Monetary Theory

Abstract

We cover the three most important models of monetary theory that are used for the conduct of monetary policy. The models are covered from both a theoretical perspective - in terms of the model and their intuition - and a practical perspective, in terms of how the models can be solved numerically and how they can be used to understand monetary-policy issues.

Objective

After taking this course, students will be able to: - Understand why intrinsically useless assets such as banknotes have value, i.e., understand the role of assets (money in particular) as a means of payment. - Understand why nominal assets can be of real importance, i.e., understand the role of money as a unit of account. - Understand inflation and interest-rate dynamics, and how these relate to real economic activity and expectations. - Understand and apply models that are used for the conduct of monetary policy. - Solve dynamic macro models with a computer, for instance with Python, Matlab and Dynare. - Apply the theory to some empirically relevant issues for monetary policy, including: the 2008-2009 financial crisis; the zero-lower bound on nominal interest rates; and large supply and demand shocks.

Content

The course is aimed at students who: - are interested in economics in general and monetary economics in specific; - are interested in how mathematical models can be used to capture real-world phenomena, particularly those related to money, inflation, and interest rates. - command over good mathematical skills; - command over good knowledge of microeconomics and macroeconomics, for instance from core courses in the Master program; Students who fulfil these requirements will benefit from the course in the following dimensions: - they will gain a deeper understanding of phenomena related to money, interest-rates and inflation, which are key elements to understand how real-world economies operate; - they will be able to understand models that are used by researchers and central banks to study and design monetary policy; - they will gain an understanding of how these models can be solved and simulated with a computer. - they will learn how to relate monetary theory to empirically relevant and topical issues, such as unconventional monetary policy (quantitative easing), high inflation, the zero lower bound on nominal interest rates, and financial crises. The course consists of weekly meetings that take the form of lectures and tutorials. The provisional agenda is as follows: Week 1-2: Cash-in-advance model; a model with a transactional role for money. - Session 1: Lecture - Session 2: Tutorial Week 3-6: New-Keynesian model; the workhorse framework for monetary policy. - Session 3: Lecture; the benchmark 3-equation model. - Session 4: Tutorial; solving the model with the computer. - Session 5: Lecture; monetary policy and the zero-lower bound. - Session 6: Tutorial; monetary policy and the zero-lower bound. Week 6-10: New-Monetarist model; a model with a role for assets as means of payment. - Session 7: Lecture; the benchmark model. - Session 8: Tutorial; self-fulfilling inflation dynamics. - Session 9: Lecture; a model of monetary policy in the interbank market. - Session 10: Tutorial; stabilization policy in the interbank market.

Resources