553 International Monetary Theory and Policy II, Part 2

Economics 553, Part 2, Spring 2002

Princeton University

Courses 2001-02 | 504 | 553 | 581f

International Monetary Theory and Policy II, Part 2

The second half of a second-year one-semester graduate course in the Spring 2002 Graduate Program, Department of Economics, Princeton University.

Part 1 was taught by Hélène Rey.

Announcements regarding Part 2 will be made on this page, and the page will be frequently updated. (Course plan and readings are preliminary and will be updated.) Students are required to check the page regularly.

Sample questions (short-answer ones and a problem)
Final readings posted. Some typos corrected in Overhead slides 5.
Some references to asset pricing and monetary policy added (not required).

Teacher: Lars Svensson, Office: 106 Fisher Hall, Tel: 258-0329, Email: svensson@princeton.edu.
Office hours: By appointment.
Administrative assistant: Kathleen DeGennaro, Office: 108 Fisher Hall, Tel: 258-7471, Email: kdegenna@princeton.edu.

Class chedule: Wed, 2:40-5:40 pm, 343 Jadwin Hall (photo).
Part 1 started Feb 6, ended Mar 13.
Part 2 starts Mar 27, ends May 1, 2002.

Final exam for 553 and general exam for 552 and 553: Wed, May 8, 12-3, Fisher B-06.
Sample questions (short-answer ones and a problem) (there might also be essay questions on the exam)

Prerequisites: Students are expected to be familiar with the material in Economics 552, Internatinal Monetary Theory and Policy, taught by Paul Krugman and Hélène Rey, in the Fall 2001 Graduate Program.

Topics

A framework for analysis of monetary policy
The evolution of monetary policy in open economies
Monetary policy issues for the Eurosystem
The zero bound, liquidity traps and deflation in open economies
Recent New Classical open-economy models of monetary policy and the transmission mechanism
Recent New Keynesian open-economy models of monetary policy and the transmission mechanism
The choice of monetary-policy/exchange-rate regime

Overhead slides: Copies of overhead slides will be available before each class on this page, as pdf files. Students are expected to download and print these before each class.

Notice: These slides are not self-contained but incomplete, and are not a substitute for coming to class. In particular, the slides are simplified and sometimes provocative, and should not be interpreted as definitive statements.

Overhead slides 1
Notes on Optimization under Commitment and Discretion
Overhead slides 2
Overhead slides 3
Gali 01 Fig 3
Overhead slides 4
Overhead slides 5 (Rev 5/4/02)
Overhead slides 6
Overhead slides 7

Readings and course plan

* indicates required reading. Other readings are suggested but not required.

Students are expected to find most of the readings on the web. Learning to find your way to the monetary-policy literature on the web is part of the course. Use links to authors' personal homepages (this usually gives you the most recent copy), central bank's publications and working papers, NBER working papers, CEPR discussion papers, journals, JSTOR, the PU Library e-journals, etc. Some restricted material is available here.

1. A framework for analyzing monetary policy

Cecchetti (1998)
Clarida, Gali and Gertler (1999)
*Söderlind (1999)
*Svensson (2000b, 2001a)
Svensson and Woodford (1999)

2. The evolution of monetary policy rules

Cecchetti (1998)
Clarida, Gali and Gertler (1999)
McCallum (1999)
*Meltzer (n.d.)
*Svensson (2001a, 2001b)
Svensson and Woodford (1999)
*Taylor (1993)
Wicksell (1898)
Woodford (1998)

3. Monetary-policy issues for the Eurosystem

Begg, De Grauwe, Giavazzi, Uhlig and Wyplosz (1998)
Bofinger (1999)
Buiter (1999)
European Central Bank (1999)
*European Central Bank (2001, chap. 3: The ECB's monetary policy strategy)
*Gali (2001)
Gerlach and Svensson (2002)
Issing (1999)
Rudebusch and Svensson (2002)
*Svensson (1999a, 2000a)

