Advanced monetary theory and policy

Advanced monetary theory and policy
[EPOS 9 CFU]

This page has been built by borrowing materials from many colleagues. I thank them; in particular, G. Ascari, L. Christiano, M. Ellison, J. Galì, M. Iacoviello, H. Jensen, M. Jullard, T. Monacelli, L. Rossi, P. Tirelli, N. Viegi. I suggest you look at their web pages. 

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Lectures

• Lecture 1 - The evidence
  Slides - Reference: Read Walsh Chapter 1

• Lecture 2 - Macro theory: A review
  Slides - Reference: See below - Optimal policy in the 60s. Play with the Phillips curve (OSL) 

• Lecture 3 - DSGE example (RBC model)
  Slides - A good description of the RBC model can be found in Var der Ploeg and Heijdra (2002): Look at their slides (Chapter 15)

• Lecture 4 - Using Dynare (see below)
  Slides - Dynare manual - Example code

• Lecture 5 - From RBC to New Keynesian DSGE model
  Slides - Read Gali Chapter 1. If you want more details on price stickiness, look at Klenow and Malin (2011) [see below]

• Lecture 6 - Inter-temporal consumption choice (Euler equation)
  Slides - Read Gali Chapter 2 (15-20)

• Lecture 7 - Monopolistic competition
  Slides - Read Gali Chapter 4 (71-74). Refresh your knowledge with a video from prof. Welker (video)

• Lecture 8 - Small menu cost and price adjustment
  Slides - See Mankiw G, Small menu costs and large business cycles: A macroeconomic model of monopoly, Quarterly Journal of Economics, 1985  

• Lecture 9 - New Keynesian DSGE model: A guided tour
  Slides - Read Gali Chapter 3 (42-56)  and Carlin W and D Soskice, The 3-equation New Keynesian model: A graphical exposition, Contributions to Macroeconomics, 2005 - Handout on log linearization

• Lecture 10 - Optimal discretionary policies
  Slides - Read Gali Chapter 5 (98-102) 

• Lecture 11 - REE stability and Taylor's rules
  Slides - Read Gali Chapter 4 (75-89) - Look at  Inflation in the 70s  - Read (again) Clarida R, J Gali, M Gertler, Monetary policy rules and macroeconomic stability: Evidence and some theory, Quarterly Journal of Economics, 2000

• Lecture 12 - Policy regimes and inflation targeting
  Slides - Read Mishkin F,  Inflation targeting, Encyclopedia of Macroeconomics, 2002; and Walsh C, Teaching inflation targeting: An analysis for intermediate macro, Journal of Economic Education, 2002

• Lecture 13 - Policy regimes: The theory
  Slides - Read Gali Chapter 5 - Read Clarida R, J Gali, M Gertler, The science of monetary policy: A New Keynesian perspective, Journal of Economic Literature, 1999 

• Lecture 14 - Friedman rule
  Slides - Read Gali Chapter 2  (24-34)

• Lecture 15 - The optimal inflation rate
  Slides - Read Di Bartolomeo G, P Tirelli, N Acocella, The optimal inflation rate revisited, WPCom working paper no 69, 2011

• Lecture 16 - The working capital channel in New Keynesian DSGE models
  Slides - Read Christiano L, M Traband and K Walentin, DSGE models for monetary policy analysis, in B Friedman and M Woodford, editors, Handbook of Monetary Economics, 2011 and Walsh C and F Ravenna, Optimal monetary policy with the cost channel, Journal of Monetary Economics, 2006

• Lecture 17 - Taking the model to the data
  RBC approximation (mod), RBC estimation (mod), A NK DSGE model (mod and data) - Read Fernández-Villaverde J, The econometrics of DSGE models, SERIEs, 2010

• Lecture 18 - Monetary economy in emerging markets
  Slides - Read Frankel J, Monetary policy in emerging markets: A survey, B Friedman and M Woodford, editors, Handbook of Monetary Economics, 2010

Tool: DYNARE

• Dynare is a software platform for handling a broad class of economic models, particularly dynamic stochastic general equilibrium (DSGE). Dynare is free software which can be downloaded free of charge. Download dynare from the download page. Dynare needs MATLAB, which is not free. Campus licenses for MATLAB allow downloading the software for free on a PC connected to the Sapienza University net (details). 

• An excellent alternative to MATLAB is to use Octave, which is a freeware software!!!! Download the Octave installer at the Octave download page. Double-click on the Octave installer and follow the instructions. Download the latest Dynare Windows installer at the download page. Double-click on the Dynare installer and follow the instructions. Run Octave by locating it in the Windows start menu or on the desktop and clicking on its icon. Configuring Octave for Dynare. Type the following at the Octave command prompt: replace 4.x.y with your Dynare version.

• You can download the Dynare user guide here (T. Mancini Griffoli).

Homeworks
(solutions will be distributed in class.)

• Homework 1 - Play with the Phillips curve (OSL)

• Homework 2 - Read: Blanchard OJ, What do we know about macroeconomics that Fisher and Wicksell did not?, Quarterly Journal of Economics, 2000

• Dynare solution (levels and logs). Think about the difference between the two versions of the solution!!!

• Homework 3 - Read: Clarida R, J Gali, M Gertler, Monetary policy rules and macroeconomic stability: Evidence and some theory, Quarterly Journal of Economics, 2000

• Homework 4 - (replicate this figure with or without habits) - Solution.

