Master’s Programme in Economics (Research track). Open also to students of the doctoral programme in economics.
The course builds upon the contents of Advanced Macroeconomics 1 and 2.
After the course, the student should
- Understand why monetary policy is neutral in the classical model and when it is non-neutral
- Be able to derive the New Keynesian model and compare the welfare effects of alternative monetary policy rules
- Understand optimal monetary policy in this framework
- Understand the time-consistency problem
- Understand the effect of the zero lower bound
- Be able to describe the interaction between monetary and fiscal policy
- Be able to describe how the open-economy setting alters the previous results
Annually in the fourth period
In the course, we study why the monetary policy is neutral in classical, RBC-type macro models and explain a special case where it is not. The classical model is augmented with imperfect competition and price rigidities, leading to the canonical new Keynesian model. Next, various monetary policy rules are studied in this framework. We also study the zero lower bound restriction of nominal interest rates on monetary policy and the resulting extensions to the basic framework. This builds a bridge to study the interaction of fiscal and monetary policies. Discretion and commitment in monetary policy making is introduced. We also study the open economy dimension of monetary policy.
The course material will mainly draw elements from the following books and articles:
- Chapters 1–5 and 7 of Jordi Galí's book Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, 2nd edition, Princeton University Press. (The 1st edition is also suitable.)
- Gauti B. Eggertson and Paul Krugman (2012): Debt, Deleverageing, and the Liquidity Trap: A FisherMinsky-Koo Approach, The Quarterly Journal of Economics 127 (3), 1469–1513.
- Matthew Canzoneri, Robert Cumby, Behzad Diba, Chapter 17 - The Interaction Between Monetary and Fiscal Policy, In: Benjamin M. Friedman and Michael Woodford, (Editors), Handbook of Monetary Economics, Elsevier, 2010, Volume 3, Pages 935–999
The course material is delivered through the course website. The website also contains moderated discussion groups that support learning. Problem sets are designed to support learning of the course material.
The grade on a scale from 0 (fail) to 5 is based on the points earned in the final exam.
The course consists of lectures (18 hours) and exercise sessions (8 hours), where solutions to the homework assignments are discussed. The lectures and exercise sessions are not mandatory. There is a written final exam based on the lecture material and the homework assignments. The homework assignments consist of analytical exercises. They familiarise the student with the theory and calculations typically required in applying and extending the models that have been studied in the lecture. They also involve the interpretation of model economies.