EE 631: MONETARY ECONOMICS 2 nd Semester 2013

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1 EE 631: MONETARY ECONOMICS 2 nd Semester 2013 Times/location: Wed 9:30 am 12:30 pm Office: 60 th Building, Room #16 Phone: pisut@econ.tu.ac.th Office Hours: Wed 1:30 4:30 pm or by appointment Course Objective This course provides an overview of recent topics in monetary economics, mainly based on the New Keynesian framework. Besides familiarizing students with the theoretical and empirical literature, the course intends to practice students in giving presentations and writing referee reports. Thus, students could develop their analytical ability throughout the course. Textbooks The main textbook for this course is: 1. Kulthanavit, P., (2011). Lecture Notes for EE631 (Monetary Economics), Faculty of Economics, Thammasat University. 2. Gali, J. (2008). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press, Princeton, NJ. This book provides a very comprehensive analysis of modern monetary theory in the New Keynesian framework. In addition, a monetary policy design under adaptive learning will be based on the following text: 3. Evans, G. W. & Honkapohja, S. (2001). Learning and Expectations in Macroeconomics, Princeton University Press, Princeton, NJ. The following textbooks are useful references: 4. Walsh, C. E. (2010). Monetary Theory and Policy, 3 rd edition, The MIT Press, Cambridge, MA. 5. Woodford, M. (2003). Interest & Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, Princeton, NJ. 1

2 Course Evaluation 1. Term paper (35%): Students will write one referee report (due on 4 March 2013). Students will work together (as a small group of 2 persons) through one assigned paper. a) (10%) The paper should summarize following topics: research questions, research methodology, theoretical framework and results. This part should be roughly 8-10 pages. b) (10%) Depending on the paper, you must (1) provide/derive (critical) missing steps and (2) replicate core empirical results or recalibrate a simulation model. c) (5%) You also must provide critique, i.e., value-added to the literature, in the last 3 4 pages. d) (10%) Moreover, you are also required to give a presentation on each report (tentative dates: 19 February 2013): you will teach the assemblage, not summarize, not regurgitate. Importantly, class participants are expected to read the paper in advance and ask intelligent-sounding questions. (Presentation 6% and Response 4%) Note: Times New Roman, 12pt, 1.5 spaced-pages 2. Assignments (10%) 3. Midterm exam (15%): 8 January Final exam (40%): 28 February 2014 Topics and Readings The following outline gives a guide to the material that will be discussed throughout the course. (An * indicates required readings, while an is recommended.) 1. Introduction/Overview (6 Nov) * Kulthanavit, P. Lecture Notes: Monetary Economics: Introduction. * Gali Ch. 1 * Gali, J. (2009). The New Keynesian Approach to Monetary Policy Analysis: Lessons and New Directions, In Wieland, V. (Ed.), The Science and Practice of Monetary Policy Today, Springer, pp * Goodfriend, M. & King, R.G. (1997). The New Neoclassical Synthesis and the Role of Monetary Policy. NBER Macroeconomics Annual 1997,

3 - Mankiw, N. G. (1990). A Quick Refresher Course in Macroeconomics. Journal of Economics Literature 28, Gali, J. & Gertler, M. (2007). Macroeconomic Modeling for Monetary Policy Evaluation. Journal of Economic Perspective 21, A Classical Monetary Model (13 Nov) * Kulthanavit, P. Lecture Notes: Log-linearization. * Gali Ch The Basic New Keynesian Model (20 Nov) * Kulthanavit, P. Lecture Notes: The Basic New Keynesian (Monetary) Model. * Gali Ch. 3. * Gali, J. (2003). New Perspectives on Monetary Policy, Inflation, and the Business Cycle. In M. Dewatripont, L. Hansen & S. Turnovsky (Eds.), Advances in Economics and Econometrics 3, Cambridge University Press, Cambridge, MA, pp Calvo, G. (1983). Staggered Prices in a Utility Maximizing Framework. Journal Monetary Economics 12, Yun, T. (1996). Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles. Journal Monetary Economics 37, Mankiw, G. & Reis, R. (2002). Sticky Information vs. Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve. Quarterly Journal of Economics 117, Gali, J. & Gertler, M. (1999). Inflation Dynamics: A Structural Econometric Analysis. Journal Monetary Economics 44, Monetary Policy Design I: Simple Policy Rules (27 Nov) * Kulthanavit, P. Lecture Notes: Monetary Policy Design I: Simple Policy Rules. * Gali Ch. 4 * Bullard, J. & Mitra, K. (2002). Learning about Monetary Policy Rules. Journal Monetary Economics 49, * Bullard, J. & Mitra, K. (2007). Determinacy, Learnability, and Monetary Policy Inertia. Journal of Money, Credit, and Banking 39,

