Financial Frictions and the Macroeconomy
By Lawrence J. Christiano
Lectures and Handouts
1)
Introducing financial frictions
into the New Keynesian DSGE Model.
a)
Microfoundations for
the Costly State Verification (CSV) approach.
b)
Integrating CSV
into an NK model and the results of Bayesian estimation of the model using US
and EA data.
i)
The model
ii)
The importance of risk shocks.
iii) The
response of monetary policy to an increase in interest rate spreads.
c)
Very brief discussion of extending CSV to
risky banking (discussion based on papers by Zeng and
by Hirakata, Sudo and
Ueda.)
d)
A moral hazard approach to financial frictions
i)
Two-period
financial friction model of Gertler-Kiyotaki, Handout
ii)
Using the model to think about unconventional
monetary policy.
2) Implications of the zero lower bound on the nominal rate of interest.
a) The deflation spiral, the government spending multiplier.
b) Quantitative
analysis of the role of the zero bound in the dynamics of US data, 2008 and
2009.
3) Monetary policy and asset prices.
a) News
and inflation targeting.
b) Using Ramsey optimal policy as a benchmark for evaluating a policy rule.
4)
Introducing unemployment with
imperfect labor market insurance into the NK Model
a)
Revisiting Lucas’ cost of business cycles.
b)
Alternative approaches: Gali,
search and matching.
c) Using
unemployment data to estimate the output gap.
Afternoon Sessions
Apart from giving students hands-on experience
with the quantitative analysis of models, 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.
3)
The timeless perspective in Ramsey-optimal monetary policy (handout).
Assignment #8
The pdf file
contained in the following zip file should be available in hard copy. The zip
file itself should be placed in a directory labeled assignment8
http://faculty.wcas.northwestern.edu/~lchrist/course/assignment8ver4.zip
The following text should be
distributed as hard copy: http://faculty.wcas.northwestern.edu/~lchrist/course/assignment8.htm
Assignment #9
The
text for this assignment should be distributed in hard copy, and it is
the pdf file in the following zip file:
http://faculty.wcas.northwestern.edu/~lchrist/course/assignment9ver4.zip
The
zip file should be placed in a folder labeled assignment#9
Background readings
The
main reference for the
course is my chapter with Trabandt and Walentin, in the forthcoming Handbook of
Monetary Economics, edited by Friedman and Woodford.
Unemployment:
Christiano, Trabandt and Walentin, Involuntary Unemployment in a Business Cycle Model
Financial
Frictions:
Bernanke, Gertler and Gilchrist’s classic 1999 paper.
Christiano, Motto, Rostagno (2003): Using the BGG model to analyze the cause of the US Great Depression, and the reason it lasted so long.
Christiano, Motto, Rostagno (2009): Using the BGG model to understand the causes of economic fluctuations in the EA and the US.
Christiano, Trabandt and Walentin (2009): Financial and labor market frictions in a small open economy model of Sweden. (Handout)
Government spending and the zero bound:
Christiano, Eichenbaum and Rebelo (2009) When is the Government Spending Multiplier Large?