Economics 751

Macroeconomic Theory II: part 2

Spring 2009


Lectures: Monday and Wednesday, 10 AM-11.50 AM (see exact schedule below)

Location: Seminar room 429

Professor Matteo Iacoviello
Administration Building
, Room 470
Tel: 552-3689
Web page:

TA: Tamas

Review Sessions: Mondays, 12 pm ()


Office Hours: Tuesday 2.00 PM – 3.00 PM and by appointment

The final exam will be on TBA

Lecture Notes href=""



Course Description, Course Materials, Course Requirements, Reading List, Additional Information



Course Description

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This course is part of the first year graduate sequence in Macroeconomic Theory. We will cover modern neo-keynesian theories of business cycle fluctuations. We will begin by analyzing what the data say on the interaction between monetary factors and the business cycle. We will then develop and analyze several models of the interaction between money and the business cycle.

Among the topics that we will cover:  

Evidence on money, prices, interest rates and output

Money in models without nominal rigidities

Credit and business cycle

Dynamic-Neo Keynesian theories of the business cycle

Discretionary Policy and Time Inconsistency



Course Materials

No single textbook covers the material. I will make copies of my lecture notes available. A textbook which I loosely follow is:

Walsh, Carl E., 2003: Monetary Theory and Policy, Cambridge: MIT Press.

Other useful textbooks which might be useful for some parts of the course are:

Obstfeld, Maurice, and Kenneth Rogoff, 1997, Foundations of International Macroeconomics, MIT Press 

Hamilton, James D. 1994, Time Series Analysis, Princeton University Press


Course Requirements

Evaluation of this course will be based on homeworks (30%) and on a final exam (70%)

We will make extensive use of dynamic general equilibrium models. You will have to learn how to use computer codes that solve stochastic systems of difference equations.







Problem sets are here

(Matlab file with data for PS 1)



March 16

DSGE models




March 18

DSGE models




March 23


Matlab tutorial

Matlab tutorial file



March 25





March 30


Problem Set 1 (VAR) due on March 30

Discussion of PS1



April 1





April 6

Credit cycles

Problem Set 2 (Sidrauski) due on April 6

Discussion of PS2



April 8

Credit cycles




April 15


Problem Set 3 (Credit cycles) due on April 15

Discussion of PS3



April 20


Homework A (Credit cycles) due on April 20

Discussion of HWA



April 22





April 27


Problem Set 4 (DNK) due on April 27

Discussion of PS4



April 29

Time inconsistency






Homework B (DNK) due May 1st

Problem Set 5 due

Discussion May 1st (FRI)


Reading List (* denotes required reading)


DSGE Models

* Uhlig, Harald (1995), “A toolkit for analyzing nonlinear economic dynamic models easily”, material available at


VARs and Evidence on money and output

Note: For this part, I suggest you to read the paper by Stock and Watson to get some background, and then you can read Hamilton's chapter to get the technical details straight away. If (as I expect) you realize that Hamilton is too tough for you to handle (you will see that it contains lots of stuff that we did not go through), you can begin by reading Enders, chapter 5, which is much easier. The Stock and Watson paper is on the web, whereas you can find the two books in the BC library. The other two references (Christiano et al and Walsh) are useful if you want to deepen your understanding of the empirical literature, but I will not expect you to read them thoroughly.

* Stock, James, and Mark Watson (2001), “Vector Autoregressions”, Journal of Economic Perspectives, 15(4).

* Enders, Walter (1995), RATS Handbook for Applied Econometric Time Series, Chapter 5

* Hamilton, chapter 10 (sections 10.1 and 10.2) and Chapter 11

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

Walsh, chapter 1


Money in models without nominal rigidities

For this part, the best reference is Walsh, Chapter 2.  Chapter 8 of Obstfeld and Rogoff is also worth reading: in Sections 8.1 to 8.3 of that chapter you will recognize many of the things we went through

* Walsh, Chapter 2

* Obstfeld and Rogoff, Chapter 8


Credit and Business Cycles

For this part, the best reference is the credit cycles paper by Kiyotaki and Moore (1997).  Chapter 7 of Walsh (especially 7.3.2) is great as a background reading.  

* Kiyotaki, Nobuhiro and John Moore (1997).  "Credit Cycles."  Journal of Political Economy, 211-248. 

* Walsh, Chapter 7

Kiyotaki, Nobuhiro (1998) “Credit and Business Cycles,” Japanese Economic Review, 18-35



Models with imperfect competition and nominal rigidities

For this part, besides the class notes, you have to read at least the papers by Gali (2002), Gertler, and Chapter 5 in Walsh.

* Gali, Jordi (2002), "New Perspectives on Monetary Policy, Inflation, and the Business Cycle"," NBER WP 8767, February 2002.

* Gertler, Mark (2003), Lecture Notes on sticky price models

* Walsh (2003, new edition), Chapter 5

* Gali, Jordi, and Mark Gertler, “Macroeconomic Modeling for Monetary Policy Evaluation,” Journal of Economic Perspectives, vol. 21, no. 4, fall 2007, pp. 25-45.

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

Goodfriend, Marvin, and Robert King (1997), “The New Neoclassical Synthesis and the Role of Monetary Policy”, NBER Macro Annual



Discretionary Policy and Time Inconsistency

For this part, besides the class notes, you have to read Chapter 8 in Walsh and Section 9.5 of Obstfeld-Rogoff. The papers in the Macro Annual by Nancy Stokey and the comments by Peter Ireland and Lars Svensson are also worth reading.

* Walsh (2003, new edition), Chapter 8

* Obstfeld and Rogoff, Chapter 9, section 5

* Stokey, Nancy, (2002), “Rules Versus Discretion after Twenty-Five Years,” NBER Macro Annual

* Svensson, Lars (2002) "Comments on Nancy Stokey, 'Rules and Discretion' after Twenty-Five Years," 17th Annual Conference on Macroeconomics, NBER

* Ireland, Peter (2002) "Comments on Nancy Stokey, 'Rules and Discretion' after Twenty-Five Years," 17th Annual Conference on Macroeconomics, NBER






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