Ec 970: Monetary Economics

Harvard University Department of Economics

Spring 2016

• Class meetings: Tu/Th 1:00-2:30, Littauer M-17

• Instructor: Daniel Lewis (daniellewis@fas.harvard.edu, Littauer G28)

• Office hours: By appointment, Thursdays 2:30-4, Littauer M-42

• Course website: https://canvas.harvard.edu/courses/9471

Course Description
Monetary policy has the ability to shape all economic interactions in a way that no other
policy does. It “gets in all the cracks”, since all transactions in the modern economy are in-
dexed to currency in some way. The money supply, exchange rates, and reserve requirements
all impact the way economic actors operate. However, the recent experience of the Great
Recession has raised questions in monetary policy surrounding the limits to this power. At
the same time, new methods to adress these challenges have been developed, but are yet to
be rigourously evaluated. Moreover, some countries are considering expanding the role of
the central bank to include the macro-prudential regulation of financial markets. It is truly
an exciting time to be a monetary economist.
What is Quantitative Easing, and how does it work? How do interest rates impact the
real economy? Why should markets believe what the Federal Reserve says? Is the Euro
doomed - was its struggle predictable? How can we avoid bank runs? Central banks and the
tools they use to shape markets are now at the forefront of policy debates more than ever,
and new challenges abound. This class will analyze a range of current questions in monetary
economics through a variety of lenses. Students will develop a critical understanding of
both theoretical and empirical strategies used in the literature. We will study the evolving
role of the central bank, starting from the importance of its independence, considering the
role of commitment and credibility in monetary policy, and progressing to the frontier of
unconventional monetary policy and macroprudential policy. We will also explore a variety
of other topics in monetary economics, including bank runs, exchange rate regimes, sovereign
debt, and the Euro crisis. While the United States and the Federal Reserve will be central
to many of the papers we discuss, the class will focus on issues of international importance.

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Prerequisites
• Stat 104 or 110

• Ec 1010a or 1011a

• Ec 1010b or 1011b concurrently

• Ec 1123 concurrently

• Math 1b (or higher) highly recommended.

Evaluation
You will be evaluated on a variety of assignments for this class. The bulk of work con-
sists of written assignments, but you will also be assessed on your Stata problem sets, two
presentations, attendance, and participation.

Writing Assignments: 65%

The writing assignments are designed to help you learn to read, think, and write like an
economists. We begin by developing the skills to criticallly read the economics literature, and
gradually move on to assessing and extending existing work before creating something of your
own. A great resource for all written assignments is the Writing Economics guide available
online (http://economics.harvard.edu/files/economics/files/writingec_f2014_0.pdf). Unless
otherwise noted, assignments are due via email by midnight on the due date (assignments
should be submitted doublespaced, in a normal font, with reasonable margins)

Reading Responses: 10%

1 page each. A reading response should summarize the starred papers for the next day’s class.
Beyond that, it should raise questions for discussion in class. You might take issue with some
of the authors’ assumptions, disagree with the conclusions they draw, have methodological
concerns, consider ways to improve the paper, form related research questions of your own,
or raise difficulities of comprehension. The goal of these assignments is to encourage active
and critical reading of the papers and to help you prepare for productive class discussions.
You will choose one class each week for which to prepare a response, and it is due at midnight
the day before. I will count your best ten responses from the 12 possible weeks. You cannot
write a response for a class that includes a paper you review for a referee report.

Referee Reports: 15%

Two reports of 4 pages each. Referee reports are like more developed reading responses. The
first page should summarize the paper: what is the questions it seeks to answer, what is the
methodology, what are its assumptions, what type of data or model does it use, what are
its results? The remainder of the report should accomplish two tasks. First, it should assess

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the paper’s contribution to the literature. Second, it should raise concerns and weaknesses
of the paper, and praise its strengths, suggesting possible refinements or extensions. Both
reports should be on required readings for which you do not write a reading response. You
must complete one on a theoretical paper and one on an empirical paper. The reports are
due at midnight the day before the class for which the paper is assigned.

