Course in Monetary Economics

Benjamin Eden is a Professor of Economics at Vanderbilt University and the University of Haifa in Israel. He has published articles in numerous academic journals, including The Journal of Political Economy, The Quarterly Journal of Economics, and The American Economic Review. Professor Eden served for many years as a consultant to the Bank of Israel, and has taught monetary economics at various schools including Carnegie Mellon University, UCLA, the University of Iowa and the University of Chicago.

• Preface xiiiPart I: Introduction to Monetary Economics 11 Overview 51.1 Money, Inflation, and Output: Some Empirical Evidence 51.2 The Policy Debate 81.3 Modeling Issues 131.4 Background Material 141.4.1 The Fisherian diagram 151.4.2 Efficiency and distortive taxes 181.4.3 Asset pricing 212 Money in the Utility Function 262.1 Motivating the Money in the Utility Function Approach: The Single-period, Single-agent Problem 262.2 The Multi-period, Single-agent Problem 282.3 Equilibrium with Constant Money Supply 332.4 The Social and Private Cost for Accumulating Real Balances 342.5 AdministrativeWays of Getting to the Optimum 362.6 Once and for All Changes in M 362.7 Change in the Rate of Money Supply Change: Technical Aspects 372.8 Change in the Rate of Money Supply Change: Economics 382.9 Steady-state Equilibrium (SSE) 412.10 Transition from One Steady State to Another 412.11 Regime Changes 432.12 Introducing Physical Capital and Bonds 452.13 The Golden Rule and the Modified Golden Rule 47Appendix 2A A dynamic programming example 533 The Welfare Cost of Inflation in a Growing Economy 573.1 Steady-state Equilibrium in a Growing Economy 573.2 Generalizing the Model in Chapter 2 to the Case of Growth 583.3 Money Substitutes 64Appendix 3A A dynamic programming formulation 694 Government 724.1 The Revenues from Printing Money 724.1.1 Steady-state revenues 724.1.2 Out of the steady-state revenues 734.1.3 The present value of revenues 75Appendix 4A Non-steady-state equilibria 764.2 The Government’s “Budget Constraint” 784.2.1 Monetary and fiscal policy: Who moves first? 814.2.2 The fiscal approach to the price level 814.3 Policy in the Absence of Perfect Commitment: A Positive Theory of Inflation 825 More Explicit Models of Money 865.1 A Cash-in-advance Model 865.1.1 A two-goods model 875.1.2 An analogous real economy 895.1.3 Money super-neutrality in a one-good model 925.2 An Overlapping Generations Model 945.3 A Baumol–Tobin Type Model 96Appendix 5A 986 Optimal Fiscal and Monetary Policy 1006.1 The Second-best Allocation 1006.2 The Second Best and the Friedman Rule 1036.3 Smoothing Tax Distortions 1096.4 A Shopping Time Model 1127 Money and the Business Cycle: Does Money Matter? 1237.1 VAR and Impulse Response Functions: An Example 1257.2 Using VAR Impulse Response Analysis to Assess the Money–Output Relationship 1277.3 Specification Search 1357.4 Variance Decomposition 1428 Sticky Prices in a Demand-satisfying Model 1479 Sticky Prices with Optimal Quantity Choices 1559.1 The Production to Order Case 1569.2 The Production to Market Case 16110 Flexible Prices 17010.1 Lucas’ Confusion Hypothesis 17010.2 Limited Participation 174Part II: An Introduction to the Economics of Uncertainty 17911 Preliminaries 18211.1 Trade in Contingent Commodities 18511.2 Efficient Risk Allocation 19012 Does Insurance Require Risk Aversion? 19712.1 The Insurance-buying Gambler 20012.2 Socially Harmful Information 20113 Asset Prices and the Lucas “Tree Model” 202Part III: An Introduction to Uncertain and Sequential Trade (UST) 20714 Real Models 21014.1 An Example 21014.1.1 Downward sloping demand 21514.1.2 Welfare analysis 21814.1.3 Demand and supply analysis 22114.2 Monopoly 22414.2.1 Procyclical productivity 22614.2.2 Estimating the markup 22714.3 Relationship to the Arrow–Debreu Model 22814.4 Heterogeneity and Supply Uncertainty 23114.4.1 The model 23314.5 Inventories 23714.5.1 Temporary (partial) equilibrium 23814.5.2 Solving for a temporary equilibrium 24014.5.3 Full equilibrium 24314.5.4 Efficiency 243Appendix 14A The firm’s problem 247Appendix 14B The planner’s problem 24815 A Monetary Model 25015.1 An Example 25115.2 Working with the Money Supply as the Unit of Account 25315.3 Anticipated and Unanticipated Money 25515.4 Labor Choice, Average Capacity Utilization andWelfare 25615.5 A Generalization to Many Potential Markets 25615.6 Asymmetric Equilibria: A Perfectly Flexible Price Distribution is Consistent with Individual Prices That Appear to Be “Rigid” 25815.7 Summary of the Implications of the Model 25916 Limited Participation, Sticky Prices, and UST: A Comparison 26116.1 Limited Participation 26116.2 Sticky Prices 26516.3 UST 26816.4 A Real Business Cycle Model withWedges: Some Equivalence Results 27416.5 Additional Tests Based on Unit Labor Cost and Labor Share 27617 Inventories and the Business Cycle 28017.1 Introducing Costless Storage 28217.2 Adding Supply Shocks 28817.3 Testing the Model with Detrended Variables 29217.4 Using an Impulse Response Analysis with Non-detrended Variables to Test for Persistence 297Appendix 17A The Hodrick–Prescott (H–P) filter 30018 Money and Credit in the Business Cycle 30218.1 A UST Model with Credit 30218.2 Inventories Are a Sufficient Statistic for Past Demand Shocks 30518.3 Estimating the Responses to a Money Shock 30618.4 Estimating the Responses to an Inventories Shock 31018.5 Concluding Remarks 31219 Evidence from Micro Data 31319.1 A Menu Cost Model 31319.2 The Serial Correlation in the Nominal Price Change 31519.3 A Two-Sided Policy 31619.4 Relative Price Variability and Inflation 31719.5 A Staggered Price Setting Model 31920 The Friedman Rule in a UST Model 32720.1 A Single-Asset Economy 32720.2 Adding a Costless Bonds Market 33020.3 Costly Transactions in Bonds 33121 Sequential International Trade 33321.1 A Real Model 33421.2 A Monetary Model 34121.3 Exchange Rates 348Appendix 21A Proofs of the Claims in the Monetary Model 350Appendix 21B Example 7 in detail 35322 Endogenous Information and Externalities 35622.1 A Real Model 35622.2 A Monetary Model 36122.3 Relationship to the New Keynesian Economics 36723 Search and Contracts 36923.1 Search over Time 36923.2 Random Choice of Markets 37123.3 Capacity Utilization Contracts and Carlton’s Observations 375References 385Index 395