1 Course Objectives and Textbooks

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1 UNIVERSITY OF WATERLOO Department of Economics Economics Winter 2009 Topics in Money and Finance Professor: Jean-Paul Lam Office: Hagey Hall 220 Location: CPH 3604 Telephone: (519) x33091 Time: 11:30-12:50 TuTh jplam@uwaterloo.ca Office Hours: Wed 1:00-4:00 or by appointment 1 Course Objectives and Textbooks This course will cover various topics in monetary economics, monetary policy and central banking. Although this course will contain a mix of old and new theories, we will mostly concentrate on the recent developments on monetary policy and theory. This course will give you an overview of the main issues in monetary theory and policy and possibly ideas for thesis or dissertation research. Knowledge of Matlab is important for this course. If you are not familiar with Matlab, I will provide you with a start-up guide. I will make copies of my lecture notes available on UW-ACE. They are mostly based on the articles and book chapters included in the reading list. In addition to the lecture notes and book chapters, there are a number of required readings for this class. Items with two stars denote required readings, one star are papers that you can read if time permits and no star denotes suggested readings for further studies, especially if you want to deepen your understanding of a particular topic. Most of the papers can be downloaded from the course web page or are either available online through JSTOR, from the author s or journal s website and from the Library. Please let me know if you cannot find a particular paper. There are two textbooks which I will use for this course. However, I recommend buying only the first book on the list. 1. Walsh, Carl E., Monetary Theory and Policy, Cambridge: MIT Press, [CW] 2. Woodford, Michael., Interest & Prices Princeton University Press, (MW) Other useful references include 3. Taylor, John B. (ed.), 1999: Monetary Policy Rules, Chicago: University of Chicago Press. [TAY] 4. Blinder, Alan S., Central Bank in Theory and Practice, The MIT Press, [B] 5. Bernanke, Ben S., Thomas Laubach, Frederic S. Mishkin, and Adam S. Posen, 1999: Inflation Targeting: Lessons from the International Experience, Princeton: Princeton University Press. [BLMP] 6. McCallum, Bennet., Monetary Economics: Theory and Policy Macmillan Publishing McC] 7. Ljungqvist, Lars., and Thomas Sargent, Recursive Macroeconomic Theory 2nd edition, The MIT Press, (LS) 8. Sargent, Thomas., Dynamic Macroeconomic Theory, Harvard University Press, (TS) 1

2 9. Blanchard, Olivier Jean., and Stanley Fisher, Lectures on Macroeconomics Cambridge, Mass.: MIT Press, (BF) 10. Judd, Ken., Numerical Methods in Economics MIT Press, (KJ) 11. Useful websites: Bank of Canada, Federal Reserve System, Bank of England, especially the working papers, the NBER and CEPR. 2 Evaluation Final exam (3 Hours) at the end of the term (worth 50 percent). One midterm worth 20 percent of your marks. The midterm is scheduled on Thursday March assignments worth 30 percent of your total marks 3 Lecture Topics and References 3.1 Empirical Evidence on Money and Output and VAR ( ) CW, Chapter 1 ( ) Symposium on the Monetary Transmission Mechanism (particularly papers by Mishkin, Bernanke and Gertler and Taylor) Journal of Economic Perspectives, 1995, vol. 9, issue 4: 3 10 ( ) Blanchard, Olivier Jean. Why Does Money Affect Output? A Survey? in Handbook of Monetary Economics Vol 2 Friedman, B.M and Frank H. Hann. (eds.), North-Holland. ( ) Cochrane, John H What Do the VARs Mean? Measuring the Output Effects of Monetary Policy, Journal of Monetary Economics 41: ( ) Christiano, Lawrence J., Martin Eichenbaum, and Charles Evans Monetary Policy Shocks: What Have We Learned and To What End? NBER Working Paper No ( ) Friedman, Milton The Role of Monetary Policy, American Economic Review 58: ( ) Lucas, Robert E Nobel Lecture: Monetary Neutrality, Journal of Political Economy, Vol. 104, no 4. Bernanke, Ben S., and Alan S. Blinder The Federal Funds Rate and the Channels of Monetary Transmission, American Economic Review, vol. 82, Bernanke, Ben S., and Ilian Mihov Measuring Monetary Policy, NBER WP Christiano, Lawrence J., Martin Eichenbaum, and Charles Evans The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds, Review of Economics and Statistics 78: Faust, Jon The Robustness of Identified VAR Conclusions About Money, Carnegie- Rochester Conference Series on Public Policy 49: Ireland, Peter N Moneys Role in the Monetary Business Cycle, NBER Working Paper No Leeper, Eric M., Christopher A. Sims, and Tao Zha What Does Monetary Policy Do? Brookings Papers on Economic Activity 2:

3 Rudebusch, Glenn What Are the Lags in Monetary Policy? FRBSF Economic Letter Rudebusch, Glenn Do Measures of Monetary Policy in a VAR Make Sense International Economic Review 39: General Equilibrium Models of Money Money in the Utility Function ( ) CW, Chapter 2 ( ) Cooley, Thomas F., and Gary D. Hansen Money and the Business Cycle, in Cooley, Thomas F. (ed.), Frontiers of Business Cycle Research, Princeton: Princeton University Press. Brock, William A Money and Growth: The Case of Long-Run Perfect Foresight, International Economic Review 15: Friedman, Milton The Optimum Quantity of Money, in Friedman, Milton (ed.), The Optimum Quantity of Money and Other Essays, Chicago: Aldine Cash-in Advance Models ( ) CW, Chapter 3, section 3.3 and 3.6 ( ) Cooley, Thomas., and Gary Hansen The Inflation Tax in a Real Business Cycle Model, American Economic Review 79: ( ) Cogley, Timothy What Is the Optimal Rate of Inflation? Federal Reserve Bank of San Francisco Economic Letter No Dotsey, Michael, and Peter N. Ireland The Welfare Cost of Inflation in General Equilibrium, Journal of Monetary Economics 37: Lucas, Robert E., Jr., and Nancy L. Stokey Money and Interest in a Cash-in-advance Economy, Econometrica 55: Svensson, Lars E. O Money and Asset Prices in a Cash-in-Advance Economy, Journal of Political Economy 93: Liquidity Effects and Limited Participation Models ( ) CW Chapter 5, section 5.2 ( ) Christiano, Lawrence, J. and Martin Eichenbaum Liquidity Effects, Monetary Policy and the Business Cycle. Journal of Money, Credit and Banking 27, ( ) Christiano, Lawrence J., Martin Eichenbaum, and Charles Evans Sticky Price and Limited Participation Models of Money: A Comparison, European Economic Review 41: ( ) Fuerst, Timothy Liquidity, Loanable Funds, and Real Activity. Journal of Monetary Economics: 29, Christiano, Lawrence, J Modelling the Liquidity Effects of a Money Shock. Federal Reserve Bank of Minneapolis Quarterly Review Winter,

4 Keen, Benjamin D. 2001, In Search of the Liquidity Effect in a Modern Monetary Model, unpublished manuscript, University of Virginia. King, Robert G., and Mark W. Watson Money, Prices, Interest Rates, and the Business Cycle, Review of Economics and Statistics 78: New Keynesian Models and Optimal Monetary Policy ( ) CW chapter 5 ( ) Clarida, R., J. Galí and M. Gertler The Science of Monetary-Policy: A New Keynesian Perspective. Journal of Economic Literature. ( ) Kydland, F.E., and E.C. Prescott Rules Rather Than Discretion: The Inconsistency of Optimal Plans. Journal of Political Economy 85(3): ( ) MW chapter 3 ( ) Barro, R.J., and D.B. Gordon. 1983b. Rules, Discretion, and Reputation in a Model of Monetary Policy. Journal of Monetary Economics 12(1): ( ) Barro, R.J., and D.B. Gordon. 1983a. A Positive Theory of Monetary Policy in a Natural Rate Model. Journal of Political Economy 91(4): ( ) Dennis, R and U. Söderstöm How Important is Precommitment for Monetary Policy? Sveriges Riksbank Working Paper No Walsh, C.E Optimal Contracts for Central Bankers. American Economic Review 85: ( ) Jensen, Henrik Targeting Nominal Income Growth or Inflation? American Economic Review 4: ( ) Goodfriend, M., and R.G. King The New Neoclassical Synthesis and the Role of Monetary Policy. NBER Macroeconomics Annual ( ) McCallum, Bennet Recent Developments in Monetary Policy Analysis: The Roles of Theory and Evidence Journal of Economic Methodology 6: ( ) McCallum, Bennet., and Edward Nelson An Optimizing IS-LM Specification for Monetary Policy and Business Cycles Analysis, Journal of Money, Credit, and Banking 31: ( ) Meyer, Laurence H. Meyer Rules and Discretion. ( gov/boarddocs/speeches/2002/ /default.htm) ( ) Rogoff, K.S The Optimal Degree of Commitment to an Intermediate Monetary Target. Quarterly Journal of Economics 100: ( ) Walsh, C.E Speed Limit Policies: The Output Gap and Optimal Monetary Policy. American Economic Review 1: ( ) Walsh, C.E Optimal Contracts for Central Bankers. American Economic Review 85: Monetary Policy Rules ( ) CW Chapter 10. ( ) MW Chapter 2, p ( ) Poole, W., Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model, Quarterly Journal of Economics, 84:

5 ( ) Taylor, John B. (ed.), 1999: Monetary Policy Rules, Chicago: University of Chicago Press. (papers by Levin, Wieland and Williams, Batini and Haldane and Woodford, Rudebusch and Svensson) ( ) Côté, Denise., John Kuszczak, Jean-Paul Lam, Ying Liu and Pierre St-Amant The Performance and Robustness of Simple Monetary Policy Rules in Models of the Canadian Economy, Canadian Journal of Economics Vol 3, Issue 4, ( ) Clarida, Richard, Jordi Galí, and Mark Gertler Monetary Policy Rules in Practice: Some International Evidence, European Economic Review 42: ( ) Hetzel, Robert L The Taylor Rule: Is It a Useful Guide to Understanding Monetary Policy? Federal Reserve Bank of Richmond Quarterly Review, Volume 86, No. 2. ( ) Kozicki, Sharon How Useful Are Taylor Rules for Monetary Policy? Federal Reserve Bank of Kansas City Economic Review. ( ) Levin, Andrew, John C. Williams and Volker Wieland The Performance of Forecast- Based Monetary Policy Rules Under Model Uncertainty, American Economic Review 93(3): ( ) Taylor, John. B Discretion versus Policy Rules in Practice, Carnegie Rochester Series on Public Policy, 39: Clarida, Richard, Jordi Gal, and Mark Gertler Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory, Quarterly Journal of Economics 115: Nelson, Edward UK Monetary Policy : A Guide Using Taylor Rules, Bank of England Working Paper 120. Orphanides, Athanasios Activist Stabilization Policy and Inflation: The Taylor Rule in the 1970s, Board of Governors of the Federal Reserve System. Svensson, Lars E. O What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules, Journal of Economic Literature Vol 41, Issue 2, , and NBER Working Paper No Williams, John C Simple Rules for Monetary Policy, Finance and Economics Discussion Series, Staff WP , Board of Governors of the Federal Reserve System. 3.5 The Credit Channel and The Financial Accelerator ( ) CW Chapter 7, section 7.3 ( ) Bernanke, Ben S., and Mark Gertler Inside the Black Box: The Credit Channel of Monetary Transmission, Journal of Economic Perspectives 9: and NBER Working Paper No ( ) Bernanke, Ben S., Mark Gertler, and Simon Gilchrist The Financial Accelerator in a Quantitative Business Cycle Framework, in John B. Taylor and Michael Woodford (eds.), [Handbook of Macroeconomics, Amsterdam: North-Holland and NBER Working Paper No Kiyotaki, Nobuhiro., and John Moore., Credit Cycles, Journal of Political Economy Vol 105, No 2: Bernanke, Ben S., and Mark Gertler Agency Costs, Net Worth, and Business Fluctuations, American Economic Review 79: Carlstrom, Charles T., and Timothy S. Fuerst Agency Costs, Net Worth, and Business Cycle Fluctuations: A Computable General Equilibrium Analysis, American Economic Review 87:

6 Policy on Missed Tests and Assignments: No make-up tests or assignments will be provided. Students who do not have a relevant medical certificate will receive a mark of zero on any missed test or assignment. For students who miss one or more tests and have a relevant medical certificate, or medical certificates, the weight of the missed tests will be automatically transferred to the final. Policy on Remarking of Tests: If you feel that your midterm was not marked properly, you must advise the instructor within 10 days of the test being handed back to the students in class. Note that if you want your test re-graded, I will remark the entire test (your mark may go up or down as a result of this) Note on avoidance of academic offences: All students registered in the courses of the Faculty of Arts are expected to know what constitutes an academic offence, to avoid committing academic offences, and to take responsibility for their academic actions. When the commission of an offence is established, disciplinary penalties will be imposed in accord with Policy #71 (Student Academic Discipline). For information on categories of offences and types of penalties, students are directed to consult the summary of Policy #71 which is supplied in the Undergraduate Calendar 1 If you need help in learning how to avoid offences such as plagiarism, cheating, and double submission, or if you need clarification of aspects of the discipline policy, ask your TA or course instructor for guidance. Other resources regarding the discipline policy are your academic advisor and the Undergraduate Associate Dean. Students who believe that they have been wrongfully or unjustly penalized have the right to grieve; refer to Policy #70, Student Grievance, policy70.html. Note for students with disabilities: The Office for Persons with Disabilities (OPD), located in Needles Hall, Room 1132, collaborates with all academic departments to arrange appropriate accommodations for students with disabilities without compromising the academic integrity of the curriculum. If you require academic accommodations to lessen the impact of your disability, please register with the OPD at the beginning of each academic term. 1 Section 1 on the Web at 6