Econ205C Advanced Macroeconomics III - Carl E Walsh

 Advanced Macroeconomics Theory III 

   Carl Walsh    
        Contact & Website
        Course Website
        Background Info

    Class Time and Location
        Social Science 1 - Room 145
        Mon & Wed - 5:00 - 6:45PM
        Office Hours: Tu 9-10am, W 3:30-4:30pm, 
            or by appointment.

Economics 205C is the third quarter of the year-long first-year sequence in macroeconomics for Ph.D 
(and a continuation of Econ 205B). The focus in 205C will be on new Keynesian dynamic stochastic general equilibrium models of fluctuations and monetary policy, financial frictions, fiscal policy, and unemployment.

According to the Class Description: Modern macroeconomic theory: determination of national income; employment, inflation, and exchange rates; theories of growth and business cycle fluctuations; international transmission of inflation and other disturbances; recent developments in the analysis of macroeconomic policy; modern theoretical and empirical analysis of aggregate relationships. Courses must be taken in sequence.


    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. 
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).