Some Skeptical Observations on Real Business Cycle Theory (P
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EC541: Monetary Theory & Policy
EC541: Monetary Theory & Policy RGK Home Main Class preparation Lab sessions Teaching Assistant Paper topics News links Office hours and email Electronics policies Fall 2012 This class is designed so that it can be taken in two different ways by students in the masters programs. First, a student attending just the lectures can gain an overview of issues in monetary theory and policy. Second, a student attending both the lectures and the weekly lab sessions can obtain a more detailed understanding of how modern macroeconomic models are constructed and used. These lab sessions are optional, but most students find that the sessions substantially advance their understanding of the lecture material. Students are likely to find that there is a higher benefit from this class if they have previously taken MA macroeconomics (EC 502) or are taking it simultaneously. Students in their third semester of the MA program that have previously taken EC 502 optionally may take this class on a research basis (all such students must get written consent of the instructor prior to October 1). These students will attend all sessions of the class as well as taking examinations and quizzes. However, as discussed further below, their grade will be partly based on writing and presenting a research paper on a macroeconomic topic using the tools developed in their macro classes and in the lab sessions. The topics of these papers will be developed in consultation with the instructor. Research papers must be written in teams of two students. The two authors must jointly prepare the presentation of the paper. -
NBER WORKII4G PAPER SERS Christopher A. Sims Forthcoming In
NBER WORKII4G PAPER SERS TOWARD A MODERN MACROECONOMIC MODEL USABLE FOR POLICY ANALYSIS Eric M. L.eeper Christopher A. Sims Working Paper No. 4761 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050Massachusetts Avenue Cambridge, MA 02138 June1994 Forthcomingin Fischer, Stanley and Rotemberg, Julio J.. eds., NBER Macroeconomics Annual 1994. MIT Press, Cambridge. MA. This paper is part of NBER's research program in International Trade and Investment. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. NBER Working Paper #4761 June 1994 TOWARD A MODERN MACROECONOMIC MODEL USABLE FOR POLICY ANALYSIS ABS'rRAa This paper presents a macroeconomic model that is both a completely specified dynamic general equilibrium model and a pmbabilistic model for time series data. We view the model as a potential competitor to existingISLM-based modelsthat continue to be used for actual policy analysis. Our approach is also an alternative to recent efforts to calibrate real business cycle models. In contrast to these existing models, the one we present embodies all the following important characteristics: 1) It generates a complete multivariate stochastic process model for the data it aims to explain, and the full specification is used in the maximum likelihood estimation of the model; ii) It integrates modeling of nominal variables --moneystock, price level, wage level, and nominal interest rate --withmodeling real vthables iii) It contains a Keynesian investment function, breaking the tight relationship of the return on investment with the capital-output ratio; iv) It treats both monetary and fiscal policy explicitly; v) It is based on dynamic optimizing behavior of the private agents in the model. -
New Deal Policies and the Persistence of the Great Depression: a General Equilibrium Analysis
Federal Reserve Bank of Minneapolis Research Department New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis Harold L. Cole and Lee E. Ohanian∗ Working Paper 597 Revised May 2001 ABSTRACT There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution of New Deal cartelization policies designed to limit competition and increase labor bargaining power to the persistence of the Depression. We develop a model of the bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion. ∗Both, U.C.L.A. and Federal Reserve Bank of Minneapolis. We thank Andrew Atkeson, Tom Holmes, Narayana Kocherlakota, Tom Sargent, Nancy Stokey, seminar participants, and in particular, Ed Prescott for comments. Ohanian thanks the Sloan Foundation and the National Science Foundation for support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1. Introduction There are two striking aspects of the recovery from the Great Depression in the United States. -
On the Mechanics of Economic Development*
