Monetary
Theory I
Spring 2009
LAST UPDATED: October 27, 2009
Classes: Tuesday and Thursday, 12 PM
Office Hours: After
class
Location: Department
Tel: 552-3689
E-mail: iacoviel@bc.edu
Web page: matteoiacoviello.com
Course Description,
Course Materials, Course
Requirements, Reading List, Additional Information
This course covers models of Money demand, recent developments
in the foundation of a role for Monetary policy in affecting the real economy,
and issues in the formulation and conduct of Monetary policy.
This is a graduate course in Monetary Economics. We
will study issues related to money, credit and the macroeconomy in general.
Course
I will make copies of my lecture notes available.
Four books are recommended:
Woodford,
Michael, 2003, Interest and Prices, Princeton University Press
Walsh, Carl E., 2003: Monetary Theory and Policy, Cambridge: MIT Press, Second Edition.
DeJong, David N. and Chetan
Dave (2007), Structural Macroeconometrics, Princeton University Press
On VARs, a book worth looking at is:
Enders,
Walter, 1995, Applied Econometric Time Series, John Wiley
The requirements of the course are that:
1.
You complete the homework assignments that I
will give you. In order to complete these assignments, you will have to learn how to simulate
dynamic general equilibrium models.
2.
You write a short paper on a topic of
my/your choice.
3.
You give a presentation on a paper from of your
choice (pertaining to Monetary economics, not necessarily from the reading
list, but still unpublished)
4.
You attend the
Total grade will be as follow:
45% homework assignments (3 ASSIGNMENTS IN TOTAL)
35% short paper
20% presentation
Due dates will appear below:
|
|
week |
DAY |
CLASS |
VARIOUS |
|
Tue |
8-Sep |
DSGE models |
|
|
|
2 |
Thu |
10-Sep |
DSGE models |
|
|
3 |
Tue |
15-Sep |
DSGE models |
Files to run VARS |
|
4 |
Thu |
17-Sep |
Dynare |
|
|
5 |
Tue |
22-Sep |
Dynare |
|
|
6 |
Thu |
24-Sep |
Maximum
Likelihood |
|
|
7 |
Tue |
29-Sep |
Maximum
Likelihood |
|
|
8 |
Thu |
1-Oct |
VAR |
|
|
9 |
Tue |
6-Oct |
VAR |
|
|
10 |
Thu |
8-Oct |
Incomplete
Markets |
HOMEWORK
1 DUE |
|
11 |
Tue |
13-Oct |
Incomplete
Markets |
|
|
12 |
Thu |
15-Oct |
Incomplete Markets |
|
|
13 |
Tue |
20-Oct |
Incomplete
Markets |
|
|
14 |
Thu |
22-Oct |
Incomplete Markets |
|
|
15 |
Tue |
27-Oct |
Incomplete
Markets |
HOMEWORK
2 DUE |
|
16 |
Thu |
29-Oct |
Multi-sector models |
|
|
17 |
Tue |
3-Nov |
Multi-sector
models |
|
|
18 |
Thu |
5-Nov |
CORE
DSGE Model |
|
|
19 |
Tue |
10-Nov |
|
PRESENTATION: Xiaoping
Chen: Nicholas Bloom, (2009) Ekin Ustun: Mendoza, AER forthcoming |
|
20 |
Thu |
12-Nov |
|
|
|
21 |
Tue |
17-Nov |
|
|
|
22 |
Thu |
19-Nov |
|
PRESENTATIONS Shahed
Khan: Gali, Lopez-Salido and Valles (2007) Mikhail
Dmitriev: Barsky House and Kimball (2007). |
|
23 |
Tue |
24-Nov |
|
PRESENTATION Xinhao
Dong: Justiniano & Primiceri (2008), AER Kimiaki
Shinozaki: |
|
24 |
Thu |
26-Nov |
THANKSGIVING |
|
|
25 |
Tue |
1-Dec |
|
PRESENTATIONS Brent
Bundick: Curdia and Woodford (2009) Isaiah Mario
Arend Serrano: Gertler and Kiyotaki (2009) |
|
26 |
Thu |
3-Dec |
|
PRESENTATION |
|
27 |
Tue |
8-Dec |
|
|
NOTE: A
star * denotes absolutely required readings. It refers to paper that we
discussed in class or that are strong complements/substitutes to those papers.
In addition to the lecture notes, You should plan to read all the required
papers before the comprehensive exam. Class notes will not be enough.
Papers
denoted with # are instead available for presentation in class.
In most of the papers you can find a link to the
(working paper version of the) paper. You are encouraged to find the published
version of the paper or its most recent version on the authors website.
