Handbook of Monetary Economics, Volume 3A

754 Pages·2010·8.65 MB·English

by  Benjamin M. Friedman

HANDBOOK OF
MONETARY
ECONOMICS
3A
VOLUME
INTRODUCTION TO THE SERIES
The aim of the Handbooks in Economics series is to produce Handbooks for various
branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer
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is also included, but the main goal is to provide comprehensive and accessible surveys.
The Handbooks are intended to provide not only useful reference volumes for
professional collections but also possible supplementary readings for advanced courses
for graduate students in economics.
KENNETH J. ARROW and MICHAEL D. INTRILIGATOR
HANDBOOK OF
MONETARY
ECONOMICS
3A
VOLUME
Edited by
BENJAMIN M. FRIEDMAN
MICHAEL WOODFORD
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CONTENTS-VOLUME 3A
Contributors xv
Preface xvii
Part One: Foundations: The Role of Money in the Economy
1. The Mechanism-Design Approach to Monetary Theory 3
NeilWallace
1. Introduction 4
2. SomeFrictions 5
3. AnIllustrative Model withPerfectRecognizability 8
4. Imperfect Recognizability andUniformCurrency 14
5. Optima UnderaUniform OutsideCurrency 16
6. Extensions ofthe IllustrativeModel 18
7. ConcludingRemarks 22
References 23
2. New Monetarist Economics: Models 25
Stephen Williamson and RandallWright
1. Introduction 26
2. BasicMonetary Theory 31
3. ABenchmark Model 38
4. New ModelsofOld Ideas 57
5. Money, Payments, andBanking 71
6. Finance 79
7. Conclusion 89
References 90
3. Money and Inflation: Some Critical Issues 97
BennettT. McCallumand EdwardNelson
1. Introduction 98
2. TheQuantity TheoryofMoney 99
3. Related Concepts 102
4. Historical BehaviorofMonetaryAggregates 104
5. Flawed Evidenceon Money Growth-Inflation Relations 108
v
vi Contents-Volume3A
6. MoneyGrowth andInflationin TimeSeries Data 112
7. Implications ofaDiminishing RoleforMoney 134
8. MoneyVersus InterestRates in PriceLevel Analysis 136
9. Conclusions 146
References 148
Part Two: Foundations: Information and Adjustment
4. Rational Inattention and Monetary Economics 155
ChristopherA. Sims
1. Motivation 156
2. Information Theory 157
3. Information TheoryandEconomic Behavior 160
4. Implications forMacroeconomic Modeling 171
5. Implications forMonetaryPolicy 174
6. Directions forProgress 176
7. Conclusion 178
References 180
5. Imperfect Information and Aggregate Supply 183
N. Gregory Mankiwand Ricardo Reis
1. Introduction 184
2. TheBaseline ModelofAggregate Supply 185
3. FoundationsofImperfect-Information andAggregate-Supply Models 191
4. Partial andDelayed Information Models: Common Predictions 196
5. Partial andDelayed Information Models: Novel Predictions 207
6. Microfoundations ofIncompleteInformation 213
7. TheResearch Frontier 217
8. Conclusion 222
References 223
6. Microeconomic Evidence on Price-Setting 231
Peter J.Klenow and Benjamin A.Malin
1. Introduction 232
2. DataSources 234
3. Frequency ofPrice Changes 238
4. SizeofPrice Changes 257
5. DynamicFeatures ofPriceChanges 258
Contents-Volume3A vii
6. TenFacts andImplications forMacro Models 271
7. Conclusion 278
References 279
PartThree: ModelsoftheMonetaryTransmissionMechanism
7. DSGE Models for Monetary Policy Analysis 285
LawrenceJ. Christiano, MathiasTrabandt, and KarlWalentin
1. Introduction 286
2. Simple Model 289
3. Simple Model:Some Implications forMonetaryPolicy 302
