522 Advanced Macroeconomic Theory, Part 1, Spring 2003

Economics 522, Spring 2007

Princeton University

Courses 2006-2007: 504 522 554 | Blackboard | Calendars | Students | Graduate Program

Advanced Macroeconomics II, Part 1

This is the first half of a second-year one-semester graduate course in the Graduate Program, Department of Economics, Princeton University.

Part 1 is taught by Lars Svensson. Part 2 will be taught by Nobu Kiyotaki.

Announcements regarding part 1 of the course will be made on this page, and the page will be frequently updated. (Course plan and readings are preliminary and will be updated until the end of classes.) Students are required to check the page regularly.

March 13: Lecture notes for Blinder's presentation posted.

On part of the class on March 13, Alan Blinder will present his paper Blinder (2006) (see readings under topic 8, "Current issues in monetary policy").

On part of the class on February 27, Ricardo Reis will present his work on monetary policy in inattentive economies (see readings under topic 4, "Monetary policy in inattentive economies").

Teacher: Lars Svensson, Office: 106 Fisher Hall, Tel: 258-0329, Email: svensson@princeton.edu.
Office hours: By appointment.
Administrative assistant: Kathleen Hurley, Office: 107 Fisher Hall, Tel: 258 4023, Email: kahurley@princeton.edu.

Class schedule: Tuesday, 1:00-4:00 pm, B-06 Fisher Hall.
Part 1 starts Feb 6 and ends Mar 13.
Part 2 starts Mar 27 and ends May 1.

Final exam for 522 and general macro exam (521 and 522): T.b.a.

Prerequisites: Students are expected to be familiar with the material in Economics 521, Macroeconomics I.

Topics: (preliminary)

Linear-quadratic optimization with forward-looking variables: Sequential and recursive methods
Optimal policy under partial information
Optimal policy under model uncertainty
Monetary policy for inattentive economies
Commitment, discretion, and optimal delegation in monetary policy
Transparency
Current issues in monetary policy

Slides: Copies of slides or notes will be available before each class on this page, as pdf files. Students are expected to download and print these before each class.

Notice: These slides are not self-contained but incomplete. They are not a substitute for coming to class. In particular, the slides are simplified and sometimes provocative. They should therefore not be interpreted as definitive statements. The slides should never be quoted without my permission.

Lecture notes 1
Lecture notes 2
Orphanides 2003b Figure 2
Lecture notes 3
Lecture notes 4
Lecture notes Reis
Lecture notes 5
Lecture notes 6
Lecture notes 7
Lecture notes Blinder

Readings and course plan (preliminary)

1. Linear-quadratic optimization with forward-looking variables: Sequential and recursive methods

Anderson (2005)
Anderson, Hansen, McGrattan, and Sargent (1995)
Dennis (2005)
Golub and van Loan (1989)
Harville (1997)
King and Watson (1998, 2002)
*Klein (2000)
*Ljungqvist and Sargent (2004, Ch. 5)
Marcet and Marimon (1998)
McCallum (1998)
McCallum (2005)
Messner and Pavoni (2004)
*Söderlind (1999)
Sims (2000)
Svensson (2005a)
*Svensson (2007a)
Van Loan (2000)
Wang and Wen (2006)

2. Optimal policy under partial information

Dotsey and Hornstein (2003)
*Ehrmann and Smets (2003)
Gerali and Lippi (2006)
Coenen, Levin, and Wieland (2005)
Hamilton (1994)
Harvey (1981, 1989)
*Ljungqvist and Sargent (2004, Sect. 5.6, App. B)
Orphanides (2003a,b)
*Svensson and Woodford (2003)
Svensson and Woodford (2004)
Swanson (2004)

3. Optimal policy under model uncertainty

Blake and Zampolli (2006)
Brainard (1967)
Chow (1975)
Costa, Fragoso, and Marques (2005)
Farmer, Waggoner, and Zha (2006a,b)
Miranda and Fackler (2002, Ch. 6.8, 8, 9)
*Onatski and Williams (2003)
*Söderström (2002)
*Svensson (1999b, 2007b)
*Svensson and Williams (2007, DFT)
*Svensson and Williams (2006, BOP)
Zampolli (2006)

