Course Syllabus Monetary Economics (440.610) Masters in Applied Economics Program Johns Hopkins University Spring Semester, 2014 Dr. Sang-Sub Lee ([email protected]) Saturday 10:00 – 12:45 1. General Course Objective: This course is designed as a survey of the basic theories in monetary economics for master level students. The main objective of the course is to help students understand the core aspects of monetary economy: how monetary phenomena and policies are determined, and how they interact with the rest of the macro economy. For that purpose, several key theoretical frameworks will be constructed, and various monetary economic phenomena including monetary policy actions will be analyzed within such frameworks. Among the topics to be covered include: money demand and money supply, inflation and optimal quantity of money, monetary policy transmission mechanism, the term structure of interest rates, strategy of monetary policy and optimal monetary policy, time inconsistency problem in monetary policy, monetary policy targets and rules, and nonconventional monetary policies. We will also examine the recent financial crisis, the FED’s policy reaction to the crisis, and the challenges facing monetary authority ahead. For each topic covered, a core body of theories, issues, and evidence will be presented and discussed. 2. Readings: 2-A) Textbook Sources: Walsh, Carl, Monetary Theory and Policy, 3rd edition, MIT Press, 2010 Cochrane, John, Time Series for Macroeconomics and Finance*, 2005, can be downloaded at http://faculty.chicagogsb.edu/john.cochrane/research/Papers/time_series_book.pdf. 2-B) Other References of Interest: Blinder, Alan, Central Banking in Theory and Practice, MIT Press, 1998

Enders, Walter, 2004, Applied Econometrics Time Series, John Wiley & Sons, Inc., 2nd Edition Hamilton, James, 1994, Time Series Analysis, Princeton University Press Dejong, David and Chetan Dave, Structural Macroeconometrics 2nd ed., 2011, Princeton University Press Shin, Hyun Song, 2010, Risk and Liquidity, Oxford University Press Woodford, Michael, 2003, Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press Greider, Wiliam, 1989, Secrets of Temple: How the Federal Reserve Runs the Country, Simon Schuster Meyer, Laurence, 2004, A Term at the Fed: An Insider’s View, Harper Collins Wessel, David, 2009, In Fed, We Trust, Crown Business, Random House, August 2009 2-C) Articles: Numerous articles from the FRB publications, academic journals, and financial newspapers and magazines such as WSJ and Economist will also be used and posted. 3. Exams and Other Assignments: There will be one mid-term (30%), final (40%), term paper (30%), and occasional homework (10%). 4. Tentative Course Outline (The detailed reading list could change somewhat.) (*: Optional Reading) I. Introduction and Overview Readings: Walsh: Introduction and Chapter 1 Mishkin, Frederic, 2007, Will Monetary Policy Become More of A Science?, Finance and Economic Discussion Series 207-44, Federal Reserve Board

Bernanke, Ben, 2010, On the Implications of the Financial Crisis for Economics, speech delivered at Conference co-sponsored by the Bendheim Center for Finance and the Center for Economic Policy Studies, Princeton, New Jersey Bernanke, Ben, 2014, The Federal Reserve: Looking Back, Looking Forward, At the Annual Meeting of the American Economic Association, Philadelphia, Pennsylvania January 3, 2014 II. Money in the Long Run and General Equilibrium Models of Monetary Economy A. Review of Solow Growth Model and Tobin’s Monetary Growth Model B. Sidrauski’s Monetary Growth Model (Money-in-the-Utility Function Model) and Other Extensions Readings: Walsh: Chapter 2: Skip pp44-46 on existence and skim through 2.5 and Appendix) Chapter 3: Skim through 3.1-3.3, and skip the rest) Campbell, John, 2000, Asset Pricing at the Millennium, Journal of Finance, Vol. LV, No. 4 Mehra, Rajnish and Edward Prescott, 2008, The Equity Premium: ABCs, Chapter 1 in Handbook of the Equity Premium Cochrane, John, Discount Rates, Journal of Finance, Vol. LXVI, No. 4, November 2011* C. Money and Public Finance Readings: Walsh: Chapter 4: Read 4.1-4.5 (pp146-152; Cagan's model, pp156-159; and 4.5 can be skimmed through), 4.6.1-4.6.2, 4.6-4.7 Other Readings (Bernanke, Ben, 2004, The Benefits of Price Stability by Ben Bernanke (available at http://www.federalreserve.gov/boarddocs/speeches/2006/200602242/default.htm)) Bernanke, Ben, 2009, Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet, Speech delivered at the National Press Club Luncheon, National Press Club, Washington, D.C.

