Macroeconomics III

EUI, 2009

(Giancarlo Corsetti and Charles Gottlieb)

Aim of the course:
This course will be concerned with monetary economics, business cycles and with stabilization policy. Here you have the main conclusions:

This page will be updated during the lecture period. Lecture notes will be added briefly before lecture time. A (*) at the end of a reference means 'required reading'.

Copyright: lecture notes for Lectures 1 3 4 5 6 are based on slides by Morten Ravn. Lecture notes 2 7 8 9 10 by Giancarlo Corsetti.

Modelling money: Cash in Advance, Transaction Costs and Money in Utility Function. Deriving money demand in Perfect Foresight Exchange Economies. Central banks balance sheet and the government budget constraint. Definition of a stationary equilibrium. Inflation and budget deficits (the fiscal theory of inflation). Helicopter drops of money and the quantity theory. Lecture notes 1

Cost of inflation. Monetary versus Fiscal Distortions (Friedman versus Phelps) in a simple production economy. Ramsey Problem. Optimality of the Friedman rule. Implementing the optimal plan. The fiscal theory of the price level. Lecture notes 2

Production, money and inflation dynamics. Neutrality and superneutrality. Existence and stability of steady state. Dynamics effects of stochastic money growth rate shocks. Dichotomy, superneutrality, and liquidity effects. Lecture notes 3. A quantitative exercise here

• Ljungqvist and Sargent, (2004), Recursive Macroeconomic Theory, MIT Press (2nd edition) Chapter 24 (pages 857-874 and 880-885). (*) Obstfeld, Maurice and Kenneth Rogoff (1996), Foundations of International Macroeconomics, Chapter 8 section 8.3 (*),
• Obstfeld, Maurice and Kenneth Rogoff (1996), Foundations of International Macroeconomics, Chapter 8. 8.1, 8.2.1-8.2.3, 8.2.6.
• Galí Jordi (2008), Monetary Policy, Inflation and the Business Cycle, Princeton University Press, Chapter 2.
• Walsh, Carl E. (2003): Monetary Theory and Policy, Second Edition, MIT Press, chapters 2 and 3 (*)
• Cooley, Thomas F. and Gary D. Hansen (1989), “Inflation Tax in a Real Business Cycle Model,” American Economic Review 79, 733-748.
• Christiano L. and T. Fitzgerald, `Understanding the Fiscal Theory of the Price Level,' Federal Reserve Bank of Cleveland Economic Review, Quarter 2, vol. 36, no. 2
• Adao B., Teles P. and Correia I. (2003), "Gaps and Triangles," Review of Economic Studies 50, 1701-1718

Evidence on money and inflation in the long and the short run. Money and the business cycle. Measuring the effects of monetary policy. Indicators, identification of monetary policy shocks. Lecture notes 4

• Bernanke, Ben S., and Ilian Mihov (1997), “Measuring Monetary Policy,” Quarterly Journal of Economics, vol. CXIII, no. 3, 869-902. (*)
• Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (1996), “The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds”, Review of Economics and Statistics, 16-34. (*)
• Kydland, Finn E. and Edward C. Prescott, 1990, "Business Cycles: Real Facts and a Monetary Myth", Quarterly Review, Federal Reserve Bank of Minneapolis.
• McCandless, George T., Warren Weber (1995): “Some Monetary Facts,” Federal Reserve Bank of Minneapolis, Quarterly Review.
• Yun, Tack (1996): “Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles,” Journal of Monetary Economics 37, 345-370.

Basic new-keynesian model with imperfect competitive firms. General equilibrium implications: New-Keynesian Phillips Curve (NKPC) and Forward-looking IS Curve. Lecture notes 5

• Galí (2008) Chapter 2 and 3 (*)
• Walsh, Carl E. (2003): Monetary Theory and Policy, Second Edition, MIT Press, Chapter 1, Chapter 5, Sections 5.3-5.5
• Blinder, Alan (1991): “Why Are Prices Sticky? Preliminary Results from an Interview Study”, American Economic Review (P&P), 89-96.
• Bils, Mark, and Peter Klenow (2004), “Some Evidence on the Importance of Sticky Prices”, Journal of Political Economy, 947-85.
• Nakamura, Emi, and Jon Steinsson (2006), “Five Facts About Prices: A Reevaluation of Menu Cost Models”, Quarterly Journal of Economics 123(4), 1415-1464, (http://www.columbia.edu/~en2198/papers/fivefacts.pdf).