Journal of Monetary Economics 22 (1988) 3-42. North-Holland ON THE MECHANICS OF ECONOMIC DEVELOPMENT* Robert E. LUCAS, Jr. University of Chicago, Chicago, 1L 60637, USA Received August 1987, final version received February 1988 This paper considers the prospects for constructing a neoclassical theory of growth and interna tional trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumula tion and technological change, a model emphasizing human capital accumulation through school ing. and a model emphasizing specialized human capital accumulation through learning-by-doing. 1. Introduction By the problem of economic development I mean simply the problem of accounting for the observed pattern, across countries and across time, in levels and rates of growth of per capita income. This may seem too narrow a definition, and perhaps it is, but thinking about income patterns will neces sarily involve us in thinking about many other aspects of societies too. so I would suggest that we withhold judgment on the scope of this definition until we have a clearer idea of where it leads us. The main features of levels and rates of growth of national incomes are well enough known to all of us, but I want to begin with a few numbers, so as to set a quantitative tone and to keep us from getting mired in the wrong kind of details. Unless I say otherwise, all figures are from the World Bank's World Development Report of 1983. The diversity across countries in measured per capita income levels is literally too great to be believed. -
The Theory of Allocation and Its Implications for Marketing and Industrial Structure
NBER WORKING PAPERS SERIES THE THEORY OF ALLOCATION AND ITS IMPLICATIONS FOR MARKETING AND INDUSTRIAL STRUCTURE Dennis W. Canton Working Paper No. 3786 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 1991 I thank NSF and the program in Law and Economics at the University of Chicago for financial assistance. I also thank K. Crocker, E. Lazear, S. Peltzman, A. Shleifer, G. Stigler, and participants at seminars at the Department of Justice, MIT, NBER, Northwestern, Pennsylvania State, Princeton, University of Chicago and University of Florida. This paper is part of NBER's research programs in Economic Fluctuations and Industrial Organization. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research. NBER Working Paper #3786 July 1991 THE THEORY OF ALLOCATION AND ITS IMPLICATIONS FOR MARKETING AND INDUSTRIAL STRUCTURE ABSTRACT This paper identifies a cost of using the price system and from that develops a general theory of allocation. The theory explains why a buyer's stochastic purchasing behavior matters to a seller. This leads to a theory of optimal customer mix much akin to the theory of optimal portfolio composition. It is the ob of a firm's marketing department to put together this optimal customer mix. A dynamic pattern of pricing related to Ramsey pricing emerges as the efficient pricing structure. Price no longer equals marginal cost and is no longer the sole mechanism used to allocate goods. It is optimal for long term relationships to emerge between buyers and sellers and for sellers to use their knowledge about buyers to ration goods during periods when demand is high. -
Low Interest Rates and High Asset Prices: an Interpretation in Terms of Changing Popular Models
LOW INTEREST RATES AND HIGH ASSET PRICES: AN INTERPRETATION IN TERMS OF CHANGING POPULAR MODELS By Robert J. Shiller October 2007 COWLES FOUNDATION DISCUSSION PAPER NO. 1632 COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven, Connecticut 06520-8281 http://cowles.econ.yale.edu/ Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models By Robert J. Shiller October, 2007 Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models Abstract There has been a widespread perception in the past few years that long-term asset prices are generally high because monetary authorities have effectively kept long-term interest rates, which the market uses to discount cash flows, low. This perception is not accurate. Long-term interest rates have not been especially low. What has changed to produce high asset prices appears instead to be changes in popular economic models that people actually rely on when valuing assets. The public has mostly forgotten the concept of “real interest rate.” Money illusion appears to be an important factor to consider. Robert J. Shiller Cowles Foundation for Research in Economics 30 Hillhouse Avenue New Haven CT 06520-8281 [email protected] 2 Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models1 By Robert J. Shiller It is widely discussed that we appear to be living in an era of low long-term interest rates and high long-term asset prices. Although long rates have been increasing in the last few years, they are still commonly described as low in the 21st century, both in nominal and real terms, when compared with long historical averages, or compared with a decade or two ago. -
Rethinking the Implications of Monetary Policy: How a Transactions Role for Money Transforms the Predictions of Our Leading Models* by JULIA K
