Monetary Economics 2008

1. Course: Monetary Economics

2. Lecturer: Max Gillman

3. 2 Credits (4 ECTS)

4. Winter Semester

5. Requirements: sufficient level of knowledge in Macroeconomics

6. Course Level: MA/PhD

7. Introduction:

The course develops the field of Monetary Economics in terms of elemental theory. It

is an introduction to graduate monetary economics and goes to the frontier on a few

selected topics relating to inflation theory. Its main emphasis is the analytic

development of the main general equilibrium models that are used for monetary

economics. It used a consistent dynamic methodology throughout. This approach is

extended to cover Monetary Policy as well, although this is just an introduction to the

broad topic of central bank policy models. This course compliments the

Macroeconomic stream and is essential for the field of Monetary Economics.

8. Goals:

The object is to teach the students how to include money in the general equilibrium

analysis, show why this might be important, and to acquaint the student with many of

the central issues in the field. A focus on money within endogenous growth and

business cycles is also made, to build foundations for frontier neoclassical growth and

business cycle analysis issues with money.

9. Learning Outcome:

The object of the learning experience is that students will know how to construct and

analyze general equilibrium models with money. Emphasis is on learning the intuition

of how the inflation tax distorts the margins and affects the economy.

10. Contents:

Week 1: Elements of Monetary Economics, Policy, and Partial Equilibrium Models

of Monetary Economics. Readings: see course outline.

Week 2: General Equilibrium Models: Overlapping Generations, Money in the Utility

Function, Cash-in-Advance, Shopping Time, and Search. Readings: see course

outline.

Week 3: Banking Time Models; Money, Credit and Banking Models; Money

Demand and Velocity. Readings: see course outline.

Week 4: Endogenous Growth with Inflation Tax, Monetary Business Cycles, and

Central Bank Policy Models: endogenous Taylor Conditions. Readings: see course

outline.

11. Assessment:

Grades are given according to completed homework assignments (40%) and a final

exam (60%).

Course attendance is mandatory, and good attendance will be taken into account for

course grades on the margin. Homework will be weekly and will count for 40% of the

grade with the exam counting for 60%. Homework will be graded as satisfactory

(check), unsatisfactory (check minus), and excellent (check plus).

Detailed Syllabus

1 Elements of Monetary Economics

Fisher Equation

Quantity Theory of Money

Optimum Quantity of Money

Euler Equation of growth

2 Policy

Rules versus Discretion

Taylor Interest Rate Rule

Friedman versus Keynes_McCallum Money Supply Rules

3 Partial versus General EquilibriumMonetaryModels: a Review

3.1 Partial Equilibrium

Money Demand

Constant Interest Elasticity

Constant Semi-Interest Elasticity

Baumol-Tobin Model of Transactions Demand

Welfare Cost of Inflation

Cagan (1956), Marcet and Nicolini (2003), Mark and Sul (2003).Friedman (1956),

Cagan (1956), Baumol (1952), Tobin (1956), Friedman (1959), Marty (1967), Marty

(1999), Friedman (1969).

3.2 Overlapping Generations

Samuelson (1958), Lucas (1972), Wallace (1980), Lucas (1996).

3.3 Money in the Utility Function

Samuelson (1947), Sidrauski (1967), Eckstein and Leiderman (1992), Lucas (2000),

Walsh (2003) Chapter 2.

3.4 Cash-in-Advance

Hicks (1935), Lucas (1980), Lucas (1988), Walsh (2003) Chapter 3.

Cash-Credit

Lucas and Stokey (1983), Lucas and Stokey (1987), Englund and Svensson (1988).

3.5 Shopping Time

Dotsey and Ireland (1996), Lucas (2000),Walsh (2003), Chapter 3, Ljungqvist and

Sargent (2000) 17:493-500, Gavin and Kydland (2004).

3.6 Banking Time

Hicks (1935), Baltensperger (1980), Clarke (1984).

3.7 Search Model

Waller, Christopher (2003) "Comment on "Search, Money, and Capital: A

Neoclassical Dichotomy" "Journal of Money, Credit, and Banking, Volume 35,

Number 6 (Part 2), December, pp. 1111-1117.

Aruoba, Waller and Wright (2005) Money and Capital, working paper.

4 General Equilibrium Cash-in-Advance Economies

4.1 What Exactly Does Cash-in-Advance Mean?

Lucas (1980).

4.2 Money Demand and Credit Substitutes: Continuum Model

Gillman (1993), Einarsson and Marquis (1994), Ireland (1994), King and Wolman

(2002),

Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption

tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795.

4.2.1 Welface Cost of Inflation

Gillman (1993), Gillman (1995).

4.2.2 Interest Elasticity

Gillman (1993)

4.2.3 Optimal Money Supply

?

4.2.4 Optimal Credit Policy

Gillman (2000)

5 Money and Credit in the standard Growth and Business Model

5.1 Money Demand and Velocity

Fisher (1911), Gillman, Siklos, and Silver (1997),

Jovanovic (1982), Eckstein and Leiderman (1992), Ireland (1995), Chari, Christiano,

and Eichenbaum (1995), , Bental and Eckstein (1997).

5.1.1 Developed Countries

Gillman and Otto (2002), Gillman and Kejak (2004)

5.1.2 Transition Countries

Gillman and Nakov (2004)

5.2 Tobin Effect

Sidrauski (1967), Tobin (1956), Tobin (1965), Stockman (1981), Ireland (1994),

Ahmed and Rogers (2000), Gillman and Kejak (2005b), Gillman and Nakov (2003b).