4. Monetary policy for inattentive economies

*Ball, Mankiw, and Reis (2005)
*Mankiw and Reis (2002)
Mankiw and Reis (2007)
Reis (2006)

5. Commitment, discretion, and optimal delegation in monetary policy

Abreu, Pearce, and Stacchetti (1990)
Athey, Atkeson, and Kehoe (2005)
Blinder (1998, chap. 2, sec. 4)
Chang (1998)
Clarida, Gali and Gertler (1999)
Kydland and Prescott (1977)
McCallum and Nelson (2000)
Persson, Persson, and Svensson (2006)
Söderlind (1999)
Svensson (1997b)
Walsh (2003, chap. 8)
Woodford (2003, chap. 7)

7. Transparency

Angeletos and Pavan (2005)
Bergo (2007)
Blinder and Wyplosz (2004)
Geraats (2002)
Gosselin, Lotz, and Wyplosz (2006)
Govil (2006)
Lomax (2007)
*Morris and Shin (2002)
Norges Bank (2005, 2006)
Rosenberg (2007)
Rudebusch and Williams (2006)
Svensson (2006a)
*Svensson (2006b)
Walsh (2007)
*Woodford (2006, p. 399-421, 439-460)

8. Current issues in monetary policy

Bergo (2007)
*Blinder (2006)
Lomax (2007)
Rosenberg (2007)
Svensson (2006a)

