Advanced Topics in Macroeconomics
By Lawrence J. Christiano
Morning lectures will develop the New Keynesian model from its foundations. Afternoon sessions will be devoted to computer exercises designed to illustrate properties of the New Keynesian model and to gain experience in solving models with Dynare.
Lectures and Handouts
1) Linearization as a method for solving general equilibrium models (handout).
a) A simple non-monetary model: efficient allocations and decentralization.
b) Monetary, sticky price (i.e., New Keynesian) version of the above model.
i) (Ramsey) optimal monetary policy defined and analyzed in the sticky price model.
Result: under Ramsey optimal monetary policy, allocations in sticky price model (eventually) coincide with efficient allocations in non-monetary economy.
ii) Analysis of sticky price model when monetary policy is governed by the Taylor rule.
Apart from giving students hands-on experience with the quantitative analysis of models, the two homework exercises allow us to discuss the following topics:
1) The Taylor principle (see section 3.1 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.
2) The Taylor rule versus optimal monetary policy.
a) Display several examples in which the Taylor rule is not ‘aggressive enough’ in moving the interest rate.
b) Modifying the Taylor rule so that the Ramsey-optimal monetary policy is implemented.
Introduction to model solving with Dynare using the real business cycle model.
We will study question 2 of this assignment only. This question works with the Clarida-Gali-Gertler model, which is developed in the handout above, as well as here.
The text for this assignment, as well as all the necessary software, is included in this zip file.
The main reference for New Keynesian models is my chapter with Trabandt and Walentin, in the 2010 Handbook of Monetary Economics, edited by Friedman and Woodford.