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).
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.
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.