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Advanced Monetary Theory and Policy (ECO-AD-MONETTHE)

ECO-AD-MONETTHE

Description

Description:

A defining feature of the current economic landscape is the large—and rapidly growing—stock of public debt in many advanced and emerging economies. As fiscal imbalances continue to widen, questions about how monetary and fiscal authorities will respond, and about the consequences of those responses, have moved to the forefront of policy debates around the world.

This five-lecture course examines the conditions under which public debt can generate inflation in general equilibrium models. Using these models as a framework, we will explore the challenges faced by monetary authorities when public debt is high and increasing. We will also study the conflicts that can emerge between fiscal and monetary authorities when public debt is large. Particular attention will be paid to the case in which monetary and fiscal authorities pursue conflicting objectives, examining how growing fiscal pressures can constrain monetary policy, challenge central bank independence, and shape the evolution of interest rates, inflation, and economic activity.

Building on these theoretical foundations, we will apply the models to historical and contemporary episodes. We will show how the large public spending programs introduced during the 1960s can help explain the surge in inflation observed in the following decade. We will also examine the lessons these models provide for understanding how monetary and fiscal authorities in the United States and the Euro Area can address the large and growing public debt burdens that emerged in the aftermath of the COVID-19 pandemic.

Goal: The course aims to introduce students to the research frontier on monetary–fiscal interactions.

Assessment: It will consist of a take-home exam and several informal computer-based assignments. The assignments will be discussed and submitted during class and will not be graded. Their purpose is to encourage interested students to develop a deeper understanding of concepts that cannot be covered in full detail within the limited time available. The final grade will be based exclusively on the take-home exam.

The take-home exam requires students to read and replicate selected results from Smets and Wouters (2025). Particular emphasis will be placed on the ability to explain results clearly, concisely, and intuitively, as well as on the economic insights drawn from the analysis. The exam should not exceed 10 pages in length.

The submission deadline will be announced at a later date. Late submissions will be subject to substantial penalties.

Course Outline

1.Fiscal Imbalances and Monetary Policy in the XXI Century

2.Monetary and Fiscal Interactions in General Equilibrium Models

(a)Monetary and Fiscal Coordination

(b)Imperfect Information and Dormant Fiscal Shocks

(c) Lack of Monetary and Fiscal Coordination

3.Empirical Applications

(a)Trend Inflation in the Seventies

(b)The Post-Pandemic Trade-Off between Stagnation and Inflation

i The case of the US

ii The case of the Euro Area and the Introduction of Eurobonds

Main References:

•Bianchi, Faccini, and Melosi (2020)

•Bianchi, Fang, Melosi, Rogantini-Picco (2026)

•Bianchi and Ilut (2017)

•Bianchi and Melosi (2013, 2017, and 2019)

•Leeper (1991)

•Leeper, Traum, and Walker (2017)

•Sims (1994)

•Smets and Wouter (2024)

•Woodford (1994, 2001, 2003)

References

Bassetto, M. (2002): A Game-Theoretic View of the Fiscal Theory of the Price Level, Econometrica, 70(6), 2167 2195.

Bianchi, F., Faccini, R., and L. Melosi (2023): Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength, Quarterly Journal of Economics, 138(4).

Bianchi, F., and C. Ilut (2017): Monetary/Fiscal Policy Mix and Agents Beliefs, Review of Economic Dynamics, 26, 113 139.

Bianchi, F., and L. Melosi (2013): Dormant Shocks and Fiscal Virtue, in NBER Macroeconomics Annual 2013, Volume 28, NBER Chapters, pp. 1 46. National Bureau of Economic Research, Inc.

(2017): Escaping the Great Recession, American Economic Review, 107(4), 1030 58.

(2019): The dire effects of the lack of monetary and fiscal coordination, Journal of Monetary Economics, 104, 1 22.

Bianchi, F., Fang, Q., Melosi L., A. Rogantini-Picco (2026): Who is Afraid of Eurobonds, Mimeo.

Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005): Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, 113(1), 1 45.

Cochrane, J. H. (1998): A Frictionless Model of U.S. In ation, in NBER Macroeconomics Annual 1998, ed. by B. S. Bernanke, and J. J. Rotemberg, pp. 323 384. MIT Press, Cambridge, MA.

(2001): Long Term Debt and Optimal Policy in the Fiscal Theory of the Price Level, Econometrica, 69, 69 116.

Hall, G. J., and T. J. Sargent (2011): Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics, American Economic Journal: Macroeconomics, 3(3), 192 214.

4

Jacobson, M. M., E. M. Leeper, and B. Preston (2019): Recovery of 1933, NBER Working Papers 25629, National Bureau of Economic Research, Inc.

Leeper, E. M. (1991): Equilibria Under Active and Passive Monetary and Fiscal Policies, Journal of Monetary Economics, 27, 129 147.

Leeper, E. M., N. Traum, and T. B. Walker (2017): Clearing Up the Fiscal Multiplier Morass, American Economic Review, 107(8), 2409 2454.

Sargent, T., and N. Wallace (1981): Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis Quarterly Review, Fall, 1 17.

Sims, C. A. (1994): A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy, Economic Theory, 4, 381 399.

Sims, C. A. (2016): Fiscal policy, monetary policy and central bank independence, in Kansas City Fed Jackson Hole Conference.

Smets, F., and R. Wouters (2024), Fiscal Backing, Inflation and US Business Cycles, CEPR working paper, n. 19791.

Woodford, M. (1994): Monetary Policy and Price Level Determinacy in a Cash-in Advance Economy, Economic Theory, 4, 345 389.

(1995): Price Level Determinacy without Control of a Monetary Aggregate, Carnegie-Rochester Series of Public Policy, 43, 1 46.

(2001): Fiscal Requirements of Price Stability, Journal of Money, Credit, and Banking, 33, 669 728.

(2003): Interest and prices: Foundations of a theory of monetary policy. Princeton University Press, Princeton, New Jersey.

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