Advanced Monetary Theory and Policy (ECO-AD-MONETTHEO)

ECO-AD-MONETTHEO

Description

A remarkable feature of the time we live in is the large and rapidly increasing government debts. As a consequence, the debate over widening fiscal imbalances and what monetary and fiscal authorities should do about it is now at the center of the policy discourse in several countries. In this short five-lecture course, we will show under what conditions a large public debt brings about macroeconomic instability in dynamic stochastic general equilibrium (DSGE) models. Through the lens of these models, we will investigate the challenges faced by the monetary authorities when public debt is large and growing. We will study various ways for the monetary and fiscal authorities to coordinate in order to stabilize the dynamics of public debt and how this coordination is expected to affect inflation and output growth. We will also study how the issue of coordinating fiscal policies is particularly challenging in a monetary union, such as the EU.
Equipped with these theoretical notions, we put the theory at work and show that these models suggest fiscal-monetary policies interactions should be regarded as an important factor behind inflation dynamics in the postwar period. We will also use what the theory teaches us regarding how monetary and fiscal authorities in the U.S. and in the Euro Area can cope with the post-pandemic large and growing stock of public debts.
Goal: The course is aimed to bring students to the frontier of research on monetary-fiscal policies interactions. There will be a lecture in the morning and practice sessions in the afternoon.
Practice sessions: There will be five practice sessions where the use of Matlab and the Gensys patch, which can be downloaded for free from the link https://sims.princeton.edu/yftp/gensys/mfiles/, are required. Please make sure that both features are installed and work properly in your laptop before coming to practice sessions.
Final Assessment: The students will be asked to replicate some of the results in Bianchi, Faccini, and Melosi (2023).
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Course Outline
1. Fiscal Imbalances and Monetary Policy in the XXI Century
2. Monetary and fiscal dominance in DSGE models
3. DSGE models with regime switching to study
(a) Lack of coordination between monetary and fiscal policies
(b) Learning the policy mix
4. Monetary and fiscal policy mix in a monetary union
5. Models with partially unfunded debt

Main References:
•Leeper (1991)
•
Sargent and Wallace (1981)
•Sims (1994)
•Woodford (1994, 2001, 2003)
•Bianchi and Melosi (2013, 2016, 2017, and 2019)
•Bianchi and Ilut (2017)
•Leeper, Traum, and Walker (2017)
•Bianchi, Faccini, and Melosi (2023)
•Bianchi, Melosi, Rogantini-Picco (2023)
References
Bassetto, M. (2002): A Game-Theoretic View of the Fiscal Theory of the Price Level, Econometrica, 70(6), 2167 2195.
Bianchi, F., Faccini, R., and L. Melosi (2020): Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength, in NBER Working Papers # 27112. National Bureau of Economic Research, Inc.
(2023): A Fiscal Theory of Persistent Inflation, Quarterly Journal of Economics, 138(4), 2127–2179.
Bianchi, F., and C. Ilut (2017): Monetary/Fiscal Policy Mix and Agents Beliefs, Review of Economic Dynamics, 26, 113 139.
Bianchi, F., and L. Melosi (2013): Dormant Shocks and Fiscal Virtue, in NBER Macroeconomics Annual 2013, Volume 28, NBER Chapters, pp. 1 46. National Bureau of Economic Research, Inc.
(2017): Escaping the Great Recession, American Economic Review, 107(4), 1030 58.
(2019): The dire effects of the lack of monetary and fiscal coordination, Journal of Monetary Economics, 104, 1 22.
Bianchi, F., Melosi L., A. Rogantini-Picco (2020): Who is Afraid of Eurobonds, Mimeo.
Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005): Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, 113(1), 1 45.
Cochrane, J. H. (1998): A Frictionless Model of U.S. In ation, in NBER Macroeconomics Annual 1998, ed. by B. S. Bernanke, and J. J. Rotemberg, pp. 323 384. MIT Press, Cambridge, MA.
(2001): Long Term Debt and Optimal Policy in the Fiscal Theory of the Price Level, Econometrica, 69, 69 116.
Hall, G. J., and T. J. Sargent (2011): Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics, American Economic Journal: Macroeconomics, 3(3), 192 214.
Jacobson, M. M., E. M. Leeper, and B. Preston (2019): Recovery of 1933, NBER Working Papers 25629, National Bureau of Economic Research, Inc.
Leeper, E. M. (1991): Equilibria Under Active and Passive Monetary and Fiscal Policies, Journal of Monetary Economics, 27, 129 147.
Leeper, E. M., N. Traum, and T. B. Walker (2017): Clearing Up the Fiscal Multiplier Morass, American Economic Review, 107(8), 2409 2454.
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Sargent, T., and N. Wallace (1981): Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis Quarterly Review, Fall, 1 17.
Sims, C. A. (1994): A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy, Economic Theory, 4, 381 399.
Sims, C. A. (2016): Fiscal policy, monetary policy and central bank independence, in Kansas City Fed Jackson Hole Conference.
Woodford, M. (1994): Monetary Policy and Price Level Determinacy in a Cash-in Advance Economy, Economic Theory, 4, 345 389.
(1995): Price Level Determinacy without Control of a Monetary Aggregate, Carnegie-Rochester Series of Public Policy, 43, 1 46.
(2001): Fiscal Requirements of Price Stability, Journal of Money, Credit, and Banking, 33, 669 728.
(2003): Interest and prices: Foundations of a theory of monetary policy. Princeton University Press, Princeton, New Jersey.