Econ 447: Advanced Monetary Policy and Theory II

Welcome to this web page! This class is taught by Christian Zimmermann. This class meets on Tuesdays and Thursdays 8:00-9:30AM in room 311, Monteith Building.

Office hours for this class are Wednesdays 7:30-12:00 AM or by appointment.


I will not formally use a textbook for this class.If you have Monetary Theory and Policy, by Carl Walsh, keep it.

We will cover a few chapter of the textbook, and rapidly divert from it.In particular, some recent working papers or articles will also be covered. They are mentioned below, whenever possible with a link to an online version. This list may change as we go along...


The schedule is very tentative, as we will see how fast we progress. I may also change a few things in order to do less money and more macro. I will cover some of the papers myself, but every student will have to present several papers to the class.

  1. What is Money?

    Narayana Kocherlakota, 1998. "Money is Memory", Journal of Economic Theory.

  2. Stylized Facts about Money (rapid overview)

    Walsh, Chapter 1
    David Backus & Patrick Kehoe, 1992. "International Evidence of the Historical Properties of Business Cycles", American Economic Review
    Lawrence Christiano, Martin Eichenbaum, Charles Evans, 1998, "Monetary Policy Shocks: What Have We Learned and to What End?", NBER working paper.
    Riccardo Fiorito and Tryphon Kollintzas, 1994. "Stylized Facts of Business Cycles in the G7 from a Real Business Cycles Perspective", European Economic Review.
    Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth", Federal Reserve Bank of Minneapolis Quarterly Review, (Spr) pp. 3-18.
    George McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts", Federal Reserve Bank of Minneapolis Quarterly Review, (Sum) pp. 2-11.

  3. Introducing Money in a Macroeconomic Model

    1. Money-in-the-Utility Function

      Walsh, Chapter 2
      James M. Poterba & Julio J. Rotemberg, 1988. "Money in the Utility Function: An Empirical Implementation", NBER Reprints 1024 (also Working Paper 1796 ), National Bureau of Economic Research, Inc
      Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation", Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco (not available online, ask me for copy).
      Alvin L. Marty, 1999. "The welfare cost of inflation: a critique of Bailey and Lucas", Federal Reserve Bank of St. Louis Review, (Jan) pp. 41-46.

    2. Shopping Time (very fast)

      Walsh, Section 3.2

    3. Cash-in-Advance

      Walsh, Sections 3.3, 3.6
      Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy", Journal of Political Economy, Vol. 93 (5) pp. 919-44.
      Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy", Econometrica, Vol. 55 (3) pp. 491-513.
      Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model", American Economic Review, Vol. 79 (4) pp. 733-48.
      Cooley, Thomas F & Hansen, Gary D, 1991. "The Welfare Costs of Moderate Inflations", Journal of Money, Credit and Banking, Vol. 23 (3) pp. 483-503.

    4. Money Search with Fixed Prices

      Walsh, Section 3.4.2
      Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange", Journal of Political Economy, Vol. 97 (4) pp. 927-54.
      Ritter, Joseph A, 1995. "The Transition from Barter to Fiat Money", American Economic Review, Vol. 85 (1) pp. 134-49.
      Howitt, Peter, and Robert Clower, 2000. "The Emergence of Economic Organization", Journal of Economic Behavior and Organization, Vol. 41 (1) pp. 55-84.

    5. Money Search with Flexible Prices

      Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices", Journal of Political Economy, Vol. 103 (1) pp. 118-41.
      Ricardo Lagos and Randall Wright, 2005. A Unified Framework for Monetary Theory and Policy Analysis, Journal of Political Economy, vol. 113(3), pages 463-484.

    6. Overlapping Generations

      McCandless, George & Wallace, Neil, 1991. "Introduction to Dynamic Macroeconomic Theory", Harvard University Press. Chapters 10, 11, 12.

  4. Limited Participation

    Walsh, Section 5.2.2
    Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism", American Economic Review, Vol. 73 (5) pp. 871-80.
    Fernando Alvarez, Andrew Atkeson, and Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets", Journal of Political Economy, Vol. 110 (1) pp. 73-112.
    Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism", American Economic Review, Vol. 82 (2) pp. 346-53.
    Moran, Kevin, and Hendry, Scott, 2004. "Limited Participation and Costly Search in Financial Markets", Bank of Canada, mimeo.
    Filippo Occhino, 2001. "Monetary Policy Shocks in an Economy with Segmented Markets", Departmental Working Papers 200108, Rutgers University, Department of Economics.
    Williamson, Stephen, 2004. "Limited Participation, Private Money, and Credit in a Spatial Model of Money", Economic Theory, Springer, vol. 24(4), pages 857-875.
    David Andolfatto & Ed Nosal, 2003. "A Theory of Money and Banking", working paper 03-10, Federal Reserve Bank of Cleveland.

