Fall 2002
 

Lectures: Tuesday and Thursday, 9:00 - 10:30 am
McGuinn Hall, Room 531

Professor Matteo Iacoviello
Carney Hall, Room 147
Tel: 552-3689
E-mail: m.iacoviello@lse.ac.uk
Web page: http://fmwww.bc.edu/ec-v/iacoviello.fac.html

Office Hours: Tuesday, 2:30 - 4:30 PM

Course_Description, Course Materials, Course_Requirements, Reading_List

This course covers models of money demand, recent developments in the foundation of a role for monetary policy in affecting the real economy, and issues in the formulation and conduct of monetary policy.

(back to top)

Recent years have seen a marked convergence, among academic and central bank researchers, on a general framework for conducting analysis of monetary policy. Today, most academics and central bankers who examine monetary issues have in common techniques and models. Such models they use are generally simple, linear and have some component of forward lookingness: in addition, most of these models can be viewed as linear approximations to general equilibrium models based on firm microfoundations.

Most of the literature has adopted Lucas' suggestion that economists

"need to test models as useful imitations of reality by subjecting them to shocks for which we are fairly certain how actual economies [...] would react. The more dimensions on which the model mimics the answers actual economies give to simple questions, the more we trust its answers to harder questions''

Among the topics that we will cover:

Empirical evidence on money, prices, interest rates and output

In order to understand and analyze the theoretical models that economists work with, we first have to understand what monetary policy is and what monetary policy does; at the beginning of this course, we focus therefore on some empirical regularities involving money, interest rates, inflation and the real economy; and on the effects of exogenous monetary actions (monetary shocks).

Money in models without nominal rigidities

The RBC literature has dominated most of the debate in macroeconomics throughout the 1980s and the early 1990s. Most of the early RBC models, in the spirit of Kydland and Prescott (1982), did not incorporate money or a role for money in explaining business cycles.

We look at simple ways to incorporate money into these models and consider the "limited'' role that money plays here.

We then consider a recent model (Kiyotaki and Moore, 2001) in which money can have real effects on the economy even in absence of nominal rigidities.

Money in models with imperfect competition and nominal rigidities (aka the DNK)

Most of the recent literature that grapples with monetary policy draws on recent developments in "New Keynesian Macroeconomics'' that provide a microstructure for sticky prices and/or wages. The models in this tradition feature imperfect competition in the product markets and an optimizing approach to sticky prices. These features are then embedded in a dynamic general equilibrium (DGE) model, of the form used in RBC research. This framework is known as the NNS (the New Neoclassical Synthesis).

Optimal monetary policy

Models with nominal rigidities typically feature (1) a suboptimal level of equilibrium output, caused by the fact that firm produce less than the optimal amount of output; (2) a suboptimal response to shocks: with some prices fixed, real and nominal shocks affect the terms of trade between output and inputs (aka as markup). We consider what monetary policy should do in this class of models.

Most of the course will focus on the topics above. We will also consider:

interactions between fiscal and monetary policy

Fiscal and monetary policy are linked through the government sector budget constraint. Inflation can affect how government finances its expenditures, and decisions by the fiscal authority might affect inflation too.

monetary policy and inflation and output persistence

Interest rate rules

monetary policy and real indeterminacy

monetary policy in open economies

monetary policy and asset prices

A good background paper to read: Goodfriend, Marvin and Robert King, ''The New Neoclassical Synthesis and the Role of Monetary Policy,'' in Ben Bernanke and Julio Rotemberg, eds., Macroeconomics Annual, Cambridge: MIT Press, 1997, pp. 231-282.

(back to top)

I will make copies of my lecture notes available. Two books are required for the topics we will discuss.

Taylor, John B. (ed.), 1999: Monetary Policy Rules, Chicago: University of Chicago Press.
Walsh, Carl E., 1998: Monetary Theory and Policy, Cambridge: MIT Press.

(back to top)

The requirement of the course are that:

1. you write 3 referee reports on any of the papers in the reading list (you cannot choose papers from the same topic)
2. you write a short paper
3. you give a short (30/40 minutes) presentation on a paper from of your choice (pertaining to monetary economics)
4. you attend the seminars that will take place at BC during the semester in which monetary economics papers are presented
5. you attend Charles Carlstrom mini-course on indeterminacy that will take place in October.

Due PROVISIONAL dates for referee reports and papers are below:

Very provisional Reading List (* denotes required readings). In most of the papers you can find a link to the (working paper version of the) paper.

(back to top)

(back to top)

Bernanke, B., (1986), "Alternative Explanations of the Money-Income Correlation'', Carnegie-Rochester Conference on Public Policy, 25, 49-99.

