Economics 546: Monetary Theory and Policy

Michael Devereux

Winter Term 2011

 

This course is being co-taught with Professor Henry Siu.  I will be covering the first half of the course.  This part of the syllabus will cover a number of current topics in monetary and macroeconomics.  We will start by developing a basic model of money and price level determination.  Following this, we introduce the role of nominal rigidities in this model, and explore the traditional role for monetary policy in the macro-economy.  We will then question the success of this model, and discuss a number of extensions and alternative frameworks which offer a more complete understanding of the scope and importance of monetary policy, in particular using the evidence from the recent financial and economic crisis as a backdrop to the analysis.

 

There are number of good general references for the material:

Monetary Theory and Policy: Carl Walsh 3rd  Edition MIT Press 2010 (2nd Edition 2003 is ok too for most parts)

Monetary Policy, Inflation, and the Business Cycle, Jordi Gali, Princeton University Press, 2008

Here are some pre-published draft notes for the book:

Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5

Interest and Prices, Michael Woodford, MIT Press, 2003

In addition, I will post outline notes for the lectures on the web page. 

 

Office Hours: Wednesday 2-3.30 pm

 

Question Sheet 1: Due January 18th in class

Question Sheet 2: Due February 3rd in class

 

The assessment for this half of the course will be based on 3 assignments and a midterm.

 

Topics:

 

1.         Money and Monetary Policy in General Equilibrium

  Walsh, Chapter 1 ,2, 3.     Gali, Chapter 2

Lecture 1

Lecture 2

 

 

2.       Evidence on Price Rigidities

Nakamura, Emi, and Jon Steinsson (2006), “Five Facts About Prices: A Reevaluation of Menu Cost Models”, Quarterly Journal of Economics 123(4), 1415-1464, (http://www.columbia.edu/~en2198/papers/fivefacts.pdf).

Eichenbaum, Martin S., Nir Jaimovich, and Sergio Rebelo, Reference prices, costs, and nominal rigidities. American Economic Review forthcoming.              

Patrick Kehoe and Virgiliu Midrigan, 2010 “Prices Are Sticky After All”, mimeo

Lecture 3

 

3.       The New Keynesian Model of Money and Monetary Policy

                Gali, Chapter 3, Walsh, Chapter 5

Gertler and Gali Macroeconomic Modeling for Monetary Policy Evaluation, Journal of Economic Perspectives, 2007

Frank Smets and Raf Wouters (2003), "An estimated stochastic dynamic general equilibrium model of the euro area", JEEA.

Gali 2009  The New Keynesian Approach: Lessons and New Directionsl…

Lecture 4

 

4.       Optimal Monetary Policy in Theory and Practice

Gali, Chapter 4, 5  Woodford Chapter 6

Clarida, Gali and Gertler, The Science of Monetary Policy JEL 1999

Lecture 5

 

Lecture 6

 

5.       Limitations of Monetary Policy at Low Interest Rates

Jung, Taehun & Teranishi, Yuki & Watanabe, Tsutomu, 2005. "Optimal Monetary Policy at the Zero-Interest-Rate Bound," Journal of Money, Credit and Banking

Eggertson Gauti and Michael Woodford “The Zero Bound on Interest Rates and Optimal Monetary Policy”, 2003

Eggertson Gauti and Paul Krugman 2010 “Debt, Deleveraging, and the Liquidity Trap”,

Lecture 7

 

6.       Monetary Policy with Imperfect Financial Markets

Bernanke Gertler and Gilchrist The Financial Accelerator in a Quantitative Business Cycle Framework, 2001, Handbook of Macroeconomics

Carlstrom Fuerst and Paustian 2010 Optimal Monetary Policy in a Model with Agency Costs, JMCB

De Fiore Tristani 2009, “Optimal Monetary Policy in a Model of the Credit Channel”

Bernanke and Gertler 2001  Should Central Banks Respond to Asset Price Movements?

Boivin, Lane and Meh, Should Monetary Policy Be Used to Counteract Financial Imbalances?

Lecture 8

 

7.       Unconventional Monetary Policy

Gertler and Karadi  2009 A Model of Unconventional Monetary Policy

Del Negro, Marco, Gauti Eggertsson, Andrea Ferrero and Nobuhiro Kiyotaki, 2010,

“The Great Escape? A Quantitative Evaluation of the Feds Non-Standard Policies”, mimeo

 

 

 

8.        Monetary Policy in the Open Economy

Clarida Gali and Gertler, A Simple Framework for Monetary Policy Evaluation JME 2001

Devereux and Engel Monetary Policy In the Open Economy Revisited, RES 2003

Engel, Currency Misalignments and Optimal Monetary Policy 2009

Corsetti, Dedola and Leduc “Optimal monetary policy in open economies”

Lecture 9

 

 

The final exam for this part of the course will be given on February 22nd.