Rethinking Macro Policy II : Getting Granular
Olivier J Blanchard ; Giovanni Dell'Ariccia ; Paolo Mauro
April 15, 2013
Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file
This note explores how the economic thinking about macroeconomic management has evolved since the crisis began. It discusses developments in monetary policy, including unconventional measures; the challenges associated with increased public debt; and the policy potential, risks, and institutional challenges associated with new macroprudential measures. Rationale: The note contributes to the ongoing debate on several aspects of macroeconomic policy. It follows up on the earlier “Rethinking” paper, refining the analysis in light of the events of the past two years. Given the relatively fluid state of the debate (e.g., recent challenges to central bank independence), it is useful to highlight that while many of the tenets of the pre-crisis consensus have been challenged, others (such as the desirability of central bank independence) remain valid.
Course Schedule and Lecture Notes(schedule is tentative; please check for updates regularly)
* Notes will be posted AFTER each lecture
(* indicates required readings; for copy right reasons, the links below are password protected and only accessible to students registered for the course.)
I. REVIEW AND INTRODUCTION
A. Recent Issues and Debates
Olivier Blanchard, (2016). "Do DSGE Models Have a Future?"
Paul Romer, (2016). "The Trouble with Macroeconomics"
Narayana Kocherlakota, (2016) blog on "how I believe macroeconomic research could be improved"
Macroeconomics is a broad and rapidly changing field. The following sets of surveys, pre and post-2008 provide a sense of the general landscape:
Olivier Blanchard, (2009). "The State of Macro," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 209-228, 05.
Blanchard, O. (2000), "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?" QJE, November 2000, 115:4, 1375-1410.
Woodford, M. (1999), "Revolution and Evolution in Twentieth-Century Macroeconomics," in P. Gifford, ed., Frontiers of the Mind in the Twenty-First Century, Harvard University Press.
Goodfriend, Marvin; King, Robert G (1997), "The New Neoclassical Synthesis and the Role of Monetary Policy", NBER Macroeconomics Annual, NBER Chapters (National Bureau of Economic Research) 12: 231–83
Goodfriend, Marvin (2004), "Monetary Policy in the New Neoclassical Synthesis: A Primer", Richmond Fed
Woodford, M. (2009), "Convergence in Macroeconomics: Elements of the New Synthesis," American Economic Journal: Macroeconomics, 1(1): 267-79.
B. Business Cycle Facts
* Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics.
* King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics.
Frontiers of business cycle research. Edited by T. Cooley. Princeton University Press, 1995. Chapters 1 and 2.
C. Financial Frictions and Other Current Agenda:
Matsuyama, Kiminori (2007), "Aggregate Implications of Credit Market Imperfections," NBER Macro Annual, 2007.
Gertler and Karadi (2011), "A Model of Unconventional Monetary Policy," Journal of Monetary Economics, 58(1), January, pp. 17-34.
Gertler and Kiyotaki (2010), " Financial Intermediation and Credit Policy in Business Cycle Analysis", Handbook of Monetary Economics, B.M Friedman and M. Woodford (eds.), vol 3, ch.11, 547-599. Elsevier.
Brunnermeier, Eisenbach and Sannikov (2012), "Macroeconomics with Financial Frictions: a Survey," Princeton University, mimeo
Romer and Stiglitz on the state of the macroeconomics from IMF's 2013 conference on "Rethinking Macro Policy II: First Steps and Early Lessons"
Things got quite interesting lately; below aresome casual pieces to give you a flavor:
Buiter, Willem (2009), "The unfortunate uselessness of most ‘state of the art’ academic monetary economics", FT
Woodford, M. (2011), "“What’s Wrong with Economic Models?” October 2011.
Eichengreen, B. (2013), "Our Children's Economics"
Rajan, Raghuram (2011), "Why did economists not foresee the crisis?"
S Wren-Lewis (2012), "The return of schools of thought in macroeconomics"
"'DSGE + Financial Frictions = Macro that Works?' 2013
II. MONETARY THEORIES OF THE BUSINESS CYCLE
* Romer, Sections 5.9, 6.3-6.4
* Mankiw, N. G., "A QuickRefresher Course in Macroeconomics," Journal of Economic Literature, December 1990.