Term Paper: 40%

15-18 pages, excluding graphs and tables. For the first part of the tutorial, you will focus
on becoming a critical, active consumer of economic literature. The term paper ecourages
you to produce your own contribution to the academic discourse. You will be graded on
intermediate steps as well as the final paper. I will be happy to read and critique a draft
if you send it before a specified date, to be announced. You are required to meet with me
prior to the first intermediate due date to discuss potential topics - this should help ensure
you do nott start working down a dead end. The topic must be related to material discussed
in at least two classes.

Prospectus I: 5% 3-5 pages. The first prospectus should illustrate your plan for the
paper. What is your research question? What is your motivation? What do you hope to
show? What has already been written by others on your topic? You should synthesize these
existing papers so you can situate your paper amongst them - what does it add, and what
does it build on? You should reference at least 5 papers, including 3 not required for the
class.

Prospectus II: 10% 3-5 pages. The second prospectus should discuss your method-
olgy, and data or model. If you are using data, you should have it at this time, and if you
are using a model, you should be able to lay out the basic components. You should discuss
limitations and any controversial assumptions you make. Ideally, you will be able to provide
summary statistics of your data.

Final Paper: 25% 15-18 pages. Your final paper should analyze a question in mon-
etary economics. You should clearly pose and motivate a research question, formulate a
hypothesis, summarize existing literature, present and defend your methodology to test your
hypothesis, discuss your results, and draw some interesting implications.

Class Attendance, Participation, and Presentations: 25%

Attendance is mandatory, as class discussion is an essential component of the sophomore
tutorial experience. You are expected to read all the starred readings before each class
(other readings are optional), and participate fully in our class discussion.
Each student will present the readings and lead the discussion for one class. This cannot
be a class including a paper for which you present a referee report, but it can be one for
which you write a reading response. You should come prepared with slides and be able to
explain the required papers to students who may not have read them as carefully as you
have. You should have five thought-provoking questions to lead the discussion.

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In addition, each student will give a polished presentation of their term paper topic,
discussing the motivation, relevant existing literature, intended methodology, and progress
so far. Each presentation should last approximately 10 minutes (exact time will depend on
number of students). Presentation to your peers is a great way of finding holes in your paper
– the more thought you put into your presentation, the more useful your peers’ feedback will
be. Note: you are also expected to provide feedback to your classmates when they present
their final project. Presentations will take place the last two class meeting times.

Stata Problem Sets: 10%

Enrollment in Ec 970 requires completion of a Stata mini-course (one live session, February
TBD, 8:30am, and three video modules), and four Stata problem sets. The goal of the
tutorial is to expose you to, and make you comfortable with, the main data analysis software
package that you will use as an economics concentrator. More details on the Stata tutorial
and our Stata tutor available online: https://canvas.harvard.edu/courses/3694. Problem
sets due: 2/19, 3/4, 3/25 and 4/8.

Course Policies
Academic Integrity
Collaboration is important in academic work, and can be very helpful. You are welcome to
discuss ideas, readings, and papers with others, but your work must be your own. Specifically,
I will be adhering to the below collaboration policy:
“Discussion and the exchange of ideas are essential to academic work. For assignments
in this course, you are encouraged to consult with your classmates on the choice of paper
topics and to share sources. You may find it useful to discuss your chosen topic with your
peers, particularly if you are working on the same topic as a classmate. However, you should
ensure that any written work you submit for evaluation is the result of your own research
and writing and that it reflects your own approach to the topic. You must also adhere to
standard citation practices in this discipline and properly cite any books, articles, websites,
lectures, etc. that have helped you with your work. If you received any help with your
writing (feedback on drafts, etc), you must also acknowledge this assistance.”
I will take violations of this policy very seriously. Consult the Academic Information
section of the Harvard College Handbook for Students for more information, and the Havard
Guide to Using Sources for advice on citing sources to avoid plagiarism.

