Historic Day

My birthday this year marks the day...

1. NBER officially declares a recession in the US, which apparently started since Dec 2007. Too bad they didn't specify which day it was...for all we knew it could be Dec 2nd, 2007.
   
   
   
   



2. The People's Power Party was ordered dissolved by the supreme court. PM was automatically unseated and banned for 5 years along with other party executives. The PAD, having occupied the airports for just about a week, declared victory and announced an end to their 5-month protest. Only a few days ago, coup/bloodshed/civil war were all possibilities. Not all-clear yet of course, but let's hope talk can resume.
   
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3. There's no mistake the Moon is wishing me a happy birthday this year!
   
   
   
   
   

What defines an under-developed country?

Answer: Its policy maker?

Deputy Finance Minister Suchart Thada-Thamrongvech signals on Thursday that the government wants the Bank of Thailand to "step back" on its monetary policy.

"So far, the monetary policy of the BOT governor (Tarisa Watanagase) has been in the opposite way of the government's policy. The government wants to stimulate the economy, but the BOT has done the opposite thing," Suchart told a seminar earlier today.

He said he would meet BOT Deputy Governor Atchana Waiquamdee later today and would talke about the monetary policy issue with her.

I am not expecting a top-notch economic genius (who may yet to be born in Thailand) here, but surely we could at least afford someone who have either:

• Done economics 101, and understand that fiscal policy does not involve interfering with monetary policy, or
  
• Heard of time inconsistency and the central bank independence debate, or
• Read world history, and remember what inevitably happens when inflation is allowed to get out of hand because money supply is dictated by political will
  

So more education, and we should be sorted? Here comes the real depressing bit...this guy's qualification:

• B.A. (Hons), (Economics), Thammasat University
• M.Sc. (Economics), The London School of
  Economics and Political Science, U.K.
• Ph.D. (Economics), McMaster University, Canada

Maybe it's my fault, and I should go back to brush up my economic education. Not on monetary economics, but on incentives and political economy.

Mohammed El-Erian on Global Economy

The legendary El-Erian speaks at Charlie Rose's programme. I'm buying his book at first opportunity!

Part 1

Part 2

Part 3

MABE: Past Exam Questions

Here's the exam questions in 2007, which may (or may not) be useful for your revisions.

Please note that

• Some part of the course has been revised, especially the part covered by Dr. Surach, which is incorporated only this year. So question 3 in the old exam is no longer applicable this year, for example.
  
• The old exam questions are meant to give you some idea of the style of questions that could be asked in exams. The actual contents of the questions need not be similar, so do not base your revisions solely on these questions. The safest approach is to stick with what is covered in the lectures.
• For reasons outlined above, I will not provide solutions to these exam questions. If you wish to cross-check your answers, the best way would be to consult among your friends.

Exams-related questions are welcomed. Leave your message!

MABE: Monetary Theory and Policy (Dr. Surach)

Here's a collection of course materials for lectures delivered by Dr. Surach.

MABE: Simulation Game Data, and Other Comments

First of all, I hope you are already aware that tomorrow class (Sat 5th) is postponed to Sunday 13th! Check out the updated schedule here.

Next, regarding the simulation game, links to various data sources can be found at the following:

• Economic Data @ Economics Network
  

For those writing Fed reports, you may want to go straight to the following

• US Economic Data @ FRED

Those writing ECB reports, please see

• EU Statistics @ ECB

Do let me know if there is any other data series which you want, but cannot obtain from the web. I'll try to get them for you if possible.

MABE: Extra Readings for Lecture 4

Here are some extra readings for lecture 4 which you may find helpful.

For a comprehensive coverage of instruments in the money market (eurodollars, fed fund futures, swaps etc) please check out

• Instruments of the Money Market: by Richmond Fed

On how to infer market expectations from the prices of these markets, please see the following introductory article

• Gauging the Market's Expectations about Monetary Policy: by San Fran Fed

Do check out the references therein, which include a more detailed paper and a speech by Ben Bernanke on the topic.