Topics
for the short paper
1)
Goods
versus Asset Price Inflation persistence: Some papers (e.g. Benati
QJE) have documented that CPI inflation persistence has gone down, but what has
happened to house price inflation (or inflation in the price of other assets?)
throughout the same period. There is room here for a model, or for a rigorous
econometric analysis that documents the facts
2)
Uncertainty
shocks and consumer spending: It is everywhere: the idea
these days (2009) being that when uncertainty rises, consumption goes down.
Maybe yes (in partial equilibrium), but how much? Construct a rigorous measure
of how much uncertainty has gone up (see e.g. Nick Blooms work). Then take any
partial equilibrium incomplete markets model and simulate an exogenous increase
in uncertainty (keeping mean income unchanged). What would happen to
consumption and savings?
3)
Uncertainty
shocks and consumer spending part 2: Same as above, but using the
perspective of a consumer/firm that can spend or invest in productive assets
4)
Asset
price shocks and spending: The last two recessions seem intimately related to
asset price shocks (both house prices in 2008 and stock prices in 2001 and
2008). In the past, this relation was not so evident. Room here for a nice VAR
study pre and post 1980s or so
1. Linking Data and Economic Models
BACKGROUND
AND USEFUL
Stock, J. H., and
Woodford, Chapter 1.
Kydland, Nobel Lecture, AER
Prescott, Nobel Lecture, JPE
DATA
* Herr and Maussner, Chapters 1 and 2, and Section
3.3 of Chapter 4
*
De Jong and Dave, Chapters 1, 2, 3
*
Fernandez-Villaverde, J., Rubio-Ramirez, J., T.Sargent and Mark Watson (2007),
A;B;CS (AND D)S OF UNDERSTANDING VARS, American Economic Review, June 2007
*
MODELS
* Uhlig, Harald (1997) A Toolkit
for Analyzing Nonlinear Dynamic Stochastic Models Easily''
*
* Schmitt-Grohe, Stephanie and Martin Uribe.
Solving Dynamic General Equilibrium Models Using a Second-Order Approximation
to the Policy Function. Journal of Economic Dynamics and Control 28 (January
2004): 755-75.
* Jermann, Urban (1998), Asset
Pricing in Production Economies, Journal of Monetary Economics, 41,
257-75.
2. Maximum Likelihood Estimation
*
De Jong and Dave, Chapters 4 and 9
* Canova, Fabio and Luca Sala (2009), Back to
Square One: Identification Issues in DSGE Models, JME
* An, Sungbae, and Frank Schorfheide (2007),
Bayesian analysis of DSGE models, Econometric Reviews, 26:2, 113-172.
*
3. Vector Autoregressions
* Enders, W., Applied Econometric Time Series,
John Wiley and Sons, Chapter 5
* 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
* Angeloni, Ignazio, Anil Kashyap and Benoît Mojon
and Daniele Terlizzese, (2002) "Monetary Transmission in the Euro
Area: Where Do We Stand?". Journal of Money, Credit and Banking
Uhlig, H. (2001), "What are the Effects of
Monetary Policy on Output: Results from an Agnostic Identification Procedure'',
JME
4. Incomplete
Markets Models
* Herr and Maussner, Chapters 5
and 6
* Huggett, Mark, 1993. "The
risk-free rate in heterogeneous-agent incomplete-insurance economies,"
Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969
* Aiyagari, Rao, 1994.
"Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly
Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
* Per Krusell & Anthony A.
Smith & Jr., 1998. "Income and Wealth Heterogeneity in the
Macroeconomy," Journal of Political Economy,
* Heathcote, Jonathan, Kjetil
Storesletten and Gianluca Violante, (2009), Quantitative
Macroeconomics with Heterogeneous Agents, Annual Review of Economics
* Kiyotaki, Nobuhiro, Alex Michaelides and Kalin Nikolov
(2007) Winners
and Losers in Housing Markets
* Young, Eric R. (2006), Approximate Aggregation.,
mimeo,
# Bloom, Nick (2009), The Impact
of Uncertainty Shocks, Econometrica
http://www.stanford.edu/~nbloom/uncertaintyshocks.pdf
# Bloom, Nick, Max Floetotto and Nir Jaimovich (2009). Really
Uncertain Business Cycles.
# An, Sungbae; Chang, Yongsung,
and Kim, Sun-Bin: Can
A Representative Agent Model Represent A Heterogeneous Agent Economy?, AEJ
Macro
# Mendoza, Enrique; Sudden Stops,
Financial Crises And Leverage: A Fisherian Deflation Of Tobin's Q, AER
forthcoming,
# Favilukis, Jack, Sydney Ludvigson, and Stijn Van
Nieuwerburgh. (2009). Macroeconomic Implications of Housing Wealth, Housing Finance, and
Limited Risk-Sharing in General Equilibrium., Unpublished.