Rethinking the Implications of Monetary Policy: How a Transactions Role for Money Transforms the Predictions of Our Leading Models* BY JULIA K. THOMAS ver the past several decades, economists have everything from car and home sales to consumer spending over the Christmas O devoted ever-growing effort to developing holiday season. Whenever business economic models to help us understand conditions are widely perceived to be weak, most people welcome cuts in the how changes in interest rates brought federal funds rate. about by monetary policy actions affect the production Despite these observations, however, the means through which and provision of goods and services in the economy. changes in an interest rate affect Although New Keynesian models have broad appeal in business activity is, in fact, far from obvious. Over the past few decades, explaining how changes in the money stock can affect economists have devoted ever-growing business activity, these models generate results that are effort to developing formal economic models to help us understand precisely inconsistent with what we know about how interest rates how changes in interest rates brought move with policy-induced changes in the money stock. about by monetary policy actions affect the production and provision of goods In this article, Julia Thomas argues that by extending the and services throughout the economy. New Keynesian model to reintroduce money’s liquidity While there are several different types role, we can resolve some of the remaining divorce of models describing how monetary policy actions drive short-run changes between economic theory and the patterns observed in in total employment and GDP, a the workings of actual economies. -
Money and Banking in a New Keynesian Model∗
Money and banking in a New Keynesian model∗ Monika Piazzesi Ciaran Rogers Martin Schneider Stanford & NBER Stanford Stanford & NBER March 2019 Abstract This paper studies a New Keynesian model with a banking system. As in the data, the policy instrument of the central bank is held by banks to back inside money and therefore earns a convenience yield. While interest rate policy is less powerful than in the standard model, policy rules that do not respond aggressively to inflation – such as an interest rate peg – do not lead to self-fulfilling fluctuations. Interest rate policy is stronger (and closer to the standard model) when the central bank operates a corridor system as opposed to a floor system. It is weaker when there are more nominal rigidities in banks’ balance sheets and when banks have more market power. ∗Email addresses: [email protected], [email protected], [email protected]. We thank seminar and conference participants at the Bank of Canada, Kellogg, Lausanne, NYU, Princeton, UC Santa Cruz, the RBNZ Macro-Finance Conference and the NBER SI Impulse and Propagations meeting for helpful comments and suggestions. 1 1 Introduction Models of monetary policy typically assume that the central bank sets the short nominal inter- est rate earned by households. In the presence of nominal rigidities, the central bank then has a powerful lever to affect intertemporal decisions such as savings and investment. In practice, however, central banks target interest rates on short safe bonds that are predominantly held by intermediaries.1 At the same time, the behavior of such interest rates is not well accounted for by asset pricing models that fit expected returns on other assets such as long terms bonds or stocks: this "short rate disconnect" has been attributed to a convenience yield on short safe bonds.2 This paper studies a New Keynesian model with a banking system that is consistent with key facts on holdings and pricing of policy instruments. -
Efficiency Wage Theories: a Partial Evaluation
NBER WORKING PAPER SERIES EFFICIENCY WAGE THEORIES: A PARTIAL EVALUATION Lawrence F. Katz Working Paper No. 1906 NATIONAL BUREAU OF ECONOMIC RESEARCH 1060 Massachusetts Avenue Cambridge, MA 02138 April 1986 This is a revised version of a paper presented at the NBER Conference on Macroeconomics held in Cambridge, Massachusetts on March 7 and 8, 1986. 1 am indebted to William Dickens for numerous discussions and for comments on previous drafts of this paper; a significant part of this paper grew out of our joint work. I thank George Akerlof, Joe Altonji, Stan Fischer, Kevin Lang, Lawrence Summers, Janet Yellen, and the conference participants for helpful comments. I am grateful to Phil Bokovoy and Elizabeth Bishop for expert research assistance. The Institute of Industrial Relations at U.C. Berkeley provided research support. All remaining errors are my own. The research reported here is part of the NBER's research program -in Labor Studies. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research. NBER Working Paper #1906 April 1986 Efficiency Wage Theories: A Partial Evaluation ABSTRACT This paper surveys recent developments in the literature on efficiency wage theories of unemployment. Efficiency wage models have in common the property that in equilibrium firms may find it profitable to pay wages in excess of market clearing. High wages can help reduce turnover, elicit worker effort, prevent worker collective action, and attract higher quality employees. Simple versions of efficiency wage models can explain normal involuntary unemployment, segmented labor markets, and wage differentials across firms and industries for workers with similar productive characteristics. -
Financial Factors in the Great Depression