Bernanke, Ben, 2009, The Federal Reserve’s Balance Sheet, Speech delivered at the Federal Reserve Bank of Richmond 2009 Credit Market Symposium, April, 2009 (Update in October) http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm Cecchetti, Stephen, 2009, Crisis ands Responses: The Federal Reserve in the Early Stages of the Financial Crisis, Journal of Economic Perspectives, Vol 23, Number 1, Winter 2009, pp51-75 Carpenter, Seth,Jane Ihrig, Elizabeth Klee, Daniel Quinn, Alexander Boote, 2013, Federal Reserve Balance and Earnings: A Primer and Projections, Finance and Economics Discussion Series 2013-01, BOG. Greenlaw, David, James Hamilton, Peter Hooper, and Frederick Mishkin, 2013, Fiscal Policy and the Role of Monetary Policy Roberto M. Billi and George A. Kahn, What is the Optimal Inflation Rate?, Economic Review, FRB of Kansas City

Mid-Term I: Tentatively Scheduled on 03/08/2014 No Class on March 22 (Spring Break) III. Money in the Short Run: Short Run Models and Monetary Policy Transmission Mechanism A. Static AD-AS Model and the Phillips Curve B. Rational Expectations and Stochastic Static AD-AS model with Rational Expectations C. Extension of the Basic Rational Expectations AD-AS Model: Persistent Effects of Monetary Policy on Output and Price D. New Keynesian Synthesis Combined Readings for A, B, C, and D: Walsh, Chapter 5-6, Chapter 1, Chapter 10.1-10.2. Chapter 5 (Skim 5.3; While reading 6, don’t pay too much attention to the detailed model specifications and derivations Chapter 1 (1.2.2, 1.3)

Attfield, C.L.F., D. Demery, and N.W. Duck, Rational Expectations in Macroeconomics, 2nd edition, Oxford: Blackwell, 1991. Auerbach, Alan, William Gale, and Benjamin Harris, 2010, Activist Fiscal Policy, Journal of Economic Perspectives, Vol 24, No.4 Bernanke, Benjamin (2003), Remarks at the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman's Free to Choose, Dallas, Texas ____________(2004), The Great Moderation Ball, Laurence, and Gregory Mankiw (2002), The NAIRU in Theory and Practice, NBER WP #8940 Mankiw, N.G. (2000), The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment, NBER WP #7884 Mankiw, N.G. (2006), The Macroeconomist as Scientist and Engineer, NBER WP #12349 Fuhrer, Jeffrey, 2009, Inflation Persistence, FRB of Boston, Handbook of Monetary Economics* Taylor, John (1993), Discretion versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy, v. 39, 1993, pp. 195–214. Judd, John and Glenn Rudebusch, 1998, Taylor’s Rule and the Fed: 1970–1997, FRBSF ECONOMIC REVIEW 1998, NUMBER 3 Gali, Jordi, and Mark Gertler, 2007, MACROECONOMIC MODELING FOR MONETARY POLICY EVALUATION, NBER WP 13542 (JEP) D. Monetary Policy Transmission Mechanism and Credit Channel of Monetary Policy Walsh, Chapter 10.5 (Skip 10.5.5 and Skim over 10.5.3, 10.5.4) Bernanke, Ben, (2007), The Financial Accelerator and the Credit Channel, Speech made at the Credit Channel of Monetary Policy in the Twenty-first Century Conference, Federal Reserve Board ______, and Mark Gertler (1995), Inside the Black Box: The Credit Channel of Monetary Policy Transmission, NBER WP #5146 Kiyotaki, Nobuhiro and John Moore, 1997, "Credit Cycles," Journal of Political Economy.

