ADVANCES IN MONETARY POLICY ANALYSIS
David López-Salido (Federal Reserve Board)

Objectives

This course provides a deep and rigorous presentation of the New Keynesian models used for the analysis and design of monetary policy. The course starts describing the ingredients of a prototypical New Keynesian framework that integrates staggered price setting into a dynamic stochastic general equilibrium model with optimizing private agents. After discussing in detail the non-linear representation of its equilibrium conditions, as well as the more familiar first-order approximation, the course covers a number of applications, discussions and extensions around the baseline model.

Applications include comparing the performance of an optimal monetary policy with alternatives such as discretionary policy, a “timeless” policy or a “loose commitment” policy. The implications of alternative rationalizations for inflation and output persistence, unemployment dynamics, the interaction of nominal and real rigidities, and the introduction of financial frictions are also discussed. The last part of the course covers the implications of the zero lower bound on the nominal interest rate and the differences between conventional and non-conventional monetary policies –quantitative easing and credit easing. In addition, there will be a focus on the implications of monetary policy for fluctuations in risk, reviewing models that incorporate financial frictions to generate fluctuations in the external finance premium and the risk premium. Part of the presentation focuses on the use of computer programs to quantitatively assess the contribution of the previous features to inflation dynamics and optimal monetary policy.

Intended for

Economists, researchers, and academics interested in monetary economics and monetary policy analysis.

Prerequisites

Even though the course is self-contained, macroeconomics at an advanced undergraduate or first year graduate levels are recommended. Computer applications will be based on RATS and Matlab.

Topics

The prototypical New Keynesian framework. Price setting and inflation dynamics. The monetary policy transmission mechanism. Relative price and markup distortions. Equilibrium characterization in the long-run and in the stochastic economy.

Monetary policy applications. Simple rules vs. optimal monetary policy: the Ramsey non-linear representation and the linear-quadratic representation. Discretionary policy. Inflation and Stabilization biases.

Alternative sources of output and inflation persistence. The interaction between nominal and real rigidities. Labor market frictions and unemployment. Implications for the estimation of inflation dynamics and for optimal policy.

New directions. Implications of the zero lower bound on the nominal interest rates for the design and implementation of monetary policy. Endogenously segmented financial markets models, monetary policy and the equity premium.