  5. Imperfect Competitition and Price Stickiness (maybe)

    Walsh, Section 5.3.2
    Mark Bils and Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Paper 7236.
    Christopher Hanes & John A. James, 2003. "Wage Adjustment under Low Inflation: Evidence from U.S. History," American Economic Review, vol. 93(4), pages 1414-1424, September.
    Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    Cho, Jang-Ok & Cooley, Thomas F, 1995. "The Business Cycle with Nominal Contracts", Economic Theory, Vol. 6 (1) pp. 13-33.
    V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?", Econometrica, Vol. 68 (5) pp. 1151-1180.

  6. The Credit Channel of Monetary Policy

    Walsh, Chapter 7
    Bernanke, Ben S & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission", Journal of Economic Perspectives, Vol. 9 (4) pp. 27-48.
    Cooley, Thomas & Quadrini, Vincenzo, 2006. "Monetary Policy and The Financial Decisions of Firms", Economic Theory, Springer, vol. 27(1), pages 243-270.

  7. Perils of VARS

    Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2005. "A critique of structural VARs using business cycle theory," Staff Report 364, Federal Reserve Bank of Minneapolis.
    Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C's (And D's) For Understanding VARS," PIER Working Paper 05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2006. "Assessing structural VARs," International Finance Discussion Paper 866, Board of Governors of the Federal Reserve System (U.S.).

  8. Monetary Policy and Time Inconsistency

    Walsh, Chapter 8
    Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans", Journal of Political Economy, Vol. 85 (3) pp. 473-91.
    Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model", Journal of Political Economy, Vol. 91 (4) pp. 589-610.

  9. Taylor Rules

    Taylor, John B., 1993. "Discretion versus Policy Rules in Practice". Carnegie-Rochester Conference Series on Public Policy, Vol. 39 pp. 195-214.
    Athanasios Orphanides, 2000. "Activist stabilization policy and inflation: the Taylor rule in the 1970s," Finance and Economics Discussion Series 2000-13, Board of Governors of the Federal Reserve System (U.S.).
    Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.

  10. More on Economies with Incomplete Markets

    Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
    Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
    Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
    Stéphane Pallage & Christian Zimmermann, 2001. "Voting on Unemployment Insurance," International Economic Review, vol. 42(4), pages 903-923, November. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44, pages 1-41, June.

  11. Labor Market Trends

    Raquel Fernandez & Alessandra Fogli & Claudia Olivetti, 2002. "Marrying Your Mom: Preference Transmission and Women's Labor and Education Choices," NBER Working Papers 9234, National Bureau of Economic Research, Inc.
    Jeremy Greenwood & Ananth Seshadri & Mehmet Yorukoglu, 2005. "Engines of Liberation," Review of Economic Studies, Blackwell Publishing, vol. 72(1), pages 109-133, 01.
    Larry E. Jones & Rodolfo E. Manuelli & Ellen R. McGrattan, 2003. "Why are married women working so much?," Staff Report 317, Federal Reserve Bank of Minneapolis.
    John Knowles, 2005. "Why are Married Men Working So Much?," PIER Working Paper 05-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.


There will be a mid-term and a final exam. Each will last a full class. I will also sprinkle a certain number of homeworks here and there, both to entice you to work without delay and to allow me to check we are on the right track. You will also be asked to write a short essay on a rather narrow topic and present it in the macro workshop (1 hour). The formula will be:

A word about grades. When I grade, the average is usually around 60%. This allows me to reward better those who do well. Do not be too alarmed when you get a grade that is lower than those you get in other classes. But if it is really low, you should do something about it...

Suggested Essay Topics

The essay should be 8 pages long, plus a bibliography of at least 10 items. At least three must be articles (no more than two from the same journal), at least three must be unpublished working papers. The topic should be distinct from what you have written for Econ 429. A few suggestions: Other, non-menetary, topics are fine as well as long as they are within the realm of macroeconomics. Examples could be: Topics need to be approved by me. Past presentations of topics that cannot be chosen at this time included: The essay then needs to be presented within a macro workshop, that is an audience broader than this class. The last five workshop slots of the semester have been reserved for this class. To contact me: Phone: 6-3272, Email: