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Economics 235B
Instructor:
Monetary Theory
Spring 2003
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: OLSON 151
Office Hours:
Mondays, 3:00 – 4:00, Fridays, 11:00 – 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.
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.
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
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write. This will give me the opportunity to give you feedback and to try to guide
your research.
In class presentation: I will schedule time during the last week of classes so that
you can present your own paper and receive comments from your peers.
General Paper Topics: here is a collection of ideas you may want to pursue for
your paper. However, do not feel you have to pursue these if you have other
preferences:
- Measuring systematic monetary policy effects: this would be working on
variations on the papers Kevin Hoover and I have written by trying alternative
specifications of by analyzing other countries. Other variations may include
theoretical justifications of the empirical framework that we propose,
counterfactual simulations of historical episodes, etc.
- Demand Shocks versus Supply Shocks in empirical, RBC-based models.
Recent work by Galí (1999, AER), Barth and Ramey (NBER Macro Annual,
2001) and Francis and Ramey (NBER, 2002) has opened new ground in this
area.
- Inflation and Output volatility effects on monetary policy. Kevin Salyer and I
have a paper that investigates second order moment effects in monetary policy
on the term structure by introducing a new empirical approach – the GARCHSVAR model. However, the model is well designed for going the other way,
especially since output and inflation volatility are usually counted as primary
objectives of the central bank. Also, signal extraction of monetary policy will
depend on the volatility of prices, for example (as in the classic Lucas island
model).
- Measuring the output gap and the Phillips curve. These magnitudes are critical
in any analysis of policy but we have limited empirical knowledge about
them. Recent work by Ball and Mankiw (2002) and Hirose and Kamada
(2003) proposes interesting approaches worth pursuing.
- Informing the public about monetary policy. Selva Demiralp and I have
worked on how news about monetary policy affect term rates. Similar
investigations can be done on the prices of other financial assets. Bernanke
and Kuttner (2003) have a recent paper along this line.
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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)
IV. (*) Univariate Filtering (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 THE EFFECTS OF MONETARY POLICY
I. MONETARY POLICY IN THE SHORT RUN
(*) MTP, Chapter 5.
(*) 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.
(*) Clarida, Richard, Jordi Galí and Mark Gertler (1999) “The Science of Monetary
Policy: A New Keynesian Perspective,” Journal of Economic Literature, 37, 16611707.
II. THE LUCAS CRITIQUE AND VAR MEASURES OF MONETARY POLICY EFFECTS
(*) 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.
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(*) Sims, Christopher A. (1998), “Do Measures of Monetary Policy in a VAR
Make Sense?, A Reply” International Economic Review, 39(4), 943-48.
III. MEASURING SYSTEMATIC MONETARY POLICY EFFECTS
(*) Amato, Jeffery D. and Thomas Laubach (2002) “Rule-of-Thumb Behavior
and Monetary Policy,” available at www.ssrn.com
(*) 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 Òscar Jordà (2001) “Measuring Systematic Monetary
Policy,” Review, Federal Reserve Bank of St. Louis, July/August, 83(4), 113-138.
(*) Hoover, Kevin D. and Òscar Jordà (2003) “Expectations, Learning, and the
Effects of Systematic Monetary Policy,” U.C. Davis, manuscript.
(*) 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), 283308.
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.
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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.
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 (1992) “The Federal Funds Rate and
the Channels of Monetary Transmission,” American Economic Review, 82(4),
901-921.
(*) Blanchard, Olivier and Stanley Fischer (1989), Lectures on Macroeconomics,
MIT Press, 478-489.
(*) Carlstrom, Charles T. and Timothy S. Fuerst (1997) “Agency Costs, Net
Worth, and Business Fluctuations: A Computable General Equilibrium
Analysis,” American Economic Review, 87(5), 893-910.
(*) Carlstron, Charles T. and Timothy S. Fuerst (2001) “Monetary Shocks,
Agency Costs, and Business Cycles,” Carnegie-Rochester Conference Series on
Public Policy, 54, 1-27.
