Three Lectures on the Basic Model and on the Zero Lower Bound

By Lawrence J. Christiano

**Three Morning Lectures**

1)
The basic, medium-sized New
Keynesian model.

a)
Motivating the ingredients (habit
persistence, adjustment costs in the flow of investment, variable capital
utilization) using VAR-based impulse response functions.

b)
Are the micro and macro evidence
on price inertia reconcilable?

2) Implications of the zero lower bound on the nominal rate of interest.

a) The deflation spiral, the government spending multiplier.

b) Tax policy in the zero lower bound (details and MATLAB code pertaining to the analysis of the effects of a cut in the labor income tax rate).

**c)
**Quantitative analysis of the role of the zero bound in the
dynamics of US data, 2008 and 2009.

**Three Afternoon Sessions**

Apart from giving students hands-on
experience with the quantitative analysis of models using Dynare,
the two homework exercises allow us to discuss the following topics:

a)
Bayesian
estimation of DSGE models.

b)
The
HP filter as a way to estimate the output gap.

2)
The
Taylor principle (see section 3 of handbook chapter).

a)
The
rationale for the principle in the standard NK model.

b)
Circumstances
when things can go awry with the Taylor principle:

i)
An
important working capital channel.

ii) News shocks and the relationship
between monetary policy and asset price volatility (see the Jackson Hole paper
on this subject).

**Assignment #9**** **

This assignment
works heavily with the Clarida-Gali-Gertler model,
which is developed here.

The
text for this assignment, as well as all the necessary software, is included in
this zip file.

**Background reading**

The main reference for the
lectures is my chapter with Trabandt and Walentin, in the forthcoming Handbook
of Monetary Economics, edited by Friedman and Woodford.

A careful
read of Krugman’s
discussion of the Sweeney-Sweeney paper on the Great Capitol Hill Baby-sitting
co-op crisis is helpful for understanding the Clarida-Gali-Gertler
model.

Government spending and the zero bound:

Christiano,
Eichenbaum and Rebelo (2009) When is the Government Spending
Multiplier Large?

This 1986 Delong-Summers AER paper is useful for gaining a better understanding of the deflation spiral that is at the heart of the analysis of the zero bound in the NK model.