Monetary Theory and Policy
Spring 2015
2nd Year MA and PhD Students
Central European University
Professor Max Gillman
We will cover mainly the general equilibrium derivation of monetary economies, including money in the utility function, cash-in-advance, shopping time, and banking based models. These will be used to build up to a neoclassical derivation of the monetary policy rules in terms of money supply versus interest rate rules. We will show how to derive a generalized "Taylor rule" from a monetary economy, using the Euler equilibrium condition and exchange constraints. Combined with presentation of empirical results that test this model, we find that the Taylor rule holds in one special case: when the money supply growth exactly equals the inflation rate. When these two latter variables differ, then there is a persistent liquidity effect and cointegration of the interest rate equation can only be found when including the money supply growth rate. This evidence will include identification of the Unconventional Monetary Policy period as one of three Markov-Switching regimes that explain the dynamics of the cointegrating vector within a post-1960 US sample; the other two regimes are expansions and contractions.
Spring 2017 Syllabus.pdfSpring 2017 Syllabus.pdf