Codes to solve incomplete markets models
Code to approximate an AR(1)
process using a Markov chain (from Liungqvist-Sargent) markovappr.m
To solve Deaton-Huggett-Aiyagari model. (Save in Matlab directory all
files below)
CODE FOR THE CAKE-EATING PROBLEM: cakeeating1.m
MAIN FILE: aiyagari1.m
To simulate agents decision
rules, call either: aiyagari1_sim.m,
aiyagari1_sim2.m,
aiyagari1_sim3.m
(Aiyagari1_sim3 is faster than
Aiyagari_sim2 or aiyagari_sim, but they all serve the same purpose. The file llnenforce.m is also needed and called by the _sim files);
To implement Howard improvement
algorithm, you also need aiyagari1_hwd.m
Note that to find the market clearing rate you will need a simple loop
outside the m file that finds the market clearing interest rate, but this is
not implemented.
To solve a version of the Krusell-Smith model.
MAIN FILE: krusell1.m
To simulate agents decision
rules, call: krusell1_sim.m
(also need krusell1_hwd.m)
Note that to find the equilibrium actual law of motion you will need
to run the krusell1.m file more than once, until the regression coefficients
b0, b1 and b2 have converged.
5. Multi-sector
Models
* Iacoviello, Matteo, and
# Barsky, Robert, Christopher L.
House, and Miles Kimball (2007), Sticky
Price Models and Durable Goods, American Economic Review
Bouakez, Hafedh, Emanuela Cardia, and Francisco
Ruge-Murcia (2005), "The Transmission of Monetary Policy in a Multi-Sector
Economy," mimeo.
Davis, Morris A., and Jonathan Heathcote (2005),
"Housing and the Business Cycle," International Economic Review, 46,
3, 751-784.
# Fisher, Jonas (2007), Why Does Household Investment Lead
Business Investment Over the Business Cycle? (REVISED January, 2006) , JPE
Horvath, Michael, (2000), "Sectoral Shocks and
Aggregate Fluctuations," Journal of Monetary Economics, 45, 69-106
* Lawrence J. Cristiano & Terry J. Fitzgerald, 1998.
"The business cycle: it's still a puzzle," Economic Perspectives,
Federal Reserve Bank of
* Christiano and Fisher (2003), NBER working paper 10031,
Stock Market and Investment Good Prices.
*
*
Whelan, Karl (2003), "A Two-Sector Approach to
Modeling
6. Money in Flexible Price Environments
* Walsh, Carl,
* Cooley, Thomas, and Gary D. Hansen (1995), Money
and the Business Cycle, Chapter 3 in "Frontiers of Business Cycle
Research'', Thomas Cooley, editor
* Cooley, Thomas, and Gary D. Hansen (1989), "The
Inflation Tax in a Real Business Cycle Model", American Economic
Review, 79, 4, 733-748.
7. Money in Models with Nominal Rigidities
BASIC MODEL
*
*
Rotemberg, Julio J., and
* Galí,
Jordi, Mark Gertler, J. David Lopez-Salido, (2002), "Markups, Gaps, and the Welfare Costs of Business
Fluctuations, ''NBER Working
Paper No.w8850
# Jordi Galí & J. David López-Salido & Javier
Vallés, 2007. "Understanding the Effects of Government Spending on
Consumption,"
Journal
of the European Economic Association, MIT Press, vol. 5(1), pages
227-270, 03.
Rotemberg,
Julio J., and Michael Woodford (1997), "An
Optimization-Based Econometric Framework for the Evaluation of Monetary
Policy'' (link to the WP version), in NBER Macroeconomics
Annual 1997,
# Davig,
BIGGER
# Smets, Frank and Raf Wouters,
Shocks and Frictions in
* Christiano, Lawrence, Eichembaum, Martin, and Evans (2005), Nominal Rigidities and the Dynamics Effects of a Shock to Monetary Policy, Journal of Political Economy
# Justiniano, Alejandro, and
Giorgio Primiceri (2008), The
time varying volatility of Macroeconomic Fluctuations , AER 2008
* Carvalho, Carlos (2006) "Heterogeneity
in Price Stickiness and the Real Effects of Monetary Shocks," Frontiers of
Macroeconomics: 2, 1.
ESTIMATION
* Rubio-Ramirez, Juan and Pau Rabanal (2005), Comparing
New Keynesian Models of the Business Cycle : A Bayesian approach (pdf file).
Journal of Monetary Economics, 52, pp 1151-1166.
