Lectures at Doug Laxton’s Workshop on Hot Topics in Macro Modeling, Washington DC, March 14-15,
2011
Financial Frictions in Monetary DSGE
Models
By
Introductory remarks
1)
Introducing financial frictions
into the New Keynesian DSGE Model.
a)
Microfoundations for
the Costly State Verification (CSV) approach.
b)
Integrating CSV
into a very simple GE setting.
c)
Integrating CSV
into a large-scale 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.
d) Very
brief discussion of extending CSV to risky banking (discussion based on papers
by Zeng and
by Hirakata, Sudo and
Ueda.)
2)
Financial frictions in the intermediation
sector, exposited in two-period settings (sections 3, 4, 5 of reading, handout).
a)
Two approaches based on moral hazard.
i)
Two-period
financial friction model of Gertler-Kiyotaki, (section
3)
ii)
Hidden action (section 4)
b) Adverse selection (section 5).
3) Implications of the zero lower bound on the nominal rate of interest (manuscript).
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.
4) Monetary policy and asset
prices. (Background manuscript)
a) News
and inflation targeting.
b) Using Ramsey optimal policy as a benchmark for evaluating a policy rule.
Background
reading on DSGE models and monetary policy:
Lawrence J. Christiano, Mathias Trabandt, and Karl Walentin, DSGE Models for Monetary Policy Analysis, In Benjamin M. Friedman, and Michael Woodford, editors: Handbook of Monetary Economics, Vol. 3A, The Netherlands: North-Holland, 2011, pp. 285-367.