Monetary Theory and Policy (MIT Press)
Carl E. Walsh
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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.
hyperinﬂations. As discussed more fully in chapter 5, the distinction between anticipated and unanticipated changes in monetary policy has played an important role during the past 30 years in academic discussions of monetary policy, and a key hypothesis is that anticipated changes should a¤ect prices and inﬂation with little or no e¤ect on real economic activity. This implies that a credible policy to reduce inﬂation should succeed in actually reducing inﬂation without causing a recession. This
originally addressed by Bailey (1956) and M. Friedman (1969). Their basic intuition was the following. The private opportunity cost of holding money depends on the nominal rate of interest (see (2.12)). The social marginal cost of producing money, that is, running the printing presses, is essentially zero. The wedge that arises between the private marginal cost and the social marginal cost when the nominal rate of interest is positive generates an ine‰ciency. This ine‰ciency would be eliminated
c ss , and k ss equiproportionally. The e¤ect of faster money growth will depend on how uc , and ul are a¤ected by m. For example, suppose money holdings do not a¤ect the marginal utility of leisure ðulm ¼ 0Þ but money and consumption are Edgeworth complements; higher inﬂation that reduces real money balances decreases the marginal utility of consumption ðucm > 0Þ. In this case, faster money growth reduces m ss and decreases the marginal utility of consumption. Households substitute away from
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
region. Alternatively, suppose the deﬁcit that needs to be ﬁnanced with seigniorage grows. If it rises above D Ã , the maximum that can be ﬁnanced by money creation, the government ﬁnds itself unable to obtain enough revenue, so it runs the printing presses faster, further reducing the real revenue it obtains and forcing it to print money even 22. The current modern example of such a ﬁscally driven hyperinﬂation is provided by Zimbabwe. 160 4 Money and Public Finance faster. Most