Late Assignments
Late assignments will be accepted for up to 50% credit up until the next class meeting after
the due date, and will not be accepted after that. The final project is an exception, (and
intermediate steps) a third of a letter grade will be deducted per day.

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Laptops
Given that most students read papers on laptops almost exclusively, they will be permitted in
class. However, remember that participation and engagement is a key part of the evaluation.
As such, I reserve the right to cold-call students who disappear into their laptops. The ideal
use of a laptop in this course will be to skim through parts of a paper as they come up in
discussion and to refer back to notes taken while reading papers.

Email
During the week I will do my best to respond to email within 12 hours. This is not a
guarantee, but a general rule. During the weekends and if I am traveling, I will do my best
to respond within 24 hours. The same caveat applies.

Topics, Readings, and Assignment Due Dates

All required readings are available on the internet. Please make sure to download the version
I cite (not a working paper). Papers should be accessed using Econlit on the Harvard
University Library site, unless “available online” is noted, in which case you should follow
the link. Over the course of the semester, if I change any readings on this list, I will give
ample notice.

Introduction
Meeting 1, Feb 2

1. Friedman, Milton. 1968. “The Role of Monetary Policy.” American Economic Review
58(March): 1–17. Link.

2. Bernanke, Ben S. 2013. “A Century of U.S. Central Banking: Goals, Frameworks, Ac-
countability.” The First 100 Years of the Federal Reserve: The Policy Record, Lessons
Learned, and Prospects for the Future, 0–24. Link.

Tools of Macro
Meeting 2, Feb 4

1. Lewis, Daniel. 2015. “Essentials of the New Keynesian Model.”

2. Lewis, Daniel. 2015. “Econometrics for Modern Macroeconomics.”

Approaches to research
Meeting 3, Feb 9: Empirical Work

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1. Romer, Christina D, and David H Romer. 1989. “Does Monetary Policy Matter? A
New Test in the Spirit of Friedman and Schwartz.” NBER Macroeconomics Annual 4:
121–84. Link.

2. Monticini, Andrea, and Giacomo Vaciago. 2005. “Are Euro Interest Rates Led by FED
Announcements?” Link.

Meeting 4, Feb 11: Theoretical Work

1. Taylor, John B. 1993. “Discretion Practice versus Policy Rules in Practice.” Carnegie-
Rochester Conference Series on Public Policy 39: 195–214. Link.

2. Eggertsson, Gauti, and Paul R. Krugman. 2012. “Debt, Deleveraging, and the Liquid-
ity Trap: A Fisher-Minsky-Koo Approach.” Quarterly Journal of Economics: 1469–1513.
Link.

Unconventional MP
Meeting 5, Feb 16: Non-academic Discourse on Unconventional Policy

1. Bernanke, Ben S. 2015. “Monetary Policy Since the Onset of the Crisis.” Rederal
Reserve Bank of Kansas City Economic Symposium, 1–13. Link.

2. Walker, Andrew. 2014. “Has Quantitative Easing Worked in the US?” BBC Business.
Link.

3. Da Costa, Pedro Nicolaci. 2015. “Fed Forward Guidance: A Look Back.” The Wall
Street Journal. Link.

4. R.A. 2015. “What ‘forward Guidance’ Is, and How It (theoretically) Works.” The
Economist. Link.

5. Joyce, Michael, Matthew Tong, and Robert Woods. 2011. “The United Kingdom’s
Quantitative Easing Policy: Design, Operation and Impact.” Link.

Meeting 6, Feb 18: Forward Guidance

1. Mckay, Alisdair, Emi Nakamura, and Jon Steinsson. 2014. “The Power of Forward
Guidance Revisited.” Link.

2. Moessner, Richhild, and William R Nelson. 2008. “Central Bank Policy Rate Guid-
ance and Financial Market Functioning.” International Journal of Central Banking (4):
204–26. Link.

