18.751 Advanced Monetary Macroeconomics Fall Term 2004
The reading list will include the second half of Carl E.
Walsh, Monetary Theory and Policy
(Cambridge, MA: MIT Press, 1998) (Dafoe, HG 230.3 W35 1998),
supplemented by other material to fill in for topics that Walsh does not
cover. You may want to keep on hand some
reference for mathematical economics (such as Alpha Chiang, Fundamental Methods of Mathematical
Economics or Dowling's Introduction
to Mathematical Economics, to brush up on whatever techniques may have
become rusty.
Structure
of the course:
The logic of monetary policy involves devising a monetary policy rule for choosing settings of policy levers
so as to maximize a set of policy
objectives, subject to a set of constraints. The constraints of policymaking reflect the
dynamic reactions of the economy to be stabilized, and are mostly reflected in
macroeconomic models. The first section
reviews the kinds of medium-run, dynamic macro models available to generate the
constraints for any policy choice. The
second section reviews the literature on the objectives that monetary policy
might be expected to help achieve. The
third section discusses the range of policy levers available for stabilization,
monetary or otherwise. The fourth
section discusses policy rules for using those levers.
1. Macroeconomic models / constraints for policy
rules:
Bennett McCallum and Edward Nelson, An optimizing IS-LM specification for monetary policy and business cycle analysis, NBER Working paper 5875, and JMCB August 1999, Part II, 296-316. Answers the question “when is it all right to use just an IS-LM model?”
David
Romer, Keynesian economics without the LM curve, JEP
Spring 2000, 149-170. Replaces
LM with MP curve.
David
Romer, "The New Keynesian Synthesis", Journal of Economic Perspectives, Winter 1993, 5-22 explains the logic behind various sources
of price rigidity. It is also summarized
in chapter 6 part 3 of Romer, Advanced Macroeconomics.
Walsh,
ch. 5.3.3, 5.4, 5.5 on streamlined New Keynesian
policy models for a closed economy
Laurence
Ball and N. Gregory Mankiw,
"Relative price changes as aggregate supply shocks," Quarterly Journal of Economics Feb. 1995
applies the menu-cost approach explicitly, and explains/defines AS shocks.
Bernanke, B. and M. Gertler,
“Inside the black box: the credit channel of monetary policy transmission,” JEP
1995, 27-48. Adds
asymmetric info to the mainstream model.
Walsh
ch. 6.4, 6.5 adds openness to the mainstream model
economy
Robert
Amano, Don Coletti, and Tiff Macklem,
Monetary rules when economic behaviour
changes, Bank of Canada Working Paper, 99-8 (April 1999). Read for the description of the CPAM model
they use; CPAM is a simplified and therefore more understandable version of the
models now in common use in major central banks (at least, in their research
and forecasting departments). To be contrasted with those discussed above.
Walsh,
ch. 10.3, 10.4 adds the structure of financial
markets to the mainstream model.
2. Policy objectives:
Walsh,
ch. 11.2
William Brainard, "Uncertainty and the effectiveness of
policy," AER May 1967, 411-425. On optimal policy choice under uncertainty
about policy impacts; a must-read for all policymakers.
John
Helliwell, “How’s Life? Combining individual and national variables to explain
subjective wellbeing,” Economic Modelling 20 (2), March 2003; available through ScienceDirect (through uminfo)
Joaquin
Sylvestre, "The market power foundations of macroeconomic policy,"
JEL March 1993, 105-141, a survey of the literature on how stabilization of
real quantities like output and employment is or is not beneficial under
various assumptions about market power.
John
Chant, “Financial stability as a goal,” in John Chant et al., Essays on
Financial Stability (Ottawa, Bank of Canada, Technical Report 95, Sept.
2003).
Arthur
Okun, Prices
and Quantities (Washington: Brookings, 1981), ch.
8 on loss functions.
Daniel
J. Richards, "Do Canadians want zero inflation? Some evidence from a model with
'sophisticated' voters," CPP Dec. 1992, 413-424.
Nicholas
Rowe and James Yetman, Identifying poicymakers’ objectives: an application to
the Bank of Canada, Bank of Canada Working Paper 2000-11. An interesting empirical technique to
identify objectives ex post.
3. Policy
levers available:
Walsh ch. 9.2 on classifications
of goals and instruments and targets.
Arthur
Okun, Prices and Quantities (
Kenneth
J. Koford and Jeffery B. Miller, "Macroeconomic
market incentive plans: history and theoretical rationale", AER May 1992, 330-334. The following article by David Colander,
("A real theory of inflation and incentive anti-inflation plans") pp.
335-340, explains some of the issues in Koford &
Miller more fully.