4. The zero bound, liquidity traps and deflation in open economies

*Bernanke (2000)
Buiter and Panigirtzoglou (1999)
Clouse, Henderson, Orphanides, Small and Tinsley (2000)
Goodfriend (2000)
*Krugman (1998)
*McCallum (2000)
Meltzer (1999)
Orphanides and Wieland (1999)
Posen (1998)
Reifschneider and Williams (2000)
*Svensson (2001c)
*Ueda (2000)

5. Recent New Classical open-economy models of monetary policy and the transmission mechanism

Bacchetta and van Wincoop (2002)
Canzoneri, Cumby and Diba (2002)
Chari, Kehoe and McGrattan (1998)
Cole and Obstfeld (1991)
*Corsetti and Pesenti (2002)
Devereux and Engel (2001)
Engel (2002)
Friberg (1998)
*Lane (2001)
*Obstfeld and Rogoff (1996, sec. 9.2, 10.1, 10.2)
Obstfeld and Rogoff (2000)
Obstfeld and Rogoff (2001)
Sutherland (2000)
Svensson and van Wijnbergen (1989)

6. Recent New Keynesian open-economy models of monetary policy and the transmission mechanism

Ball (1999)
Batini and Haldane (1999)
Benigno and Benigno (2002)
Chari, Kehoe and McGrattan (2000)
*Clarida, Gali and Gertler (2002)
Flamini (2001)
Gali and Monacelli (2002)
Kollman (2001)
McCallum and Nelson (1999, 2000)
*Nelson (2002)
*Schmitt-Grohe, Stephanie, and Martin Uribe (2001)
*Smets and Wouters (2001)
Svensson (2000b)
Weerapana (2000)

7. The choice of monetary-policy/exchange-rate regime

*Calvo and Reinhart (2000)
Cavallo, Kisselev, Perri and Roubini (2002)
Céspedes, Chang and Velasco (2002)
*Fischer (2001)
*Frankel (1999)
Mishkin and Savastano (1999)
Obstfeld and Rogoff (1995)
Svensson (1997a)

