Monetary Theory and Policy (MIT Press)
Carl E. Walsh
Language: English
Pages: 640
ISBN: 0262013770
Format: PDF / Kindle (mobi) / ePub
This text presents a comprehensive treatment of the most important topics in monetary economics, focusing on the primary models monetary economists have employed to address topics in theory and policy. It covers the basic theoretical approaches, shows how to do simulation work with the models, and discusses the full range of frictions that economists have studied to understand the impacts of monetary policy. Among the topics presented are money-in-the-utility function, cash-in-advance, and search models of money; informational, portfolio, and nominal rigidities; credit frictions; the open economy; and issues of monetary policy, including discretion and commitment, policy analysis in new Keynesian models, and monetary operating procedures. The use of models based on dynamic optimization and nominal rigidities in consistent general equilibrium frameworks, relatively new when introduced to students in the first edition of this popular text, has since become the method of choice of monetary policy analysis.
This third edition reflects the latest advances in the field, incorporating new or expanded material on such topics as monetary search equilibria, sticky information, adaptive learning, state-contingent pricing models, and channel systems for implementing monetary policy. Much of the material on policy analysis has been reorganized to reflect the dominance of the new Keynesian approach. Monetary Theory and Policy continues to be the only comprehensive and up-to-date treatment of monetary economics, not only the leading text in the field but also the standard reference for academics and central bank researchers.
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payment received at the start of period t; pt is the inflation rate. Define the value function V ðat ; ktÀ1 Þ as the maximum present value of utility the household can achieve if the current state is ðat ; ktÀ1 Þ, where ktÀ1 is the per capita (or household) stock of capital at the start of the period. If nt denotes the fraction of time the household devotes to market employment (so that nt ¼ 1 À lt , where lt is the fraction of time spent in leisure activities), output per household yt is given by
characterize the steady state for the CIA model. See the appendix to chapter 2 for details. With a binding CIA constraint, c ss ¼ t ss þ m ss =ð1 þ p ss Þ, but in a steady state with m constant, t ss þ m ss =ð1 þ p ss Þ ¼ m ss . Thus, c ss ¼ m ss , and m ss =c ss ¼ 1. From the first-order condition for the household’s choice of n, Cð1 À n ss ÞÀh ¼ ð1 À aÞ y ss ss l ; n ss ð3:64Þ and since y ss =k ss takes on the same values as in the MIU model (because the production technology and the
first-order conditions for the household’s optimal choices for Ctm and Ctc . How are these a¤ected by the cash-in-advance constraint? c. Show that the nominal rate of interest acts as a tax on the consumption of Ctm . 7. Assume the model of section 3.3.1 is modified so that only a fraction c of consumption must be purchased using cash. In this case, the cash-in-advance constraint takes the form cct a mtÀ1 þ tt ; 1 þ pt 0 < c a 1: a. Write down the household’s decision problem. b. Write down the
change in the debt held by the private sector, Bt À BtÀ1 . Finally, the government can print currency to pay for its expenditures, and this is represented by the change in the outstanding stock of non-interest-bearing debt, Ht À HtÀ1 . Equation (4.3) can be divided by the price level Pt to obtain Gt BtÀ1 Tt Bt À BtÀ1 Ht À HtÀ1 ¼ þ þ itÀ1 þ : Pt Pt Pt Pt Pt Note that terms like BtÀ1 =Pt can be multiplied and divided by PtÀ1 , yielding 2. In 2007 the Federal Reserve banks turned over $34.6
open market operations a¤ect the relative proportions of money and bonds in government liabilities, open market operations determine l. Equation (4.18) can then be written as P ss ¼ ss br ½1 À cð1 À lÞðM þ BÞ: dy Open market purchases (an increase in l) that substitute money for bonds but leave M þ B unchanged raise P ss when c > 0. The rise in P ss is not proportional to the increase in M. Shifting the composition of its liabilities away from interest-bearing debt reduces the present