Reading List for Monetary Economics Ph. D. Class

Business 33944, Economics 38201

John H. Cochrane and Tom Sargent

Updated June 20 2012 Hit refresh when you come back so you get the newest version!

NOTE: some of the links on this page have broken with the passage of time. I'll fix them if and when I teach the class. In the meantime, if you find a broken link just google the paper instead.

Annoucnements

4/19 Problem set 3 and problem set 2 answers are up.
3/29 Review session Fridays 10:30 Ro 301
3/29 If you want to take this sequence as your "exam field," you have to write a paper. See directions below.

Overview

I will be teaching half of this course, together with Tom Sargent. .

The first part of this website contains the required readings for my part of the course. The rest of the website is a larger set of reading suggestions.

The substantive question we will address is this: What determines the price level in a fiat-money economy like ours? I'll focus on the fiscal theory of the price level. But we'll think about MV=PY, interest rate targets, new- and old Keynesian models, and we'll study central bank policy in the recent crisis and recession.

Please read these articles ahead of time! While I encourage reading more, only the indicated page numbers are required reading and basis of classroom discussions. This is primarily a readings class.

Mechanics: Since this is a joint class, we will be understanding than usual about R or PF grades for those of you who want to focus on the material in one or the other half of the course. Auditors are also welcome, but we would much rather you registered in some way (R or PF) if you can, so the deans and department chairs know we weren't teaching to an empty room. If you come, though, you are expected to do the readings, participate in class discussion, do the written work, and come every week.

Make sure you are getting class emails! There will be a lot of communication via the class email list. All materials except Woodford’s text will be available on the class website.

Prerequisites: I presume most students have taken the first year Ph.D. macro courses. Your macroeconomics course should have covered some monetary economics, including a cash in advance and  money in the utility function models. You should have one quarter of Ph.D. level time series, and be ready to use simple time series models like AR(1)s, take conditional expectations, interpret an impulse-response function, etc. with no fuss.

I will distribute occasional problem sets, which will include written response questions to the readings. However, most of our work will be on reading and understanding ideas rather than on developing further modeling abilities or econometric technique.

Bring a name card to every class at least until everyone in the class knows everyone else. If you don't use a name card, don't be disappointed when I don't learn your name.

We meet Tuesday and Thursday 10:30-12:00 in Rosenwald 301. Class is canceled for Thursday, April 5. We'll find a time to reschedule.

Notes etc.

Week 1 notes. 4/2/2012 My lecture notes for week 1, cleaned up a bit. Warning: Many typos. This is not required reading, but may be a useful reference.

New Keynesian Models with Fiscal Price Determination. January 2011 These are some slides that I'll cover following "Determinacy and Identification." Maybe I can get you to write the paper.

Problem sets

Problem set 1 Due Tuesday April 10
Problem set 1 answers

Problem set 2 Due Tuesday April 17
Problem set 2 answers
Matlab program

Problem set 3
Problem set 3 answers
Matlab program

Final exam answers

Sargent Readings

Chapter 1
Chapter 19
Chapter 20
Chapter 22
Chapter 23
Chapter 24

Cochrane Readings

Note: You should be able to get all the links to external sites when logged in to a U of C IP address or via VPN. I have local copies of many papers, which should always work. Please report any broken links.

The required readngs are marked with a bullet point

  • Required reading

Links to other reading in the comments are not required.

Week 1 Fiscal theory of the price level.

The basic fiscal framework, comparison with quantity theory, commodity/gold standards, and interest rate targets; Ricardian and NonRicardian regimes; classic doctrines upheld or denied, unpleasant monetarist arithmetic.

You may find my "Inflation and Debt" in National Affairs also useful. It was designed as a nontechnical version of "Understanding policy," but also explains what I think is wrong with standard views. The Appendix to understandng policy with budget constraint algebra is a useful reference. Of course I think you should read all my earlier papers on fiscal theory and monetary economics, especially the long term debt paper. But of course you should read all of Tom Sargent and Chris Sims's too (and maybe first!)