4 - Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press, Princeton, NJ. (Ch. 6) 5. Monetary Policy Design II: Optimal Monetary Policy (4, 11 Dec) * Gali Ch. 5 * Kulthanavit, P. Lecture Notes: Monetary Policy Design II: Optimal Monetary Policy. * Aoki, K. (2001). Optimal Monetary Policy Responses to Relative-Price Changes. Journal of Monetary Economics 48, * Clarida, R., Gali, J. & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature 37, * Mankiw, N. G. & Reis, R. (2003). What Measure of Inflation Should a Central Bank Target? Journal of the European Economic Association 1, * McCallum, B. T. & Nelson, E. (2004). Timeless Perspective vs. Discretionary Monetary Policy in Forward-Looking Models. Federal Reserve Bank of St. Louis Review 86, * Ravenna, F. & Walsh, C.E. (2006) Optimal Monetary Policy with the Cost Channel, Journal of Monetary Economics 53, Coibion, O. & Gorodnichenko, Y. (2011). Monetary Policy, Trend Inflation, and Great Moderation: An Alternative Interpretation. American Economic Review 101(1), Taylor, J. (1993). Discretion versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy 39, Woodford s Textbook Review by Walsh C. E. - Woodford, M. (2007). Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice. NBER WP # Yun, T. (2005). Optimal Monetary Policy with Relative Price Distortions. American Economic Review 95, Monetary Policy Design III: Instrument vs Targeting Rules (18 Dec) * Kulthanavit, P. Lecture Notes: Monetary Policy Design III: Instrument vs Targeting Rules * McCallum, B. T. & Nelson, E. (2005) Targeting vs. Instrument Rules for Monetary Policy. Federal Reserve Bank of St. Louis Review 87, * Svensson, L.E.O. (2003). What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules. Journal of Economic Literature 41,

5 * Svensson, L.E.O. (2005). Targeting Rules vs. Instrument Rules for Monetary Policy: What Is Wrong with McCallum and Nelson? Federal Reserve Bank of St. Louis Review 87, * Woodford, M. (2001). The Taylor Rule and Optimal Policy. American Economic Review 91, A Model with Sticky Wages (25 Dec) * Gali Ch. 6 * Erceg, C. J., Henderson, D.W. & Levin, A.T. (2000). Optimal Monetary Policy with Staggered Wage and Price Contracts. Journal Monetary Economics 46, Christiano, L. J., Eichenbaum, M. & Evans, C.L. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal Political Economy 113, Monetary Policy under the Adaptive Learning Framework (3, 8, 15 Jan) * Kulthanavit, P. Lecture Notes: Monetary Policy under Adaptive Learning. * Bullard, J. & Mitra, K. (2002). Learning about Monetary Policy Rules. Journal Monetary Economics 49, * Evans, G., & Honkapohja, S. (2001). Learning and Expectations in Macroeconomics. Princeton University Press, Princeton, NJ. (Ch. 1, 2) * Evans, G., & Honkapohja, S. (2003a). Expectations and the Stability Problem for Optimal Monetary Policies. Review of Economic Studies 70, * Evans, G., & Honkapohja, S. (2003b). Adaptive Learning and Monetary Policy Design. Journal of Money, Credit, and Banking 35, * Evans, G., & Honkapohja, S. (2009). Expectations, Learning and Monetary Policy: An overview of Recent Research. In K. Schmidt-Hebbel & C. Walsh (Eds). Monetary Policy under Uncertainty and Learning (pp.27-76). Central Bank of Chile, Santiago, Chile. * Llosa, L-G. & Tuesta, V. (2009). Learning about Monetary Policy Rules when the Cost- Channel Matters. Journal of Monetary Economics 33, * Orphanides, A. & Williams, J.C. (2006). Monetary Policy with Imperfect Knowledge. Journal of the European Economic Association 4, Bullard, J. & Mitra, K. (2007). Determinacy, Learnability, and Monetary Policy Inertia. Journal of Money, Credit, and Banking 39,

