ADVANCED MACROECONOMICS 2A:
MONETARY ECONOMICS
CEU, Economics Department, 2006




Lecturer: Prof. Max Gillman
Course: 2 credits
 

1. Introduction

The course will study the general equilibrium theory of money within the neoclassical growth and business cycle models.
There will be a short review of empirical evidence (Section 2), with most of the time spent on theory (Section 3), and
some time on policy (Section 4).

2 Empirical Evidence

2.1 Money and Inflation
2.1.1 Money To Prices
Money demand, fixed exchange rate systems.

Cagan (1956), Fischer, Sahay, and Végh (2002), McCallum(1987), Chapter 15 "Episodes in US Monetary History",
Rolnick and Weber (1997).

2.1.2 VARS
Walsh (2003) Chapter 1, Cochrane (1998), Cochrane and Piszzesi (2002), Kraft (2003),
Ross (1998), Bernanke, Boivin, and Eliasz (2004)

2.1.3 Unit Roots and Granger Causality
Crowder (1998), Crowder, Ho¤man, and Rasche (1999), Crowder and Wohar (????), Perron (1989), Culver and
Papell (1997), Benati and Kapetanios (2002), Caporale and Gillana (2003)

2.1.4 Money Demand
Cagan (1956), Marcet and Nicolini (2003), Mark and Sul (2002).

2.2 Money, Output, Banking, and Tobin
Banking shocks, Depressions, VARs, anticipated effects, Tobin, TFP shocks.

Friedman and Schwartz (1963), Ghosh and Ghosh (1999), Calomiris andMason (2003b), Calomiris and Mason (2003a),
Kehoe and Prescott (2002), Hopenhayn and Neumeyer (2002), Ahmed and Rogers (2000), Gillman and Nakov (2003b),
Rapach (2003), Rapach and Wohar (2004), Uhlig (2003), Chari, Kehoe, and McGrattan (2003).

2.3 Money and Growth
Judson and Orphanides (1996), Ghosh and Phillips (1998), Gylfason and Herbertsson (2001), Barro (2001), Khan and
Senhadji (2001) and Gillman, Harris, and Matyas (2004), Gillman and Nakov (2004), Gillman and Wallace (2003).

2.4 Money and Unemployment
Haldane and Quah (1999), Ireland (1999), Romer (2000), Ball and Mankiw (2002), Shadman-Mehta (2001), Ljungqvist and
Sargent (2002).

2.5 Money and Commodity Prices
Hamilton (1983), Perron (1989), Hooker (1999), Hooker (2002), Jones, Leiby, and Paik (2002).

2.6 Money and Asset Prices
McGrattan and Prescott (2001), McGrattan and Prescott (2003), Gillman and Nakov (2003a).

3 Theory

3.0.1 Partial Equilibrium
Cagan (1956), Baumol (1952), Tobin (1956).

3.0.2 Overlapping Generations
Samuelson (195), Lucas (1972), Wallace (1980), Lucas (1996).

3.0.3 Money in the Utility Function
Samuelson (1947), Sidrauski (1967), Eckstein and Leiderman (1992), Lucas (2000), Walsh (2003) Chapter 2.

3.0.4 Cash-in-Advance
Hicks (1935), Lucas (1980), Lucas (1988).

3.0.5 Cash-Credit
Lucas and Stokey (1983), Lucas and Stokey (1987), Lucas (2000), Walsh (2003) Chapters 2 and 3, Ljungqvist and
Sargent (2000) 17:493-500.

3.0.6 Shopping Time
Lucas (2000), Walsh (2003), Chapter 3, Ljungqvist and Sargent (2000) 17:493-500.

3.1 The Welfare Cost of Inflation
Gillman (1993), Gillman (1995), Dotsey and Ireland (1996), Marty (1999), Lucas (2000), Marty (1967).

3.2 Money Demand and Velocity
Jovanovic (1982), Eckstein and Leiderman (1992), Bental and Eckstein (1997), Gillman (1993), Ireland (1995), Chari,
Christiano, and Eichenbaum (1995), Gillman, Siklos, and Silver (1997), Bental and Eckstein (1997), Gillman and Otto (2002),
Gillman and Kejak (2004), Szapary (2001), Gillman and Nakov (2004).

3.3 Money, Inflation, Output, and Growth
Sidrauski (1967), Tobin (1956), Tobin (1965), Stockman (1981), Temple (2000), Gomme (1993), Ireland (1994), Chari,
Jones, and Manuelli (1996), Haslag (1998), Gillman and Kejak (2005a), Gillman and Kejak (2005b)

3.4 Financial Development and the Theory of Credit

3.4.1 Generalized Exchange Theory: Clower Constraint as Isoquant of Exchange

Parente, Rogerson, and Wright (1999), Parente, Rogerson, and Wright (2000), Gillman and Kejak (2005a), Gillman
and Cziraky (2004).

3.4.2 Effect of Financial Development on Growth: The Role of Inflation
King and Levine (1993), Levine (1997), Levine, Loayza, and Beck (2000), Boyd and Smith (2001), Rousseau and
Wachtel (2001), Gillman, Harris, and Matyas (2004), Gillman and Harris (2004a), Dawson (2003), Gillman and Harris (2004b).

