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Instructors: Dr. Thanh Son Pham
Event type:
Interactive class
Displayed in timetable as:
Hours per week:
3
Credits:
6,0
Language of instruction:
English
Min. | Max. participants:
- | 45
Comments/contents:
This course considers the general optimal policy problem where the policymaker has a number of instruments and sets out to maximize a general discounted welfare criterion subject to the constraints of a New Keynesian model. We will set out a simple core New Keynesian (NK) model, which allows us to examine the links between money and the main economic variables such as output, inflation and unemployment. This allows addressing the core issue in monetary economics, which is the role of monetary policy. After the study of transmission monetary channels, we address the most pertinent problem, which is the optimal monetary policy design under the zero-lower bound or uncertainty. The module will be organized in the following structure:
• Chapter 1: The classical monetary models. We first examines the money neutrality property in RBC models. Classical models examined during the lecture are: (1) money in the utility function models, (2) cash-in-advance models.
• Chapter 2: A core NK model. In this chapter, we develop an NK model with the stationarized Real Business Cycle (RBC) model at its core. Then we add sticky prices. The household sector and its supply of homogeneous is as in the RBC core. We therefore focus on the supply side and the modelling of price stickiness.
• Chapter 3: Monetary policy design in New Keynesian models. Constant money growth rule versus interest rate rule. The problem of determinacy. Second-order approximation of the social welfare.
• Chapter 4: The optimal monetary policy. (1) A Ramsey problem (Full commitment), (2) A discretionary solution. We first consider the case where the policy makers can 2 commit, or it is assumed that the policy maker will never default on it past promises. The welfare-optimal policy is the solution to the Ramsey problem with commitment. We next examines the case in the absence of commitment the policymaker optimizes period-by-period, or a policy maker can never make and fulfill a promise.
• Chapter 5: Other optimal monetary policy regimes. First, a loose commitment solution. Clearly, the commitment and discretion settings are two extreme cases. Due to the political cycle, it is more reasonable to assume that a policy maker can sometimes fulfill and sometimes cannot. Second, A simple rule framework and Linear-Quadratic (LQ) approach. Even with commitment the policymaker may be constrained to simple rules (e.g., Taylor-type rules). Rationale for simplicity: transparency, information available and ease of implementation, a mandate framework.
• Chapter 6: Additive issues Monetary policy at effective zero-lower bound (unconventional monetary policy). Monetary policy under uncertainty (Robust monetary policy).
Learning objectives:
In a general class of problems in macroeconomics, households’ behavior depends on expectations of future variables. Characterizing optimal monetary policy in such circumstances is complicated. A central banker influences households’ expectations through its actions, and in turn households’ expectations influence the central banker’s actions. therefore, the main aims of this course are: (1) Reviewing the instruments available to the central bank to achieve its objectives. (2) Considering a number of issues relating to the optimal design of monetary policy institutions and the conduct of monetary policy.
Learning outcomes:
• Solve macroeconomic NK models and assess the role and efficacy of monetary policy for these models.
• Understand the main channels of the monetary transmission mechanism, through which monetary policy can have real effects on the economy.
• Discuss the rationale of different monetary regimes used by Central Banks.
Didactic concept:
The course will first proceed with on-class lectures providing students theoretical understandings and hand-on machine-coding exercises (matlab + DYNARE). During the later part of the course, students will be presenting their assigments.
Literature:
Woodford, M. (2003). Interest and Prices. Foundations of a Theory of Monetary Policy. Princeton University Press.
Galí, J. (2015). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications Second edition. Number 10495 in Economics Books. Princeton University Press.
Debortoli, D. and Nunes, R. (2007). Loose commitment. Technical report.
Levine, Paul & McAdam, Peter & Pearlman, Joseph, 2008. "Quantifying and sustaining welfare gains from monetary commitment," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1253-1276, October.
Throughout the course, students will also be required to read a number of ACADEMIC articles.
Additional examination information:
A replication exercise of a certain model with the optimal policy application (work in group) and a report to interpreting the results. There will be NO written exam.
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