References

Angeloni, Ignazio, Vitor Gaspar and Oreste Tristani (1999), "The Monetary Policy Strategy of the ECB," working paper, ECB.
Bacchetta, Philippe, and Eric van Wincoop (2002), "A Theory of Currency Denomination of International Trade," CEPR Discussion Paper No. 3120.
Ball, Larry (1999), "Policy Rules for Open Economies," in Taylor (1999)
Batini, Nicoletta, and Andrew Haldane (1999), "Forward-Looking Rules for Monetary Policy," in Taylor (1999)
Begg, David, Paul De Grauwe, Francesco Giavazzi, Harald Uhlig, and Charles Wyplosz (1998), The ECB: Safe at any Speed?, Monitoring the European Central Bank 1, CEPR, London.
Benigno, Pierpaolo (1999), "Optimal Monetary Policy in a Currency Area," working paper, Princeton University.
Benigno, Gianluca, and Pierpaolo Benigno (2002), "Implementing Monetary Cooperation Through Inflation Targeting," CEPR DP No. 3226.
Berg, Claes, and Lars Jonung (1999), "Pioneering Price Level Targeting: The Swedish Experience 1931-1937," Journal of Monetary Economics 43, 525-551.
Bernanke, Ben S. (2000), "Japanese Monetary Policy: A Case of Self-Induced Paralysis?" working paper.
Bernanke, Ben, and Mark Gertler (1999), "Monetary Policy and Asset Price Volatility," in New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City.
Bernanke, Ben, and Mark Gertler (2001), "Should Central Banks Respond to Movements in Asset Prices?" American Economic Review, May.
Bernanke, Ben, Mark Gertler and Simon Gilchrist (1998), "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Paper No. 6455.
Bernanke, Ben S., Thomas Laubach, Frederic Mishkin and Adam Posen (1999), Inflation Targeting: Lessons from the International Experience, Princeton: Princeton Univ. Press.
Bernanke, Ben S., and Ilian Mihov (1998), "Measuring Monetary Policy," Quarterly Journal of Economics 113, 869-902.
Bernanke, Ben S., and Frederic S. Mishkin (1997), "Inflation Targeting: A New Framework for Monetary Policy?" Journal of Economic Perspectives 11, 97-116.
Blinder, Alan S. (1998), Central Banking in Theory and Practice, MIT Press.
Bofinger, Peter (1999), "The Conduct of Monetary Policy by the European Central Bank According to Article 105 of the Treaty versus the Real Economy," working paper, University of Würzburg.
Buiter, Willem H. (1999), "Alice in Euroland," CEPR Policy Paper No. 1.
Buiter, Willem H., and Nikolas Panigirtzoglou (1999), "Liquidity Traps: How to Avoid Them and How to Escape Them," NBER Working Paper No. 7245.
Calvo, Guillermo A., and Carmen M. Reinhart (2000), "Fear of floating," NBER Working Paper No. 7993.
Canzoneri, Matthew B., Robert E. Cumby and Behzad T. Diba (2002), "The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?" NBER Working Paper No. 8765.
Cavallo, Michele, Kate Kisselev, Fabrizio Perri and Nouriel Roubini (2002), "Exchange Rates Overshooting and the Costs of Floating," working paper.
Cecchetti, Stephen G. (1998), "Policy Rules and Targets: Framing the Central Banker's Problem," Economic Policy Review of the Federal Reserve Bank of New York 4 (June 1998) 1-14.
Cecchetti, Stephen G., Hans Genberg, John Lipsky and Sushil Wadhwani (2000), Asset Prices and Central Bank Policy, Geneva Report on the World Economy 2, CEPR and ICMB.
Cecchetti, Stephen G., Hans Genberg and Sushil Wadhwani (2002), "Asset Prices in a Flexible Inflation Targeting Framework," working paper.
Céspedes, Luis Felipe, Roberto Chang and Andres Velasco (2002), "Balance Sheets and Exchange Rate Policy," working paper.
Chari, V.V., Patrick J. Kehoe and Ellen McGrattan (2000), "Can Sticky Price Models Generate Volatile and Persistent Exchange Rates?", NBER Working Paper No. 7869.
Clarida, Richard, Jordi Gali, and Mark Gertler (1999), "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature 37, 1661-1707.
Clarida, Richard, Jordi Gali, and Mark Gertler (2001), "Optimal Monetary Policy in Open vs. Closed Economies," American Economic Review (May 2001).
Clarida, Richard, Jordi Gali, and Mark Gertler (2002), "A Simple Framework for International Monetary Policy Issues," working paper, February.
Clouse, James, Dale Henderson, Athanasios Orphanides, David Small and Peter Tinsley (2000), "Monetary Policy when the Nominal Short-Term Interest Rate is Zero," Journal of Money, Credit, and Banking 32 (November 2000, Part 2). (FEDS Working Paper No. 2000-51, Federal Reserve Board)
Cole, Harold L, and Maurice Obsrfeld (1991), "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?" Journal of Monetary Economics 28, 3-24.
