Michael K. Salemi
Office: Gardner 301
Office Hours: 1:00-2:00 TWR, and by appointment
Phone: 966-5391 (office), 929-9504 (home)
Email: Michael_Salemi@unc.edu

Richard Froyen
Office: Gardner 300 E
Office Hours: 3:30-4:30 TR and 3:00-4:00 W
Phone: 966-5375 (office), 929-5945 (home)
Email: froyen@email.unc.edu
 

Course Goals
Students should reach an understanding of monetary theory and policy substantially deeper than they attained in Econ 202-203. The course covers both closed and open economy models. Students interested in additional coverage of open economy models should take Econ 262. As of 2001, Econ 281 no longer includes material on the pricing of financial assets. Students interested in asset pricing should take Econ 286, Introduction to Empirical Finance, and possibly Econ 388, Advanced Topics in Empirical Finance.
 

Course Texts
EH: Eichberger, Jurgen and Ian R. Harper, Financial Economics, Oxford University Press, New York, 1997.
CW: Walsh, Carl E., Monetary Theory and Policy, The MIT Press, Cambridge, MA, 1998.
 

Frequently Used References
FH: Friedman, Benjamin M. and Frank H. Hahn (eds.), Handbook of Monetary Economics, Volumes 1 and 2, Elsevier Science Publishers, New York, 1990.
TW: Taylor, John and Michael Woodford, eds., Handbook of Macroeconomics, Elsevier Science Publishers, New York, 1999.
 

Examinations and Grades
Grades will be based on a final exam (50%) and a course paper (50%). Grades are based on total points earned and not on an average of letter grades for each assignment.

Course Project
Students who elect the standard course project will select, with the instructors' help, several papers in an area of interest to them, write individual precis of each paper and write a ten page overview. The overview should explain the question(s) addressed by the readings, the answers they provide, and unanswered questions worthy of further work. Students may negotiate an alternative project with the instructors.
 
 

Syllabus Part One

1 Aug 20: Empirical Evidence on Money and Output
CW, Chapter 1
Christiano, Lawrence, Martin Eichenbaum, ane Chalres L. Evans, "Monetary Policy Shocks: What Have We Learned And To What End?" TW, Chapter 2.
McCandless, G. T. and W. E. Weber, "Some Monetary Facts," Federal Reserve Bank of Minneapolis Quarterly Review, 19, 3, 2-11.
Sims, C., "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, 70, 2, 250-57.

2 (Aug 22): Why Does Money Effect Output?
Blanchard, Olivier, "Why Does Money Affect Output?" FH, Chapter 15.
Campbell, John Y., "Asset Prices, Consumption, and the Business Cycle," TW, Chapter 19.
Samuelson, P. A. , "What Classical and Neo-classical Monetary Theory Really Was," Canadian Journal of Economics, 1, 1, 1968, 1-15.
Sargent, T. J., "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics," Journal of Political Economy, 84, 3, 631-40.

3-4 (Aug 27, 29): Money in a General Equilibrium Framework

CW, Chapter 2.
Orphanides, A and R. Solow, "Money, Inflation and Growth," Chapter 6 in FH
Tobin, J., "Money and Economic Growth," Econometrica, 33, 4 (part 2), 1965, 671-84.

5-7 (Sept 3, 5, 10): Money and Transactions
CW, Chapter 3.
Kiyotaki, N. and R. Wright , "A Search-Theoretic Approach to Monetary Economics," American Economic Review, 83, 1, 1993, 63-77.
Benassy, J., "Non-Walrasian Equilibrium, Money and Macroeconomics," Handbook, Chapter 4
Duffie, D., "Money in General Equilibrium Theory," FH, Chapter 3
Friedman, M., "The Quantity Theory of Money: A Restatement," in Friedman, M. (ed.), Studies in the Quantity Theory of Money, University of Chicago Press, Chicago, 1956, 3-24.
Hahn, F. H., "Liquidity," FH, Chapter 2
Ostroy, J. M. and R. M. Starr, "The Transactions Role of Money," FH, Chapter 1
Townsend, Robert M., "Models of Money with Spatially Separated Agents," in Kareken, John and N. Wallace, editors, Models of Monetary Economies, Federal Reserve Bank of Minneapolis, 1980, 265-304.