Bernanke, Ben, Mark Gertler, and Simon Gilchrist, 1999, "The Financial Accelerator in a Quantitative Business Cycle Framework," Handbook of Macroeconomics, John Taylor and Michael Woodford editors Markus K., Brunnermeier,Thomas M. Eisenbach,andYuliySannikov, 2012, Macroeconomics with Financial Friction: A Survey Boivin, Jean, Michael Kiley, and Fredrick Mishkin, 2010, How Has the Monetary Transmission Mechanism Evolved Over Time, Forthcoming in Handbook of Monetary Economics Stock, James and Mark Watson, 2001, Vector Autoregressions, Journal of Economic Perspectives, Volume 15, Number 4—Fall 2001—Pages 101–115 Kilian, Lutz, 2012, Structural VAR Adrian, Tobias and Hyun Song Shin, 2010, Financial Intermediaries and Monetary Policy, Handbook of Monetary Economics IV. Topics in Monetary Policy a) Monetary Policy Operating Procedures, Policy Instrument Choice, Policy Tools at ZLB Readings: Walsh: Chapter 11 Bernanke, Ben, S. (2005), Implementing Monetary Policy, FRB, March 30, 2005 Bernanke, Ben, S. (2004), The Logic of Monetary Policy, FRB, December 2, 2004 Bernanke, Ben, 2002, Deflation: Making Sure It Doesn’t Happen Here, Remarks Before he National Economists’ Club Blinder, Alan (1998), Central Banking in Theory and Practice, MIT Press, 1998 Friedman, Ben, and Ken Kuttner, 2010, Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?, NBER WP 16165 Keister, Todd, Antoine Martin, and James McAndrews (2008), Divorcing Money from Monetary Policy, Federal Reserve Bank of New York

Poole, William. (1970), Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model, The Quarterly Journal of Economics, v. 84, n. 2. pp. 197–216, May, 1970* Bernanke, Ben, Vincent Reinhart, and Brian Sack, Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment, Brooking Papers on Economic Activities* Eggertsson, Gauti and Michael Woodford, The Zero Bound on Interest Rates and Optimal Monetary Policy, Brooking Papers on Economic Activities* Woodford, Michael, 2012, Methods of Policy Accommodation at Interest Rate Lower Bound, Jackson Hole Symposium Curdia, Vasco, and Michael Woodford, 2009, Conventional and Unconventional Monetary Policy* English, William, David Lopez-Salido, Robert Tetlow, 2013, The Federal Reserve Framework for Monetary Policy, Recent Changes and New Questions b) Interest Rates and Monetary Policy: The Term Structure of Interest Rates Readings: Walsh: 10.3 Bernanke, Ben, (2005), The Global Saving Glut and the U.S. Current Account Deficit., Federal Reserve Bank of St. Louis. April 14; Federal Reserve Bank of St. Louis Review _______ (2006), Reflections on the Yield Curve and Monetary Policy, FRB, March 20, 2006 Estrella, Arturo (2005), The Yield Curve as a Leading Indicator: Frequently Asked Questions, Federal Reserve Bank of New York, 2005 Fisher, Mark (2001) Forces that Shape Yield Curve Parts 1 and 2, FRB of Atlanta* Gagnon, Joseph, Raskin, Matthew, Remache, Julie, & Sack, Brian P. 2010 (March). Large-Scale Asset Purchases by the Federal Reserve: Did They Work? Staff Report 441. Federal Reserve Bank of New York. D’amico, Steffania, and Thomas King, 2010, Flow and Stock Effects of Large-Scale TreasuryPurchases, BOG D’amico, Steffania, William English, David Lopez-Salido, and Edward Nelson, 2013, The Federal Reserve’s Large-Scale Asset Purchases: Rationale and Effects, BOG