* Boivin, Jean, and
# Boivin, Jean, and Marc Giannoni
(2008), DSGE
Models in a Data-Rich Environment, mimeo
Fuhrer,
Jeffrey, (2000), "Habit Formation in Consumption and Its Implications for
Monetary Policy" American Economic Review. (September 2000)
INFLATION DYNAMICS
* Galí, J, and M.Gertler (1999), Inflation Dynamics: A Structural
Econometric Analysis, Journal of Monetary Economics, vol. 44, nº 2,
195-222, 1999
* Benati,
Luca (2007), Investigating Inflation Persistence Across Monetary
Regimes, mimeo
Fuhrer, Jeffrey C., and G.R. Moore,
(1995), "Inflation
persistence"
(JSTOR), Quarterly Journal of Economics 110, 127-159.
Christopher J. Erceg and Andrew T.
Levin (2003), Imperfect
credibility and inflation persistence, Journal of Monetary Economics,
Volume 50, Issue 4, May 2003, Pages 915-944.
Bils,
Mark and Peter J.Klenow (2004), Some Evidence on the Importance of Sticky
Prices, Journal of Political Economy
8. Optimal Monetary Policy
*
Clarida, R., J. Galí, and
* Walsh,
Chapter 4, Section 5
*
Christopher J. Erceg, Dale W. Henderson, Andrew T. Levin (2000), Journal of
*
Schmitt-Grohe, S. and
* Schmitt-Grohe,
S. and
* 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
* Woodford, Michael, (1999), "Optimal Monetary Policy
Inertia,"
August 1999 [Also available as NBER working paper no. 7261.]
Giannoni, Marc, and Michael
Woodford (2002), "Optimal
Interest-Rate Rules: I. General Theory,", mimeo
* Giannoni, Marc, and Michael
Woodford (2002), "Optimal
Interest-Rate Rules: II. Applications," , mimeo
* Woodford, Michael (2001), "The Taylor Rule and Optimal
Monetary Policy''
January 2001 [Shorter version published in: American Economic Review 91(2):
232-237
9. Interactions between Fiscal and
Monetary Policy
*
Woodford,
* Leeper,
Eric M. (1991). Equilibria Under 'Active' and 'Passive'
#
Christiano, Larry, Martin Eichenbaum and Sergio Rebelo (2009). When is the Government Spending Multiplier Large?, mimeo
David B.
Gordon, and Eric M. Leeper (2002), "The Price
Level, the Quantity Theory of Money, and the Fiscal Theory of the Price Level'', NBER
Working Paper No.w9084, July 2002
10. Financial Factors and the Business Cycle
Financial Frictions and the Transmission Mechanism
# Marvin Goodfriend, Bennett T. McCallum, Banking and interest rates in monetary policy analysis: A quantitative exploration, Journal of Monetary Economics, Volume 54, Issue 5, July 2007
*
Iacoviello, Matteo (2005), House
Prices, Borrowing Constraints and Monetary Policy in the Business Cycle,
American Economic Review, May
#
Christiano,
#
Gilchrist, Simon, Albero Ortiz and Egon Zakrasjek, Credit Risk and the
Macroeconomy: Evidence from and Estimated DSGE Model, mimeo, 2009.
# Curdia,
Vasco, and Michael Woodford (2009), Conventional and Unconventional Monetary Policy, mimeo
#
#
Jermann, Urban, and Vincenzo Quadrini (2006). "Financial Innovations and
Macroeconomic Volatility," NBER Working Papers 12308, National Bureau of
Economic Research, Inc.
#
Lansing, Kevin (2009), Speculative
growth and overreaction to technology shocks, mimeo,
San Francisco Fed
Bernanke,
Ben S., Mark Gertler, and Simon Gilchrist (2000), "The Financial
Accelerator in a Quantitative Business Cycle Framework'', in Handbook of
Macroeconomics, Volume 1C, edited by John Taylor and Michael Woodford
(Elsevier).
Monetary Policy and Asset Prices
Bernanke,
Ben S., and Mark Gertler (2001), "Should
Central Banks Respond to Movements in Asset Prices?'', American
Economic Association Papers and Proceedings, May, 91, 2, pp.253-257.
Piazzesi, Monika, and Martin Schneider (2006), Inflation Illusion, Credit and Asset Prices, mimeo
Lettau,
Martin and Sydney Ludvigson (2003), Understanding
Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption, NBER
Working paper 9848 (EFG, AP)
Banks and Business Cycles
#
Gertler, Mark, and Peter Karadi (2009), A Model of Unconventional Monetary
Policy, mimeo, NYU
#
Gertler, Mark, and Nobuhiro Kiyotaki (2009), Financial Intermediation and Credit Policy in Business
Cycle Analysis, mimeo, prepared for the Handbook of Monetary Economics
This is a link to my webpage
containing resources on how to simulate dynamic stochastic models using Dynare