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Economics 235B
Instructor:
Monetary Theory
Spring 2002
Professor Oscar Jorda
1150 Social Sciences and Humanities Bldg.
Phone: 752 7021
e-mail: [email protected]
CLASS URL:
http://www.econ.ucdavis.edu/faculty/jorda/class/235b/235b.html
Class Meets:
T-R, 9:00 – 10:20. Room: WELLMAN 209
Office Hours:
Mondays, Tuesdays 10:30-12:00, or by appointment
Course Goals: This course surveys several topics on monetary theory with a strong
applied emphasis. Ultimately, the ideal goal is to motivate your interest in these topics
and get you started in your dissertation. The syllabus includes many papers for each
topic. You are not expected to read all of them. Rather, I hope this syllabus will serve as a
useful bibliographical reference so that you may concentrate on topics that interest you.
Most of the papers will be on reserve. Some will be available via the internet. A number
of books are available from the library.
Textbook: Carl Walsh's book, Monetary Theory and Policy (MTP hereafter), will serve
as a quasi-text for the course. Asterisks (*) indicate strongly suggested readings.
Participation and Grading: Your grade in the course will consist of the following, quasinon-negotiable, elements:
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Problem Sets
In-class presentations, discussions, and overall participation
Regular attendance to the Macro/International Brownbag series
Regular attendance to the Macro/International Seminar series
One term paper. In the past, a polished version of the term paper has constituted
the first chapter of the dissertation for some students. This will not be true for all
of you but if you are thinking of writing a dissertation in monetary economics,
this may be a good opportunity to get your thesis jump-started.
General Comments: you should select a topic that you find interesting, early in
the quarter – there is simply not enough time to procrastinate. Naturally, it is hard
to come up with original research in one quarter (but not impossible). Begin by
concentrating on a few papers and think in terms of replicating some of the
analysis with different data or replicating the analysis in a different context (crosspollination is usually a fruitful strategy). Do not set your goals to high. You only
have one quarter so think about how hard it is to get the data, write the necessary
code, write the paper, and so on. Be realistic.
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Midterm: half-way through the course you will turn in a 10 page paper which will
include a literature review and the skeleton of the term paper that you want to
write. This will give me the opportunity to give you feedback and to try to guide
your research.
Course Outline:
1. REVIEW OF VECTOR TIME SERIES ECONOMETRICS
I. (*) MPT Chapter 1
II. (*) Review of Time Series (download from my web-site)
III. (*) Issues in Dynamic Modeling (download from my web-site)
References
Favero, Carlo A. (2001) Applied Macroeconometrics. Oxford University Press.
Hamilton, James D. (1994) Time Series Analysis. Princeton University Press. Chapters: 10,
11, 18, 19, 20.
Pesaran, M. Hashem and Michael R. Wickens (1995) Handbook of Applied Econometrics,
Volume 1: Macroeconomics. Blackwell Publishers.
2. EMPIRICAL MEASURES OF MONETARY POLICY
I. THE LUCAS CRITIQUE AND VAR MEASURES OF MONETARY POLICY
(*) Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans, (2000)
“Monetary Policy Shocks: What Have We Learned and To What End?” in
Handbook of Macroeconomics, Vol. 1A. John B. Taylor and Michael Woodford,
(eds). Elsevier.
(*) Cochrane, John H. (1994) “Shocks,” Carnegie-Rochester Conference Series
on Public Policy, 41, 295-364.
(*) Lucas, Robert E. Jr. (1976), “Econometric Policy Evaluation: A Critique,”
Journal of Monetary Economics, Supplementary Series 1976 1(7), 62.
(*) Rudebusch, Glenn D. (1998) “Do Measures of Monetary Policy in a VAR
Make Sense?” International Economic Review, 39(4), 907-31.
(*) Sims, Christopher A. (1998), “Do Measures of Monetary Policy in a VAR
Make Sense?, A Reply” International Economic Review, 39(4), 943-48.
II. MEASURING SYSTEMATIC MONETARY POLICY
(*) Amato, Jeffery D. and Thomas Laubach (2002) “Rule-of-Thumb Behavior
and Monetary Policy,” available at www.ssrn.com
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(*) Bernanke, Ben S., Mark Gertler and Mark Watson (1997) “Systematic
Monetary Policy and the Effects of Oil Price Shocks,” Brookings Papers on
Economic Activity, 1, 91-157.
