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Macroeconomic Policy

 

Second Semester 2019



Prof. Nicola Viegi

nicola.viegi@up.ac.za

Books

There is not a prescribed text for the course.

For the first part of Business Cycle and Business cycle theories: David Romer, Advanced Macroeconomics.

The most complete book on monetary economics presently published is Walsh, Carl. (2003) Monetary Theory and Policy. MIT Press. but the following are also highly recommended books:

Gali Jordi (2008) Monetary Policy, Inflation, and the Business Cycle Princeton University Press -- the best introduction to New Keynesian models – we will follow this book quite closely, especially chapters 2 to 5 – check material on Gali’s website

Woodford, Michael, 2003, Interest and Prices. Princeton University Press -- difficult read, very analytical – 1st chapter is required reading – again, have a look at Woodford’s website

Obstfeld, Maurice, Kenneth Rogoff, 1996, Foundations of International Macroeconomics, MIT Press -- an open economy focused presentation but probably the best macroeconomics book available at the moment. Some open economy issues will be analyzed following their presentation

Course information

Lectures – Tuesday 16.30-19.30

Visiting Hours: by appointment (just ask in class or send me an email)

 

 

Lectures and Readings

 

Introduction

Lecture 1 – Macroeconomic Cycle and Economic Policy

 

Readings

 

Business Cycle in Emerging Countries

Hodrick, R J and E C Prescott (1997), “Postwar US business cycles: An empirical investigation”, Journal of Money, Credit and Banking, 29(1): 1-16.

Hamilton, J D  Why you should never use the Hodrick-Prescott filter”, VOXEU

Aguiar, M. and Gopinath, G., 2007. Emerging Market Business Cycles: The Cycle is the Trend. Journal of political Economy, 115(1), pp.69-102.

 

History and Methodology

Lucas Jr, R.E., 1976, January. Econometric policy evaluation: A critique. In Carnegie-Rochester conference series on public policy (Vol. 1, pp. 19-46). North-Holland.

Dornbusch, R. and Edwards, S., 1990. Macroeconomic populism. Journal of Development Economics, 32(2), pp.247-277.

Taylor, J.B., 2007. ThirtyFive Years of Model Building for Monetary Policy Evaluation: Breakthroughs, Dark Ages, and a Renaissance. Journal of Money, Credit and Banking, 39, pp.193-201.

Bernanke 2004 The Great Moderation Federal Reserve

Blanchard, O., Dell’Ariccia, G. and Mauro, P., 2010. Rethinking macroeconomic policy. Journal of Money, Credit and Banking, 42, pp.199-215.

 

 

Modelling in Dynare

Lecture 2 – The Basic Real Business Cycle Model -  DSGE Modelling in Dynare

 

Reading – Dynare User Guide

 

Introducing Money

Lecture 3 [pdf] Money and the Economy : the evidence

 

Readings:

 

Carl Walsh -- Chapter 1

Sims, Christopher A. (1972): "Money, Income and Causality," American Economic Review 62: 540-552.

Romer, Christina D., and David H. Romer (1990): "New Evidence on the Monetary Transmission Mechanism,"

Cochrane, John H. (1998): "What Do the VARs Mean? Measuring the Output Effects of Monetary Policy,"

 

Var Analysis of Monetary Policy: an Introduction

 

Chris Sims Dataset in excel and here in Eviews format – the dataset is used to replicate the results in the following paper:

 

Leeper, Eric M., Christopher A. Sims, and Tao Zha (1996): "What Does Monetary Policy Do?" Brookings Papers on Economic Activity 2: 1-63

 

Modelling Money

Lecture 4 [pdf] The Cagan Model and Basic Classical Monetary Models

 

Obstfeld and Rogoff – Chapter 8

Walsh Chapters 2 and 3

Gali Chapter 2

 

South African VAR Data Here

 

Lecture 4-1 [pdf] Introduction to New Keynesian Models

 

Note: The Mathematics of New Keynesian Models

 

Readings:

 

Gali: chapters 3 and 4

Sbordone, et all - Policy Analysis Using DSGE Models: An Introduction

 

Basic New-Keynesian Model in Dynare

Stability of New Keynesian Model: Note

 

Tutorial on Dynare

 

New Keynesian Models and Optimal Monetary Policy

Lecture 5 [pdf]: Optimal Monetary Policy

 

Readings:

Gali: chapter 5

Clarida, R., J. Galí, and M. Gertler (1999), "The Science of Monetary Policy: A New Keynesian Perspective"

 

Lecture 5-2 [pdf] Large Scale DSGE Models for policy analysis

 

Readings

Smets and Wouters (2003) An estimated DSGE model of the euro area - Journal of the European Economic Association –

Papers and Dynare Programs

Professor Harald Uhlig provides an implementation of the Smets and Wouters model which makes easy experimenting with the calibration of the model Download here. This exe-file, once executed, will install a program on your computer which allows you to get impulse responses to various shocks in the Smets and Wouters (JEEA, 2003) model.

A Methodological Discussion: Now that you have some idea of the working of this class of models frequently used in policy analysis, it is worth thinking a bit methodologically. Here are 4 contributions to start with.

Woodford M (2009) ‘Convergence in Macroeconomics: Element of the New Synthesis’ An overview of the state of Macro and the elements of convergence and disagreements.

V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2009. New Keynesian Models: Not Yet Useful for Policy AnalysisA critical assessment of the Smets and Wouters model from the point of view of the RBC tradition

Wren-Lewis, S (2007) ‘Are There Dangers in the Microfoundations Consensus? A critical view of the New Synthesis model from the point of view of the policy making process.

Credit, Asset Prices and Monetary Policy

Lecture 6 [pdf]

Financial Market imperfection and the Business Cycle

Readings:

Blanchard, O. J., and S. Fischer. Lectures on Macroeconomics. Cambridge , MA : MIT Press, 1989, pp. 478-488.

Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American economic review, 71(3), 393-410.

Kiyotaki, N., and J. Moore. (1997) "Credit Cycles." Journal of Political Economy 105 : 211-248.

Bernanke, B., and M. Gertler (1989). "Agency Costs, Net Worth, and Business Fluctuations."

Bernanke, B M. Gertler and S Gilchrist (2000) "The Financial Accelerator in a Quantitative Business Cycle Framework", in Taylor and Woodford, Handbook of Macroeconomics, North Holland

 

Dynare Program for Bernenke and Gertler Model

Implementation of Kiyotaki and Moore Model in Dynare

 

 

Fiscal Policy

Lecture 7 [pdf] – Fiscal Policy in Modern Macroeconomics

Sargent and Wallace (1981) “Unpleasant Monetarist Arithmetic” 

Woodford, Michael (1995) "Fiscal Requirements for Price Stability"

Leeper, Eric M. (1991) "Equilibria Under 'Active' and 'Passive' Monetary and Fiscal Policies"

Leeper, Eric M (2010) “Monetary Science, Fiscal Alchemy”