Sticky prices and the business cycle. Money and business cycle. Monetary rules and indeterminacy. Dynamic response to nominal and real shocks. Empirical evidence on the NKPC. Extension: indexation. Recap and a look at alternative models. Lecture notes 6

• Gertler, Mark, and Jordi Galí , "Inflation Dynamics: A Structural Econometric Approach", Journal of Monetary Economics, 1999 (*)
• Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (2005): “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,” Journal of Political Economy.
• Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (1998):“Monetary Policy Shocks: What Have We Learned and to What End ?,” in
  J.B. Taylor and M. Woodford eds., Handbook of Macroeconomics, volume 1A, 65-148.
• Dotsey, Michael, Robert G. King, and Alexander L. Wolman (1999): “State Dependent Pricing and the General Equilibrium Dynamics of Money and
  Output,” Quarterly Journal of Economics, vol. CXIV, issue 2, 655-690.

A recap and some discussion Notes

The Friedman rule reconsidered: trade-offs between output stabilization and containing monetary distortions Lecture notes 7

• Adao Bernardino, Isabel Correia and Pedro Teles, 2003, Gaps and Triangles, Review of Economic Studies

Inflation unemployment trade-offs: introduction to the traditional debate on policy analysis and design based on the traditional expectations-augmented Phillips Curve Lecture notes

• Romer David (2006), Advanced Macroeconomics, McGraw-Hill Irving, (3 ed.) Chapter 10.3-6. (*)
• Walsh Carl E. (2003) Chapter 8.

New-keynesian reconsideration of the traditional debate: a basics Lecture notes 8 and commitment versus discretion Lecture notes 9

• Galí Chapter 4 and 5

Recap and topics in monetary policy design

Basics on Ricardian Equivalence (LS chapter 10) and equilibrium response to government spending shocks.

• Galí, Jordi, J. David López-Salido, and Javier Vallés (2007), Understanding the Effects of Government Spending on Consumption. Journal of the European Economic Association, 5, 227-270.
• (*)Perotti, R.: 2007, In search of the transmission mechanism of fiscal policy, NBER WP 2007.

SVAR approach

• Blanchard, O, and R. Perotti (2002), “An Empirical Characterization of Dynamic Effects of Changes in Government Spending and Taxes on Output”, Quarterly Journal of Economics 117(4), 1329-1368.

Even Studies and Dummy Variable Approach

• Ramey Shapiro (1998) Costly Capital Reallocation and the Effects of Government Spending, Carnegie Rochester Conference on Public Policy 145-194
• Ramey, V. A.: 2006, Identifying government spending shocks: Its all in the timing. mimeo.
• Edelberg Eichenbaum and Fisher (1999), Understanding the Effects of a Shock to Government Purchases, Review of Economics Dynamics 166-206
• Burnside Eichenbaum and Fisher (2004) Fiscal Shocks and their Consequences, Journal of Economic Theory, 89-115
• Romer C. and Romer D. (2008) The Macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. Mimeo
• Romer C. and Romer D. (2008) , A narrative analysis of post-war tax changes, mimeo
• Mertens, K., and M. O. Ravn (2008): “The Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks: Theory and Empirical Evidence,” mimeo

Sign-restrictions

• Mountford, A. and Uhlig, H. (2005),What are the effects of fiscal policy shocks? mimeo.

Non linearities

• Perotti, Roberto (1999) Fiscal policy in good times and bad. Quarterly Journal of Economics, 114(4):1399– 1436.
• Giavazzi, F., T. Jappelli, and M. Pagano (2000) Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries. European Economic Review, 44:1259–1289.

Bilbiie, Florin, André Meier and Gernot Müller (2008), “What accounts for the changes in U.S. Fiscal policy transmission,” Journal of Money, Credit and Banking 40(7), 1439-1469.

A discussion of fiscal stimulus

• Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies? by John H. Cochrane
• Is Government Spending Too Easy an Answer? by Greg Mankiw