Empirical Evidence

Slides

• Evidence

• The monetary neutrality debate

Handouts

• Short and long-run statistical evidence (correlations)

• The debate on money neutrality (causality)

• Vector Auto-Regressive models (VARs)*

References

• Galì: 1.2.1 or Acocella: 5.2

Homeworks

• Homework 1 (good luck!) [solution 1 / solution 2]

Extras*

• FRED data

• Walsh, C. E. (2010), Monetary Theory and Policy, Fourth Edition, MIT Press:  Chapter 1 (further details)

IS/LM Neoclassical Synthesis

Slides

• The IS/LM neoclassical synthesis

• Backward-looking economies

• The dynamics of the IS/LM model

Handouts

• IS-LM model

• Deterministic simulations

References

• Acocella: Chapter 2

Homeworks

• Homework 2 [solution]

Extras

• The Great Depression (read it, but it is not mandatory for the exam)

• The K equation Excel and Matlab codes (see the handout on the deterministic simulations)

Original references

• Hicks J., Mr. Keynes and the “Classic”: A Suggested Interpretation, Econometrica, 1937

• Modigliani F., Liquidity Preference and the Theory of Interest and Money, Econometrica, 1944

Cagan's Model

Slides

• Cagan's model

• Forward-looking economies

Handouts

• Cagan's model estimation

References. 

Note that Phillip Cagan was a student of Milton Friedman, and the expectation scheme used in his work was based on adaptive expectations (differently from the slides). The rational expectations version is due to Tom Sargent

• Original article: Cagan, P., The Monetary Dynamics of Hyperinflation, in Milton Friedman (ed.), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press, 1956

• Sargent T. J., The Demand for Money during Hyperinflations under Rational Expectations: I, International Economic Review, 1977 

Homeworks

• Homework 3 [solution]

Extras

• Sargent's codes: ML and Bayesian estimation of Cagan's model with RE

• Simulations with dynare

From the (Neo)Classic to the New Keynesian Approach

Slides

• The Classic model (RBC model)

• The Classic model with money

• Blanchard and Kiyotaki model

• The New Keynesian DSGE model (Mickey-Mouse version)

Handouts

• RBC

References.

• Galì: Chapters 2 and 3 (formalized) 

• Acocella: Chapters 3 and 4 (less formal)

• Blanchard, O. J., and N. Kiyotaki (1987), Monopolistic competition and the effects of aggregate demand, American Economic Review, 77: 647.666.

Extras

• New Keynesian DSGE Mickey-Mouse code (dynare)

Monetary Policy Design

Slides

• Taylor rules and REE determinacy

  • Focus: Monetary policy at the ECB and Fed in action

• Welfare and policy tradeoffs

• Optimal policy: Discretion

• Optimal policy: Commitment

Handouts

References.

• Galì: Chapters 4  (formalized) 

• Acocella: Chapter 5 (less formal)

• Clarida R., J. Galí, M. Gertler, The science of monetary policy: A New Keynesian perspective, Journal of Economic Literature, 1999, 37: 1661-1707

Homeworks

• Homework 4

Current Policy Debates

EU (Stagflation is coming! Unconventional vs. conventional policies. The inflation target. The ECB policy during the Covid19)

• The ECB's policy measures during the COVID-19 crisis by Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori 

• Financial dominance in the pandemic and post-pandemic European economy by Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori 

• The implementation and the rationale of the new inflation target of the ECB by Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori 

• Uncertainty and the pandemic shocks by Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori 

• The ECB's Asset Purchase Programme: Theory, effects, and risks by Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori 

The debate about the DSGE models usage

• Mankiw, N. G., 2006, The Macroeconomist as Scientist and Engineer, Journal of Economic Perspectives, 20.

• Blanchard, O., 2018. On the future of macroeconomic models. Oxford Review of Economic Policy, 34.

• Christiano, L. J. & M. S. Eichenbaum & M. Trabandt, 2018. On DSGE Models, Journal of Economic Perspectives, 32.

• Lindé, J., 2018. DSGE models: still useful in policy analysis? Oxford Review of Economic Policy, 34.

• Rao C. & A. M. Sbordone & A. Tambalotti & K. Walsh, 2010. Policy analysis using DSGE models: An introduction, Economic Policy Review, New York Fed, 16.

• Gürkaynak, R. & C. Tille, 2017, DSGE Models in the Conduct of Policy: Use as intended, A VoxEU.org Book, CEPR Press

Introduction

• Empirical Evidence 

• The Neutrality Debate

  • Self Assessment #1 [delivery  Tuesday, 17 October 2023, 10:35 am]

  • Self Assessment #2 [delivery  Thursday, 19 October 2023, 10:35 am]

The Real Business Cycle Approach

• DSGE Foundations

• Solving the Model (by paper& pencil and with the computer)

  • Team Homework #1 [extra time delivery Thursday, 19 October 2023, 12:00 am]

• Introducing Money

  • Self Assessment #3 [delivery  Thursday, 19 October 2023, 10:35 am]

  • Self Assessment #4 [delivery  Thursday, 19 October 2023, 10:35 am]

The New Keynesian Approach

• Old Keynesian Approach

• Blanchard and Kiyotaki Model (real rigidities)

  • Team Homework #2 [extra time delivery Sunday, 29 October 2023, 12:00 am]

• Woodford-Galì DSGE Model (nominal rigidities)

• Monetary Policy in the Woodford-Galì DSGE Model: Rules and REE Determinacy

• Welfare in the Woodford-Galì DSGE Model

• Optimal Monetary Policy in the Woodford-Galì DSGE model: Discretion vs. Commitment

Additional topics

• Ramsey's Approach and the Optimal Inflation Rate (Schmitt-Grohe and Uribe and Acocella, Di Bartolomeo and Tirelli's Extension) 

• Cagan's model

• The monetary union and the ECB's policies

Empirical evidence

• Class 1 - Money Facts

• Class 2 - Money Neutrality

• Class 3 - The Return of Structural Econometric Models

• References for Class 1-3

Walsh, C. E. (2010), "Monetary theory and policy," MIT Press, Cambridge, 3rd ed: Chapter 1.