4. Medium-Sized DSGE Model 331
5. Estimation Strategy 345
6. Medium-Sized DSGE Model: Results 351
7. Conclusion 362
References 364
8. How Has the Monetary Transmission Mechanism Evolved Over Time? 369
Jean Boivin,MichaelT. Kiley,and Frederic S.Mishkin
1. Introduction 370
2. TheChannels ofMonetaryTransmission 374
3. Whythe MonetaryTransmission Mechanism mayhaveChanged 385
4. HastheEffect ofMonetary Policyonthe Economy Changed? Aggregate Evidence 388
5. What Caused theMonetaryTransmission Mechanismto Evolve? 396
6. Implications fortheFuture Conduct ofMonetary Policy 415
References 418
9. Inflation Persistence 423
Jeffrey C. Fuhrer
1. Introduction 424
2. Definingand MeasuringReduced-Form InflationPersistence 431
3. Structural SourcesofPersistence 449
4. Inferenceabout Persistencein SmallSamples:
“Anchored Expectations” andtheir Implications forInflationPersistence 473
5. Microeconomic Evidence on Persistence 478
6. Conclusions 482
References 483
viii Contents-Volume3A
10. Monetary Policy and Unemployment 487
Jordi Galí
1. Introduction 488
2. Evidence onthe Cyclical BehaviorofLabor Market Variablesand Inflation 491
3. AModel withNominal Rigidities andLabor Market Frictions 495
4. Equilibrium Dynamics: TheEffects ofMonetaryPolicyand Technology Shocks 515
5. Labor Market Frictions, NominalRigidities andMonetary PolicyDesign 528
6. Possible Extensions 535
7. Conclusions 537
References 543
11. Financial Intermediation and Credit Policy in Business Cycle Analysis 547
Mark Gertlerand Nobuhiro Kiyotaki
1. Introduction 548
2. ACanonical Model ofFinancialIntermediation andBusiness Fluctuations 551
3. Credit Policies 566
4. Crisis Simulations and PolicyExperiments 574
5. Issues andExtensions 581
6. Concluding Remarks 589
References 597
12. Financial Intermediaries and Monetary Economics 601
Tobias Adrianand Hyun SongShin
1. Introduction 602
2. Financial Intermediaries andthePrice ofRisk 606
3. Changing Nature ofFinancial Intermediation 615
4. Empirical Relevance ofFinancial Intermediary BalanceSheets 623
5. Central Bank asLender ofLast Resort 631
6. Role ofShort-Term InterestRates 636
7. Concluding Remarks 646
References 648
Index-Volume3A I1
Index-Volume3B I39
CONTENTS-VOLUME 3B
Contributors xv
Preface xvii
Part Four: Optimal Monetary Policy
13. The Optimal Rate of Inflation 653
Stephanie Schmitt-Grohé andMartín Uribe
1. Introduction 654
2. Money Demand andtheOptimal RateofInflation 658
3. Money Demand, Fiscal PolicyandtheOptimal RateofInflation 664
4. Failure ofthe Friedman Rule Dueto UntaxedIncome:Three Examples 667
5. AForeign Demand ForDomestic CurrencyandtheOptimal RateofInflation 675
6. Sticky PricesandtheOptimal RateofInflation 684
7. TheFriedman Rule Versus Price-Stability Trade-Off 695
8. Does theZero BoundProvide a Rationale forPositiveInflation Targets? 701
9. Downward Nominal Rigidity 704
10. Quality BiasandtheOptimal RateofInflation 706
11. Conclusion 715
References 720
14. Optimal Monetary Stabilization Policy 723
MichaelWoodford
1. Introduction 724
2. Optimal Policyin aCanonical NewKeynesian Model 726
3. Stabilization andWelfare 759
4. Generalizations ofthe BasicModel 790
5. Research Agenda 818
References 826
15. Simple and Robust Rules for Monetary Policy 829
John B. Taylor andJohn C. Williams
1. Introduction 830
2. Historical Background 830
3. Using Models toEvaluate Simple PolicyRules 833
ix