**Feb 19: Stata Problem Set 1 due**

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Meeting 7, Feb 23: Quantitative Easing

1. Vissing-Jorgensen, Annette, and Arvind Krishnamurthy. 2011. “The Effects of Quan-

titative Easing on Interest Rates: Channels and Implications for Policy.” Brookings
Papers on Economic Activity (Fall): 215–87. Link.

2. Blinder, Alan S. 2010. “Quantitative Easing : Entrance and Exit Strategies.” Federal
Reserve Bank of St. Louis Review 92(6): 465–80. Link.

Meeting 8, Feb 25: Negative Interest Rates

1. Garbade, Kenneth, and Jamie McAndrews. 2012. “If Interest Rates Go Negative . .
. Or, Be Careful What You Wish For.” Liberty Street Economics. Link (August 17,
2015).

2. Mankiw, Gregory. 2015. “It May Be Time for the Fed to Go Negative.” The New York
Times. Link.

3. Buiter, Willem H, and Nikolaos Panigirtzoglou. 2003. “Overcoming the Zero Bound on
Nominal Interest Rates with Negative Interest On Currency: Gesell’s Solution.” The
Economic Journal (113): 723–46. Link.

Credibility
Meeting 9, Mar 1: Policy Commitment

1. Osborne, Martin. 2000. “Nash Equilibrium: Theory.” In An Introduction to Game

Theory, Oxford: Oxford University Press, 11–30. Link.

2. Osborne, Martin. 2000. “Repeated Games: The Prisoner’s Dilemma.” In An Introduc-

tion to Game Theory, Oxford: Oxford University Press, 389–402. Link.

3. Barro, Robert J., and David B. Gordon. 1983. “Rules, Discretion, and Reputation in
a Model of Monetary Policy.” Journal of Monetary Economics 12: 101–21. Link.

Meeting 10, Mar 3: Independence and Information

1. Keefer, Philip, and David Stasavage. 2003. “The Limits of Delegation: Veto Play-
ers, Central Bank Independence, and the Credibility of Monetary Policy.” American
Political Science Review 97(3): 407–23. Link.

2. Romer, David, and Christina Romer. 2000. “Federal Reserve Information and the
Behavior of Interest Rates.” The American Economic Review 90(3): 429–57. Link.

**Mar 4: Stata Problem Set 2 due**

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Bank Failure
Meeting 11, Mar 8: Bank Runs

1. Diamond, Douglas W., and Philip H. Dybvig. 1983. “Bank Runs, Deposit Insurance,
and Liquidity.” Journal of Political Economy 91(3): 401. Link.

2. Shin, Hyun Song. 2009. “Reflections on Northern Rock : The Bank Run That Heralded
the Global Financial Crisis.” The Journal of Economic Perspectives 23(1): 101–20.
Link.

Meeting 12, Mar 10: Bank Bailouts

1. Stiglitz, Joseph. 2009. “A Bank Bailout That Works.” The Nation: 1–8. Link.

2. Cordella, Tito, and Eduardo Levy Yeyati. 2003. “Bank Bailouts: Moral Hazard vs.
Value Effect.” Journal of Financial Intermediation 12(4): 300–330. Link (August 17,
2015).

**March 11: Prospectus I due**

Macro-prudential Policy
Meeting 13, Mar 22: Previous Experience

1. Elliott, Douglas. 2013. “Time to Start Experimenting.” The Economist: 1–2. Link.

2. Lim, C et al. 2011. “Macroprudential Policy: What Instruments and How to Use
Them? Lessons from Country Experiences.” Link.

Meeting 14, Mar 24: Policy Recommendations

1. Hanson, Samuel G, Anil K Kashyap, and Jeremy C Stein. 2011. “A Macroprudential

Approach to Financial Regulation.” Journal of Economic Perspectives 25(1): 3–28.
Link.

2. Galati, Gabriele, and Richhild Moessner. 2012. “Macroprudential Policy - a Literature

Review.” Journal of Economic Surveys 27(5): 846–78. Link (August 17, 2015).

