Economics | Monetary Theory
E551 | 1655 | Leeper

This course surveys theoretical and empirical developments in monetary
economics over the past 30 years. We will focus on some of the classic
issues in monetary economics: the effects of money on economic growth;
the demand for money; the endogeneity of velocity; interest rate and
price level determination; the role of substitutions among real and
nominal assets; the dynamic interactions between monetary and fiscal

The course begins with some writings by Hicks, Friedman, and Tobin and
then moves on to develop some recent general equilibrium models of
money. The specifications include money-in-the-utility function,
cash-in-advance, transactions costs, and shopping time models
associated with Brock, Feenstra,Grossman and Weiss, King and Plosser,
Lucas, McCallum, Rotemberg, Sidrauski, Stokey, and Wallace,among
others. We will explore recent work that emphasizes the importance of
studying monetary and fiscal policy simultaneously (Aiyagari and
Gertler, Leeper, Sargent and Wallace, Sims, and Woodford).

Time permitting, we will look into empirical aspects that focus on the
time series properties of money, interest rates, output, and prices
and on efforts to identify monetary policy shocks. The overview traces
developments from Friedman and Schwartz's classic Monetary History of
the United States to Barro's unanticipated money papers and Sims's use
of vector autoregressions. Empirical papers by Bernanke, Blinder,
Christiano and Eichenbaum, Cushman and Zha, Gordon and Leeper, and
Leeper, Sims, and Zha will be discussed. This part of the course uses
some of the time series techniques taught in E628, though students
will not be expected to apply the econometric methods directly.
Instead, the emphasis in the course will be on the economic analysis
underlying the identification of policy behavior.

We will be using a new textbook, Monetary Theory and Policy, by Carl
E. Walsh (MIT Press, 1998). Other readings will be available for
copying from me. A course outline and a long reading list are
available for downloading. (The long reading list is primarily for
your benefit, should you decide to pursue monetary economics in the
future.) No text is required. Students may be expected to present
papers, solve models, and critically evaluate existing work.