Macroeconomic Policy


Second Semester 2020

Prof. Nicola Viegi


There is not a prescribed text for the course.

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

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.



Lectures and Readings


Introducing Money

Lecture 1 [pdf] Money and the Economy : the evidence




Carl Walsh -- Chapter 1

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

Romer, C.D., Romer, D.H., Goldfeld, S.M. and Friedman, B.M., 1990. "New Evidence on the Monetary Transmission Mechanism,"Brookings papers on economic activity, 1990(1), pp.149-213.

Christiano, L.J., Eichenbaum, M. and Evans, C.L., 1999. Monetary policy shocks: What have we learned and to what end?. Handbook of macroeconomics, 1, pp.65-148.

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

Nakamura E, Steinsson J. Identification in macroeconomics. Journal of Economic Perspectives. 2018 Aug;32(3):59-86.


Var Analysis: an intuitive Introduction


Problem 1


Chris Sims Dataset in excel use the dataset to replicate the results in Leeper, Eric M., Christopher A. Sims, and Tao Zha (1996): "What Does Monetary Policy Do?" After replicating the analysis with US data, try with South Africa data, collecting them from FRED (not all data will be available for South Africa, do your best).


New Keynesian Models � the basics

Lecture 2 [pdf] The Cagan Model and Basic Classical Monetary Models


Obstfeld and Rogoff Chapter 8

Walsh Chapters 2 and 3

Gali Chapter 2


Lecture 3 [pdf] Introduction to New Keynesian Models


Note: The Mathematics of New Keynesian Models




Gali: chapters 3 and 4

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


DSGE Modelling in Dynare


Reading � Dynare User Guide


Basic New-Keynesian Model in Dynare

Stability of New Keynesian Model: Note


Tutorial on Dynare


New Keynesian Models and Optimal Monetary Policy

Lecture 4 [pdf]: Optimal Monetary Policy



Gali: chapter 5

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


Lecture 4.1 [pdf] Large Scale DSGE Models for policy analysis



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 5 [pdf]


Financial Market imperfection and the Business Cycle


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 6 [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