I have gathered some of these papers plus additional ones that may be of interests, and you can download them HERE. Most of these go well beyond the scope of this course, so you only need to read these selectively!

MABE: Lecture 6 Note

Here's the final note for my final lecture

• Lecture 6: The Stock Market

Dr. Surach will take over from Saturday July 6th onwards. Drop me any questions in the meantime, either via email or on the chat box to the right. And check this website periodically, as I may post some materials.

MABE: Lecture 5 Note & Some Fixed Income Readings

Here's note for

• Lecture 5: Foreign Exchange Market

Some readings on forward rates computation, and duration/convexity etc as requested

• Fixed Income Readings

Quote of the Week

Questioned whether the EU leaders discussed foreign exchange intervention, Jean-Claude Juncker said

"Would we have done so, I wouldn't answer the question, but we have not done so. Would we have done so, I would have denied that we did"

MABE: Lecture 3 and 4 Notes

Here're notes for

• Lecture 3: Explaining Movements in Interest Rates and Term Structure


• Lecture 4: Market Expectations of Interest Rates
  

A couple of excel files shown in class are included in the pack.

MABE Simulation Game: Primer on Economic Data

In your assignments, the reports (both economic and financial) will need to discuss the implications of real-life incoming economic data. To understand what these are, and what they mean, a good place to start would be the following 'primers'

• US Economic Indicators (@ Forex)
• Euro-Zone Economic Indicators (@ FXwords)

For basic explanation on economic indicators, e.g. what does 'annualised' mean etc, please see

• Economic Indicator User Guide (@ FX words)

More materials to be posted here. Do check back.

MABE: Lecture 2 Fixed Income Securities

Here's lecture ppt file.

J.K. Rowling at Harvard

I originally saw this at Greg Mankiw's Blog: Congratulations, Harvard Grads.

Great speech by the crafter of Harry Potter. Most highly recommended for those of you young students, and adults alike.

Part 1:



Part 2:



Part 3:

MABE: Money and Financial Management in Economic Development

That's mouthful for a course title.

Here's Lecture-1 note and course descriptions .

Details about the assignments tba, but probably will be similar to last year as I mentioned.

George Soros on Credit Crisis

George Soros delivered a lecture at the LSE on May 21st, 2008 on his 'reflexivity', credit crisis and others (actually to advertise his book, but still a very interesting talk).

http://www.georgesoros.com/lse-creditcrisis08-podcast

Factor Analysis

I've been trying to learn a bit of factor analysis recently. Here are some readings on the web:

• http://www.psych.cornell.edu/Darlington/factor.htm


• http://www.statsoft.com/textbook/stfacan.html


• http://www.hawaii.edu/powerkills/UFA.HTM


• http://www.yorku.ca/ptryfos/f1400.pdf


• http://www.socialresearchmethods.net/tutorial/Flynn/factor.htm

"Dollar Falls as Oil Goes Up"

is a typical financial news headline these days. Bloomberg just ran an article that stated exactly this

The dollar posted its third consecutive weekly decline against the euro as the U.S. housing slump and record oil prices slow growth in the world's biggest economy.

The dollar fell against 13 of the 16 most-traded currencies this week as oil touched a record $135.09 a barrel yesterday on the New York Mercantile Exchange. The U.S. is the world's biggest importer of oil. Oil traded at $131.87 today.

The correlation coefficient between oil prices and the euro dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time.

First of all, the statistical correlation between euro and oil price implies absolutely nothing about the causality between oil and dollar. Both euro and oil are priced in dollar term, so if the dollar depreciates against everything else (euro, sterling, yen, gold, and oil), you'd precisely expect a positive correlation between euro and oil. In fact, the closer the correlation is to 1, the more likely that we're having an exogenous shock that comes from the dollar factors, and not the oil factors or the european factors.

This accounting correlation is masking what's going on underneath. There's probably a real but complex causal mechanism between oil, dollar, euro and everything else, but it will not be easily identified by just looking at the simple correlation or multiple plots.