• Homework 5 - (write a loop that checks the determinacy for different values of the coefficients on inflation and output gap in the Taylor rule.)

• Homework 6 -  (see the last slide: Inflation in the 70s) - Solution look at Clarida R, J Gali, M Gertler, The science of monetary policy: A New Keynesian perspective, Journal of Economic Literature, 1999.

• Homework 7 - (a) Read Di Bartolomeo G, P Tirelli, N Acocella, The optimal inflation rate revisited, WPCom, 2011 and discuss why the positive rate of inflation can be positive;  b) read Ascari G and T Ropele, Trend inflation, Taylor principle and indeterminacy, Journal of Money, Credit and Banking, 2009, and discuss how trend inflation affects the determinacy of REE under a Taylor rule type).

References

Main reference

• Gali J (2008), Monetary Policy, Inflation, and the Business Cycle, Princeton University Press (the best introduction to New Keynesian models)

• Carlin W and D Soskice, The 3-equation New Keynesian model: A graphical exposition, Contributions to Macroeconomics, 5, 2005

• Walsh C, Teaching inflation targeting: An analysis for intermediate macro, Journal of Economic Education, 2002

• Clarida R, J Gali, M Gertler, Monetary policy rules and macroeconomic stability: Evidence and some theory, Quarterly Journal of Economics, 2000

• Clarida R, J Gali, M Gertler, The science of monetary policy: A New Keynesian perspective, Journal of Economic Literature, 1999

Other references of interest

• Walsh C (2003), Monetary Theory and Policy. MIT Press (A complete book on monetary economics presently published)

• Woodford M (2003), Interest and Prices. Princeton University Press (difficult read, very analytical)

• Handbook of Monetary Economics, Friedman BM and M Woodford (eds), Vol 3 A-B, Elsevier, 2011

• Var der Ploeg R and BJ Heijdra (2002), Foundations of Modern Macroeconomics, Oxford University Press, Oxford

• Emerging economies references

Extra readings (not compulsory)

The Phillips curve debate

• Hicks J, Mr. Keynes and the “Classic”: A suggested interpretation, Econometrica, 1937 (link)

• Phillips W, The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957, Economica, 1958 (link)

• Samuelson PA and RM Solow, Analytical aspects of anti-inflation policy, American Economic Review, 1960 (link)

• Friedman M, The role of monetary policy, American Economic Review, 1968 (link)

• Friedman M, Inflation and unemployment, Nobel Memorial Lecture, 1976 (link)

• Lucas RE and TJ Sargent, After Keynesian macroeconomics", in After the Phillips curve, Fed Reserve Bank of Boston, 1978 (link)

• Taylor R, Staggered wage setting in a macro model, American Economic Review, 1979 (link)

• Lucas R, Monetary neutrality, Nobel Memorial Lecture, 1995 (link)

• Stock JH and MW Watson, Has the business cycle changed? Evidence and explanations, Monetary policy and uncertainty, Fed of Kansas City, 2003 (link)

• King RG, The Phillips curve and US macroeconomic policy: snapshots 1958-1996, Fed of Richmond Economic Quarterly Review, 2008 (link)

• See also my course on macroeconomics topics for (advanced) details (follow the link), but it is not needed for the exam

RBC models

• Plosser C, Understanding real business cycles, Journal of Economic Perspectives, 1989 (link)

• Stadler GW, Real business cycles, Journal of Economic Literature, 1994 (link)

• Wen Y, Where's the beef? The trivial dynamics of  RBC models, Fed St Loius WP No 39A, 2005 (link). On the weak propagation mechanism criticism

• Galì J and P Rabanal, Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data?, NBER Macro Annual, 2004 (link). On the criticism about the role played by  technology shocks as a source of the postwar U.S. business cycle

• Gertler M and N Kiyotaki, Financial intermediation and credit policy in business cycle analysis, Handbook of Monetary Economics, edited by B Friedman and M Woodford (North Holland), 2011 (link)

New Keynesian models

• Blanchard OJ, The state of macro, NBER WP N. 14259, 2008 (link)

• Klenow PJ and BA Malin, Microeconomic evidence on price-setting, Handbook of Monetary Economics, 2011 (link)

• Mankiw G, Small menu costs and large business cycles: A macroeconomic model of monopoly, Quarterly Journal of Economics, 1985  (link)

• Carlin W and D Soskice, The 3-equation New Keynesian model: A graphical exposition,, Contributions to Macroeconomics, 2005 (link)

• Walsh C, Teaching inflation targeting: An analysis for intermediate macro, Journal of Economic Education, 2002 (link)

• Clarida R, J Gali, M Gertler, Monetary policy rules and macroeconomic stability: Evidence and some theory, Quarterly Journal of Economics, 2000 (link)

• Clarida R, J Gali, M Gertler, The science of monetary policy: A New Keynesian perspective, Journal of Economic Literature, 1999  (link)

• Di Bartolomeo G, P Tirelli, N Acocella, The optimal inflation rate revisited, WPCom working paper no 69, 2011 (link)

• Ascari G and T Ropele, Trend inflation, Taylor principle and indeterminacy, Journal of Money, Credit, and Banking, 2009 (link)

• Christiano L, M Traband and K Walentin, DSGE models for monetary policy analysis, in B Friedman and M Woodford, editors, Handbook of Monetary Economics, 2010  (link)