Economics 416
Larry Christiano
Fall, 2001
Advanced Macroeconomics, 'Monetary Economics and Policy'
(This website is still under construction..)
The purpose of this course is to provide a selective overview of theoretical, empirical
and policy issues in modern monetary economics. The grade will be determined by a combination of homeworks and a class paper. We will cover the following topics:
1. Optimal Monetary Policy.
Homework #1: Prove the uniform taxation result, stated on page 24 of the class handout on optimal monetary policy. Adopt the utility function on page 20 of the handout. Base your proof on an analysis of the Ramsey allocation problem. For this, you need to rigorously develop a mathematical characterization of the allocations in what we call the set, B. This is the set of allocations associated with the private sector equilibria that correspond to some budget-feasible policy.
This homework is due a week from Thursday, on October 11. The second question for this homework is question 1 here.
Note: due to a prior commitment, we cannot have class on Thursday, October 4. That class will be made up later, at a time we all agree on.
Homework #2. Questions 2-6 in here. This is due October 18.
2. Monetary Policy In the Absence of Commitment.
4. Approximating Model Solutions.
5. Empirical Estimation of a Macroeconomic Model with Money.
6. Money in the Open Economy.
Possible Class Projects:
Introduce a Mortensen-Pissarides Matching Model into the Type of Models we are Studying and Analyze the Impact of Various Monetary Policies on Unemployment.
Redo Albanesi-Chari-Christiano in a model with state variables (e.g., lagged prices due to more interesting sticky prices, or investment), using the strategy based on the perturbation method discussed in Klein, Krusell and Rios-Rull. You could do it in the model discussed in class.
You could apply the markov equilibrium idea to some other setting, involving say political economy or bargaining considerations, as discussed in.
Explore models of the monetary transmission mechanism which stress countercylical markups as a device for achieving inertia in the aggregate price level (see this for more discussion).
Explore the role in the monetary transmission mechanism of the assumption that intermediate good producers use the output of other intermediate good producers as inputs. You could introduce this assumption into an existing monetary model (for example, Christiano-Eichenbaum-Evans), to see what is the impact. For more details, see this.
Explore quantitatively the hypothesis that Britain's return to the pre-war gold parity was the reason for Britain's poor economic performance in the 1920s.
Explore quantitatively, the Friedman-Schwartz hypothesis that tight money was an important impulse for the Great Depression (see James Hamilton, JME, and Bordo, Erceg and Evans, AER, and a Minneapolis Fed Working Paper by Cole and Ohanian for more discussion).
Christiano and Fitzgerald (section 4) document that money and inflation move together closely in all frequency bands in the first half of the 20th century. This is true in the second half of the century for low frequencies, but a phase shift has occurred in the higher frequencies. Construct a model to interpret these observations. One interpretation might be that there are greater frictions in price setting in the later period.
Construct a model which differentiates between different types of investment goods (residential investment, investment in business structures, investment in business equipment and household purchases of durables), which can account for the different ways in which they respond to a monetary policy shock. Structures lag, and so does equipment to some extent. Durables and residential investment move right away. One explanation is that structures are characterized by 'time to plan' as discussed in Christiano and Todd (Minneapolis Fed Quarterly Review, 1990s), while residential investment and household durables are not. This idea suggests that the slight lag in business equipment reflects complementarity with business structures, not to plan in business equipment.
Useful link:
http://www2.bc.edu/~ghironi/monesyll.html