Corsetti, Giancarlo, and Paolo Pesenti (2002), "International Dimensions of Optimal Monetary Policy," working paper.
Devereux, Michael B., and Charles Engel (2001), "Exchange Rate Pass-Through, Exchange Rate Volatility, and Exchange-Rate Disconnect," working paper.
Dornbusch, Rudiger (1980), Open Economy Macroeconomics, Basic Books, New York.
Engel, Charles (2002), "Expenditure Switching and Exchange Rate Policy," working paper.
European Central Bank (1999), "The Stability-Oriented Monetary Policy Strategy of the Eurosystem," ECB Monthly Bulletin, January 1999, 39-50.
European Central Bank (2001), The Monetary Policy of the ECB, ECB, Frankfurt.
Fischer, Stanley (2001), "Exchange Rate Regimes: Is the Bipolar View Correct?" Journal of Economic Perspectives 15(2), 3-24.
Flamini, Alessandro (2001), "Open-Economy Inflation Targeting and Exchange Rate Pass Through," HEI Working Paper No. 03/2001.
Frankel, Jeffrey A. (1999), "No Single Currency Regime is Right for All Countries or at All Times," NBER Working Paper 7338.
Friberg, Richard (1998), "In Which Currency Should Exporters Set Their Prices," Journal of International Economics 45, 59-76.
Friedman, Milton (1968), "The Role of Monetary Policy," American Economic Review 58, 1-17.
Friedman, Milton (1969), "The Optimum Quantity of Money", in The Optimum Quantity of Money and Other Essays, Aldine.
Gali, Jordi (2001), "Monetary Policy in the Early Years of EMU," working paper.
Gali, Jordi, and Tommaso Monacelli (2002), "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," working paper, March.
Gerlach, Stefan, and Lars E.O. Svensson (2002), "Money and Inflation in the Euro Area: A Case for Monetary Indicators?" working paper.
Gertler, Mark, Simon Gilchrist and Fabio Massimo Natalucci (2001), "External Constraints on Monetary Policy and the Financial Accelerator," working paper.
Goodfriend, Marvin (2000), "Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit, and Banking 32 (November 2000, Part 2), 1007-1035.
Hetzel, Robert L. (2000), "The Taylor Rule: Is it a Useful Guide to Understanding Monetary Policy?" Quarterly Review, Federal Reserve Bank of Richmond, Spring 2000, 1-33.
Issing, Otmar, Vitor Gaspar, Ignazio Angeloni and Oreste Tristiani (2001), Monetary Policy in the Euro Area, Cambridge University Press.
Kollman, Robert (2001), "Monetar Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," working paper, University of Bonn.
Krugman, Paul (1998), "It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity 1998(2), 137-205.
Lane, Philip R. (2001), "The New Open Economy Macroeconomics: A Survey," Journal of International Economics 54, 235-266.
McCallum, Bennett T. (1999a), "Issues in the Design of Monetary Policy Rules," in Taylor, John B., and Michael Woodford, eds., Handbook of Macroeconomics, Vol. 1C, North-Holland, chap. 23. (NBER Working Paper No. 6016.)
McCallum, Bennett T. (2000), "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit, and Banking 32 (November 2000, Part 2), 870-904.
McCallum, Bennett T., and Edward Nelson (1999), "Nominal Income Targeting in an Open-Economy Optimizing Model, Journal of Monetary Economics 43, 553-578.
McCallum, Bennett T., and Edward Nelson (2000), "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy 16 (Winter 2000), 74-91.
Meltzer, Allan H. (1999), "A Policy for Japanese Recovery," working paper.
Meltzer, Allan H. (n.d.), "Money," draft encyclopedia entry.
Mishkin, Frederic S. (1995), "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives 9(4), 3-10.
Mishkin, Frederic S. (2000), The Economics of Money, Banking and Financial Markets, 6th edition, Addison-Wesley Publishing.
Mishkin, Frederic S., and Miguel A. Savastano (1999), "Monetary Policy Strategies for Latin America," working paper.
Nelson, Eward (2002), "Comment on Clarida, Gali and Gertler (2002)."
Obstfeld, Maurice, and Kenneth Rogoff (1996), Foundations of International Macroeconomics, MIT Press.
Obstfeld, Maurice, and Kenneth Rogoff (1995), "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives 9(4), 73-96.
Obstfeld, Maurice, and Kenneth Rogoff (2000), "New Directions for Stochastic Open Economy Models," Journal of International Economics 50, 117-153.
Obstfeld, Maurice, and Kenneth Rogoff (2001), "Global Implications of Self-Oriented National Monetary Rules," working paper.
Orphanides, Athanasios, and Volker Wieland (1999), "Efficient Monetary Policy Design Near Price Stability," working paper, Federal Reserve Board.
Posen, Adam S. (1998), Restoring Japan's Economic Growth, Institute for International Economics, Washington, DC.
