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Objective
We study the theoretical foundations and empirical performance of the New Keynesian framework, the most popular model used in monetary economics. Key issues to be addressed are the conduct of monetary policy (interest rate rules, optimal policy), the zero bound on nominal interest rates, medium-scale models of the monetary business cycle, and extensions to the open economy. If time permits, we will discuss two key issues of the New Keynesian framework in more detail. First, the most basic New Keynesian model is contradicted by evidence from price data collected at low levels of aggregation. Second, the New Keynesian model assumes that money matters rather than providing a microeconomic rationale why agents should hold money in the first place.
Prerequisites
In general, participants should have a solid background in microeconomics and macroeconomics.
Assessment
Participants will have to write a seminar paper, in which they discuss 3 to 4 to papers as outlined below. The length of the paper should be in the range of 10 to 15 pages (12pt, line spacing 1.5) and written in English. While I will be more specific about the seminar paper later, a good one should a) clearly state the common theme of the papers discussed and how they fit into the literature, b) analyze the technical approach, c) critically discuss the technical approach and results, and d) provide suggestions how to improve upon the papers, i.e. suggestions for follow-up research. Within in each topic I have chosen a lead paper around which it may be helpful to organize the discussion. Students will also be required to give a 20 min. presentation in English. The presentation will count for 20 % of the grade; the paper 80%.
Organizational Details
The 14 Topics are allocated on a first come, first serve basis. Please send a list with at least 3 topics and state your preferences. Each option will be assigned at most twice, but I will try to avoid this and I may add additional options if demand is really high. Links to all papers will be provided soon.
The seminar will be held June 14 to 18. As most students may be new to the topic, I will dedicate the first three days to teaching some of the key concepts of New Keynesian economics. This should help you in preparing your presentation, but also enable you to follow the presentations of your fellow students.
Most likely, I will be available on June 21for office hours to clarify open issues regarding your understanding of your assigned papers.
Papers for lecture part
1. Introducing the New Keynesian Framework
Yun, T., (1996). Nominal price rigidity, money supply endogeneity, and business cycles. Journal of Monetary Economics 37, 345-370.
Erceg, C.J., Henderson, D.W., and Levin, A.T., (2000). Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313.
2. Instrument Rules
Bodenstein, M., Erceg C., and Guerrieri L., (2008). Optimal monetary policy in a model with distinct core and headline inflation. Journal of Monetary Economics 55, S18-S33.
Bernanke, B., and Woodford, M., (1997). Inflation Forecasts and Monetary Policy. Journal of Money, Credit and Banking 24, 653–684.
Clarida, R., Gali, J., and Gertler, M., (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature 37, 1661–1707.
3. Optimal Monetary Policy under Full Commitment
Woodford, M. (2003). Interest and Prices, Princeton University Press, Princeton.
Erceg, C.J., Henderson, D.W., and Levin, A.T., (2000). Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313.
4. Optimal Monetary Policy without Full Commitment
Armenter, R., and Bodenstein, M. (2009). Of Nutters and Doves. The B.E. Journal of Macroeconomics, Vol. 9, Iss. 1 (Contributions), Art. 35.
5. Targeting Rules
Svensson, L. (1997). Optimal Inflation Targets, ’Conservative’ Central Banks, and Linear Inflation Contracts. American Economic Review 87, 98-114.
6. Search Theory of Money
Kiyotaki, N., and Wright, R. (1993). A Search-Theoretic Approach to Monetary Economics. American Economic Review 83, 63-77.
7. Micro Price Data
Klenow, Peter J., and Oleksiy Kryvtsov (2008). State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? Quarterly Journal of Economics 123, 863–904.
Dhyne, E., et al (2006). Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer PriceData. Journal of Economic Perspectives 20, 171–192.
Papers for seminar paper
Empirical validation of the New Keynesian framework
Option 1
Gali, J., and Gertler, M. (1999). Inflation Dynamics: A Structural Econometric Analysis. Journal of Monetary Economics 44 (2), 195-222.
Sbordone, A. M. (2002). Prices and Unit Labor Costs: A New Test of Price Stickiness. Journal of Monetary Economics 49 (2), 265-292.
Kurmann, A. (2005). "Quantifying the Uncertainty about a Forward-Looking New Keynesian Pricing Model." Journal of Monetary Economics, vol. 52(6), 1119-1134.
Guerrieri, L., Gust, C., and Lopez-Salido, D. (2010). International Competition and Inflation: A New Keynesian Perspective. American Economic Journal: Macroeconomics (forthcoming).
Option 2
Gali, J., and Gertler, M. (1999). Inflation Dynamics: A Structural Econometric Analysis. Journal of Monetary Economics 44 (2), 195-222.
Gali, J., Gertler, M., and Lopez-Salido, D. (2001). European Inflation Dynamics. European Economic Review 45, 1237-1270.
Nunes, R. (2010). Inflation Dynamics: The Role of Expectations. Journal of Money, Credit and Banking, forthcoming.
Rudd, J. and Whelan, K. (2006). Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics? American Economic Review 96, 303-320.
Breaking the “Devine Coincidence”
Option 3
Blanchard, O., and Gali, J. (2007). Real Wage Rigidities and the New Keynesian Model. Journal of Money, Credit, and Banking, 39(S1): 35–65.