3.5 The Credit Channel

3.5.1 Kiyotaki and Moore Credit Constraints in DGE
Kocherlakota (2000), Walsh (2003) 7.3.2

3.5.2 Other Credit Constraints
Warner and Georges (2001), Walsh (2003)7: 323-362, Bohacek and Medizabal (2004).

3.6 Theory of the Aggregate Price Level
Gillman (2002), McCallum (2001a), Kocherlakota and Phelen (1999), Walsh (2003)4:164-171 and 10: 474-480,
Canzoneri, Cumby, and Diba (2001), Canzoneri and Diba (2005), Ljungqvist and Sargent (2000): 506-507, Schabert (2003b),
Cochrane (2003).

3.7 Monetary Business Cycles
Rose (1969), Cooley (1995), Cooley and Hansen (1998), Gavin and Kydland (1999), Berger, Kyle, and Scalise (2003),
Tallman and Bharucha (2000), Benk, Gillman, and Kejak (2004).

3.8 Liquidity Effect
Li (2000), Einarsson and Marquis (2000).

3.9 Money and the Open Economy
Calvo and Mishkin (2003), Walsh (2003)Chapter 6.

4 Policy
Tsiang (1969), Svensson (2003), McCallum (2000), McCallum (2001b), Walsh (2003)4: 135-172, Chapters 5, 8, 9, 10:
499-514, 11.

4.1 Second-Best Ramsey Theory of Optimal Iflation
Braun (1994), Gillman (2000), Lucas (2000), Ljungqvist and Sargent (2000): 510-514, Walsh (2003)4: 172-191, Gillman and
Yerokhin (2003), Burnell and Kim (2003), Alvarez, Kehoe, and Neumeyer (2002).

4.2 Rules versus Discretion
Bernanke and Mishkin (1997), Alvarez, Lucas, and Weber (2001), Schabert and Bruckner (2002), Schabert (2003a),
Schabert (2003b), Chowdhury and Schabert (2003), Linnemann and Schabert (2003), Siklos and Abel (2001).

A.  Homework and Exam

A.1 Weekly Sets: 20%
HW1: Any 5 of the questions in Walsh (2003) 2: 1-11; due Jan 16.
HW2: Any 4 of the questions in Walsh (2003) 3: 1-9; due Jan 23.
HW3: Walsh (2003) 4: 1, 2, 5, 7; one problem from the end of chapter 17 in Ljundqvist
and Sargent (2000); due Jan 30.

A.2 End of Course Project: 30%
Choose one of the following projects, due Feb 6:
1. Estimate a VAR with structural break testing for Money, Prices, and Income as in
Gillman and Nakov (2004), for a transition/accesion country that is pre-approved by the
lecturer.
2. Estimate the degree to which actual nominal interest rates followed the interest
rates that would have resulted if the country had followed a Taylor rule of monetary
policy, for a transition/accession country pre-approved by the lecturer.
3. Estimate money demand, as in Gillman and Cziraky (2005, BER forthcoming), or
otherwise.
4. Go through and derive all the equations in a journal article or working paper that
is found in the Reference list below and that is pre-approved by the lecturer.
5. Other suggestions.

A.3   Final Exam: 50%
The exam will be based on the lectures. Regular class attendance is recommended.

A.4   On Reserve
Monetary economics : theory and policy / Bennett T. McCallum McCallum, Bennett T.

Required Readings /RH ?332.4 MCC - AVAILABLE
Monetary theory and policy / Carl E. Walsh Walsh, Carl E.
Required Readings /RH ?332.4/6 WAL - AVAILABLE
Recursive macroeconomic theory / Lars Ljungqvist, T.J. Sargent Ljungqvist, Lars
Required Readings /RH ?339./015 LJU - AVAILABLE
Recursive macroeconomic theory / Lars Ljungqvist, T. J. Sargent Ljungqvist, Lars
Required Readings /RH ?339./015 LJU - AVAILABLE
Recursive macroeconomic theory / Lars Ljungqvist, T. J. Sargent Ljungqvist, Lars
Required Readings /RH ?339./015 LJU - AVAILABLE
Recursive macroeconomic theory / Lars Ljungqvist, T. J. Sargent Ljungqvist, Lars
Required Readings /RH ?339./015 LJU - AVAILABLE
Recursive macroeconomic theory / Lars Ljungqvist, T. J. Sargent Ljungqvist, Lars
Required Readings /RH ?339./015 LJU - AVAILABLE
Studies in the quantity theory of money / edited by Milton Friedmann ; with essays
by Milton Friedman.
Required Readings /RH ?332.4/01 FRI - AVAILABLE
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Benati, L., and G. Kapetanios (2002): "Structural Breaks in Inflation Dynamics," Bank of England manuscript.

Benk, S., M. Gillman, and M. Kejak (2004): "Credit Shocks in a Monetary Business Cycle,"Working Paper 7/2004,
Central European University, Budapest.

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