(*) Stiglitz, Joseph and Andrew Weiss (1981) “Credit Rationing in Markets with
Imperfect Information,” American Economic Review, 71; 393-410.
References
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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,” in John B. Taylor and
Michael Woodford (eds.) Handbook of Macroeconomics, volume 1, 1341-1393.
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.
(*) 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.
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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 (2001) “The Cost Channel of
Monetary Transmission,” NBER Macro Annual.
(*) Bolton, Patrick and Xavier Freixas (2000) “Corporate Finance and the
Monetary Transmission Mechanism,” Universitat Pompeu Fabra, manuscript.
(*) Galí, Jordi (1999) “Technology, Employment, and the Business Cycle: Do
Technology Shocks Explain Aggregate Fluctuations?” American Economic
Review, 89(1), 249-271.
(*) Gertler, Mark, Simon Gilchrist and Fabio M. Natalucci, (2001) “External
Constraints on Monetary Policy and The Financial Accelerator,” NYU,
manuscript.
(*) Francis, Neville and Valerie A. Ramey (2002) “Is the Technology-Driven
Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations
Revisited,” UCSD Working paper 2002-03.
(*) King, Sharmila (2001) “A Credit Channel in Europe: Evidence from Banks
Balance Sheets,” U. C. Davis, manuscript.
4. THE TRANSMISSION OF 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), 149-194.
(*) 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 Òscar Jordà (2002) “The Announcement Effect: Evidence from
Open Market Desk Data,” Economic Policy Review, Federal Reserve Bank of New York,
8(1), 29-48.
(*) Strongin, Stephen (1995) “The Identification of Monetary Policy Disturbances:
Explaining the Liquidity Puzzle,” Journal of Monetary Economics, 35, 463-497.
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(*) Taylor, John B. (2001) “Expectations, Open Market Operations, and Changes in the
Federal Funds Rate,” Review, Federal Reserve Bank of St. Louis 83(4), 33-49.
References
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.
(*) Demiralp, Selva and Òscar Jordà, (2003) “The Response of Term Rates to Fed
Announcements,” Journal of Money, Credit and Banking, forthcoming.
(*) Hamilton, James D. and Òscar Jordà (2002), “A Model for the Federal Funds Rate
Target,” Journal of Political Economy, 5(110), 1135-1167.
(*) 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
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Kuttner, Kenneth N. (2001) “Monetary Policy Surprises and Interest Rates: Evidence
from the Fed Funds Futures Market,” Journal of Monetary Economics, June.
Ingersoll, Jonathan E. (1987) Theory of Financial Decision Making, Rowman &
Littlefield Publishers.
6. MONETARY POLICY: POLICY RULES, OPTIMAL POLICY AND MODELS FOR POLICY
ANALYSIS
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.
(*) Galí, Jordi and Mark Gertler (1999) “Inflation Dynamics: A Structural
Econometric Analysis,” Journal of Monetary Economics, 44(2), 195-222.
(*) 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. EVALUATING MONETARY POLICY RULES
(*) MTP, Chapter 10
(*) Levin, Andrew and John C. Williams (2002) “Robust Monetary Policy with
Competing Reference Models,” Carnegie-Rochester Conference Series on Public
Policy, forthcoming.
(*)McCallum, Bennett T. and Edward Nelson (1999) “Performance of Operational
Policy Rules in an Estimated Semiclassical Structural Model,” in Monetary Policy
Rules, John Taylor (ed.), NBER, University of Chicago Press.
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(*) 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) “Show me the Money or
Taking the Monetary Implications of a Monetary Model Seriously,” U.C. Davis,
manuscript.
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.
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
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.
(*) Bernanke, Ben and Kenneth Kuttner (2003) “What Explains the Stock Market’s Reaction
to Federal Reserve Policy?” prepared for the conference Finance and Macroeconomics,
Federal Reserve Bank of San Francisco and SIEPR, 2003.
(*) 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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