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MACROECONOMICS

Program

EN IT

Updated A.Y. 2018-2019

Business Cycle and Economic Policy

Instructor: Prof. Luisa Corrado

36 hours

Course Content: This course aims at developing practical research skills for macroeconomists. In particular we will consider Real Business Cycle Models, New Keynesian model with frictions in the real and financial sectors and the role of fiscal and monetary policies. We will consider among others the role of recent unconventional monetary and macro prudential policies as business cycle stabilization devices.

We will consider Dynamic Stochastic general Equilibrium (DSGE) models where consumers, firms, banks and the public sector (monetary and fiscal policy) interact in the same economic environment and produce choices in terms of consumption, investment, output and monetary aggregates.

Macro models of monetary policy in a DSGE setting typically involve forward looking behaviour.  To develop practical research skills students will solve linear rational expectation models using MATLAB. The website which collects the main software and solution methods is available at

        http://sites.google.com/site/luisacorrado/pro/computational-economics

Focussing in particular on the method proposed by King and Watson (1998) we will then solve a larger DSGE model with a banking sector producing the full constellation of financial and monetary spreads as proposed by Goodfriend and McCallum (2007).


Syllabus

Real Business Cycle and New-Keynesian Models with Nominal Rigidities

Gali, J. (2008). Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.

Economic Policies with Financial Frictions

Adrian, T., & Shin, H. S. (2008). Liquidity, monetary policy, and financial cycles. Federal Reserve Bank of New York Economic Policy Review, 14(1), 1-7.

Bernanke, B., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. In J. B. Taylor, & M. Woodford (Eds.), Handbook of macroeconomics (Vol. 1C). North-Holland Publishing Company.

Bernanke, B.S. and M. Gertler (2001). Should Central Banks Respond to Movements in Asset Prices? American Economic Review, 253-257.

Bowdler, C and Radia, A (2012). Unconventional monetary policy: the assessment, Oxford Review of Economic Policy, 28(4),  603-21.

Chadha, J. and L. Corrado (2012). Macro-prudential policy on liquidity: What does a DSGE model tell us?, Journal of Economics and Business, 64(1), January-February 2012, pp. 37-62. http://www.sciencedirect.com/ science/ article/ pii/S0148619511000294.

Chadha, J., L. Corrado and S. Holly (2014). A Note on Money and the Conduct of Monetary Policy, Macroeconomic Dynamics, 18(08), 1854-1883.

Chadha, J.S., L. Corrado and J. Meaning, (2012). Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies., BIS Papers, No. 66.

Clarida, R., Gali, J., Gertler, M. (1999). The science of monetary policy: a new Keynesian perspective. Journal of Economic Literature 37, 1661-1707.

Gertler M. and P. Karadi (2011). A model of unconventional monetary policy, Journal of Monetary Economics, 58, 17-34.

Gertler M. and P. Karadi (2012). QE 1 vs. 2 vs. 3...A Framework for Analyzing Large Scale Asset Purchases as a Monetary Policy Tool. Available at http://www.econ.nyu.edu/user/gertler/gertlerkaradifrbconference2012.pdf

Goodfriend M. and B.T. McCallum (2007). Banking and interest rates in monetary policy analysis: A quantitative exploration, Journal of Monetary Economics, 54, 1480-1507.

IMF (2008). The Changing Housing Cycle and the Implications for Monetary Policy, World Economic Outlook, April.

Kiyotaki, N., Moore, J., (1997). Credit cycles. Journal of Political Economy 105, 211–248.

Padoan, P.C. and P. van den Noord (2012). Is Austerity Going Too Far? Structural Reforms and The Debt Trap (ch. 8) in GOVERNANCE FOR THE EUROZONE: INTEGRATION OR DISINTEGRATION? Edited by F. Allen E. Carletti and S. Simonelli.

Tucker, P (2009). The debate on financial system resilience: macroprudential instruments. Available at www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2009/speech407.pdf.

Walsh, C. E., (2009). Using Monetary Policy to Stabilize Economic Activity., Federal Reserve Bank of Kansas City Financial Stability and Macroeconomic Policy, 2009 Jackson Hole Symposium, 245-296.


Solving Macromodels with Rational Expectations

Blanchard, O. and K. C. Kahn (1980), "The Solution of Linear Difference Models under Rational Expectations", Econometrica, 48(5), 1305-11.

Brock, W.A. and L. Mirman (1972), "Optimal economic growth and uncertainty: the discounted case", Journal of Economic Theory, Vol. 4, pp. 479--513.

King, R.G and M.W. Watson (1998) The solution of singular linear difference systems under rational expectations, International Economic Review, 39 (4) (1998), pp. 1015-1026 Symposium on Forecasting and Empirical Methods in Macroeconomics and Finance.


Software

Hanselman, D. and B. Littlefield, Mastering MATLAB 5, Prentice Hall, 1998. See also on-line manuals available on line at: http://www.mathworks.com/products/matlab/usersguide.shtml.
Lecture Notes will be available during classes.
Prerequisites: basic knowledge of matrix algebra, advanced macroeconomics.


Subject learning objectives

Knowledge and Understanding Knowledge of the main topics in macroeconomics.  This course aims at developing practical research skills for macroeconomists. This course aims at developing practical research skills for macroeconomists. In particular we will consider Real Business Cycle Models, New Keynesian model with frictions in the real and financial sectors and the role of fiscal and monetary policies. We will consider among others the role of recent unconventional monetary and macro prudential policies as business cycle stabilization devices. We will consider Dynamic Stochastic general Equilibrium (DSGE) models where consumers, firms, banks and the public sector (monetary and fiscal policy) interact in the same economic environment and produce choices in terms of consumption, investment, output and monetary aggregates.
Students have to understand the analytical models presented during the lectures and develop the capacity to analyse an economic problem and elaborate a policy solution. Students have to address the main policy implications in the light of the main theories in macroeconomics and to develop their own original research ideas.

Applying Knowledge and Understanding
The course offers a compendium between policy and the macroeconomics of business cycles. Special attention will be devoted to issues that have attracted increasing attention macroeconomics, especially the ongoing debate the role of financial friction in macromodels.

We also cover more recent topics such as the relationship between liquidity and banks’ leverage and its effect on macroeconomic risk and the business cycle.

The course provides the theoretical background to understand and address the main issues in the macroeconomic debate. This can be complementary with potential students’ placement in international institutions (IMF, World Bank), Central Banks, Research Divisions etc.

Making Judgments
Ability to understand the main topics issues in macroeconomics and address them in order to inform policy. The notions acquired during the lectures can be used to assess in a critical way the policy making process in the macroeconomic context.

Communication Skills
Ability to present the main economic ideas in macroeconomics and the policy decision making process in a rigorous way to specialised and non-specialised audiences.

Learning Skills
At end of the course the students should have acquired the ability to analyse and assess in a critical way the main macroeconomic events. They are expected to be able to read and understand in a deep critical way the main articles and papers published in the area of macroeconomics  and to be able to elaborate autonomously new research ideas.