A 2013 conference on "The First 100 Years of the Federal Reserve:The Policy Record, Lessons Learned, and Prospects for the Future"
A 2008 conference on the Phillips Curve: Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective
Bordo, M. and H. Rockoff (2013), "Not Just the Great Contraction: Friedman and Schwartz's A Monetary History of the United States 1867 to 1960", NBER Working Paper 18828
Romer, C., and D. Romer, "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz" NBER Macroeconomics Annual 1989, 121-170.
Christiano, L., Eichenbaum, M., and C. Evans, "Monetary Policy Shocks: What Have we Learned and to What End?" in J. Taylor and M. Woodford editors, Handbook of Macroeconomics, vol. 1A, North Holland.
Blanchard, O., "Why Does Money Affect Output? A Survey," Handbook of Monetary Economics, vol. 2, edited by Ben Friedman and Frank Hahn, 1990.
Lucas, R., “Nobel Lecture: Monetary Neutrality”, Journal of Political Economy, August 1996, 661-682.
B. Imperfect-Information Models
* Romber Ch. 6.9-6.10
* Walsh Ch. 5
* Wickens Ch. 9
Golosov, M. and, R. Lucas, "Menu Costs and Philips Curves", Journal of Political Economy, 2007 (115), 171-199.
Lucas, R., "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, June 1973.
Barro, R., "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, 1977, 101-115.
Sargent, T., and N. Wallace, "Rational Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule" Journal of Political Economy, 1975, 241-254.
C. Contracting Models
* Blanchard and Fischer, Ch. 8.
* Walsh Ch.6
* Bils, M., and P. Klenow, "Some Evidence on the Importance of Sticky Prices", Journal of Political Economy, 2004 (112), 947-985.
Fischer, S., "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, 1977, 85(1).
Gray, J., "Wage Indexation: A Macroeconomic Approach," Journal of Monetary Economics, 1976, 221-235.
D. Menu-Cost Models
* Romer, Sections 6.5-6.7, 7.2-7.5
* Golosov, M. and R. Lucas, "Menu Costs and Phillips Curves," Journal of Political Economy, 2007, vol. 115, no. 2
Mankiw, N. G., "Small Menu Costs and Large Business Cycles," Quarterly Journal of Economics, May 1985.
Blanchard, O., and N. Kiyotaki, "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, September 1987.
E. Efficiency Wage Theory
* Romer, Sections 10.1-10.4.
Yellen, J., "Efficiency Wage Models of Unemployment," American Economic Review, May 1984.
III. DYNAMIC MODELS OF PRICE ADJUSTMENT
* Romer Ch. 7
B. State-Contingent Models
Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, vol. 54,100-121.
Caplin, A., and D. Spulber, "Menu Costs and the Neutrality of Money," Quarterly Journal of Economics, 1987.
Caplin, A., and J. Leahy, "State Dependent Pricing and the Dynamics of Money and Output," Quarterly Journal of Economics, 1991.
C. Time-Contingent Models
* Walsh Ch.6
* Gali Ch.3.1-3.3
Taylor, J., "Staggered Wage Setting in a Macro Model," American Economic Review, May 1979.
Calvo, G., "Staggered Prices in a Utility Maximizing Framework," Journal of Monetary Economics 12, 383-398, (1983).
Mankiw, N. G., and R. Reis, "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Quarterly Journal of Economics, November 2002.
IV. THE CREDIT CHANNEL & FINANCIAL FRICTION
Ben Bernanke, Mark Gertler, and Simon Gilchrist. 1999. The Financial Acceleratorin a Quantitative Business Cycle Framework. In Handbook of Macroeconomics, ed. By John Taylor and Michael Woodford. Elsevier.
Bernanke, B. (2007) The Financial Accelerator and the Credit Channel, speech June 15, 2007, Federal Reserve publication
Bernanke, Ben and Mark Gertler. 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission." Journal of Economic Perspectives. 1995, 9. 27–48.
Brunnermeier, M, T. Eisenbach and Y. Sannikov (2012) "Macroeconomics with Financial Frictions: A Survey"
Quadrini, Vincenzo (2011), "Financial Frictions in Macroeconomic Fluctuations" Economic Quarterly—Volume 97, Number 3—Third Quarter 2011—Pages 209–254
A. Discrete Time Dynamic Programming
F. Collard, Dynamic Programming, Lecture Notes
C. Edmond, Dynamic Programming and the Growth Model, Lecture Notes
Sargent, T., Dynamic Macroeconomic Theory, Ch.1
Ljungqvist and Sargent, Chs. 2-3.