At the very least, if we were to test the hypothesis that an increase in oil price is bad for dollar, then we are looking for a relationship between the oil price in effective terms, and the dollar in effective term (say some trade-weighted index). To the best of my knowledge, such strong and systematic statistical relationship cannot be found, and there's no compelling reason why it should be found. US is the world's biggest importer of oil, yes, but that's an absolute measure, plus the energy use efficiency needs to be taken into account. And should the Asian countries stop subsidising their oil prices (as Stephen Jen at Morgan Stanley recently wrote they might have to soon), no doubt you'll see that US is by no means the most vulnerable to oil price shock.

Incidentally, on exactly the same day, Chicago Tribunal ran the headline "Dollar's Drop Fuels Oil Rise". Know what I'm saying?

Oil Price: Is It a Bubble?

Charles Engel reckons it's a real possibility, and has this to say

Economics is an inexact enough science that we can’t know whether $125, or $60, or $200 is the right price based on fundamentals. I don’t know one way or the other what the right price of oil is, but what I don’t understand is the steady increase in the price of oil. How can an asset such as oil consistently pay such a high return?

One possible explanation is that the market has kept learning about the strength of demand and the weakness of supply over the years. It is consistently being surprised, in other words. That may be right, but it is a shaky argument: why is the market always being surprised in the same direction – that excess demand is greater than we thought?

Another story that I think makes some sense is the one that Jeffrey Frankel and Jim Hamilton have promoted – that Fed monetary policy has played a role. As I noted at the outset, a drop in real interest rates should cause commodity prices to rise. But here again, the decline would also have to be unanticipated to explain the continual increase in the price.

I think there is a lot of truth to the view that markets keep getting surprised in the direction that makes oil prices higher. We have been surprised at the growth in emerging markets, the shortfall in supply from some countries (such as Iraq), and the continuing low real interest rates. On the other hand, it seems to me that rising prices are also typical of frothy markets (like the housing market of late.) In fact, the steep rate of increase could even be a “rational bubble”. The rate of increase of the price is so high, perhaps, because the market is incorporating a probability of the bubble popping and prices falling back down to earth.

In a rational bubble, the oil price is rising, but there is some probability that the bubble will burst. Let r be the real interest rate. Let p(t) be the log of the real price of oil at year t, pfun(t) be the fundamental long-run price (after the bubble pops), and let k be the probability of the bubble popping. To keep it simple, I’ll assume r and k are constant. Then the expected rate of increase in the real price of oil should equal r:

r = (1-k)(p(t+1)-p(t)) -k(p(t)-pfun(t)).

(For those who aren’t familiar with logs, p(t+1)-p(t) is approximately the percentage increase in the price of oil, and p(t)-pfun(t) is approximately the amount by which oil is “over-priced” in percentage terms. The “expected rate of growth” of the oil price is simply the weighted average of the growth rate of the price if the bubble persists and the percentage decline expected if the bubble bursts. The weights are given by the probability of the bubble persisting or popping.)

So, as long as the bubble has not popped, you will see

p(t+1)-p(t) = [r+k(p(t)-pfun(t))]/(1-k).

The percentage rate of increase in the price exceeds the real interest rate. Indeed, you can see that the growth rate in oil prices would have to rise as the price rose (as p(t)-pfun(t) gets larger.) That is, the price would accelerate until the bubble burst.

In this type of rational bubble, the futures price would indicate an “expected” increase in the price equal to r, the real interest rate. But until the bubble burst, the actual increase in the price would always exceed the real interest rate. So the futures price would always underpredict the actual increase in the price of oil, much like it has in fact over the past four or five years. The payback to speculators betting against oil only comes when the bubble finally bursts.

From the perspective of producers, there is no difference between this and the no-bubble case (assuming that the producers care only about their expected return.) If they “hoard”, they expect the price to rise at the rate r, and if they sell now they can take the proceeds and earn r. They are indifferent between selling now and hoarding. There is no excess supply. Producers pump out of the ground exactly what people will buy at price p(t). The level of the price in this case is determined just as in the no bubble case – the sum of the expected demands in every period equals the amount of oil in the ground.