5.3 Endogenous Growth

Temple (2000), Gomme (1993), Ireland (1994), Chari, Jones, and Manuelli (1996),

Haslag (1998), Gillman and Kejak (2005a), Gillman and Kejak (2005b),

5.4 Business Cycles

Rose (1969), Cooley (1995), Cooley and Hansen (1998), Gavin and Kydland (1999),

Berger, Kyle, and Scalise (2003), Tallman and Bharucha (2000), Benk, Gillman, and

Kejak (2005b), Benk, Gillman, and Kejak (2005a).

5.5 Decentralized Intermediation

5.5.1 Money and Interest Bearing Demand Deposits

5.5.2 Financial Development

Parente, Rogerson, and Wright (1999), Parente, Rogerson, and Wright (2000), King

and Levine (1993), Levine (1997), Levine, Loayza, and Beck (2000), Boyd, Levine,

and Smith (2001), ?.

Developed vs Less Developed Countries Gillman, Harris, and Matyas (2004)

Interaction with In.ation Gillman and Harris (2004a)

Transition Countries Dawson (2003), Gillman and Harris (2004b).

5.6 Liquidity E¤ect

Alvarez, Lucas, Webber (2001), Li (2000), Einarsson and Marquis (2000).

5.7 Nominal Asset Pricing

5.7.1 Theory of the Aggregate Price Level

Gillman (2002), McCallum (2001a), Kocherlakota and Phelen (1999), Walsh

(2003)4:164-171 and 10: 474-480, Canzoneri, Cumby, and Diba (2001), Canzoneri

and Diba (2005),

Ljungqvist and Sargent (2000): 506-507, Schabert (2003b), ?, Cochrane (2003).

5.7.2 Oil, Gold and Reserves

Gillman and Nakov (2004).

6 Central Bank Policy Models

Bullard, James & Waller, Christopher J, 2004. " Central Bank Design in General

Equilibrium," Journal of Money, Credit and Banking, Ohio State University Press,

vol. 36(1), pages 95-113.

Svensson (2003), Tsiang (1969), ?, McCallum (2001b), Bernanke and Mishkin (1997),

Alvarez, Lucas, and Weber (2001), Schabert and Bruckner (2002), Schabert (2003a),

Schabert (2003b), Chowdhury and Schabert (2003), Linnemann and Schabert (2003),

Siklos and Abel (2001).

6.1 Second-Best Ramsey Theory of Optimal In.ation

Braun (1994), Lucas (2000), Ljungqvist and Sargent (2000): 510-514, Walsh (2003)4:

172-191, Burnell and Kim (2003), Alvarez, Kehoe, and Neumeyer (2002), Gillman

and Yerokhin (2003).

A Homework and Exam

A.1 Weekly Sets: 40%

A.2 Final Exam: 60%

The exam will be based on the lectures.

B Outstanding Facts and Evidence

B.1 Historical

B.1.1 Correlation/Causality: Money To Prices, To Income?

Fisher (1911, 1913), Cagan (1956), Schwartz, Secular Price Changes in Historical

Perspective (1973, JMCB),

Schwartz, Anna J. Money in Historical Perspective.Fischer, Sahay, and Végh (2002),

Fisher (1933), "Money and Business Cycles" with AJ Schwartz, 1963, REStat.

B.1.2 Commodity Bases for Fiat Money

McCallum (1987), Chapter 15 .Episodes in US Monetary History., Rolnick and

Weber (1997).

B.2 Modern Methods

B.2.1 VARS

Walsh (2003) Chapter 1, Cochrane (1998), Cochrane and Piszzesi (2002), Kraft

(2003),

Ross (1998), Bernanke, Boivin, and Eliasz (2004)

B.2.2 Unit Roots and Granger Causality

Crowder (1998), Crowder, Hoffman, and Rasche (1999), Crowder and Wohar (????),

B.2.3 Structural Breaks

Perron (1989), Culver and Papell (1997), Benati and Kapetanios (2002), Caporale and

Gil-Ilana (2003)

B.3 Banking Shocks, and Depressions

Fisher (1933), Friedman and Schwartz (1963), Ghosh and Ghosh (1999), Calomiris

and Mason (2003b), Calomiris and Mason (2003a), Kehoe and Prescott (2002),

Hopenhayn and Neumeyer (2002), Uhlig (2003), Chari, Kehoe, and McGrattan

(2003).

B.4 In.ation, Tobin and Growth E¤ects

Ahmed and Rogers (2000), Gillman and Nakov (2003b), Rapach (2003), Rapach and

Wohar (2004), Judson and Orphanides (1996), Ghosh and Phillips (1998), Temple

(2000),

Gylfason and Herbertsson (2001), Barro (2001), Khan and Senhadji (2001) and

Gillman,

Harris, and Matyas (2004), Gillman and Nakov (2004), Gillman and Wallace (2003).

B.5 Money and Business Cycles, In.ation and Unemployment

Haldane and Quah (1999), Ireland (1999), Romer (2000), Ball and Mankiw (2002),

Shadman-Mehta (2001), Ljungqvist and Sargent (2002), Cooley and Hansen (1989,

1995, 1998).

B.6 Money and Nominal Commodity Prices

Hamilton (1983), Perron (1989), Hooker (1999), Hooker (2002), Jones, Leiby, and

Paik (2002), Gillman and Nakov (2003a)

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