
- Future stream revenue
 z t , z t+1 , z t+2

- Expected
 z t , z et+1 , z et+2

- Example of project
 compare cost today with PV expected of
revenues valued today
Discount factor - 1/(1+it)
- Lower discount rate -> € higher -> for the same
revenue
- The discounted pv depends positively on the
size of the payment and negatively on the
interest rate
Nominal discounting - Cashflow discounted using nominal interest
rate and monetary amounts (interest rates in
currency (€, $...))
Real discounting - Cashflow discounted using real amounts and
using real interest rates
- Monetary amounts -> measured in currencies
(€zt)
- Real amounts -> real quantities (zt)
Present value - Borrow cost (ct) for investment or not?
comparisons - Compare (ct) with expected pv of the
investment
Special cases - Constant interest rate and constant €zt
- € V t=€ z∗1−¿ ¿
- When i=0
 € V t=n € z
- Payments last forever (n infinite)
€z
- € V t=
i

Bonds and Bond Prices - P 1bond=€ payment /(1+i 1 t )
e
- P 2bond =€ payment / (1+ i1 t )(1+i 1 t +1)
Bond price arbitrage - In reality
calculate the expected return

, - 1-year bond
 €1  1€ x (1+i1t)
- 2-year bond
 €1  1€ x (1/€p2t) x €pe1t+1
Bond arbitrage - For every euro you put in 1-year bonds, you
will get (1+i1t) euros next year)

- For every euro you put in 2-year bonds, you
can expect to receive €1/€p2t times €pe1t+1 next
year

- €p2t = todays price 2-year bond
- Bond arbitrage implies
 (1 + it) = (€pe1t+1 / €p2t)
Yield to maturity - Express bond price in terms of a interest rate
2
 Pbond 2 t= payment / ( 1+i 2 t )
- YTM, constant interest rate, makes PV equal to
price bond is traded for today
Pbond 2 t= payment / ( 1+i 1 t ) ( 1+i 1 t +1 )
e
-
( 1+i2 t ) = ( 1+ i1 t ) ( 1+ i1e t +1 )
2
-
Yield curve 1 e
- i 2 t ≈ (i 1t +i 1t +1 )
2

Upward sloping yield curve - Future i rates will be higher than today
Downward sloping yield - Future i rates will be lower than today
curve
ytm including risk - € P2t = payment / ( 1+i 1 t ) ( 1+i e1 t +1+ x )
- Risk premium  reduces bond price
Stock pricing - Look at returns
- One year return stock:

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