(*) Cochrane, John H. (1998) “What Do the VARs Mean? Measuring the Output
Effects of Monetary Policy,” Journal of Monetary Economics, 41(7), 277-300.
(*) Hoover, Kevin D. and Oscar Jordá (2001) “Measuring Systematic Monetary
Policy,” Review, Federal Reserve Bank of St. Louis, July/August, 83(4), 113-138.
(*) Ramey, Valerie A. (2001) “Commentary: Measuring Systematic Monetary
Policy,” Review, Federal Reserve Bank of St. Louis, July/August, 84(4), 139144.
(*) Sims, Christopher A. (1998) “The Role of Interest Rate Policy in the
Generation and Propagation of Business Cycles: What Has Changed Since the
‘30s?” in Jeffrey C. Fuhrer and Scott Schuh, editors, Beyond Shocks: What
Causes Business Cycles. Federal Reserve Bank of Boston Conference Series, no.
42, 121-160.
References
Barro, Robert J. (1977) “Unanticipated Money Growth and Unemployment in the United
States,” American Economic Review, 67(2) 101-115.
Barro, Robert J. (1978), “Unanticipated Money, Output and the Price Level in the United
States,” Journal of Political Economy, 86, 549-580.
Boivin, Jean and Marc Giannoni (2002) “Has Monetary Policy Become Less Powerful?”
available at: www.ssrn.com
Cooley, Thomas F. and Stephen F. LeRoy (1985) “Atheoretical Macroeconometrics: A
Critique,” Journal of Monetary Economics, 16(3), 283-308.
Friedman, Milton and Anna J. Schwartz (1963) A Monetary History of the United States,
1867-1960. Princeton University Press.
Leeper, Eric M. (1997) “Narrative and VAR approaches to Monetary Policy: Common
Identification Problems,” Journal of Monetary Economics, 641-657.
Lucas, Robert E. Jr. (1972) “Expectations and the Neutrality of Money,” Journal of
Economic Theory, 4(7), 103-124.
Lucas, Robert E. Jr. (1976) “Can Econometric Policy Evaluations be Salvaged? – Reply,”
Journal of Monetary Economics, Supplementary series 1976, 1(7), 62.
McCallum, Bennett T. (1999) “Analysis of the Monetary Transmission Mechanism:
Methodological Issues,” NBER working paper 7395.
Romer, David and Christina Romer (1989) “Does Monetary Policy Matter? A New Test
in the Spirit of Friedman and Scawartz,” NBER Macro Annual 1989.
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Sims, Christopher A. (1980) “Macroeconomics and Reality,” Econometrica, 48(6), 1-48.
Sims, Christopher A. (1982) “Policy Analysis with Econometric Models,” Brookings
Papers on Economic Activity, 0(6), 107-152.
Sims, Christopher A. (1986) “Are Forecasting Models Usable for Policy Analysis?”
Federal Reserve Bank of Minneapolis Quarterly Review, 10(6), 2-16.
3. THE CREDIT CHANNEL OF MONETARY TRANSMISSION
(*) MPT Chapter 7.
I. THEORY: CREDIT AND CREDIT RATIONING
(*) Bernanke, Ben S. and Alan S. Blinder (1988) “Credit, Money and Aggregate
Demand,” American Economic Review, Papers and Proceedings, 78, 435-439.
(*) Blanchard, Olivier and Stanley Fischer (1989), Lectures on Macroeconomics,
MIT Press, 478-489.
(*) Stiglitz, Joseph and Andrew Weiss (1981) “Credit Rationing in Markets with
Imperfect Information,” American Economic Review, 71; 393-410.
References
Bernanke, Ben S. and Mark Gertler (1989) “Agency Costs, Net Worth, and
Business Fluctuations,” American Economic Review, 79, 14-31.
Bernanke, Ben S., Mark Gertler and Simon Gilchrist (1998) “The Financial
Accelerator in a Quantitative Business Cycle Framework,” NBER working paper
6455.
Freixas, Xavier and Jean-Charles Rochet (1997) Microeconomics of Banking,
MIT Press.
Jaffee, D. M. and T. Russell (1976) “Imperfect Information, Uncertainty and
Credit Rationing,” Quarterly Journal of Economics, 651-666.
Kiyotaki, N. and J. Moore (1997) “Credit Cycles,” Journal of Political Economy,
105, no. 2, 211-248.
II. EMPIRICAL TESTS OF THE CREDIT CHANNEL
(*) Bernanke, Ben S., Mark Gertler and Simon Gilchrist (1996) “The Financial
Accelerator and the Flight to Quality,” Review of Economics and Statistics,
78(1); 1-15.