References

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Adolfson, Malin, Stefan Laséen, Jesper Lindé, and Lars E.O. Svensson (2007), "Optimal Monetary Policy
in an Operational Medium-Sized DSGE Model," in progress.
Adolfson, Malin, Stefan Laséen, Jesper Lindé, and Mattias Villani (2005), "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Sveriges Riksbank Working Paper No. 179, www.riksbank.se.
Adolfson, Malin, Stefan Laséen, Jesper Lindé, and Mattias Villani (2006), "Evaluating an Estimated New Keynesian Small Open Economy Model," working paper, www.riksbank.se.
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Ball, Laurence, N. Gregory Mankiw, and Ricardo Reis (2005), "Monetary Policy for Inattentive Economies," Journal of Monetary Economics 52(4).
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Bernanke, Ben S., and Michael Woodford, eds. (2005), The Inflation-Targeting Debate, University of Chicago Press.
Blake, Andrew P., and Fabrizio Zampolli (2006), "Time Consistent Policy in Markov Switching Models," Working Paper No. 298, Bank of England.
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Clarida, Richard, Jordi Gali, and Mark Gertler (1999), "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature 37, 1661-1707.
Clouse, James, Dale Henderson, Athanasios Orphanides, David Small and Peter Tinsley (2000), "Monetary Policy when the Nominal Short-Term Interest Rate is Zero," Finance and Economics Discussion Series no. 2000-51, Federal Reserve Board.
Coenen, Günter, Andrew Levin, and Volker Wieland (2005), "Data Uncertainty and the Role of Money as an Information Variable for Monetary Policy," European Economic Review 49, 975-1006.
Costa, Oswaldo L.V., Marecelo D. Fragoso, and Ricardo P. Marques (2005), Discrete-Time Markov Jump Linear Systems, Springer, London.
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Dotsey, Michael, and Andreas Hornstein (2003), "Should a Monetary Policy Maker Look at Money?", Journal of Monetary Economics 50, 47-579.
Ehrmann, Michael and Frank Smets (2003), "Uncertain potential output: implications for monetary policy," Journal of Economic Dynamics and Control 27(9), 1611-1638.
Estrella, Arturo, and Jeffrey C. Fuhrer (1998), "Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational Expectations Models," Working Paper no. 98-5, Federal Reserve Bank of Boston.
Farmer, Roger E., Daniel F. Waggoner, and Tao Zha (2006a), "Indeterminacy in a Forward Looking Regime Switching Model," working paper.
Farmer, Roger E., Daniel F. Waggoner, and Tao Zha (2006b), "Minimal State Variable Solutions to Markov-Switching Rational Expectations Models," working paper.
Friedman, Milton (1968), "The Role of Monetary Policy," American Economic Review 58, 1-17.
Friedman, Milton (1969), "The Optimum Quantity of Money", in The Optimum Quantity of Money and Other Essays, Aldine.
Gali, Jordi (2001), "Monetary Policy in the Early Years of EMU," Working Paper.
Gali, Jordi, and Mark Gertler (1999), "Inflation Dynamics: A Structural Econometric Analysis," Journal of Monetary Economics 44, 195-222.
Gerali, Andrea, and Francesco Lippi (2006), "Solving Dynamic Linear-Quadratic Problems with Forward-Looking Variables and Imperfect Information using Matlab", working paper. Toolkit.
Geraats, Petra (2002), "Central Bank Transparency," Economic Journal 112 (483), pp. F532-F565.
Gerlach, Stefan, and Lars E.O. Svensson (2003), "Money and Inflation in the Euro Area: A Case for Monetary Indicators?" Journal of Monetary Economics 50, 1649-1672.
Giannoni and Woodford (2002), "Optimal Interest-Rate Rules: I. General Theory," NBER Working Paper No. 9419.
Golub, Gene H., and Charles F. van Loan (1989), Matrix Computation, 2nd ed., Johns Hopkins University Press.
Goodfriend, Marvin (2003), "Inflation Targeting in the United States," working paper, Federal Reserve Bank of Richmond.
Gosselin, Pierre, Aileen Lotz, and Charles Wyplosz (2006), "How Much Information Should Interest-Rate-Setting Central Banks Reveal?" working paper.
Govil, Manoj (2006), "Social Value of Diversity," 2nd year paper, Princeton University.
Hamilton, James D. (1994), Time Series Analysis, Princeton University Press.
Harvey, Andrew C. (1981), Time Series Models, Philip Allan, London.
Harvey, Andrew C. (1989), Forecasting, Structural Time Series Models and the Kalman Filter, Cambridge University Press.
Harville, David A. (1997), Matrix Algebra From a Statistician’s Perspective, Springer-Verlag.
Hetzel, Robert L. (2000), "The Taylor Rule: Is it a Useful Guide to Understanding Monetary Policy?" Quarterly Review, Federal Reserve Bank of Richmond, Spring 2000, 1-33.
International Monetary Fund (2005), World Economic Outlook, September 2005, www.imf.org.
Issing, Otmar, Vitor Gaspar, Ignazio Angeloni and Oreste Tristiani (2001), Monetary Policy in the Euro Area, Cambridge University Press.
King, Mervyn (2002), "The Inflation Target Ten Years On," speech on November 19, 2002, Bank of England.