A bubble in asset prices need not be “rational”. But if the run-up in prices were too rapid, so that the “expected” growth rate of the price exceeded the interest rate, there would be a strong disincentive to sell any oil. Producers would want to keep the oil in the ground, and, as Paul Krugman has argued, speculators would have an incentive to hoard oil. We see very little of that type of behavior going on, as Krugman has noted.

The problem for economists is that the market for oil is so complicated that we cannot very accurately calculate what the price of oil “should be” if there is no bubble. We have to read the entrails to figure out whether the price is really reflecting market fundamentals – demand, supply, real interest rates – or has a bubble component. As I look at the rising price, I wonder which story is most plausible: (1) the markets have been surprised over and over about demand by end users and production capabilities; (2) markets have been surprised over and over about how low real interest rates are; (3) there is a bubble. These stories may go together, in fact. Indeed, it is hard to see how a bubble could get started all by itself, or how it could go on for a long time before it popped. In the previous asset price bubbles I mentioned above, it seems as though fundamental economic causes set off the rise in asset prices. But it looks like the bubble traders were inspired by the price increases to bet on further increases in prices, even when there was little evidence that the price needed to rise more based on fundamentals. It’s as if the fundamental traders normally keep the bubble traders at bay. But a series of shocks to the fundamentals in the same direction seem to undermine the confidence of the fundamental traders and give the bubble traders the upper hand. In any case, if either (2) or (3) are true, we might see oil prices coming down in the future, as real interest rates return to more historic levels, or as the bubble bursts.

Cutting-edge Stuff

Knowledge flows freely in internet age...

1. William Sandholm is writing a book on evolutionary game theory (specifically on population game). Get a free copy before it's printed!!!
2. What's new in econometrics? A series of lectures in google videos by Imbens and Wooldridge on modern econometrics.
   

Joze to Tora to Sakana Tachi

Recently I stumbled upon quite a few movies that I like. The title of this post is the name of one, which literally means "Josee, the Tiger and the Fish". A good review can be found here, and below is the trailer...



The basic story revolves around a romance between a young college student and a girl who is handicaped. The narrative is very low-key, and you do not need a box of tissues while watching this, despite the plot that seems to promise tear jerking scenes. Instead, this film is largely a uplifting tale that ultimately breaks your heart from the inside, and will leave you quitetly devastated. It is a honest study of humans, a depiction of the cruelty of reality, and it makes viewers ponder about themselves.

At a shallower level, this movie boasts a cast of top young stars in Japan today. Satoshi Tsumabuki was in the acclaimed "Waterboys", "Dororo", and even "Tokyo Drift" (he's the guy who shouted 'Go', and let the car race begin...remember?). Chizuru Ikewaki was in "Strawberry Cheesecake". It's also interesting to see Juri Ueno in her early years here playing a supporting role. She'd later appear as lead in "Swing Girls" and "Rainbow Song".

Champions League Afterthoughts

Here's the full story. Congrats to all the Man U fans!
The game was decided after Nicholas Anelka's penalty was saved by Van de Sar. On this, Alex Ferguson commented..

"That wasn't an accident, his penalty save. We knew exactly where certain players were putting the ball, so great credit to him."

If only someone had taught a bit of game theory to Anelka, he would have 'mixed his strategy' properly, and turned the tide for Chelsea.

On second thought, was he double-bluffing?

Bernanke's Top Gun on Bubbles

Full story @ WSJ

Now, the study of financial bubbles is hot.

Its hub is Princeton, 40 miles south of Wall Street, home to a band of young scholars hired by former professor Ben Bernanke, now the nation's chief bubble watcher as Federal Reserve chairman. The group includes Mr. Hong, a Vietnam native raised in Silicon Valley; a Chinese wunderkind who started as a physicist; and a German who'd been groomed to take over the family carpentry business. Among their conclusions:

Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.

Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.

Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.