6 - Evans, G., & Honkapohja, S. (2006). Monetary Policy, Expectations and Commitment. Scandinavian Journal of Economics 108, Orphanides, A. & Williams, J.C. (2005). Imperfect Knowledge, Inflation Expectations and Monetary Policy. In B. Bernanke and Woodford, M. (Eds.) The Inflation Targeting Debate University of Chicago Press, Chicago, IL, pp Orphanides, A. & Williams, J.C. (2007a). Inflation Targeting under Imperfect Knowledge. In F. Mishkin & K. Schmidt-Hebbel (Eds.) Monetary Policy under Inflation Targeting. Central Bank of Chile, Santiago, Chile, pp Orphanides, A. & Williams, J.C. (2007b). Robust Monetary Policy with Imperfect Knowledge. Journal of Monetary Economics 54, Monetary Policy in an Open Economy (22 Jan) * Gali Ch. 7 * Campolmi, A. (2012). Which Inflation to Target? A Small Open Economy with Sticky Wages. Macroeconomic Dynamics, * Clarida, R., Gali, J. & Gertler, M. (2002). A Simple Framework for International Monetary Policy Analysis. Journal of Monetary Economics 49, * De Paoli, B. (2009). Monetary Policy and Welfare in a Small Open Economy. Journal of International Economics 77, * Gali, J. & Monacelli, T. (2005). Monetary Policy and Exchange Rate Volatility in A Small Open Economy. Review of Economic Studies 72, * Monacelli, T. (2013). Is Monetary Policy in an Open Economy Fundamentally Different? IMF Economic Review, forthcoming. - Benigno, P. (2004). Optimal Monetary Policy in a Currency Area. Journal of International Economics 63, Benigno, G. & Benigno, P. (2003). Price Stability in Open Economies. Review of Economic Studies 70, Clarida, R., Gali, J. & Gertler, M. (2001). Optimal Monetary Policy in Open Versus Closed Economies: An Integrated Approach. American Economic Review 91, De Paoli, B. (2009). Monetary Policy under Alternative Market Structures: The Case of a Small Open Economy. Journal of Money, Credit and Banking 41,

7 - McCallum, B. T. & Nelson, E. (2000). Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices. Oxford Review of Economic Policy 16, Monacelli, T. (2004). Into the Mussa Puzzle: Monetary Policy Regimes and the Real Exchange Rate in a Small Open Economy. Journal of International Economics 62, Monetary Policy in an Open Economy with Adaptive Learning (29 Jan) * Bullard, J., Schaling, E. (2009). Monetary Policy, Determinacy, and Learnability in a Two- Block World Economy. Journal of Money, Credit and Banking 41, * Llosa, G. &Tuesta, V. (2008). Determinacy and Learnability of Monetary Policy Rules in Small open Economies. Journal of Monetary Economics 40, * Chen, Y-c. & Kulthanavit, P. (2008). Adaptive Learning and Monetary Policy in an Open Economy: Lessons from Japan. Pacific Economic Review 13, Monetary Policy in Practice (5 Feb) * Kulthanavit, P. Lecture Notes: Monetary Policy in Practice. * Clarida, R., Gali, J. & Gertler, M. (1998). Monetary Policy Rules in Practice some International Evidence, European Economic Review 42, * Clarida, R., Gali, J. & Gertler, M. (1999). Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. Quarterly Journal of Economics 115, * Orphanides, A. (2003). The Quest for Prosperity without Inflation. Journal Monetary Economics 50, * Svensson, L.E.O. (2000). Open-economy Inflation Targeting. Journal of International Economics 50, Kuttner, K. N. & Posen, A. (2004). The Difficulty of Discerning What s too Tight: Taylor Rules and Japanese Monetary Policy. North American Journal of Economics and Finance 15, McCallum, B. T. (2003). Japanese Monetary Policy: Federal Reserve Bank of Richmond Economic Quarterly 89,

8 12. Macroprudential Monetary Policy (12, 19 Feb) * Angelini, P., Neri, S. & Panetta, F. (2012). Monetary and Macroprudential Policies. ECB Working Paper Series, No * Gertler, M. & Karadi, P. (2011). A Model of Unconventional Monetary Policy. Journal of Monetary Economics 58, * Goodhart, C. (2010). The Changing Role of Central Banks. BIS Working Papers, No * Goodhart, C. (2010). The Emerging New Architecture of Financial Regulation. Bank of Thailand International Symposium Curdia, V. & Woodford, M. (2010). Conventional and Unconventional Monetary Policy. Federal Reserve Bank of St. Louis Review 92, Gerali, A., Neri, S., Sessa, L. & Signoretti, F. M. (2008). Credit and Banking in a DSGE Model. Unpublished manuscript, Bank of Italy. - Hahm, J.-H., Mishkin, F.S., Shin, H. S., & Shin, K. (2012). Macroprudential Policies in Open Emerging Economies. NBER WP # Quint, P. & Rabanal, R. Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area. IMF WP# 13/209. 8