Monetary policy levers:
Tiff
Macklem, "Information and Analysis for Monetary
Policy: Coming to a Decision”, Bank of Canada Review, Summer
2002; available on the BofC website under Monetary
Policy. Discusses the
info available to policymakers.
Bruce Montador, “The implementation of monetary poicy in
Bank
of Canada website: read the backgrounders on the conduct of monetary policy, as
described by the central bank itself for the general public.
Douglas
D. Purvis, "Economic integration, currency areas, and macroeconomic
policy", in The Exchange Rate and
the Economy (Bank of Canada, 1993) is a review of the optimal currency area
literature, from a policy perspective.
David
Laidler, “The exchange rate regime and the monetary order” Bank of Canada
Working Paper 1999-7.
John
B. Taylor, “The role of the exchange rate in monetary policy rules,” AER May
2001, 263-267.
4. Policy rules:
Glenn Rudebusch and Lars Svensson, “Policy rules for inflation targeting,” in John
Taylor, ed., Monetary Policy Rules (Chicago, NBER, 1999). Read for their categorization of policy
rules.
Walsh,
ch. 9.2, 10.2
(a) inflationary bias of discretionary policy:
Walsh ch. 8
Robert Barro and David B. Gordon,
"Rules, discretion and reputation in a model of monetary policy," JME July 1983, 101-121.
To be read with:
______________, "A positive theory of monetary policy
in a natural rate model,"JPE August 1983,
589-610.
Kenneth
Rogoff, "Reputation, coordination, and monetary
policy," in Barro, ed., Modern Business Cycle Theory (Harvard, 1989), secs
6.1, 6.2, 6.5, 6.6
(b) The instrument choice
decision:
Walsh
ch. 9.3
Gordon R. Sparks, "The choice of monetary policy
instruments in
Peter
Sephton, "The choice of monetary policy
instruments in
(c)
Matters of degree: ‘cold turkey’ v. gradualism, or the need for caution:
Wm.C.Brainard, "Uncertainty and the effectiveness of policy,"
AER May 1967, 411-425.
Paul Jenkins and David Longworth,
“Monetary policy and uncertainty,” BofCR Summer 2002. Read as an application (or not) of Brainard’s rule of caution.
Gabriel
Srour, Why do central banks smooth interest rates?
Bank of
Alberto
Alesina and Allen Drazen, "Why are
stabilizations delayed?" AER Dec. 1991, 1170-1188.
(d)
Stabilization bias:
Walsh,
ch. 11.3
(e)
targeting rules:
Walsh,
ch. 11.5
Frederic
Mishkin, “Issues in inflation targeting,” Bank of Canada
conference, 2000; available on BofC website under Monetary
Policy / Monetary Policy Framework.
Lars Svensson, “Inflation
targeting as a monetary policy rule,” Journal
of Monetary Economics, 1999, 607-654.
Jamie
Armour, Ben Fung, and Dinah
Maclean,
(f)
empirical work:
John Taylor, “Robustness and efficiency of monetary policy
rules as guidelines for interest rate setting by the European central bank,”
JME 1999, 655-679.
Largely a summary of analysis and results in a conference volume he
inspired and edited, Monetary Policy Rules (Chicago, NBER 1999).
Grahame Johnson, Measuring interest rate expectations in
Alan
S. Blinder, “What central bankers could learn from academics - and vice versa,”
JEP 1997, 3-17.
Jamie
Armour and Agathe Cote,
“Feedback rules for inflation control: an overview of the recent literature,”
BofCR, Winter 1999-2000, 43-54.
Andrew
Levin, Volker Wieland and John C. Williams, Robustness of simple monetary rules
under model uncertainty, 263-318 in
Nicholas
Rowe and David Tulk, “A simple test of simple rules: can
they improve how monetary policy is implemented with inflation targets?” Bank
of Canada Working paper 2003-31, available on the B of C website under Monetary
Policy /Monetary Policy Implementation
Abbreviations:
Walsh = Carl E. Walsh, Monetary Theory and
Policy (MIT Press, 1998) (Dafoe Library, HG 230.3 W35 1998)
AER = American Economic Review BofCR = Bank of
BPEA = Brookings Papers on Economic Activity
CJE = Canadian J of Economics CPP = Canadian Public Policy
JEL = J of Economic Literature SEJ = Southern J of Economics
JEP = J of Economic Perspectives JMCB = J of Money, Credit and Banking
JME = J of Monetary
Economics JPE = J of
Political Economy
Bank of Canada Working Papers and Technical Reports are
available on the Bank of Canada website, under publications, though you can
request them (free) from the Bank of Canada itself. Many of the jornal articles are available
through JSTOR, accessed throught the UM library website. Others are in Dafoe or will be put on reserve
in the SJC library.