As a result of all that and more, the Princeton squad argues that the Fed can and should try to restrain bubbles, rather than following former Chairman Alan Greenspan's approach: watchful waiting while prices rise and then cleaning up the mess after a bubble bursts.

Ken Rosen Reckons 2nd Leg is Yet to Drop

Final Words...

So it is finally final exams tomorrow...please don't forget to

1. Answer all questions, and attempt all subsections. Allocate your time proportionately to each question.
2. Never, ever, panic! Use what you know and what you have learned to try to answer the questions as best you can. If you have come to the lectures and have studied, you are qualified to do well, provided you are calm.
3. Don't come in late. Time is better spent in the exams than outside doing last-minute reading. Plus, it's a disturbance to your friends who come early (poor them!).

Lastly, it's been a great pleasure to have taught you all, and I'd like to thank everyone for making this class a fun and stimulating experience! Best of luck tomorrow!

Questions on Time Inconsistency

Here are some questions:

Firstly, what's the word "time inconsistency" mean in this case?

Suppose you ask the policy maker what inflation and output pair will he prefer ex ante, between (pi-star,y-bar) and (pi-high,y-bar), where pi-high is the Nash equilibrium inflation derived in lectures and is greater than pi-star the inflation target. The policy maker will readily tell you that he prefers (pi-star,y-bar), because in his loss function it gives lower inflation with no output loss. But once you let the public fix their inflation expectations at pi-star, the policy maker will no longer wish to deliver pi-star, as he wants to push output beyond y-bar by increasing inflation. When the time comes and agents decide fix their expectations at pi-star, the policy maker's optimal action is inconsistent with the plan he promises before the expectations are fixed. So ex post, what the policy maker wants to do is inconsistent with what he prefers ex ante. The public foreseeing this will not fix inflation expectations at pi-star in the first place, and we get inflation bias results.

Also in topic 7, we get output-inflation trade off but not in the topic 5. Is it because in topic 5 we consider only 1 time game and we also assume no shock but in topic 7, shock and time dimension are taking into consideration? Could you explain it intuitively?

Topic 5 uses essentially the Lucas or new classical supply function, so it is impossible to get any extra output beyond potential, unless you are willing to throw away the assumption of rational expectations. But we note that in real life, monetary policy does have real effects (on output gap, say) and it is probably due to nominal rigidities that allow the output-inflation tradeoff to exist at least in the short-run. So to be more realistic, replacing the Lucas supply curve with the New Keynesian supply function seems the most natural thing to do. The introduction of short-run output-inflation tradeoff also makes the question of optimal monetary policy much more interesting...how much short-run output benefit can you get (by active monetary policy), without generating excessive inflation expectations which will be bad for you in the long-run...and so on. So it is the fact that the inflation expectations enter with the particular lag structure according to New Keynesian story which allows us to draw implications as done in the lectures.

Even if topic 5 is extended to multi-period setup, as long as you keep the Lucas supply function, there would not be any interesting role for output stabilisation (i.e. you would not want to respond to aggregate supply shock, but let all the pain falls on output and accept no change in inflation).

In topic 7, we expect different result between rule and discretionary policy while topic 5 seems to offer indifferent result. Is that because in case of topic 5, one time game, when central banker who has similar preference to the society announces that he would commit to some rule, his main strategy is to cheat anyways? As it's the finite game, customer realized this. So output wouldn't be able stimulated, only inflation would be raised. How's this different from the topic 7 ka, why rule and discretion in topic 7 yield the different result?

Under topic 5 model, the only source of inefficiency is the policy maker's wish to target output beyond the potential. His wish to do it generates inefficiently high inflation expectations and hence actual inflation. The solution is to get rid of this vicious cycle somehow. One way is to impose a rule, so that the policy maker cannot cheat, and the inflation expectations can then be credibly controlled. Second solution is to pick someone who doesn't want to cheat (i.e. who targets only the potential output). Another related solution is to pick someone who cares infinitely more about inflation. In short, once you fix the time inconsistency problem, you've restored the efficient outcome.