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(*) Christiano, Lawrence J. and Martin Eichenbaum and Charles L. Evans (1996)
“The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds,”
Review of Economics and Statistics, 78, 16-34.
(*) Kashyap, Anil, Jeremy Stein and David Wilcox (1993) “Monetary Policy and
Credit Conditions: Evidence from the Composition of External Finance,”
American Economic Review, 83, 78-98.
References
Gertler, Mark and Simon Gilchrist (1994) “Monetary Policy, Business Cycles
and the Behavior of Small Manufacturing Firms,” Quarterly Journal of
Economics,109(2), 309-346.
Hubbard, Glenn R. (1994) “Is There a Credit Channel for Monetary Policy?”
NBER, working paper 4977.
King, Stephen (1986) “Monetary Transmission: Through Bank Loans or Bank
Liabilities,” Journal of Money, Credit and Banking, 290-303.
Oliner, Stephen and Glenn D. Rudebusch (1995) “Is There a Bank Lending
Channel for Monetary Policy?” Federal Reserve Bank of San Francisco, working
paper 2.
Oliner, Stephen and Glenn D. Rudebusch (1996) “Is There a Broad Credit
Channel for Monetary Policy?” Federal Reserve Bank of San Francisco,
Economic Review, 0(1), 4-13.
Ramey, Valerie A. (1993) “How Important is the Credit Channel in the
Transmission of Monetary Policy?” Carnegie-Rochester Conference Series on
Public Policy, 39(0), 1-45.
Romer, Christina and David Romer (1990) “New Evidence on the Monetary
Transmission Mechanism,” Brookings Papers on Economic Activity:1, 149-213.
III. CREDIT CHANNEL: TOPICS
(*) Barth, Marvin J. and Valerie A. Ramey (2000) “The Cost Channel of
Monetary Transmission,” U. C. S. D., manuscript.
(*) Gertler, Mark, Simon Gilchrist and Fabio M. Natalucci, (2001) “External
Constraints on Monetary Policy and The Financial Accelerator,” NYU,
manuscript.
(*) King, Sharmila (2001) “A Credit Channel in Europe: Evidence from Banks
Balance Sheets,” U. C. Davis, manuscript.
4. MONEY, INFLATION AND OUTPUT IN THE SHORT-RUN
(*) MTP, Chapter 5.
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I. INFLATION DYNAMICS
(*) Fuhrer, Jeffrey and G. Moore (1995a) “Inflation Persistence” Quarterly Journal
of Economics, 127-159.
(*) Fuhrer, Jeffrey and G. Moore (1995b) “Monetary Policy Trade-offs and the
Correlation between Nominal Interest Rates and Real Output,” American Economic
Review, 219-239.
(*) McCallum, Bennett T. (1994) “A Semi-Classical Model of Price Level
Adjustment,” Carnegie Rochester Conference Series on Public Policy, 41, 251284.
References
Rotemberg, Julio J. (1987) “New Keynesian Microfoundations,” in S. Fischer (ed.)
NBER Macroeconomics Annual, 1987, 69-104. MIT Press.
Taylor, John B. (1979) “ Staggered Wage Setting in a Macro Model” American
Economic Review, 69(2), 108-113.
Taylor, John B. (1980) “Aggregate Dynamics and Staggered Contracts,” Journal of
Political Economy. 88(1), 1-24.
II. IMPLEMENTING MONETARY POLICY: THE LIQUIDITY EFFECT AND THE
ANNOUNCEMENT EFFECT
(*) Bernanke, Ben S. and Ilian Mihov (1998) “The Liquidity Effect and Long-Run
Neutrality,” Carnegie-Rochester Conference Series on Public Policy, 49(0), 149194.
(*) Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans (1997)
“Sticky Price and Limited Participation Models of Money: A Comparison,”
European Economic Review, 41(6), 1201-1249.
(*) Demiralp, Selva and Oscar Jordá, (2000) “The Pavlovian Response of Term
Rates to Fed Announcements,” U.C. Davis, working paper 99-06R
(*) Strongin, Stephen (1995) “The Identification of Monetary Policy Disturbances:
Explaining the Liquidity Puzzle,” Journal of Monetary Economics, 35, 463-497.
(*) Taylor, John B. (2000) “Expectations, Open Market Operations, and Changes in
the Federal Funds Rate,” Stanford University, unpublished manuscript.
References
Demiralp, Selva and Oscar Jordá (2001) “The Announcement Effect: Evidence
from Open Market Desk Data,” U.C. Davis, manuscript.
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Hamilton, James D. (1996) “The Daily Market for Federal Funds,” Journal of
Political Economy, 104(1), 26-56.
Hamilton, James D. (1997) “Measuring the Liquidity Effect,” American Economic
Review, 87(1), 80-97.
Meulendyke, Anne M. (1998) U.S. Monetary Policy and Financial Markets,
Federal Reserve Bank of New York.
Pagan, Adrian R. And J. C. Robertson (1995) “Resolving the Liquidity Effect,”
Review, Federal Reserve Bank of St. Louis, May/June, 33-61.
5. THE TERM STRUCTURE OF INTEREST RATES
(*) MTP, Chapter 10.
(*) Hamilton, James D. and Oscar Jordá (2000), “A Model for the Federal Funds Rate
Target,” NBER, working paper 7847.
(*) McCallum, Bennett T. (1994) “Monetary Policy and the Term Structure of Interest
Rates,” NBER, working paper 4938.
(*) Rudebusch, Glenn D. (1995) “Federal Reserve Interest Rate Targeting, Rational
Expectations and the Term Structure,” Journal of Monetary Economics, 35, 245-274.
Erratum: December 1995.
References
Balduzzi, Pierluigi, Giuseppe Bertola, Silverio Foresi, and Leora Klapper (1998) “Interest
Rate Targeting and the Dynamics of Short-Term Rates, Journal of Money, Credit and
Banking, 30(1), 26-50.
Campbell, John Y. and Robert J. Shiller (1991) “Yield Spreads and Interest Rate Movements:
A Bird’s Eye View,” Review of Economic Studies, 58; 495-514.
Cook, Timothy and Thomas Hahn (1989) “The Effect of Changes in the Federal Funds Rate
Target on Market Interest Rates in the ‘70s,” Journal of Monetary Economics, 24, 331-51
Kuttner, Kenneth N. (2001) “Monetary Policy Surprises and Interest Rates: Evidence from
the Fed Funds Futures Market,” Journal of Monetary Economics, forthcoming.
Ingersoll, Jonathan E. (1987) Theory of Financial Decision Making, Rowman & Littlefield
Publishers.
6. MONETARY POLICY: POLICY RULES, OPTIMAL POLICY AND MODELS FOR POLICY
ANALYSIS
(*) MTP, Chapter 10
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(*) McCallum, Bennett T. and Edward Nelson (1999) “An Optimizing IS-LM Specification
for Monetary Policy and Business Cycle Analysis,” Journal of Money, Credit and Banking,
31(3), 296-316
(*) Rudebusch, Glenn D. and Lars E. O Svensson (1999) “Policy Rules for Inflation
Targeting” in Monetary Policy Rules, John B. Taylor (ed.). NBER, University of Chicago
Press.
(*) Salyer, Kevin D. and Kristin Van Gaasbeck (2001) “A New Application of Taylor Rules:
Model Evaluation,” U.C. Davis, working paper 00-13.
References
Erceg, Christopher J., Dale Henderson, and Andrew T. Levin (2000) “Optimal Monetary
Policy with Staggered Wage and Price Contracts,” Journal of Monetary Economics, 46(2),
281-313
Levin, Andrew T., Volker Wieland and John C. Williams (1998) “Robustness of Simple
Monetary Policy Rules Under Model Uncertainty,” Board of Governors, Finance and
Economics Discussion Paper 98/45.
Taylor, John B., ed. (1999) Monetary Policy Rules, NBER: University of Chicago Press.
Woodford, Michael (1999) “Optimal Monetary Policy Inertia,” NBER, working paper 7261
7. MONETARY POLICY AND ASSET PRICES
(*) Bernanke, Ben and Mark Gertler (1999) “Monetary Policy and Asset Price Volatility,”
Economic Review, Federal Reserve Bank of Kansas City, 4th Quarter, 17-51.
(*) Cogley, Timothy (1999) “Should the Fed Take Deliberate Steps to Deflate Asset Price
Bubbles?” Economic Review, Federal Reserve Bank of San Francisco, 1, 42-52.
(*) Rigobon, Roberto and Brian Sack (2002) “The Impact of Monetary Policy on Asset
Prices,” NBER working paper 8794.
(*) Santos, Tano and Pietro Veronesi (2002) “Labor Income and Predictable Stock Returns,”
NBER working paper 8309
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