Week 2 New Keynesian Model

  • Robert King, 2000, ''The New IS-LM Model: Language, Logic, and Limits” Federal Reserve Bank of Richmond Economic Quarterly 86, 45-103. Start by ignoring the "microfoundations," just learn to use the three equations. Then read equilibrium vs. off equilibrium analysis. Then, finally, go back and read the "microfoundations."

Woodford, Michael, Interest and Prices Princeton: Princeton University Press, p. 1-319 (Part I). I won't make you buy it, or assign 320 pages in one day, but you should own this and read part I if you're gong to do monetary economics.

Week 3 Problems in the New Keynesian model. No, it is not just smoke and mirrors for ISLM

  • Determinacy and Identification with Taylor Rules. Journal of Political Economy, 119, 3 (June 2011), pp. 565-615. Online Appendix B JSTOR link, This is a big paper -- I think, the best I've written. (Which may just prove how badly we can evaluate our own work.) . Read it all, carefully. (Much of the point is to understand the reviewed literature, so pay attention to that as well. I encourage you to track back and look at the central papaers, Clarida Gali and Gertler, Woodford, Rotemberg and Woodford, Benhabib Schmitt-Grohe and Uribe, etc.)

Week 4 Fiscal Stimulus

Background: In case you're not aware, I've been part of a bit of a blog war over stimulus. I thought Friedman, Lucas, Sargent, Kydland and Prescott got rid of it a generation ago. This essay Stimulus RIP is the best summary. If you google Krugman or Delong's blogs with "stimulus" you will find hours of entertainement on the subject.

In the sort of "classical" models you have been trained on at Chicago, stimulus really doesn't work. That's becaue you have been taught to analyze taxes and spending in terms of incentives for behavior rather than as flows of money and "spending." To you, taxes have an effect because they change margins, not because they "put money in people's pockets." Effects that appear like "stimulus" can occur, for example you can be made to feel poorer and hence work harder. (These effects are covered in the "neoclassical" parts of the above papers.) Most recently Uhlig, Harald "Some Fiscal Calculus." American Economic Review, 2010, 100(2), pp. 30-34.

Most policy is conducted within "Old-Keynesian models. For example read Romer and Bernstein to see the scientific basis on which $800 billion of your money got spent. I'll dig up an undergraduate textbook to cover ISLM "models," and we will have covered them a bit in "Determinacy and Identification."

You will see that much of my "understanding policy" describes "fiscal stimulus" as inflation. Current and future deficits cause inflation, and if you believe in a Phillips curve, you get some stimulus out of that. But that is usually considered "monetary" policy with fiscal coordination.

Finally, the assigned reading. Recently, New-Keynesian modelers have claimed very strong fiscal stimulus effects, though their models (unlike ISLM) are coherent economic models, with budget constraints and everything. Let's read one to see if it makes sense, or whether it suffers from the "Determinacy and Identification" problems. Blog Post "New Keynesian Stimulus" gives a sense of what I think we'll find.

Valerie Ramey has a nice review of empirical work. You'll learn basically that everyone runs the same regressions and nobody has solved the identification problem. Valerie Ramey, "Can Government Purchases Stimulate the Economy?"Journal of Economic Literature 2011, 49:3, 673–685 local copy.

Week 5. Monetary policy yesterday and today; the role of the central bank. credit allocation, financial regulation, credit-spread targeting, quantiative easing,

I wrote an oped saying QE2 had no effect, Is QE2 a Savior, Inflator or a Dud?.Local copy. Central banking really is the last refuge of central planners, which should embolden your search for rules, institutions and mechanisms to do a better job. One expression of that view: Geithner's Global Central Planning Wall Street Journal, October 26 2010. Local copy (This is a literary analysis of Treasury Secretary Tim Geithner's Letter to the G-20.) Blog posts Fed Independence 2025, World's biggest Hedge Fund describe some of my thinking on the question, whither the Fed?

A few papers I wish I had time for. :

  • Sims, Christopher, Stepping on a Rake The Role of Fiscal Policy in the inflation of the 1970s. A central question for fiscal theory is whether the 1970s represent a failure of monetary policy in a Ricardian regime, as conventionally analyzed, or whether there is a fiscal story for the last inflation and its end. The 70s certainly were a fiscal disaster. This paper has some of Sim's theoretical musings on the question. Good thesis topic!

