New Keynesian Economics Edouard Challe [email protected]

European University Institute Department of Economics Macroeconomics II (Block III) This version: March 12, 2021

New Keynesian Economics Edouard Challe [email protected]

Course objective

This half course of the core introduces students to the New Keynesian model. We will derive the New Keynesian Phillips Curve from nominal rigidities, and then study how it interacts with aggregate demand to jointly determine output, employment and inflation over the business cycle. In so doing we will examine various dimensions of monetary and fiscal policies, both in normal times and during liquidity traps.

Requirements

Grading will be based on a written final exam (90%) and on problem sets (10%).

Practicalities

The TA for this course is Sotirios Georgiousis ([email protected]). There will be three problem sets, which will be posted on Brightspace and that you will have to hand in shortly before the corresponding review session:

• PS 1: Posted on February 18, to be handed in on February 28, with review session on March 1st;

• PS 2: Posted on March 1, to be handed in on March 8 (9am), with review session on the same day;

• PS 3: Posted on March 8, to be handed in on March 12 (9am), with review session on the same day.

You can (and are encouraged to) work in groups, but you must hand in the assignments individually. I will hold office hours on Wednesday afternoon in the weeks when the lectures takes place (February 17, March 3 and March 10). If those times do not work for you please send me an email to make an appointment. Sotirios will hold office hours all Wednesday mornings.

1 Readings

The texbook for this course is:

• Jordi Galí. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications, Second Edition. Princeton University Press, 2015.

Students seeking a complementary (but less advanced) presentation of the NK model may also look at the following text, but it is not required for the course:

• Edouard Challe. Macroeconomic Fluctuations and Policies. MIT Press, 2019.

In the reference list below required readings are stared (*), the rest is complementary.

Outline

The basic New Keynesian model

• *Galì (2015), Chap. 3.

• Susanto Basu, John G. Fernald, and Miles S. Kimball. Are technology improvements contractionary? The American Economic Review, 96(5):1418–1448, 2006

• Olivier Jean Blanchard and Nobuhiro Kiyotaki. Monopolistic competition and the effects of aggregate demand. The American Economic Review, 77(4):647–666, 1987

• *Lawrence J Christiano, Martin S Eichenbaum, and Mathias Trabandt. On DSGE models. Journal of Economic Perspectives, 32(3):113–40, 2018

• Lawrence J Christiano, Martin Eichenbaum, and Charles L Evans. Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1):1–45, 2005

• *Jordi Galí. The state of New Keynesian economics: a partial assessment. Journal of Economic Perspectives, 32(3):87–112, 2018

• Jordi Galı and Mark Gertler. Inflation dynamics: A structural econometric analysis. Journal of monetary Economics, 44(2):195–222, 1999

• N. Gregory Mankiw. Small menu costs and large business cycles: A macroeconomic model of monopoly. The Quarterly Journal of Economics, 100(2):529–537, 1985

• Frank Smets and Rafael Wouters. Shocks and frictions in us business cycles: A bayesian dsge approach. American Economic review, 97(3):586–606, 2007

Conventional monetary policy

• *Galì (2015), Chap. 4 and Chap. 5, Section 5.1

• Olivier Jean Blanchard and Charles M. Kahn. The solution of linear difference models under rational expectations. Econometrica, 48(5):1305–1311, 1980

2 • *Richard Clarida, Jordi Gali, and Mark Gertler. Monetary policy rules and macroeconomic stability: evidence and some theory. The Quarterly journal of economics, 115(1):147–180, 2000

• *Richard Clarida, Jordi Gali, and Mark Gertler. The science of monetary policy: a new keynesian perspective. Journal of economic literature, 37(4):1661–1707, 1999

• Richard Clarida, Jordi Gali, and Mark Gertler. Monetary policy rules in practice, someinternational evidence. European Economic Review, 1998

• Marvin Goodfriend and Robert G King. The new neoclassical synthesis and the role of monetary policy. NBER macroeconomics annual, 12:231–283, 1997

• John B Taylor. Discretion versus policy rules in practice. In Carnegie-Rochester conference series on public policy, volume 39, pages 195–214. Elsevier, 1993

3