The aim of the course is to provide a good knowledge and understanding of the effect of monetary policy on output and inflation relying on dynamic general equilibrium models of the economy. Competence is developed regarding: i) the monetary transmission mechanism; ii) financial frictions in credit markets; iii) the objectives and instruments of monetary policy with an emphasis on targeting regimes and policy rules; iv) operating procedures of monetary policy.
Expected learning outcomes
Students are expected to acquire the knowledge of the theory and practice of Monetary Economics and Macroeconomic Finance. In particular, they will be able to understand: i) Monetary policy (analysis, instruments, operating procedures, transmission mechanisms, policy goals and policy effectiveness); ii) financial instruments (bonds of different maturities, structure of interest rates, debt versus equity); iii) financial frictions due to informational asymmetries and their role in the transmission of monetary policy. Students will develop the basic skills for monetary economic analysis with special attention to the modeling of empirical results, the analysis of policy issues and their solution.
Lesson period: First trimester
(In case of multiple editions, please check the period, as it may vary)
The course offers an introduction to the most important topics in monetary economics and policy, focusing on 'new Keynesian' general-equilibrium models of monetary economies with particular emphasis on the policy implications of these models. It covers the basic theoretical approaches, and discusses the role of sticky prices, expectations and financial frictions for the transmission of monetary policy. Among the topics presented are: objectives and instruments of monetary policy; operating procedures of monetary policy; targeting regimes and policy rules; the term structure of interest rates; informational asymmetries and the credit channel of monetary policy
Introduction - The Basics · Policy Objectives, Instruments and Operating Procedures · Money Demand and Money Supply · The Effects of Money in the AD-AS Model
First Part - New Keynesian Monetary Economics · Empirical Evidence: Money, Inflation and Output · Sticky Prices and the Monetary Transmission Mechanism · Monetary Policy Analysis in New Keynesian Models · Targeting Regimes and Policy Rules
Second Part - Monetary Policy and Financial Markets · The Term Structure of Interest Rates · Asymmetric Information and Credit Rationing · Financial Frictions and the Credit Channel
Prerequisites for admission
Although there are no formal prerequisites, students are recommended to take Advanced Microeconomics and Macroeconomics.
Lectures and review sessions. Lectures present the theory and provide examples of practical applications. Policy issues and solutions are also discussed. Review sessions provide the instruments to solve exercises on the topics addressed in the lectures.
Textbook Walsh, Carl E., Monetary Theory and Policy (3rd edition), MIT press, 2010. Chapters: 1, 6, 8, 10, 11.
Assessement methods and criteria
Written exam (approximately 1 hour and 30 minutes). The exam covers all the topics presented during lectures and it consists of a series of open-ended questions which may include calculations and/or explanation and/or technical analysis.