Reifschneider, David, and John Williams (2000), "Three Lessons for Monetary Policy in a Low Inflation Era," Journal of Money, Credit, and Banking 32 (November 2000, Part 2). (FEDS Working Paper No. 1999-44, Federal Reserve Board.)
Rogoff, Kenneth (2002), "Dornbusch's Overshooting Model after Twenty-Five Years," IMF Working Paper WP/02/29.
Rotemberg, Julio J., and Michael Woodford (1997), "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Macroeconomics Annual 1997, 297-346.
Rudebusch, Glenn, and Lars E.O. Svensson (1999), "Policy Rules for Inflation Targeting," in John B. Taylor (ed.), Monetary Policy Rules, University of Chicago Press, 1999.
Schmitt-Grohe, Stephanie, and Martin Uribe (2001), "Closing Small Open Economy Models," Working Paper.
Smets, Frank, and Raf Wouters (2001), "Openness, Imperfect Exchange-Rate Pass-Through and Monetary Policy," Working Paper.
Söderlind, Paul (1999), "Solution and Estimation of RE Macromodels with Optimal Policy," European Economic Review 43, 813-823.
Sutherland, Alan (2000), "Inflation Targeting in a Small Open Economy," working paper.
Svensson, Lars E.O. (1993), "Term, Inflation, and Foreign Exchange Risk Premia: A Unified Treatment," NBER working paper No. 4544.
Svensson, Lars E.O. (1997a), "Exchange rate target or inflation target for Norway?" in Anne Berit Christiansen and Jan Fredrik Qvigstad, eds., Choosing a Monetary Policy Target, Scandinavian University Press (Universitetsforlaget AS), Oslo, 120-138.
Svensson, Lars E.O. (1997b), "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," European Economic Review 41 (1997), 1111-1146.
Svensson, Lars E.O. (1999a), "Inflation Targeting as a Monetary Policy Rule," Journal of Monetary Economics 43, 607-654.
Svensson, Lars E.O. (1999b), "Monetary Policy Issues for the Eurosystem," Carnegie-Rochester Conferences Series on Public Policy 51-1, 79-136.
Svensson, Lars E.O. (2000a), "The First Year of the Eurosystem: Inflation Targeting or Not?" American Economic Review: Papers and Proceedings 90, May 2000, 95-99.
Svensson, Lars E.O. (2000b), "Open-Economy Inflation Targeting," Journal of International Economics 50 (2000), 155-183.
Svensson, Lars E.O. (2001a), "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," in Deutsche Bundesbank, ed. (2001), The Monetary Transmission Process: Recent Developments and Lessons for Europe, Palgrave, New York, 60-102.
Svensson, Lars E.O. (2001b), "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," working paper.
Svensson, Lars E.O. (2001c), "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies 19(S-1), February 2001, 277-312.
Svensson, Lars E.O., and Sweder van Wijnbergen (1989), "Excess Capacity, Monopolistic Competition and International Transmission of Monetary Disturbances," Economic Journal 99, 785-805.
Svensson, Lars E.O., and Michael Woodford (1999), "Implementing Optimal Policy through Inflation-Forecast Targeting," working paper.
Svensson, Lars E.O., and Michael Woodford (2002), "Indicator Variables for Optimal Policy," working paper.
Taylor, John B. (1993), "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy 39, 195-214.
Taylor, John B. (1999), "A Historical Analysis of Monetary Policy Rules," in Taylor, John B., ed., Monetary Policy Rules, Chicago: Univ. of Chicago Press.
Ueda, Kazuo (2000), "Why the Bank of Japan Won't Target Inflation," Wall Street Journal, March 6, 2000.
Walsh, Carl (1998), Monetary Theory and Policy, MIT Press.
Weerapana, Akila (2000), “The Performance of Simple Monetary Policy Rules in a Large Open Economy," Wellesley College Department of Economics Working Paper
2000-05.
Wicksell, Knut (1898), Geldzins und Güterpreise, Jena. English translation: Interest and Prices, 1936. Reprinted 1965, Kelley, New York.
Woodford, Michael (1998), "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics 1: 173-219. (NBER Working Paper No. 6168.)
Woodford, Michael (1999), "Inflation Stabilization and Welfare," working paper.
Woodford, Michael (2000), "Pitfalls of Forward-Looking Monetary Policy," American Economic Review 90, 100-104.
Woodford, Michael (2001a), "Optimizing Models with Nominal Rigidities," manuscript.
Woodford, Michael (2001b), "The Taylor Rule and Optimal Monetary Policy," American Economic Review 91, 232-237.
Woodford, Michael (2002), "Price-Level Determination under Interest-Rate Rules," manuscript.

Errors: Please email me about errors, for instance in the reading list and URLs.

Courses 2001-02 | 504 | 553 | 581f

Revised juli 16, 2007 .