King, Robert G. (2000), "The New IS-LM Model: Language, Logic and Limits," Federal Reserve Bank of Richmond Economic Quarterly 86/3, 45-103.
King, Robert G., and Mark W. Watson (1998), "The Solution of Singular Difference Systems under Rational Expectations, International Economic Review 39, 1015-1026.
King, Robert G., and Mark W. Watson (2002), "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics 20 (October), 57-86.
Klein, Paul (2000), “Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model,” Journal of Economic Dynamics and Control 24, 1405-1423.
Kozicki, Sharon (1999), "How Useful Are Taylor Rules for Monetary Policy?" Federal Reserve Bank of Kansas City Economic Review, Second Quarter 1999, 5-33.
Krugman, Paul (1998), "It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity 1998(2), 137-205.
Kydland, Finn E., and Edward C. Prescott (1977), "Rules Rather than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy 85, 473-491.
Ljungqvist, Lars, and Thomas J. Sargent (2004), Recursive Macroeconomic Theory, 2nd edition, MIT Press, Cambridge, MA.
Lomax, Rachel (2007), "The MPC Comes of Age," speech on February 28, www.bankofenglad.co.uk.
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Lucas, Robert E., Jr. (2000), "Inflation and Welfare," Econometrica 68, 247-274.
Mankiw, N. Gregory, and Ricardo Reis (2002), "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Quarterly Journal of Economics 117,1295-1328.
Mankiw, N. Gregory, and Ricardo Reis (2007), "Sticky Information in General Equilibrium," Journal of the European Economic Association 5(2-3).
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McCallum, Bennett T. (1998), "Solution to Linear Rational Expectations Models: A Compact Exposition," Economics Letters 61, 143-147.
McCallum, Bennett T. (2005), "What Is the Proper Perspective for Monetary Policy Optimality?", working paper.
McCallum, Bennett T., and Edward Nelson (2000), "Timeless Perspectives vs. Discretionary Monetary Policy in Forward-Looking Models," NBER working paper no. 7915.
McCallum, Bennett T., and Edward Nelson (2005), "Targeting Rules vs. Instrument Rules for Monetary Policy," Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5), 597-611.
Messner, Matthias, and Nicola Pavoni (2004), "On the Recursive Saddle Point Method," IGIER Working Paper No. 255, www.igier.uni-bocconi.it.
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Morris, Stephen, and Hyun Song Shin (2002), "The Social Value of Public Information," American Economic Review 92, 1521-1534.
Nelson, Edward (2003), "The Future of Monetary Aggregates in Monetary Policy Analysis," Journal of Monetary Economics, forthcoming.
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Onatski, Alexei, and Noah Williams (2003), “Modeling Model Uncertainty,” Journal of the European Economic Association 1, 1087—1022.
Orphanides, Athanasios (2003a), "Monetary Policy Evaluation with Noisy Information," Journal of Monetary Economics 50, 605-631.
Orphanides, Athanasios (2003b), ''The Quest for Prosperity Without Inflation,'' Journal of Monetary Economics 50, 633-663.
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Persson, Mats, Torsten Persson, and Lars E.O. Svensson (2006), "Time Consistency of Fiscal and Monetary Policy: A Solution," Econometrica 74 (2006) 193-212.
Reis, Ricardo (2006), "Inattentive Producers. Ricardo Reis," Review of Economic Studies 73(3).
Roca, Mauro (2006), "Transparency and Monetary Policy with Imperfect Common Knowledge," working paper.
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Rudebusch, Glenn, and Lars E.O. Svensson (1999), "Policy Rules for Inflation Targeting," in John B. Taylor (ed.), Monetary Policy Rules, University of Chicago Press, 1999.
Rudebusch, Glenn, and Lars E.O. Svensson (2002),"Eurosystem Monetary Targeting: Lessons from U.S. Data," European Economic Review 46, 417-442.
Rudebusch, Glenn, and John C. Williams (2006), "Revealing the Secrets of the Temple: The Value of Publishing Interest Rate Projections," working paper.
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Sims, Christopher A. (2000), "Solving Linear Rational Expectations Models," working paper.
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Söderström, Ulf (2002), "Monetary policy with uncertain parameters," Scandinavian Journal of Economics 104, 125-145.
Svensson, Lars E.O. (1993), "Term, Inflation, and Foreign Exchange Risk Premia: A Unified Treatment," NBER Working Paper No. 4544.
Svensson, Lars E.O. (1997a), "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," European Economic Review 41 (1997), 1111-1146.
Svensson, Lars E.O. (1997b), "Optimal Inflation Targets, 'Conservative' Central banks, and Linear Inflation Contracts," American Economic Review 87, 98-114.
Svensson, Lars E.O. (1999a), "Inflation Targeting as a Monetary Policy Rule," Journal of Monetary Economics 43, 607-654.
Svensson, Lars E.O. (1999b), "Inflation Targeting: Some Extensions," Scandinavian Journal of Economics 101, 337-361.
Svensson, Lars E.O. (2001a) "Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?" European Economic Review 46 (2002) 771-780.
Svensson, Lars E.O. (2001b), "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," in Deutsche Bundesbank, ed. (2001), The Monetary Transmission Process: Recent Developments and Lessons for Europe, Palgrave, New York, 60-102.
Svensson, Lars E.O. (2001c), "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies 19(S-1), February 2001, 277-312.
Svensson, Lars E.O. (2003a), "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives 17-4 (Fall), 145-166, PDF.
Svensson, Lars E.O. (2003b), "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature 41, 426-477.
Svensson, Lars E.O. (2005a), "Monetary Policy with Judgment: Forecast Targeting," International Journal of Central Banking 1(1) (2005) 1-54.
Svensson, Lars E.O. (2005b), "Targeting Rules vs. Instrument Rules for Monetary Policy: What Is Wrong with McCallum and Nelson?" Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5), 613-626.
Svensson, Lars E.O. (2006a), "Optimal Inflation Targeting: Further Developments of Inflation Targeting," working paper.
Svensson, Lars E.O. (2006b), "Social Value of Public Information: Morris and Shin (2002) Is Actually Pro Transparency, Not Con," August 2005, American Economic Review 96, 448-451.
Svensson, Lars E.O. (2007a), "Optimization under Commitment and Discretion, the Recursive Saddlepoint Method, and Targeting Rules and Instrument Rules: Lecture Notes," lecture notes.
Svensson, Lars E.O. (2007b), "Robust Control Made Simple: Lecture Notes."
Svensson, Lars E.O., and Noah Williams (2006, BOP), "Bayesian and Adaptive Optimal Policy under Model Uncertainty," working paper, www.princeton.edu/svensson.
Svensson, Lars E.O., and Noah Williams (2007, DFT), "Monetary Policy with Model Uncertainty: Distribution Forecast Targeting (under revision)," working paper.
Svensson, Lars E.O., and Michael Woodford (2002), "Optimal Policy with Partial Information in a Forward-Looking Model: Certainty-Equivalence Redux," working paper.
Svensson, Lars E.O., and Michael Woodford (2003), "Indicator Variables for Optimal Policy," Journal of Monetary Economics 50, 691-720.
Svensson, Lars E.O., and Michael Woodford (2004) "Indicator Variables for Optimal Policy under Asymmetric Information," Journal of Economic Dynamics and Control 28, 661-690,
Svensson, Lars E.O., and Michael Woodford (2005), "Implementing Optimal Policy through Inflation-Forecast Targeting," in Bernanke, Ben S., and Michael Woodford, eds., The Inflation-Targeting Debate, University of Chicago Press, Chicago, 19-83.
Swanson, Eric (2004), "Signal Extraction and Non-Certainty-Equivalence in Optimal Monetary Policy Rules," Macroeconomic Dynamics 8(1), 27-50.
Taylor, John B. (1993), "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy 39, 195-214.
Taylor, John B. (1999), "A Historical Analysis of Monetary Policy Rules," in Taylor, John B., ed., Monetary Policy Rules, Chicago: Univ. of Chicago Press.
Truman, Edwin (2003), Inflation Targeting and the International Financial System: Challenges and Opportunities, manuscript, Institute for International Economics.
Taylor, John B. (2000), "Using Monetary Policy Rules in Emerging Market Economies," in Stabilization and Monetary Policy: The International Experience, Bank of Mexico, pp. 441-457.
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Vickers, John (1998), "Inflation Targeting in Practice: The U.K. Experience," Bank of England Quarterly Bulletin, November 1998.
Walsh, Carl E. (2003), Monetary Theory and Policy, 2nd edition, MIT Press.
Walsh, Carl E. (2007), "Optimal Economic Transparency," International Journal of Central Banking 3(1), 5-36.
Wang, Pengfei, and Yi Wen (2006), "Solving Linear Difference Systems with Lagged Expectations by a Method of Undetermined Coefficients," Working Paper 2006-003C, Federal Reserve Bank of St. Louis, research.stlouisfed.org/econ/wen/.
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Woodford, Michael (2001), "The Taylor Rule and Optimal Monetary Policy," American Economic Review 91, 232-237.
Woodford, Michael (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.
Woodford, Michael (2006), "Central Bank Communication and Policy Effectiveness," in The Greenspan Era: A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, 399-474..
Yun, Tack (1996), "Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles,” Journal of Monetary Economics 37, 345-370.
Zampolli, Fabrizio (2006), "Optimal Monetary Policy in a Regime-Switching Economy: The Response to Abrupt Shifts in Exchange-Rate Dynamics," Working Paper No. 297, Bank of England.

Errors: Please email me about errors, for instance in the reading list and URLs.

Courses 2006-2007: 504 522 554 | Blackboard | Calendars | Students | Graduate Program

Revised september 15, 2009.