**Mar 25: Stata Problem Set 3 due**

Exchange Rates
Meeting 15, Mar 29: Policy Under Exchange Rate Regimes

1. Mundell, Robert A. 1968. “The Monetary Dynamics of International Adjustment under

Fixed and Flexible Exchange Rates.” In International Economics, New York: Macmil-
lan, 152–76 Link.

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2. Drabek, Zdenek, and Josef Brada. 1998. “Exchange Rate Regimes and the Stability
of Trade Policy in Transition Economies.” Journal of Comparative Economics 26(4):
642–68. Link.

Research idea presentations begin.

Meeting 16, Mar 31: Research Idea Presentations (continued)

No readings this week.

Meeting 17, April 5: The Trilemma and Currency Crises

1. Obstfeld, Maurice, Jay C Shambaugh, and Alan M Taylor. 2005. “The Trilemma in
History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility.”
The Review of Economics and Statistics 87(3): 423–38. Link.

2. Eichengreen, Barry, Andrew K Rose, and Charles Wyplosz. 1996. “Contagious Cur-
rency Crises.” Link.

**Prospectus II due**

Sovereign Debt
Meeting 18, April 7: Growth and Debt

1. Reinhart, Carmen M, and Kenneth S Rogoff. 2008. “This Time Is Different: A

Panoramic View of Eight Centuries of Financial Crises.” Link.

2. R.A. 2010. “This Time Probably Isn’t Different.” The Economist. Link.

3. M.C.K. 2013. “How Much Is Too Much?” The Economist. Link.

**April 8: Stata Problem Set 4 due**

Meeting 19, April 12: The Dynamics of Debt

1. Bulow, Jeremy, and Kenneth Rogoff. 1989. “Sovereign Debt: Is to Forgive to Forget.”
The American Economic Review 79(1): 43–50. Link.

2. Lane, Philip R. 2012. “The European Sovereign Debt Crisis.” Journal of Economic
Perspectives 26(3): 49–68. Link.

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The Euro
Meeting 20, April 14: (Sub)Optimal Currency Area?

1. Mundell, Robert A. 1968. “A Theory of Optimum Currency Areas.” In International

Economics, New York: Macmillan, 177–86. Link.

2. Lane, Philip R. 2006. “The Real Effects of European Monetary Union.” Journal of
Economic Perspectives 20(4): 47–66. Link.

Meeting 21, April 19: Origins of the Crisis

1. Massman, Michael, and James Mitchell. 2003. “Reconsidering the Evidence: Are
Eurozone Business Cycles Converging.” Link.

2. Grauwe, Paul De. 2010. “Crisis in the Eurozone and How to Deal with It.” Centre for
European Policy Studies Policy Briefs (204): 1–6. Link.

Meeting 22, April 21: Grexit in the Press

1. Traynor, Ian, John Hooper, and Helena Smith. 2015. “Greek Referendum No Vote
Signals Huge Challenge to Eurozone Leaders.” The Guardian. Link.

2. Daley, Suzanne, and Liz Alderman. 2015. “Premier of Greece, Alexis Tsipras, Accepts
Creditors’ Austerity Deal.” The New York Times. Link.

3. Knight, Ben. 2015. “Greece Bailout Deal: Angela Merkel Expects IMF Involvement.”
The Guardian. Link.

4. Ip, Greg. 2015. “If Greece Goes, Political Contagion Is the Bigger Risk in Europe.”
The Wall Street Journal. Link.

5. Kennedy, Simon. 2015. “The Other Contagion: What If Greece Thrived After Euro
Exit?” Bloomberg Business. Link.

Meeting 23, April 26: Grexit According to Economists

1. Christodoulakis, Nicos. 2013. “From Grexit to Growth: On Fiscal Multipliers and

How to End Recession in Greece.” National Institute Economic Review (224): 66–76.
Link.

2. Polychroniou, C.J. 2012. “The Greek Crisis: Possible Costs and Likely Outcomes of a
Grexit.” Link.

**May 2: Final Paper due**

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