| Lecture Notes Lecture One March 29 Review, Recap & Preview: we'll cover Models with Sticky Prices & Sticky Wages. This requires a model of Imperfect Substitution of goods - Monopolistic Competition. We'll do Welfare Analysis of Monetary and Fiscal Policies with these Nominal Rigidities Models. Models in the Open Economy with other Frictions, like Financial Frictions, Variable Capital Utilization and Habit Persistence. Lecture: Nominal Price & Wage Rigidities (Chapter Six). Time Dependent Models (a variant Taylor's 1983 Model with staggered prices). Menu Costs. State Dependent Models discussed. A rigid price model with Quadratic Cost Adjustment discussed in detail. Various Models Compared, with Microdata considered. Basic Model of Monopolistic Competition – Dixit & Stiglitz' Model, from Walsh's Book, Chapter 8.2 pg 330. We solve this equation for the Household. Lecture Notes [PDF Typed 10pgs] [PDF Handwritten] Chapter 6 Draft [copyrighted, sorry] - Chapter 8 Draft [copyright] Lecture Two March 31 Setting up a benchmark model of Imperfect Competition - Monopolistic Competition (Dixit & Stiglitz Model). This will be used later to compare with models with Nominal Price Rigidities. Adding Nominal Price Rigidities via Calvo's (1983) Model discussed in Walsh Chapter 6.2.4. Calvo's Time-Dependent Model explored at length, concluding with the log-linearized firm pricing decision - that is, the New Keynesian Phillips Curve. See Walsh Chapters 6 & 8. Lecture Three April 5 New Keynesian Phillips Curve recap. Price Level & Price Dynamics. A discussion of Kappa - the Elasticity of Inflation with respect to Real Marginal Cost (given various Omega levels, the parameter for the Degree of Nominal Rigidity). Solving the New Keynesian Phillips Curve forward - Inflation and future Real Marginal Costs. Log Linearized New Keynesian Phillips Curve. Empirical Evidence of New Keynesian Phillips Curve - Estimating Real Marginal Cost, Estimating the Structural Parameters like Omega and Kappa. A brief talk on State Dependent Models. Lecture Notes [PDF 10 pgs]Walsh Chapters 6.3 Lecture Four April 7 State Dependent Models continued. Firm Specific shocks. Walsh Chapter 6.2.5 Lecture Five April 12 Review of much of Walsh Chapter 12. Steps leading up through Dixit-Stiglitz Monopolistic Competition to the New Keynesian Phillips Curve. Review of the economy with flexible prices and with stickiness - with nominal rigidities. A digression on Granger Causality & Real Marginal Costs and Inflation. Real Marginal Costs and the Output Gap. The Inflation Adjustment Equation – The LM Curve – Aggregate Supply – The New Keynesian PhillIps Curve. All the steps that lead up to the IS Curve, the Linearized Euler Condition. Multiple Stationary Rational Expectations Equilibria.Lecture Notes [PDF 10 pgs] Audio Edition of Lecture [mp3] Walsh Chapter 6 & 8 Review - also 8.3.3 Lecture Six April 14 Taylor principle. Dynamic instability & sunspot (multiple) equilibrium. Liquidity trap. Solving the New Keynesian model with MATLAB (basicsol.m). Simulating price shocks (inflation), policy shock (interest rate) & demand shock (real rate). Optimal Policy. Welfare impact of inflation with sticky prices. More distortions from inflation. Policy weights with optimal policy. Importance of theta - the structural parameter describing NK market economy (it describes firm's mark-up, elasticity of demand, degree of competition in market). How omega (percentage of firms that can adjust prices - degree of nominal rigidity) effects welfare. Lecture Seven April 19 Optimal Policy with New Keynes Model. Discretion and Optimal Commitment. The time inconsistency with the optimal pre-commitment policy. Optimal policy from the timeless perspective. Lecture Eight April 21 Mid-term set for May 3rd. Alternate method for solving "Forward
Looking Rational Expectations Models". Policy Analysis. Leading to the Taylor Rule. Lecture Nine April 26 Intuition behind optimal policy under discretion + under optimal commitment + optimal pre-commitment policy from the timeless perspective. New Keynesian model and real marginal cost. Introducing wage stickiness. Lecture Ten April 28 Wage & Price Stickiness and Habit Persistence. Lecture Eleven May 5 Fiscal vs Monetary Dominance (& the unpleasant monetarist arithmetic) and Ricardian vs Non-Ricardian regime. This leads into discussions about government budget constraint and seingiorage. Fiscal Policy's impact on price level. Lecture Twelve May 10 Mid-Term Review (see notes and review to audio discussion). Lecture: Adding a fiscal authority - finding the IS Curve with government expenditure (lots of maths and discussion of how our new flex price equilibrium with government. Lecture Thirteen May 12 Optimal Policy Rule for i_t - Considering the real rate as a shock, how does that effect the optimal policy? Problem Set 4, Question 2 review (adding government, with a shock to the IS curve). Ricardian Equivalence and government. Lecture Fourteen May 17 Comparing a few loss functions. Shadow cost of government expenditure. Adding lump-sum taxes implies we can adjust optimally to government expenditure and inflation will still remain zero. The random walk of government expenditure. Lecture Fifteen May 19 Open Economy (!) the two country model variant (ala Obstfeld & Rogoff). The law of one price, terms of trade, the real exchange rate, consumer price index and GDP-deflater calculated for this model. Uncovered Interest Parity confirmed. Lecture Sixteen May 24 Open Economy continued with a small open economy model. Interest rate and international risk sharing. Lecture Seventeen May 26 Open economy and the IS Curve and the interest adjustment equation. Lecture Eighteen June 2 More Open economy. Financial frictions. Diamond-Dybvig classic model of bank runs. Adverse selection. Moral Hazard & Agency Costs - all in macro. Final & Pre-Lim Exam Review June 7 Review of 205C and a bit of 205B. Really too much material to repeat - very comprehensive, and I've rewritten the notes carefully. | Walsh's Course Notes
MATLAB Basics [PDF 4pgs]
For folk completely new to MATLAB. Very basic to tools for Macroeconomics. Simples Commands, Loops, Convergence & Equation Solving.
Notes on International Risk Sharing [PDF 2pgs]
Covered May 24th - when dealing with a small open economy model, the law of one price leads to arbitrage in financial markets, detailed here.
Monetary & Fiscal Interaction Pt. 1 [PDF 14pgs]
Monetary & Fiscal Interaction Pt 2 [PDF 7pgs]
Started covering May 5th and forward.
Slides on Monetary Economics [PPT 195slides]
New Keynesian Monetary Economics [Walsh Chapter 8] We learned out of a draft chapter of Monetary Theory and Policy - Chapter 8. Solving Linear Rational Expectations Models [PDF 5pgs] Step-by-step behind the linear algebra involved. Adding Money to an Real Business Cycle (RBC) Framework [PDF 12pgs] Awesome intro & summery of how we go from basic RBC framework to incorporating money. Money In Utility (MIU, Sidrauski 1967) and Cash In Advance (CIA, Clower 1967) Text Book All of this, of course, is in support of Professor Walsh's awesome book Monetary Theory and Policy, (Third Edition 2010)
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