Krishnamurthy, Arvind and Annette Vissing-Jorgensen, 2013, The Ins and Outs of LSAPs, Jackson Hole Meeting Ilmanen, Antti, Understanding the Yield Curve, Citibank c) Rules versus Discretion: Time Inconsistency Problem Readings: Walsh: Chapter 7* Bernanke, Ben (2004), Panel Discussion: What have we learned since October 1979 Blinder, Alan, Central Banking in Theory and Practice, MIT Press, 1998 DeLong, Bradford, America’s Only Peacetime Inflation: The 1970s, NBER Historical Paper #96 Abrams, Burton (2006), How Richard Nixon Pressured Arthur Burns: Evidence from Nixon Tapes, Journal of Economic Perspectives Alesina, Alberto, and Andrea Stella, 2010, The Politics of Monetary Policy, in Handbook of Monetary Policy d) Optimal Monetary Policy Rules Readings Walsh: Chapter 8 Bernanke, Ben and Frederic Mishkin (1997), Inflation Targeting: A New Framework for Monetary Policy, NBER WP #5893 Bernanke, Ben (2003), Constrained Discretion and Monetary Policy, FRB, Remarks before the Money Marketeers of New York University, Feb 2003 Gali, Jordi and Mark Gertler (2007), Macroeconomic Modeling for Monetary Policy Evaluation, Journal of Economic Perspectives Clarida, R., J. Gali, and M. Gertler (1999), "The Science of Monetary Policy: A New Keynesian Perspective", Journal of Economics Literature, 37, 1661-1707* John B. Taylor (1993), Discretion versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy, v. 39, 1993, pp. 195–214

Taylor, John, and John Williams,2010, Simple and Robust Rules for Monetary Policy, NBER WP 15908* Hammond, Gil, State of the Art in Inflation Targetting, Bank of England, Handbook 29Lates on Inflation targeting from Bank of England Svensson, Lars, 2010, Inflation Targetting, Handbook of Monetary Economics* e) Financial Crisis and Monetary Policy Adrian, Tobias and Hyun Song Shin (2008), Financial Intermediaries, Financial Stability and Monetary Policy Bernanke, Ben (2009), Reflections on a Year of Crisis, Remarks made at the FRB of Kansas City’s Annual Economic Symposium, Jacson Hole, Wyoming Brunnermeier, Marcus (2009), Deciphering the 2007-2008 Liquidity and Credit Crunch, Journal of Economic Perspectives Gorton, Gary, Panic of 2007, NBER WP. Mishkin, Frederic, 2011, Over the Cliff: From the Subprime to the Global Financial Crisis, JEP, Vol 25, No.1. Pozsar, Zoltan,Tobias Adrian,Adam Ashcraft, and Hayley Boesky, 2010, Shadow Banking, Federal Reserve Bank of New York Staff Reports #458 Hanson, Samuel G. , Anil K Kashyap, and Jeremy C. Stein, 21011 A Macro Prudential Approach to Financial Regulation, JEP f) Monetary policy, Asset prices, and Financial Market. Ben S. Bernanke (2002), Asset-Price Bubbles and Monetary Policy, FRB, Remarks before the New York Chapter of the National Association for Business Economics, New York, New York; October 15, 2002. ____________ and Mark Gertler (2000), Monetary Policy and Asset Market Volatility, NBER Working Paper #7559** ____________ and Mark Gertler (2001), Should Central Banks Respond to Movements in Asset Prices, American Economic Review Borio, Claudio and Philip Lowe, 2002, Asset Prices and Financial and Monetary Stability: Exploring the Nexus, BIS

Carsten, Detken and Frank Smets, 2004, Asset Price Booms and Monetary Policy, European Central Bank Asset Price Bubbles and Monetary Policy, ECB 2005 Frederic S. Mishkin (2008), How Should We Respond to Asset Price Bubbles, Federal Reserve Board Cecchetti, Stephen G., Hans Genberg, John Lipsky, Sushil Wadhwani (2000), Asset Prices and Central Bank Policy (Part 1), Geneva Reports on World Economy 2, CEPR, 2000* Gertler, Mark, Marvin Goodfriend, Otmar Issing, and Luigi Spaventa (1998), Asset Prices and Monetary Policy: Four Views, BIS and CEPR, 1998* VI. Epilogue

Term Projects (30%) Write a term paper on a monetary topic of choice, and presents to the class at the end of the semester Paper should include some literature review, theoretical basis, and empirical evidence from own data analysis 02/08/2014: (preliminary) Selection of Topic 02/22/2014: Abstract submission 03/29/02014: Mid-point check 05//03/2014: Presentation Sample Topics: Financial Crisis and the Monetary Policy Responses Term Structure of Interest Rates Inflation dynamics and forecasting Monetary Policy and Asset Prices (Structural) VAR and Monetary Policy Transmission Mechanism Effects of Large Asset Purchase