  • Thomas J. Sargent, François R. Velde , Macroeconomic Features of the French Revolution The Journal of Political Economy, Vol. 103, No. 3 (Jun., 1995), pp. 474-518. Fiscal/monetary interactions writ large, commitment and all the other issues in macroeconomics. You get a sense that our wise leaders are a step behind these guys. And look what trouble they got into...

  • Francois Velde, Chronicle of a Deflation Unforetold Journal of Political Economy 117 August 2009. This is a spectacular article. To Velde it is a sure sign of price stickiness, and he's right. But it has deeper implications. The french government separated the unit of account and denomination of government debt from the medium of exchange. Thus, it could vary the "dividend" of government debt at will, creating real "government equity." Greece could use the same mechanism. Assigned here as backround reference so I can tell the story of separate "unit of account" and "medium of exchange."

  • Sargent, Thomas J Joseph Zeira Israel 1983: A Bout of Unpleasant Monetarist Arithmetic This paper is about the consequences that using fiscal policy to bail out banks can have for inflation rates. It is a case study of a bail out of banks in Israel in 1983. That bailout might have been good news for banks’ shareholders, but it was not good news for people whose net wealth positions were harmed by inflation. Big question: is this unpleasant arithmetic or fiscal theory?

The Euro, optimal currency areas, how to invent a better "government equity"

Field paper instructions


For students that plan to take "Applied Macro" as an "exam field" (not GPA field), we will require a paper instead of an exam.  In detail:

1. A student who plans to submit a paper for the Applied Macroeconomics field requirement must approach one of the course instructors to serve as the lead faculty reader on the proposed paper.

2. After consultation with the lead faculty reader, the student must prepare a written proposal that describes plans for his/her paper. The proposal is due no later than June 15th.  The proposal is subject to the approval of the lead faculty reader.

3. Once approved by the lead faculty reader, the proposal is circulated among the other course instructors.  At least one of the other course instructors must sign off on the proposal before it, and the student, are "qualified" to submit a field paper.

4. The student submits a completed field paper for review by the lead faculty reader and one or more of the other course instructors.
The paper is due no later than July 31st, 2012.

5. The paper should have a length of 20 to 40 pages "double-spaced", including everything (figures, tables, appendix).

10 week Reading list

This is the readiung list from the last time I taught the full course. It has a larger focus, trying to cover all of monetary economics in 10 weeks.

Economics 33600 / Business 33941
Fall 2004
John H. Cochrane john.cochrane@booth.uchicago.edu  HPC 459 702-3059
Class web page
Sept 28 2004

Class description

This will be primarily a “readings” course. I will assign some exercises, primarily reproducing or extending simple pieces of empirical work. Our primary task though will be meeting and discussing articles. You must read and think about the readings before class, and be ready to discuss the readings in class. I will occasionally ask students to lead discussions on papers or parts of papers. You should be ready to do this. All the readings will be on the class website, except you need to buy a copy of Woodford’s Interest and Prices.  It’s impossible to read every word of every paper here; you, like me, will have to develop the skill of figuring out what is important in each papers (usually not the introductions and conclusions).

Grades will reflect class participation, homework, and an exam. 

Documents

Reading list

Hanno Lustig Christopher Sleet, and Şevin Yeltekin Fiscal hedging with nominal assets Journal of Monetary Economics Volume 55, Issue 4, May 2008, Pages 710-727
doi:10.1016/j.jmoneco.2008.05.012

1.  Friedman and the big picture
The (supposed) effects of monetary policy.

  • Friedman, Milton, 1968, “The Role of Monetary Policy,” American Economic Review

  • J Bradford DeLong “The Triumph of Monetarism” Journal of Economic Perspectives 14, 83-94.

2. VARs

The attempt to document Friedman’s views in data.
Questions: What is a shock anyway? Why is it important to study policy shocks? Does studying responses to shocks mean we implicitly assume a model in which only unanticipated shocks have effects? How important is orthogonalization to the results? Vars are simple and deceptive!

  • Christiano, Lawrence, Martin Eichenbaum and Charles Evans, “Monetary policy shocks: what have we learned and to what end?'' In Michael Woodford and John Taylor, eds, Handbook of Macroeconomics North Holland.

This one gets at the question of anticipated vs. unanticipated shocks:

  • What do the VARs Mean? Measuring the Output  Effects  of  Monetary  Policy Journal of Monetary Economics 41:2 April 1998 277-300 (Revision of NBER WP 5154 June 1995; (Manuscript with a bit clearer pdf). Responses to monetary policy shocks seem long and drawn out. Do we need models with extensive frictions? No, because the response of policy to polich shocks is also drawn out. If you allow expected policy to affect output and inflation, you can make sense of drawn out impulse-response functions with a very short structural response, but a long-lasting impulse.

  • “Shocks” Carnegie-Rochester Conference Series on Public Policy 41, (December 1994) 295-364. A comprehensive look at which shocks matter and which don’t, including technology, money, oil and credit. None of the above accounts for much of economic fluctuations or inflation. Monetary policy shocks in particular account for very little output fluctuation and zero inflation variation. Sorry, Friedman! “Consumption” shocks, reflecting information agents see but we do not see do a pretty good job, but are harder to integrate into economic theory.

Really short, but brings up an important issue – why aren’t we using interest rates, which arguably have the best power to forecast both output and future interest rates, in VARs? :

  • Cochrane, John H. and Monika Piazzesi, “The Fed and Interest Rates – a High Frequency Identification” 2002 American Economic Review 92, 90-95.

I learned quite a bit more about what are and are not shocks by this one: 

  • Romer, Christina and David Romer, 2004, “ Derivation and Implications” American Economic Review 94, 1055-1084.

  • Cochrane, John H. 2004 “Comments on A New Measure of Monetary Policy Shocks’’ Manuscript, University of Chicago

  For some directions on the mechanics of VARs, beyond obvious textbooks such as Hamilton, see my notes on Time series for macroeconomics and finance

3. Doubts

Can the fed nail the price level by setting the price of chewing gum in the C concourse of the United Airlines terminal at O'Hare? Also, we don’t do helicopter drops, we do open market operations. The Modigliani-Miller theorem says they should have no effect.

  • Akerlof, George A., “Irving Fisher on His Head: The Consequences of Constant Threshold-Target Monitoring of Money Holdings,”  The Quarterly Journal of Economics, Vol. 93, No. 2. (May, 1979), 169-187.

A model in which velocity is completely endogenous. More M must means less V not more PY. Also a nice “near rational” analysis of money demand that might help to explain Lucas’ troubles with interest rates. I’ll quickly remind you of background you should know; the Baumol-Tobin and Miller-Orr inventory models of money demand. If these are totally new to you, look at any textbook.

  • Friedman, Benjamin, 1999, “The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps” International Finance 2:3 321—338

  • Friedman, Benjamin, “Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking,” International Finance 3:2, 261-272

Friedman’s response to Woodford’s (and others’) response to Friedman

These papers are the tip of an iceberg of worrying that the Fed is powerless. For example, the entire July 1983 Journal of Monetary Economics v12, n1 (July 1983) dealt with the problem. (Fama and Hall’s papers are particularly good)

  • Taylor, John, “Expectations, open market operations and changes in the federal funds rate.”  St. Louis Fed Review, 2001 Vol. 83, No.4

An excellent reading on the details of fed procedures. What is the quantity side of the 50 bp experiment? – what is the path of reserves/open market operations?

  • Guthrie, G. and Julian Wright (2000), “Open mouth operations” Journal of Monetary Economics 46, 2, 489-516.

It’s always been a puzzle that so large interest rate movements result from such tiny open market operations. In New Zealand, they don’t even do any open market operations. These are two of a recent slew of papers analyzing “open mouth operations.” There is a whiff here of  “the fed matters because people think it matters” reflected in some more serious modeling we’ll do below.