Bernanke, B., and A.Blinder (1992), "The Federal Funds Rate and the Channels of Monetary Transmission'', (JSTOR) American Economic Review, 82, 4, 901-921.

Fisher, Mark E and John J Seater (1993) ''Long-Run Neutrality and Superneutrality in an ARIMA Framework,'' (JSTOR) American Economic Review, 402-15 Vol. 83 (3) pp. 402-15

Friedman, M. and A.Schwartz (1963), A Monetary History of the United States, 1867-1960

Friedman, Milton, and David Meiselman (1963). ''The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States,1897-1958,'' in The Commission on Money and Credit, Stabilization Policies, Prentice Hall, 1963, pp. 165-268

* King and Watson, ''Money, Prices, Interest Rates and the Business Cycle '' Review of Economics and Statistics, 1996 (longer working paper version: http://www.wws.princeton.edu/~mwatson/papers/mpibc_wp2.pdf )

* Rapach, David (2000) "International Evidence on the Long-Run Impact of Inflation", forthcoming Journal of Money, Credit, and Banking.

Stock, J., and M.Watson (1989), "Interpreting the Evidence on Money-Income Causality,'' Journal of Econometrics 40, no. 1 (January 1989), 161-182.

Taylor, John (1999), "An Historical Analysis of Monetary Policy Rules'', in Taylor 1999

* Walsh, C., "Monetary Theory and Policy'', Chapter 1

* Uhlig, H. (2001), "What are the Effects of Monetary Policy on Output: Results from an Agnostic Identification Procedure'', mimeo

* Cochrane, John (1998), "What do the VARs Mean? Measuring the Output Effects of Monetary Policy'', Journal of Monetary Economics, 41, 2, 277-300.

* Christiano, Lawrence, Martin Eichembaum and Charles Evans (2000), "Monetary Policy Shocks: what have we Learned and to what End?'', in J.Taylor and M.Woodford (eds.), Handbook of Macroeconomics

Blanchard, O. and D.Quah (1989), "The dynamic effects of aggregate demand and supply disturbances'', American Economic Review, 79, 4, 655-673.

Canova, Fabio and Gianni de Nicolo (2000), "Monetary Disturbances Matter for Business Fluctuations in the G-7", Board of Governors of the Federal Reserve System, International Finance Discussion Papers Number 660, February 2000 (published: Journal of Monetary Economics, Volume 49, Issue 6, September 2002 )

(back to top)

Coenen, G., and J-L.Vega (1999), "The demand for M3 in the euro area'', ECB Working Paper No. 6, forthcoming, Journal of Applied Econometrics

Crowder, W.J., D.Hoffman, and R.Rasche (1999), "Identification, Long-Run Relations, and Fundamental Innovations in a Simple Cointegrated System'', Review of Economics and Statistics, 81, 1, 109-121.

Fung, B., and M.Kasumovich (1998), "Monetary Shocks in the G6 countries: is there a puzzle?'', Journal of Monetary Economics, 42, 575-592.

Gerlach, F., and F.Smets (1995), "The Monetary Transmission Mechanism: Evidence from the G7 Countries'', CEPR Discussion Paper No. 1219.

Kim, S., (1999), "Do Monetary Shocks Matter in the G-7 Countries? Using Common Identifying Restrictions about Monetary Policy across Countries'', Journal of International Economics, 48, 387-412.

Lastrapes, W.D., (1998), "International Evidence on Equity Prices, Interest Rates, and Money'', Journal of International Money and Finance, 17, 377-406.

* Leeper, Eric, Christopher Sims and Tao Zha (1996), "What Does Monetary Policy Do?", Brookings Papers on Economic Activity

* Sims, C., (1992), "Interpreting the Macroeconomic Time-series facts: the Effects of Monetary Policy'', European Economic Review, 36, 975-1011

Angeloni, Ignazio, Anil Kashyap and Benoît Mojon and Daniele Terlizzese, "Monetary Transmission in the Euro Area: Where Do We Stand?", , January 2002, (ECB Working Paper No. 114)

(back to top)

* Blanchard, Olivier, and Stanley Fischer, Lectures on Macroeconomics, Chapter 4

Cooley, Thomas, and Gary D. Hansen, Money and the Business Cycle, Chapter 3 in "Frontiers of Business Cycle Research'', Thomas Cooley, editor

* Cooley, Thomas, and Gary D. Hansen, "The Inflation Tax in a Real Business Cycle Model", American Economic Review, 79, 4, 733-748.

P.A. Samuelson (1958) ''An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money'', Journal of Political Economy, Vol. 66 (5), p.467-82.

Sidrauski, Miguel (1967): ''Rational Choice and Patterns of Growth in a Monetary Economy,'' American Economic Review 57: 534-544

Tobin, J. (1965), ''Money and economic growth'', Econometrica 33 (October): 671-84

* Walsh, Carl, Monetary Theory and Policy, Chapters 2 and 3

* Kiyotaki, N. and J. Moore, "Liquidity, Business Cycles, and Monetary Policy", LSE mimeo, July 2001

Kiyotaki, N. and J. Moore, "Liquidity and Asset Prices", LSE mimeo, July 2001

(Back to top)

* McCallum, Bennett (2001), "Should Monetary Policy Respond Strongly to Output Gaps?'', AEA Papers and Proceedings, May 2001

Bernanke, Ben S., Mark Gertler, and Simon Gilchrist (2000), "The Financial Accelerator in a Quantitative Business Cycle Framework'', (link to the WP version) in Handbook of Macroeconomics, Volume 1C, edited by John Taylor and Michael Woodford (Elsevier).

Rotemberg, Julio J., and Michael Woodford (1997), "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy''(link to the WP version), in NBER Macroeconomics Annual 1997, Cambridge, MA: The MIT Press, pp.297 346.

Gertler, Mark (2000), Lecture Notes (Chapter 8), New York University.

* Rotemberg, Julio J., and Michael Woodford (1997), "Interest Rate Rules in an Estimated Sticky Price Model" (link to WP version), Chapter 2 in Monetary Policy Rules, J.Taylor eds.

Sbordone, Argia (2002), "Prices and Unit Labor Costs: A New Test of Price Stickiness'', ((link to the WP version) Journal of Monetary Economics, vol. 49 (2), 265-292;

* Yun, Tack (1996), " Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles '', Journal of Monetary Economics, 37, 2, 345-70

Gali, Jordi, Mark Gertler, J. David Lopez-Salido, 2002, "Markups, Gaps, and the Welfare Costs of Business Fluctuations, ''NBER Working Paper No.w8850

Gali, Jordi, J. David Lopez-Salido, Javier Valles (2002), "Technology Shocks and Monetary Policy: Assessing the Fed's Performance'', NBER Working Paper No.w8768

Woodford, Michael (2002), "Optimising models with Nominal Rigidities'', chapter 3 in Interest and Price, forthcoming, PUP

Ireland, Peter N. (2001): "Sticky-Price Models of the Business Cycle: Specification and Stability," Journal of Monetary Economics 47: 3-18 (link: BC WP version).

(back to top)

* Clarida, R., J. Gali, and M. Gertler (1999), ''The Science of Monetary Policy: A New Keynesian Perspective'', Journal of Economics Literature, 37, 1661-1707.

* Walsh, Chapter 4, Section 5

* Adao, Correia and Teles (2001), "Gaps and Triangles'', mimeo

* Christopher J. Erceg, Dale W. Henderson, Andrew T. Levin (2000), Journal of Monetary Economics 46, 281-313, "Optimal monetary policy with staggered wage and price contracts''.

Christopher J. Erceg, and Andrew T. Levin (2002), "Optimal monetary policy with Durable and Non-Durable Goods Prices'', mimeo

* King, Robert and Alexander Wolman (1999), "What Should Monetary Authorities do when Prices are Sticky?'', in Taylor 99, Chapter 8

Lucas, R. E., and N. L. Stocky (1983): ''Optimal Fiscal and Monetary Policy in an Economy without Capital,'' Journal of Monetary Economics, 12, 55--93

V.V. Char, L. Christiano and P. Chow, 1991, "Optimal Fiscal and Monetary Policy: Some Recent Results", Journal of Money, Credit and Banking, vol. 23, no. 3, August, part 2

Schmitt-Grohe, S. and M. Uribe, 2001a, ''Optimal Fiscal and Monetary Policy under Sticky Prices,'' draft, University of Pennsylvania

Schmitt-Grohe, S. and M. Uribe, 2001b, ''Optimal Fiscal and Monetary Policy under Imperfect Competition,'' draft, University of Pennsylvania

Ireland, Peter N. (1996): "The Role of Countercyclical Monetary Policy," Journal of Political Economy 104: 704-724 (link: JSTOR).

(back to top)

* Christiano, Lawrence J., and Terry J. Fitzgerald, "Understanding the Fiscal Theory of the Price Level'', mimeo Northwestern University

* McCallum, Bennett, Chapter 23, Section 7, in the Handbook of Macroeconomics

David B. Gordon, Eric M. Leeper (2002), "The Price Level, the Quantity Theory of Money, and the Fiscal Theory of the Price Level'', NBER Working Paper No.w9084, July 2002

Woodford, Michael (1995), "Price Level Determinacy Without Control of a Monetary Aggregate'', CRCSPP, 43, 1-46

Woodford, Michael (2001), "Fiscal Requirements for Price Stability," October 2000. (PPF format) [Published in: Journal of Money, Credit and Banking 33: 669-728 (2001).]

* Walsh, Carl (2000), Monetary Theory and Policy, Chapter 4

(back to top)

Chari, V.V., Patrick J. Kehoe, Ellen R. McGrattan (2000): "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?", Econometrica, vol. 68, no. 5, 1151-1180.

* Kevin X.D. Huang and Zheng Liu (2002), "Staggered Price-Setting, Staggered Wage-Setting, and Business Cycle Persistence", Journal of Monetary Economics

Fuhrer, J.C. and G.R. Moore, 1995, "Inflation persistence" (JSTOR), Quarterly Journal of Economics 110, 127-159.

Fuhrer, Jeffrey, "Habit Formation in Consumption and Its Implications for Monetary Policy" American Economic Review. (September 2000)

(back to top)

* Woodford, Michael, (1999), "Optimal Monetary Policy Inertia," August 1999 [Also available as NBER working paper no. 7261.]

Giannoni, Marc, and Michael Woodford (2002), "Optimal Interest-Rate Rules: I. General Theory,", mimeo

* Giannoni, Marc, and Michael Woodford (2002), "Optimal Interest-Rate Rules: II. Applications," , mimeo

* Levin, Andrew, Volker Wieland, and John C. Williams (1998): ''Robustness of Simple Monetary Policy Rules under Model Uncertainty,'' in TAYLOR99

Levin, Andrew, Volker Wieland and John C. Williams, July 2001, "The performance of forecast-based monetary policy rules under model uncertainty", (ECB Working Paper No. 68)

* Woodford, Michael (2001), "The Taylor Rule and Optimal Monetary Policy'' January 2001 [Shorter version published in: American Economic Review 91(2): 232-237 (2001) ]

* Clarida, Richard, Jordi Galí, and Mark Gertler (2000): "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," Quarterly Journal of Economics 115: 147-180

* Lubik, Thomas A. and Frank Schorfheide (2002), "Testing for Indeterminacy: An Application to U.S. Monetary Policy", mimeo, JHU and UPenn

(back to top)

* Benigno, Pierpaolo (2001), "Optimal Monetary Policy in a Currency Area'', CEPR Discussion Paper 2755

Cespedes, L. F., R. Chang, and A. Velasco. ''Balance Sheets and Exchange Rates.'' NBER Working Paper No. 7840, August 2000

* Clarida, Richard, Jordi Gali and Mark Gertler (2001), "Optimal Monetary Policy in Open Versus Closed Economies: An Integrated Approach'', AEA Papers and Proceedings

Gertler, M., S. Gilchrist, and F. M. Natalucci (2000) ''External Constraints on Monetary Policy and the Financial Accelerator'' Manuscript, New York University, 2000

* Walsh, Carl, Monetary Theory and Policy, Chapter 6

(back to top)

*Bernanke, Ben S., and Mark Gertler (2001), "Should Central Banks Respond to Movements in Asset Prices?'', American Economic Association Papers and Proceedings, May, 91, 2, pp.253-257.

Cecchetti, Stephen.G., Hans Genberg, John Lipsky, and Sushil Wadhwani (2000). "Asset Prices and Central Bank Policy''. Geneva Reports on the World Economy 2, CEPR

* Dupor, Bill (2002), "Nominal versus Asset Price Stabilisation", mimeo, Warthon School

* Filardo, Andrew J. (2000), "Asset Prices and Monetary Policy'', Federal Reserve Bank of Kansas City Economic Review, 3rd quarter.

* Gilchrist, Simon, and John V. Leahy (2002). "Monetary Policy and Asset Prices'', Journal of Monetary Economics, 49, 75-97.

Carlstrom, Charles T. and Timothy S. Fuerst (2001), "Monetary Policy and Asset Prices with Imperfect Credit Markets''

* Rigobon, Roberto and Brian Sack (2001) "Measuring The Reaction of Monetary Policy to the Stock Market'', NBER Working Paper No.w8350

* Rigobon, Roberto and Brian Sack (2002) "The Impact of Monetary Policy on Asset Prices", Fed working paper

Stock, James H. and Mark W. Watson (2001), "Forecasting Output and Inflation: The Role of Asset Prices'', NBER Working Paper No.w8180