Monetary Economics

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----For technical reasons, this version of the syllabus is incomplete. For full syllabus refer to the Faculty website----

The course objective is to give a comprehensive presentation of main topics in monetary economics: monetary theory, its empirical formulations and their econometric tests. Part one consists of the introduction to monetary economics and of the presentation of three approaches to incorporate money into general equilibrium models. Part two covers the impact of monetary policy on the economy at the macro-level in the short run. Part three focuses on the demand for money with special attention paid to its empirical aspects. Finally, part four deals with supply of money and the central banking.

Method of assessment:

Assessment is 100% by final written exam. The exam will consist of a mixture of short essay type questions and problems. Students choose 2 out of 4 essay-type questions and 2 out of 4 problems.

Core references (required reading) in the reading list are marked with an exclamation mark !. Walsh C.E., 2003, refers to Walsh C.E., 2003, Monetary Theory and Policy, The MIT Press, second edition.

Part 1: Introduction: money in the economy

1. Origins of money

! Starr R.M., 2003, Why is there money? Endogenous derivation of 'money 'as the most liquid asset: a class of examples, Economic Theory, 21, pp. 455-474.

Kiyotaki N., Wright R., 1991, A contribution to the pure theory of money, Journal of Economic Theory, 53, No 2, 215-235.

Sussman N., Zeira J., 2003, Commodity money inflation: theory and evidence from France in 1350 - 1436, Journal of Monetary Economics, 50, pp. 1769-1793.

Burdett K., Trejos A., Wright R., 2001, Cigarette Money, Journal of Economic Theory, 99, pp. 117-142.

2. Models of Money as a Medium of Exchange I: Money in the utility function (MIU)

! Walsh C.E., 2003, ch.2 and references therein.

McCallum B.T., Godfriend M.S., 1987, Demand for Money: Theoretical Studies, In eds. P. Newman, M. Milgate, J. Eatwell, The New Palgrave Dictionary of Economics, Palgrave Macmillan Publishers Ltd, pp. 775-781

3. Models of Money as a Medium of Exchange II: Shopping costs & cash-in-advance model (CIA)

! Walsh C.E., 2003, ch. 3 and references therein.

Huo T., 1997, Inflation and Capital Accumulation in a Two-Sector Cash-in-Advance Economy, Journal of Macroeconomics, 19, No. 1, pp. 103-115.

4. Models of Money as a Store of Value: Overlapping generations models (OLG)

! McCallum B.T., 1983, The Role of Overlapping-Generations Models in Monetary Economics, Carnegie-Rochester Conference Series on Public Policy, ed. Karl Brunner and Allan H. Meltzer, Vol. 18, pp. 9-44, North-Holland Publishing Co.

Petrucci A., 1999, Inflation and capital accumulation in an OLG model with money in the production function, Economic Modelling, 16, pp. 475-487

Part 2: Money and output in the short run

5. Flexible prices and the role of expectations

! Walsh C.E., 2003, ch. 5.2 and references therein.

Apergis N., Miller S., 2004, Macroeconomic rationality and Lucas' misperceptions model: further evidence from 41 countries, Journal of Economics and Business, 56, 3, pp. 227-241.

Cole H.L., Ohanian L.E., 2002, Shrinking money: the demand for money and the nonneutrality of money, Journal of Monetary Economics, 49, No. 4, pp. 653-686.

6. Nominal rigidities

! Walsh C.E., 2003, ch. 5.3 and references therein.

Ball L., Mankiw N.G., Romer D., 1988, The new Keynesian Economics and the Output-Inflation Trade-off, Brookings Papers on Economic Activity, 19, pp. 1-65

Chari V.V., Kehoe P.J., McGrattan E.R., 2000, Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?, Econometrica, 68, 5, pp. 1151-1179

7. New Keynesian approach to short-run macroeconomics

! Walsh C.E., 2003, ch. 5.4 and references therein.

Clarida R., Gali J., Gertler M., 1999, The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature, 37, pp. 1661-1707.

McCallum B.T., Nelson E., 1999, An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis, Journal of Money, Credit, and Banking, 31, 3, part 1, pp. 296-316.

Part 3: The demand for money

8. Transaction and precautionary demand for money

! Frenkel J. A., Jovanovic B., 1981, Optimal International Reserves: A Stochastic Framework, The Economic Journal, 91, pp. 507- 514.

Miller M.H., Orr D., 1966, A Model of the Demand for Money by Firms, Quarterly Journal of Economics, 80, pp. 413-435.

Tobin J., 1956, The Interest-Elasticity of Transactions Demand for Cash, Review of Economics and Statistics, 38, No. 3, pp. 241-247.

9. Portfolio selection and speculative demand for money

Part 4: Money supply and central banking

10. Monetary aggregates and money supply process

11. Goals and tools of monetary policy

12. Rules vs. discretion debate: time inconsistency problem

13. Solutions to inflation bias

14. Monetary policy rules

The main textbook for the course is:

Walsh C.E., 2003, Monetary Theory and Policy, The MIT Press, second edition.

Each lecture is assigned a detailed reading list.

The extended syllabus is available from the Program web page.

Upon completion of the course, student is able to

Knowledge:

- analyze short- and long-run money neutrality

- understand transmission channels of monetary policy

-- provide arguments for and against rules in monetary policy conduct and central bank independence

- understand the significance of informational imperfections in the labor, goods, and credit markets

Skills:

- predict the likely short run consequences of monetary expansion for output

- assess the optimality of inflation from the point of view of long-run growth performance.

- assess the effectiveness of various strategies of monetary policy

- design an institutional setting conducive for reducing the inflation bias problem

- empirically test the relevance of monetary policy transmission channels

Social skills:

- effectively use working and leadership skills within an international context taking cultural differences into consideration

- meet time-constrained targets through effective planning and organization

- communicate research results effectively through oral presentations.

Project (results presented in class) 40% of the grade:

The following criteria will be applied to assess the project: Literature review 20%, Choice of empirical material 5%, Data analysis 40%, Critical analysis (logical development of ideas, depth of analysis) 15%, Conclusions 10%, Communication skills 10%.

Exam 60% of the grade:

Students choose 3 out of 4 questions.