Stokey and Lucas Chs. 1-4. The material here is technical and not required for this course. Students who wish to see a rigorous treatment may want to do this reading.
B. Classical Consumption Models
* Romer, Chapter 8
* Blanchard and Fischer, 6.2.
Hall, R., “Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence.” Journal of Political Economy. Vol. 86 (6), pp. 971-87, 1978.
* Attanasio, O., “Consumption,” Handbook of Macroeconomics, V.1B, pp. 741-812, 1999.
* Carroll, (2001), "A Theory of the Consumption Function: With or Without Liquidity Constraint"
Carroll (2012), Theoretical Foundations of Buffer Stock Saving
Browning, M. and T. Crossley, “A Life Cycle Model of Consumption and Saving” Journal of Economic Perspectives, August 2001.
C. Asset Pricing and Consumption Beyond Certainty Equivalence
Campbell, J., “CONSUMPTION-BASED ASSET PRICING,” Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz, 2003
Campbell, J., “Asset Prices, Consumption, and the Business Cycle,” Handbook of Macroeconomics Vol. 1C, Elsevier B.V., pp. 1231-1303, 1999.
Mankiw, N. G. and S. Zeldes, “The Consumption of Stockholders and Non-Stockholders,” Journal of Financial Economics, 29, pp. 97-112, 1991.
Kocherlakota, N., “The Equity Premium, It’s Still a Puzzle.” Journal of Economic Literature, 34, pp. 42-71, 1996.
Lucas, R., “Asset Prices in an Exchange Economy,” Econometrica, 46(6), pp. 1429-1446, 1978.
Mehra, R. and E. Prescott, “The Equity Premium: A Puzzle,” Journal of Monetary Economics. Vol. 15 (2). p 145-61. March 1985.
IV. An Introduction to DSGE Models
A. General Methods
* DeJong & Dave, Chs. 2 & 5
* T. Griffoli (2011). Dynare Guide Chapters 1-4
- Blanchard O. and C. Kahn (1980), The Solution of Linear Di erence Models Under Rational Expectations. Econometrica 48, 1305-1311
- Campbell, J. (1994). Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model. Journal of Monetary Economics 33, 463-506.
- Klein, P. (2000). Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model. Journal of Economic Dynamics and Control 24, 1405-
- Uhlig, H. (1999) A Toolkit for Analyzing Non-Linear Dynamic Stochastic Models Easily
- Sims, C. (2001). Solving Linear Rational Expectations Models. Computational Economics 20, 1-20.
Helpful DYNARE Resources:
- Juillard et al (2009) Dynare Manual
- Barillas et al. (2007) Practicing Dynare
- W. Den Haan (2009) Dynare programs
** Dynare and Dynare Manual
** Griffoli, T.M. (2011), "DYNARE User Guide"
** How to Use Dynare with Matlab
B. REAL BUSINESS CYCLE THEORY
* Gali Ch. 2
* D&D Ch.2
* Romer Ch. 5
Rebelo, Sergio T., "Real Business Cycle Models: Past, Present and Future." Scandinavian Journal of Economics, Vol. 107, No. 2, pp. 217-238, June 2005.
Kydland, Finn E & Prescott, Edward C, 1996. "The Computational Experiment: An Econometric Tool," Journal of Economic Perspectives, vol. 10(1), pages 69-85.
Ramey, V. (2011), "A Brief History of the Real Business Cycle –Search & Matching Literature"
C. New Keynesian GE Models
* Gali Ch. 3
* D&D Ch.4
* Walsh Chs 7 & 8
Smets, F. and R. Wouters, "Shocks and Frictions US Business Cycles: A Bayesian DSGE Approach", American Economic Review, 2007 (97), 586-606.
Gali J. (2001). New Perspectives on Monetary Policy, Inflation, and the Business Cycle.
Gali J. and M. Gertler (2008). Macroeconomic Modeling for Monetary Policy Evaluation., Journal of Economic Perspectives vol. 21 (4), 25-45