Description

All students doing this unit must have completed an intermediate level course in macroeconomics. The unit examines a number of issues concerning monetary theory and policy.  We begin with an analysis of empirical regularities of money, output, prices and interest rates, with particular reference to Australia. This leads to the development of key models of monetary economies in use today. These are invariably based on what is known as dynamic stochastic general equilibrium, or DSGE, models. These models were first developed in the context of real business cycle models with flexible prices. The policy relevant ones include a variety of nominal rigidities, and they are often referred to as “New Keynesian” models. The workhorse version has 3 equations (dynamic IS relation, a modern Phillips curve, and an interest rate rule), which has the virtue that it can be easily manipulated both analytically and numerically. We will examine monetary and fiscal policies interactions. A key issue addressed is how to determine optimal monetary policy, and in this context we will study the role of inflation targeting.

Topics

• Empirical regularities of money, prices, output and interest rates
• Basic monetary models
• Money and public finance, optimal inflation
• Real business cycle theory
• The New Keynesian model with nominal rigidities.
• DSGE models with nominal rigidities
• Optimal monetary policy