Steinsson, J. (2003). Optimal Monetary Policy in an Economy with Inflation Persistence. Journal of Monetary Economics 50(7), 1425-1456. Erratum (here).
Natal, J.M. (2009). Monetary Policy Response to Oil Price Shocks, Working Paper.
Option 4
Blanchard, O., and Gali, J., (2007). Real Wage Rigidities and the New Keynesian Model. Journal of Money, Credit, and Banking 39(S1), 35–65.
Merz, M. (1995). Search in the Labor Market and the Real Business Cycle. Journal of Monetary Economics 36(2), 269–300.
Real Rigidities
Option 5
Kimball, M. (1995). The Quantitative Analytics of the Basic Neomonetarist Model. Journal of Money, Credit and Banking 27(4), 1241-1277.
Carvalho, C. (2006). Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks. Frontiers of Macroeconomics, 2(1).
Chari, V., Kehoe, P., and McGrattan, E. (2000). Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem. Econometrica 68(5), 1151-1179.
Woodford, M. (2005). Firm-Specific Capital and the New-Keynesian Phillips Curve. International Journal of Central Banking 1(2), 1-46.
Optimal Monetary Policy
Option 6
Yun, T. (2005) Optimal Monetary Policy with Relative Price Distortions. American Economic Review 95, 89-108.
Aoki, K. (2001). Optimal Monetary Policy Responses to Relative-Price Changes. Journal of Monetary Economics 48, 55-80.
Erceg, C.J., Henderson, D.W., and Levin, A.T., (2000). Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313.
Option 7
Rogoff, Kenneth (1985), “The Optimal Degree of Commitment to a Monetary Target,” Quarterly Journal of Economics 100, 1169-1190.
Debortoli,D., Nunes, R., (2006). The Macroeconomic Effects of External Pressures on Monetary Policy. Working Paper.
Vestin, D. (2006). Price-level versus inflation targeting. Journal of Monetary Economics 53, 1361-1376.
Monetary Models of the Business Cycle
Option 8
Christiano, L. J., Eichenbaum, M., and Evans, C. L. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy 113, 1-45.
Smets, F., and Wouters, R. (2003). An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area. Journal of the European Economic Association 1 (5), 1124-1175.
Chari, V.V., Kehoe, P., and McGrattan, E., 2000. Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? Econometrica 68, 1151-79.
The Zero Bound on Nominal Interest Rates
Option 9
Adam, K., Billi, R., 2006. Optimal monetary policy under commitment with a zero bound on nominal interest rates. Journal of Money, Credit and Banking 38 (7), 1877-1905.
Adam, K., Billi, R., 2007. Discretionary monetary policy and the zero lower bound on nominal interest rates. Journal of Monetary Economics 54 (3), 728-752.
Billi, R., 2009. Optimal inflation for the U.S. economy. Working Paper.
Bodenstein, M., Hebden J., and Nunes R. Imperfect Credibility and the Zero Lower Bound on the Nominal Interest Rate. Working Paper.
Option 10
Christiano, L., Eichenbaum, M., and S. Rebelo (2009). When is the Government Spending Multiplier Large? Working Paper.
Erceg, C., Linde J (2010). Is There a Fiscal Free Lunch in a Liquidity Trap? Working Paper.
Eggertsson, G. (2009). What fiscal policy is effective at zero interest rates? Working Paper.
Open Economy
Option 11
Clarida, R., Gali, J., and Gertler, M. 2002. A Simple Framework for International Monetary Policy Analysis. Journal of Monetary Economics 49:5, 879-904.
Engel, C. (2010) Currency Misalignments and Optimal Monetary Policy: A Reexamination. Working Paper.
Corsetti, G., and Pesenti, P. 2005. International Dimensions of Optimal Monetary Policy. Journal of Monetary Economics 52, 281-305.
Devereux, M., and Engel, C. 2003. Monetary Policy in the Open Economy Revisited: Exchange Rate Flexibility and Price Setting Behavior. Review of Economic Studies 70:4, 765-783.
Models and Micro Price Data
Option 12
Golosov, M., and Lucas, R. (2007) Menu Costs and Phillips Curves. Journal of Political Economy 115, 171–199.
Klenow, P., and Kryvtsov, O. (2008) State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? Quarterly Journal of Economics 123, 863–904.
Nakamura, E., Steinsson, J. (2010). Monetary Non-Neutrality in a Multi-Sector Menu Cost Model. Quarterly Journal of Economics, forthcoming.
Search Theory of Money
Option 13
Lagos, R., and Wright, R. (2005). A Unified Framework for Monetary Theory and Policy Analysis. Journal of Political Economy, 113(3), 463-484.
Aruoba, B. and Schorfheide, F. (2009). Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-offs. Working Paper.
Aruoba, B. (2009). Money, Search and Business Cycles. Working Paper.
Information Frictions
Option 14
Mankiw, G., and Reis, R. (2002). Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve. Quarterly Journal of Economics 117, 1295-1328.
Woodford, M. (2002). Imperfect Common Knowledge and the Effects of Monetary Policy. In Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, ed. Philippe Aghion et al. Princeton and Oxford: Princeton University Press.
Mackoviak, B., and Wiederholt, M. (2009). Optimal Sticky Prices under Rational Inattention. American Economic Review 99, 769-803.