• Homework No 1 / Solution HW 1 (regressions with noise)

• Additional materials: Introduction to Matlab (slides); Handout on the VAR Approach; Exercise.

Modeling money in "models"

• Class 4 - Money in Search Models

• Reference for Class 4

Kiyotaki N. and R. Wright (1993), "A Search-Theoretic Approach to Monetary Economics," American Economic Review, Vol. 83, No. 1, pp. 63-77.

Gu C., H. Han, and R. Wright (2019), "New Monetarist Economics," Oxford Research Encyclopedia of Economics and Finance.

• Class 5 - OLG, Dynamic Efficiency, and Money

• Reference for Class 5

Paul A. Samuelson (1958), "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, Vol. 66, No. 6, pp. 467-482

• Homework No. 2 / Solution HW 2

The IS/LM model

• Class 6 - The Textbook Model
  Handout: The Great Depression Interpreted through the IS/LM Lens

• Class 7 - The Dynamic Version

• Original references

Hicks J., Mr. Keynes and the “Classic”: A Suggested Interpretation, Econometrica, 1937

Modigliani F., Liquidity Preference and the Theory of Interest and Money, Econometrica, 1944

• Homework No. 3 / Solution HW 3.1 (IS-LM). Type go_all to run / Solution HW 3.2 (IS-LM) to test the liquidity effect just type: corr(oo_.endo_simul(2,101:end)', oo_.endo_simul(4,101:end)') / Solution HW 3.3

Adding prices (Classical View)

• Class 8 - The Cagan Model
  Note that Phillip Cagan was a student of Milton Friedman, and the expectation scheme used in his work was based on adaptive expectations (differently from the slides). The RE version is due to Tom Sargent
  Class handout: The Cagan's model

• References for Class 8

Cagan, P., The Monetary Dynamics of Hyperinflation, in Milton Friedman (ed.), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press, 1956

Sargent T. J., The Demand for Money during Hyperinflations under Rational Expectations: I, International Economic Review, 1977 (Sargent's codes: ML and Bayesian estimation of Cagan's model with RE)

• Class 9 - A Classical Monetary Model: Real Values

• Class 10 - A Classical Monetary Model: Nominal Values

• Class 11 - MIU and the Friedman rule

• References for Class 9 and 11

Gali, J., Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press, 2015, 2nd ed. Chapter 2

Additional material: Difference equations handout

• Reading

Romer D., Keynesian Macroeconomics without the LM Curve, Journal of Economic Perspectives, 2000

• Homework 4 [Help: in answering to (1.b), you can ignore Cagan's eq. (11) [just compute current expectations by using all values of past inflation]] / HW 4.1 Solution (Cagan) / HW 4.2 Solution (MIU)

Sticky prices (New Keynesian View)

• Class 12 - Monopolistic Competition GE Model

• Class 13 - New Keynesian Basic (Textbook) Model

• Class 14 - Taylor Rule and US Monetary Policy (1979-2005) (From the conquest of the American inflation to the Great Moderation) 

• Class 15 - Running the New Keynesian model

• Dynare codes Replicate the figures from Gali's book (Chapter 3)

• Reference for Class 12 and 15

Gali, J., Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press, 2015, 2nd ed. Chapters 3 and 4   

• Readings

Blanchard O. J. and N. Kiyotaki, Monopolistic Competition and the Effects of Aggregate Demand, American Economic Review, 77: 647-666, 1987

Bernanke B. S. / Blinder A. S. / McCallum B. T. [Panel Discussion], What Have We Learned Since October 1979?, Federal Reserve Bank of St. Louis Review, March/April 2005, 87(2, Part 2): 277-282

• Homework 5 / Solution HW 5

Welfare-based optimal monetary policy

• Class 16 - Welfare (real&nominal distortions)

• Class 17 - LQ discretion

• Class 18 - Commitment

• Details on computations, Handout on CGG (1999) 

• References for Class 16-18

Gali, J., Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press, 2015, 2nd ed. Chapter 5

Clarida R., Galí J., and Gertler M. (1999), The Science of Monetary Policy, Journal of Economic Literature, 37: 1661-1707

ECB monetary policy

• Class 19 - The ECB's policy strategy  

• References for Class 19

Benigno P., Canofari P., Di Bartolomeo G., Messori M., Theory, evidence, and risks of the ECB’s Asset Purchase Programme, prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 28 September 2020 between ECON and the President of the European Central Bank, 2020.

Rostagno, M., Altavilla, C., Carboni, G., Lemke, W., Motto, R., Guilhem, A. S., Yiangou, J., A tale of two decades: the ECB’s monetary policy at 20, ECB Working Paper No. 2346, 2020.

Neri, S., Siviero, S., The non-standard monetary policy measures of the ECB: Motivations, effectiveness and risks, Credit and Capital Markets, Credit and Capital Markets, 51: 513-560, 2020.

Links

• FRED data (St. Louis Fed)

• US yield curve (Treasury)

• US recessions (NBER)

Class 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 that 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 network (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).

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