8-9 (Sept 12, 17): Money and Output in the Short Run
CW, Chapter 5
Calvo, Guillermo A., "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, 12, 1983, 383-98.
Fischer, S., "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, 85, 1, 1977, 191-206.
Lucas, R., "Expectations and the Neutrality of Money," Journal of Economic Theory, 4, 2, 1972, 103-24.
McCallum, Bennett T. and Edward Nelson, "An optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, 31, 3, Part 1, 1999, 277-431
Taylor, J. B., "Staggered Wage Setting in a Macro Model," American Economic Review, 69, 2, 1979, 108-13.
Taylor, J. B., "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, 88, 1, 1980, 1-24.
Taylor, John B., "Staggered Price and Wage Setting in Macroeconomics," TW, Chapter 15.

10-11 (Sept 19, 24): A Framework for Monetary Analysis
CW, Chapter 5
Christiano, Eichenbaum, and Evans, "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Working Paper, May 2001.
Fuhrer, Jeffrey C., "Inflation/output variance trade-offs and optimal monetary policy," Journal of Money Credit and Banking 29, 1997, 214-234.
Fuhrer, Jeffrey C. and George R. Moore, "Monetary policy trade-offs and the correlation between nominal interest rates and real output," American Economic Review 85, 1995, 219-239.
_____________, "Inflation persistence," Quarterly Journal of Economics, February, 1995, 129-59.
Gali, Jordi and Mark Gertler, "Inflation dynamics: a structural econometric analysis," Journal of Monetary Economics 44, 1999, 195-222.
Rotemberg, Julio J. and Michael Woodford, "An optimization-based econometric framework for the evaluation of monetary policy," in Bernanke, Ben S. and Julio J. Rotemberg, eds., NBER Macroeconomics Annual 1997, MIT Press, Cambridge, MA, 1997, 297-346.
Salemi, Michael K., "Monetary policy evaluation and inverse control," February, 2002.

12-13 (Sept 26, Oct 1): Solution of Rational Expectations Models
Blanchard, Olivier J. and Charles M. Kahn, "The solution of linear difference models under rational expectations," Econometrica, 48, 5, 1980, 1305-12.
Soderlind, Paul, "Lecture notes: Solving linear expectational difference equations," Stockholm School of Economics, 1999.
Uhlig, Harald, "A toolkit for analyzing nonlineary dynamic stochastic models easily," Discussion Paper 101, Federal Reserve Bank of Minneapolis, June, 1995.
Klein, Paul, "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, 24, 200, 1405-23.

14 (Oct 3): Debt Contracts and Credit Rationing
EH, Chapter 6

15-16 (Oct 8, 10): Deposit Contracts and Banking
EH, Chapter 7.
CW, Chapter 7.
Hellwig, Martin, "Banking, Financial Intermediation, and Corporate Finance," in Giovannini, Alberto and Colin Mayer eds., European Financial Integration, Cambridge University Press, Cambridge, 1991, 35-63.
Bencivenga, V. R. and B. D. Smith, "Financial Intermediation and Endogenous Growth, Review of Economics and Statistics, 58, 1991, 195-209.
Fama, E., "What's Different about Banks," Journal of Monetary Economics, 15, 1, 1985, 29-40.
Jaffee, D. and J. Stiglitz, "Credit Rationing," FH, Chapter 16.
Stiglitz, J. and A. Weiss, "Credit Rationing in Markets with Imperfect Information," American Economic Review, 71, 3, 1981, 393-410
Williamson, S. D., "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing, Journal of Monetary Economics, 18, 1986, 159-79.