4. Fiscal theory

  • Cochrane, John H., 2004, “Money as Stock: Price Level Determination with No Money Demand.” Forthcoming (at last) Journal of Monetary Economics

  • Cochrane, John H., 2001, “Money as Stock: Price Level Determination with No Money Demand.” NBER working paper 7498 . p.3-8 of this version contain the list of regimes that I will discuss in class.

  • Cochrane, John H.  ''Long Term Debt and Optimal Policy in the Fiscal Theory of the Price Level'' January 2001, Econometrica 69, 69-116.

For the class, only read from 7.1 on, pp. 99-108. This is why we can’t do Friedman and Schwartz for the fiscal theory.  (I’ll do a 5 minute summary of the rest)

Thursday Nov 11:

  • Sims, Christopher, 2001 “Fiscal Consequences for Mexico of Adopting the Dollar”  Journal of Money Credit and Banking 33, 597-616.

As private firms should issue equity, so should governments issue money. Also starts on the important task of mixing fiscal theory with optimal taxation theory

  • Schmitt-Grohe, Stephanie and Martin Uribe, 2004, “Optimal Monetary Policy Under Sticky Prices” Journal of Economic Theory 114, 198-230.

5. Fiscal history and events 

  • Burnside, Eichenbaum and Rebelo, 2001, “Prospective deficits and the Asian Currency Crisis”' Journal of Political Economy 106 (6) 1155-1197.

Thursday Nov 18:

6. Interest rate rules and “New Keynesian” Economics
We thought for a long time that interest rate targets lead to unstable price levels. And yet, the Fed does follow an interest rate target, and the price level doesn’t seem to be exploding. McCallum then pointed out that perhaps the price level could be stationary with a reactive interest rate – if the interest rate rises faster than inflation, perhaps inflation could be stabilized. Taylor noticed that a rule in which the interest rate rises more than inflation seems to characterize Fed behavior.

There is a huge literature now on “optimal Taylor rules”. For example, should the Fed react to actual or expected inflation? What happens if the Fed reacts to expected inflation, and expected inflation reacts to the Fed?

Questions: Is there a sensible model out there in which the Fed raises real rates to contain inflation? There are two schizophrenic strands to the literature; in one the Fed raises real interest rates in response to inflation and this action lowers future inflation; in the more popular strand threats of explosion select equilibria. Did the Fed conquer inflation by moving to a Taylor rule with a coefficient greater than one on inflation? Does the Fed in fact move the funds rate more than one for one with inflation -- how will it respond to a replay of 1973?

  • Clarida, Richard, Jordi Gali, and Mark Gertler. “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory” Quarterly Journal of Economics, 115 (1), February 2000, pp. 147-180.

Famous for the claim that the Fed switched from “Passive” (coefficient on inflation less than one) to “active” (coefficient larger than one) around 1980, and this stopped inflation. Also we need to read the theory section to see how this is supposed to work.

Maybe the “fact” isn’t even true – you make a lot of excuses for output responses in looking at the inflation response.

  • Robert King, 2000, ''The New IS-LM Model: Language, Logic, and Limits” Federal Reserve Bank of Richmond Economic Quarterly 86, 45-103. p.75 especially on the question of interest rate rules.

This is an excellent preview.

Thursday December 2

  • Woodford, Michael, Interest and Prices Ch. 1-4

Suggestions for Extra Readings


If that wasn’t enough….Believe it or not this is the pared down reading list. Here are some good extra readings on each of the topics.

Big picture

  • Robert E. Lucas, Jr., “Nobel Lecture: Monetary Neutrality,” The Journal of Political Economy, Vol. 104, No. 4. (Aug., 1996), pp. 661-682.

  • Lucas, Robert E. Jr., 1994, “Review of Milton Friedman and Anna J. Schwartz’s `A monetary history of the United States, 1867-1960’”, Journal of Monetary Economics 34, 5-16.

  •  Sargent, Thomas J. and Francois Velde 2002 The big problem of small change Princeton: Princeton University Press.

The whole book is pretty much a classic. Chapter 14 on Spanish hyperinflation seems to me to document the fiscal underpinnings of inflation quite well.

  • Bernanke, Ben S., “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,”  The American Economic Review, Vol. 73, No. 3. (Jun., 1983), pp. 257-276.

This is a classic you should read at some point. Maybe the output effect has nothing to do with money – maybe blowing up the banks has some independent effect. This view may explain Japan today. This started the whole “credit channel” literature.

VARs

  • Uhlig, Harald, “What are the effects of monetary policy on output: results from an agnostic identification procedure” Manuscript.

Uhlig takes to heart what people are evidently doing: identifying the shocks by the results, i.e. getting a pretty picture out of the result.

  • Cochrane, John H.  “Permanent and Transitory Components of GNP and Stock Prices” Quarterly Journal of Economics CIX (February 1994) 241-266.

No money but nice (I think) use of cointegrated VARs. Also gets at Blanchard-Quah identification of shocks by long run restrictions, i.e. the money shock is the one with no long run effect on output.

  • Cochrane, John H. “Shocks” Carnegie-Rochester Conference Series on Public Policy 41, (December 1994) 295-364. A review of money VARs up to that point.

  • Cochrane, John H. Comment on ‘What Ends Recessions? By David and Christina Romer, 1994 NBER Macroeconomics Annual 58-74. A precursor to “What do the VARs mean.”

Money Demand

I presumed you’d heard of money demand estimation, the debate starting with Friedman whether it is “stable” and the counterargument that you have to keep muddling with the aggregates to make it look “stable” ex-post.  The best paper I know of to document a classic view of money demand is

  • Lucas, Robert E. Jr. “Money Demand in the United States: A Quantitative Review” 1988, Carnegie Rochester Conference Series on Public Policy 29, 137-168

Lucas (re) discovers and brilliantly uses cointegration. Previous writers ran it in growth rates, got nice errors and junk coefficients. The latest from Lucas on Money demand is

  • Lucas, Robert E. Jr., 2000, “Inflation and Welfare” Econometrica 68   

I also like

  • Lucas, Robert E. Jr., Two Illustrations of the Quantity Theory of Money, The American Economic Review, Vol. 70, No. 5. (Dec., 1980), pp. 1005-1014.

A cool use of moving averages to show money is neutral in the “long run”

  • Cochrane, John H. 1989, “The Return of the Liquidity Effect: A Study of the Short Run Relation Between Money Growth and Interest Rates'' Journal of Business and Economic Statistics 7 (January 1989) 75-83.

A medium frequency analysis of the interest elasticity, to go with Lucas’ long run income elasticity: Band pass filters give money growth negatively correlated with interest rates in the “medium run”
Reynard, Samuel. Universithy of Chicago thesis.

Doubts

  • Woodford, Michael, “Monetary Policy in a World Without Money” Manuscript 2000.

A response to Ben Friedman

  • Demirlap, Selva, and Oscar Jorda, 2001, “The Pavlovian Response to Fed Announcements'' working paper, University of California at Davis.

More on open mouth operations

Fiscal theory

  • Woodford, Michael, “Fiscal Requirements for Price Stability” JMCB Volume 33, Number 3, August 2001

  • Woodford, Michael, “Price-level determinacy without control of a monetary aggregate,” Carnegie-Rochester Conference Series on Public Policy,  43 December 1995, 1-46.

These are some of the classic papers (along with Leeper, cited) that established the fiscal theory. I think what they have to say is covered in our readings and in Woodford’s interest and prices, but if you’re interested in this stuff the originals are a must-read

  • Sims, Christopher, “Fiat Debt as Equity: Domestic Currency Denominated Government Debt as Equity in the Primary Surplus”

  • Sargent, Thomas J., “Some unpleasant Monetarist Arithmetic” Federal Reserve Bank of Minneapolis Quarterly Review 5(3) Fall 1981 

This really brought the fiscal side of price determination to modern attention. Note that debt is real, and the reliance on seignorage. It’s taken 20 years to improve on that. We might write a slightly different model for the four hyperinflations now.

  • Cochrane, John H. , 1998, “A Frictionless view of U.S. Inflation,” in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER Macroeconomics Annual 1998 Cambridge MA: MIT press, p. 323-384.

 Some of the analysis is not as good as in later papers, but I got to tell more fun stories here.

  • Bordo, Michael D. and Carlos A. Vegh, 2002 “What if Alexander Hamilton had been Argentinean? A Comparison of the early monetary experiences of Argentina and the United States” Journal of Monetary Economics 49 459-494

  • Stokey, Nancy, “Fiscal Desperation and Inflation” Manuscript, University of Chicago.

  • Sims, Christopher, “The Precarious Fiscal Foundations of EMU” Manuscript.

Fiscal Events

  • Sargent, Thomas J. and Francois R. Velde, “Macroeconomic Features of the French Revolution,” The Journal of Political Economy, Vol. 103, No. 3. (Jun., 1995), pp. 474-518. 

  • McCandless, George T., “Money, Expectations, and the U.S. Civil War,” The American Economic Review, Vol. 86, No. 3. (Jun., 1996), pp. 661-671.

  • Velde, Francois and Marcelo Veracierto, “Dollarization in Argentina,” Economic Perspectives Federal Reserve Bank of Chicago, Winter 2000

  • Velde, Francois, “Government Equity and Money, John Law’s System in 1720 France’’ Manuscript, Federal Reserve Bank of Chicago

I plan to ignore the theory and concentrate on the facts in the following papers. They are follow-ups to prospective deficits, and should help us to see if the story works. 

  • Burnside, Craig, Martin Eichenbaum and Sergio Rebelo, 2001 “On the Fiscal Implications of Twin Crises” NBER working paper 8277

  • Burnside, Craig, Martin Eichenbaum and Sergio Rebelo, 2003, “Government Finance in the Wake of the Twin Crises,” Manuscript, Northwestern University

  • Burstein, Ariel, Martin Eichenbaum and Sergio Rebelo, 2003, “Large Devaluations and the Real Exchange Rate’’ Manuscript, Northwestern University

I can’t find pdfs so I won’t assign this, but you really should read it at some point!

  • * Sargent, Thomas J. “The Ends of Four Big Inflations”  Ch.3 of Rational Expectations and Inflation New York: Harper and Row. 40-109.

Interest rate rules

  • Goodfriend, Marvin, Interest Rate Policy and the Inflation Scare Problem: 1979-1992 Federal Reserve Bank of Richmond Economic Quarterly 79 (Winter 1993) 1-23.

A really nice, detailed and persuasive account of Fed policy in the 80s. You see the Fed reacting to expected inflation as embodied in long term bonds. 

  • Clarida, Richard, Jordi Gali, and Mark Gertler. "The Science of Monetary Policy: A New Keynesian Perspective." Journal of Economic Literature 37 (1999):  1661-1707.

  • Rudebusch, Glenn, 2001, “Term Structure Evidence on Interest Rate Smoothing and Monetary Policy Inertia'' Manuscript, Federal Reserve Bank of San Francisco, Forthcoming, Journal of Monetary Economics.16-21

shows that the errors of a Taylor rule are likely to be serially correlated inducing a false persistence measure

  • Woodford, “'The Taylor Rule and Optimal Monetary Policy,'' January 2001.

 A quick review of Taylor rules, equilibrium. Then questions whether potential (defining the gap) is the right target, whether a constant intercept rather than a time varying natural rate is optimal, etc.

  • Roberts, John M.  New Keynesian Economics and the Phillips Curve, Journal of Money, Credit and Banking, Vol. 27, No. 4, Part 1. (Nov., 1995), pp. 975-984.

  • Benhabib Jess, Stephanie Schmitt-Grohe and Martin Uribe, 2001 “Avoiding Liquidity Traps,” Journal of Political Economy 110 535-563.

Another paper with explosion threats to “stabilize” the price level.

  • Romer, David Advanced Macroeconomics

In particular, Chapter 6, “Microeconomic foundations of incomplete nominal adjustment” 241-308.  is a good introduction to “neo-keynesian” models;

  • Mankiw N. Gregory 2000, The inexorable and mysterious tradeoff between inflation and unemployment NBER working paper 7884.