Journal of Economic Perspectives—Volume 7, Number 2—Spring 1993—Pages 61–85 Financial Factors in the Great Depression Charles W. Calomiris eginning with Irving Fisher (1933) and John Maynard Keynes (1931 [1963]), macroeconomists have argued that financial markets were Bimportant sources and propagators of decline during the Great De- pression. Turning points during the Depression often coincided with or were preceded by dramatic events in financial markets: stock market collapse, waves of bankruptcy and bank failure, and contractions in the money stock. But the mechanism through which financial factors contributed to the Depression has been a source of controversy, as has been the relative importance of financial factors in explaining the origins and persistence of the Depression. This essay reviews the literature on the role of financial factors in the Depression, and draws some lessons that have more general relevance for the study of the Depression and for macroeconomics. I argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial-real links in the Depression fol- lowed a paradigm shift in economics. A central, neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets, which can imply links between disruptions in financial markets and subsequent economic activity. Also, the increasing emphasis on learning and "path-dependence" in economics has helped to explain why financial shocks during the 1930s were so severe and why policy-makers failed to prevent the Depression. • Charles W. Calomiris is Associate Professor of Finance, University of Illinois, Urbana-Champaign, Illinois, and Faculty Research Fellow, National Bureau of Eco- nomic Research, Cambridge, Massachusetts. -
The New Neoclassical Synthesis and the Role of Monetary Policy
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: NBER Macroeconomics Annual 1997, Volume 12 Volume Author/Editor: Ben S. Bernanke and Julio Rotemberg Volume Publisher: MIT Press Volume ISBN: 0-262-02435-7 Volume URL: http://www.nber.org/books/bern97-1 Publication Date: January 1997 Chapter Title: The New Neoclassical Synthesis and the Role of Monetary Policy Chapter Author: Marvin Goodfriend, Robert King Chapter URL: http://www.nber.org/chapters/c11040 Chapter pages in book: (p. 231 - 296) Marvin Goodfriendand RobertG. King FEDERAL RESERVEBANK OF RICHMOND AND UNIVERSITY OF VIRGINIA; AND UNIVERSITY OF VIRGINIA, NBER, AND FEDERAL RESERVEBANK OF RICHMOND The New Neoclassical Synthesis and the Role of Monetary Policy 1. Introduction It is common for macroeconomics to be portrayed as a field in intellectual disarray, with major and persistent disagreements about methodology and substance between competing camps of researchers. One frequently discussed measure of disarray is the distance between the flexible price models of the new classical macroeconomics and real-business-cycle (RBC) analysis, in which monetary policy is essentially unimportant for real activity, and the sticky-price models of the New Keynesian econom- ics, in which monetary policy is viewed as central to the evolution of real activity. For policymakers and the economists that advise them, this perceived intellectual disarray makes it difficult to employ recent and ongoing developments in macroeconomics. The intellectual currents of the last ten years are, however, subject to a very different interpretation: macroeconomics is moving toward a New NeoclassicalSynthesis. In the 1960s, the original synthesis involved a com- mitment to three-sometimes conflicting-principles: a desire to pro- vide practical macroeconomic policy advice, a belief that short-run price stickiness was at the root of economic fluctuations, and a commitment to modeling macroeconomic behavior using the same optimization ap- proach commonly employed in microeconomics. -
BU Econ News 2011#2.Indd
Economics News NEWSLETTER OF THE DEPARTMENT OF ECONOMICS SPRING 2011 A letter from the Chair Dear Students, Parents, Alumni, Colleagues and Friends, My second year as Department Chair has been exciting, marked by growth and change. In faculty recruiting, we hired two stellar teacher-scholars. Kehinde Ajayi specializes in economic development, focusing on education issues in Ghana. She’ll receive her PhD this spring from the University of California at Berkeley. Carola Frydman will join us from MIT’s Sloan School to teach courses in economic and fi nancial history, as well as the economics of organizations. A Harvard PhD, Frydman is recognized internationally for her path-breaking work on the economic history of executive pay. This year, more international recognition came to BU Economics, which boasts some of the most distinguished economics faculty in the world. Kevin Lang was appointed a Fellow of the Social of Labor Economics for his distinguished research in labor economics, our fi rst SOLE fellow. Robert King was elected a Fellow of the Econometric Society, one of the highest honors in the profession, joining seven other ES fellows on our faculty. This February marked the 100th anniversary volume of the American Economic Review, the fl agship journal of the American Economic Association, and one of the most infl uential in economics. As part of the celebration, the Association selected the twenty most infl uential papers in the fi rst century of the Review: included is one by BU’s John Harris. Short of a Nobel Prize, it does not get much better than this – congratulations John! Every year BU Economics sponsors workshops and visits by some of the world’s leading economists.