Topics on the Frontier of Dynamic, Stochastic General Equilibrium Models

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)
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) Ramsey-optimal
monetary policy: theory and practice (Riksbank)

4) Monetary policy and asset
prices.

a) News
and inflation targeting.

b) Using Ramsey optimal policy as a benchmark for evaluating a policy rule.

5)
Introducing unemployment into the NK Model

a)
Two approaches requiring minimal adjustments
to NK model: Christiano-Trabandt-Walentin
and Gali.

b)
Lack of perfect insurance against unemployment
and Lucas’ assessment of the cost of business cycles.

c)
Using the information in unemployment data to
estimate the output gap.

d)
Alternative approaches based on
search and matching.

**Two 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 (see lecture 3
above).

**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?