ECON 6310

Monetary Policy

The first objective of this class is to investigate the empirical facts regarding the impact monetary policy has on the economy. Secondly, we will look into advancements in theory that seek to match these empirical "facts" and explore how these models are being used for monetary policy.  The first step to understanding how monetary policy impacts the economy is to investigate the empirical regularities that arise from the use of macroeconometric methods such as VARs, structural dynamic models, and Bayesian econometrics.  Our focus will be first be on estimation and interpretation.  Then we will shift to more fundamental topics such as identification, focusing on short-run and long-run identification restrictions.  In our theory segment, we will focus on  the Sidrauski money-in-the utility function which will serve as the basis for our later models which include nominal or informational rigidities.  Our focus intitially will be on deriviation of the fundamental equations of the model through a recursive formulation.  We will focus on solving these types of models by value function iteration and log-linear approximation.  The class will also  require programming in Matlab which will be an integral part of learning the material.  Matlab provides a general environment to work from and will be useful for both the empirical and theoretical parts of the class. 

The grading for the class breaks down as follows:

Midterm (40%)

Final Exam (45%)

Paper (15%)

Textbooks:  Walsh, Carl.  Monetary Theory and Policy, Third Edition, MIT Press, 2010 and Hamilton, James. Time Series Analysis, Princeton University Press, 1994.

Another book you might find helpful: John Cochrane's Book on Time Series

David Griffiths Introduction to Matlab: Download here!

Software: Matlab

Where to get Matlab: Click Here!

Matlab Code Posted Below:

Code for Empirical Section

m-file for Vector Autoregressions and Supplementary Files






fimlst.m (Must also have likeli.m file below)


Code used for Theory Section



Take Home Exams Posted Below


Data Sets Posted Below:

Stock and Watson Data  Returns Data bgrdata

Practice Problems Posted Below:


Paper Ideas and Format

The paper should be approximately 15 pages typed.  The topic of the paper does not have to be on monetary policy.  The topic can cover any macroeconomic topic of interest.  The idea is to get you started on a research topic that is of interest to you with the hopes that the paper develops into something more substantial in the future.  Some topics that might be of interest are listed below:

  • Borrowing contraints and monetary policy
  • The state of empirical growth models
  • Nonparametric time series models
  • A comparison of solution methods for DSGE models
  • Optimal monetary policy in a liquidity trap
  • Money in OLG economies
  • Search models in monetary policy
  • Liquidity constraints in the firm
  • Job creators and tax cuts

Course Outline

I. Introduction and Basic Time Series

Meulendyke, Ann-Marie. U.S. Monetary Policy and Financial Markets,  Federal Reserve Bank of New York, 1998, Chapter 8.  Download Here!

McCandless, George and Weber, Warren. Some Monetary Facts,  Federal Reserve Bank of Minneapolis Quarterly Review 1995, pp. 2-11.  Download Here!

Hamilton, James. Time Series Analysis, Chapter 3.

Walsh, Carl.  Monetary Theory and Policy, Chapter 1. 


II. Stationary Vector Processes

A. Vector Autoregressions

Hamilton, James. Time Series Analysis, Chapter 10 & Chapter 11.

Stock, James and Watson, Mark.  "Vector Autoregressions," Journal of Economic Perspectives, Vol. 15, No. 4, Fall 2001, pp. 101-115. Download Here!

Kilian, Lutz.  "Small-sample Confidence Intervals for Impulse Response Functions," The Review of Economics and Statistics, Vol. 80, No. 2, May 1998, pp. 218-230. Download Here!

Ivanov, Ventzislav and Kilian, Lutz.  "A Practitioner's Guide to Lag Order Selection for VAR Impulse Response Analysis," Studies in Nonlinear Dynamics & Econometrics, Vol. 9, No. 1, 2005, Article 2. Download Here!

B. Dynamic Structural Models

Hamilton, James. Time Series Analysis, Chapter 11.

Blanchard, Olivier Jean and Quah, Danny. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, Vol. 79, No. 41, Sept. 1989, pp.  655-673. Download Here!

Bernanke, Ben. "Alternative Explanations of the Money-Income Correlation," Econometric Research Program, Princeton University, No. 321, Jan. 1986. Download Here!

Christiano, Lawrence, Eichenbaum, Martin, and Vigfusson, Robert. "Assessing Structural VARs," Working Paper, Jun. 2006. Download Here!

C. Bayesian VARS

Hamilton, James. Time Series Analysis, Chapter 12.

Koop, Gary and Korobilis, Dimitris. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Working Paper, Apr. 2010. Download Here!

Banbura, Marta, Giannone, Domenico, and Reichlin, Lucrezia. "Large Bayesian VARs," Working Paper Series, European Central Bank, No. 966, Nov. 2008. Download Here!


D. Applications and Summary

Bernanke, Ben and Blinder, Alan.  "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, Vol. 82, No. 4, Sep., 1992, pp. 901-921. Download Here!

Christiano, Lawrence, Eichenbaum, Martin and Evans, Charles.  "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers, No. 6400, 1998. Download Here!

Bernanke, Ben and Gertler, Mark.  "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, Vol. 9, No. 4, Fall 1995, pp. 27-48. Download Here!

III. Theoretical Models for Policy Analysis

A. Flexible Price Models

Walsh, Carl.  Monetary Theory and Policy, Chapter 2.

Sections 2.2-2.3 excluding existence and section 2.2.2

Sections 2.5-2.6 and appendix

B. Nominal Rigidities

Walsh, Carl.  Monetary Theory and Policy, Chapter 6.

Bils, Mark and Klenow, Peter J.  "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, Vol. 112, No. 5, 2004, pp. 947-985. Download Here!

C. Discretionary Policy and Time Inconsistency

Walsh, Carl.  Monetary Theory and Policy, Chapter 7.

Kydland, Finn and Prescott, Edward.  "Rules Rather than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, Vol. 85, No. 3, 1977, pp. 473-492. Download Here!

Taylor, John B.  "Discretion Versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy, No. 39, 1993, pp. 195-214. Download Here!