 Notes that NeoKeynesian Phillips curves are forward looking. This is at great variance with the data which want a backward looking Phillips curve. An expected deflation is a boom to a forward looking Phillips curve!

  • Alvarez, Fernando, Robert E. Lucas Jr., and Warren E. Weber, 2001, “Interest Rates and Inflation” American Economic Review 91 219-225.

They analyze Taylor rules without neo-keynesian economics. 

Why did US inflation rise and then fall in the 1970 and 1980s? (Preliminary list, and we may not get this far)

Any theory of inflation must have an account of the rise and fall of inflation in the US in the 1970s.. You should know the standard stories.

  • Sderstrom, Ulf, and Anders Vredin, “The Conquest of Inflation: and Introduction to Sargent’s analysis.” Svierges Riksbank Economic Review 2000:3 5-11.

  • Sargent, Thomas J. and Ulf Soderstrom, “The conquest of American Inflation: A Summary.” Svierges Riksbank Economic Review 2000:3 12-45

  • Sargent, Thomas J. “Reactions to the Berkeley story”

  • Goodfriend, Marvin, 2002, “The Phases of US monetary policy 1987 to 2001” Federal Reserve Bank of Richmond Quarterly Review 88(4)

Commitment


This is a very important strain of monetary economics, which I don’t cover for lack of time.

Romer, David Advanced Macroeconomics Ch. 9 “Inflation and Monetary Policy”;

  1. 9.1 Introduction,

  2. 9.2 Inflation money growth and interest rates,

  3. 9.4 Dyanmic inconsistency of low inflation monetary policy,

  4. 9.5 Addressing the dynamic inconsistency problem. 

  • Albanesi, Stefania V.V. Chari and Lawrence J. Christiano “Expectation Traps and Monetary Policy” NBER working paper 8912 April 2002

More Ideas

Walsh, Carl, Monetary Theory and policy.  See http://www.business.uiuc.edu/seppala/econ421/

Some followon work in international, with Burnside, Eichenbaum and Rebelo's prospecitve deficits in mind :

Corsetti, Giancarlo,Bartosz Mackowiak Fiscal Imbalances and the Dynamics of Currency Crises with , (previously Economic Growth Center at Yale University 2000 and CEPR 2001). European Economic Review 2006

Corsetti, Giancarlo, Bartosz Mackowiak A fiscal perspective on currency crises and “original sin”, with, in Barry Eichengreen and Ricardo Hausmann (eds), "Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economics," Chicago University Press.

•Sargent, Thomas, and Francois Velde The Big Problem of Small Change Princeton University Press 2003. This is great. Sargent and Velde think it's an intellectual history of how the world discovered MV=PY. Point taken, but many of the stories also ring of fiscal constraints. There's a short version in the JMCB

Any theory of inflation has to grapple with the event of our time, as Friedman and Schwartz grappled with the 1930s. That is the inflation of the 1970s and the disinflation of the 1980s. Yes, more interesting things happened to smaller economies, but those events are too easily dismissed as being peculiar to their institutitons. We alluded to the conventional view (Clarida Gali Gertler) that the Fed raised phi\pi from below one to above.

•Sargent, Thomas J., The Conquest of American Inflation Princeton University Press 2001. This book gives a story of how the Fed learned (and potentially forgot) central lessons. I disagree -- I think the 70s were a fiscal disaster, as outlined in the not very successful "A Frictionless model of U.S. Inflation" but you need to understand Sargent's view.
See also
•Sderstrom, Ulf, and Anders Vredin, “The Conquest of Inflation: and Introduction to Sargent’s analysis.” Svierges Riksbank Economic Review 2000:3 5-11.
•Sargent, Thomas J. and Ulf Soderstrom, “The conquest of American Inflation: A Summary.” Svierges Riksbank Economic Review 2000:3 12-45

A history of the Federal Reserve A Conversation between Paul Volcker and Allan H. Meltzer. American Enterprise Institute

•You should just spend a day or two browsing Chris Sims' webpage

•Eric Leeper has written a slew of recent great paeprs on fiscal issues.

•Read the original Sargent unpleasant monetarist arithmetic