Under topic 7, it's different. We showed that there is also a time inconsistency problem there, so that makes rule-type commitment valuable for essentially the same reason as in topic 5. But rules add another sort of values as well, which is more subtle. Not only can rules be used to anchor inflation expectations and solve time inconsistency problems, they can also be used to manipulate the future inflation expectations as well. And we showed that, when this is done optimally, the outcome is better than that attained by a discretionary policy maker who may target only zero output gap. The discretionary guy cannot influence future inflation expectations, so he cannot manipulate the output-inflation tradeoff facing him, so he is at a disadvantage for that reason. So the New Keynesian setup of topic 7 offers quite a few interesting implications, despite its simple dynamic form.

I have 2 Questions.For Time Inconsistency,
1. Is it necessary that at Nash equilibrium state, y has to be always y_bar when we plug in the loss function?

Under topic 5 yes...as long as you assume rational expectations. This follows from the Phillips curve alone, if Pi-e=Pi (rational expectations assumption), then we must have y=y-bar.

2. Why don't we have to minnimize our loss function with respect to y? Or Do we concentrate on only inflation?

The Phillips curve says that you face a constraint, so the moment you choose y, pi will already be automatically determined (given inflation expectations). Likewise, once you pick pi, y is already chosen implicitly. This is the same as in any consumption problem where you have a utility function and a budget set. We could minimise our loss with respect to either y or pi, as long as we get the right terms of tradeoff (from Phillips curve) into our first-order conditions.

Could you clearify about the shocks?What is the positive supply shock and negtive supply shock i.e. Ut should be positive or negative (also rise or fall) corresponding with the shocks and output in which case should be rise or fall? Finally, in AD-AS diagram, what direction will AS shift in order to repesent the shock (Ut) i.e. AS will shift to the right or left if there is a positive supply shock?

I think if there is ever a convention, by positive supply shock we normally mean a shock that lowers inflation and/or raise output. In other words, a positive supply shock means AS shifts to the right. So here, a positive supply shock in this language corresponds to u_t being negative (because u_t is the shock that adds to inflation, according to how we write our Phillips curve). But I think of this as a language issue...as long as we are clear whether u_t is moving up or down, there's no confusion.

As u_t goes up, we have higher inflation for any given output (or equivalently, lower output for any given inflation), so AS has to be shifting to the left. And I think it's conventional to call this type of shock a negative supply shock.

Questions on Transmission Mechanism

I get a few questions regarding the use of VAR in topic 6. Here are some comments.

Exams requirement
As I mentioned in class, I expect you to be able to interpret the VAR results, but I don't require you to understand the econometrics of VAR. So just approach it like an end-user, rather than a developer.

VAR faqs
Disclaimer: My worst nightmare would be for you to skip all journal readings and just relying on my comments below. Below I intend only to clarify certain issues, and answer questions that were raised, so it is not comprehensive in any way. Also, in no way does the following aim to provide any hint about what's coming in exams!!!

What is VAR?

VAR or vector autoregression is a statistical model, which attempts to capture interdependence between various variables over time. It is purely statistical, so if you put in all the variables that really matter (and have not omitted anything important), then your model would be 'true', and would capture how these variables really co-move over time

VAR analysis returns an output in the form of many estimated coefficients, e.g. the response of inflation to interest rate 1 period ago, 2 periods ago, and so on. Because there are simply too many numbers, it is not very useful for us. One way to illustrate the implications of VAR is to ask..."what would be the impact of a one-time shock to variable x on variables z1, z2, z3 and so on, over time?". By one-time shock, we mean we let x go up or down by more than the model predicts by one period, and then return things to normal thereafter. The responses of other variables will take place over a number of periods, as the rich interactions between variables work through over time. If you plot these responses over time, you get the impulse-response analysis graphs, which I show on the last slide (these graphs were taken from a very good introductory paper by Stock and Watson (2001), "Vector Autoregressions", Journal of Economic Perspectives...a highly recommended read) . So all the changes of the various variables shown on each graph are due to that single one-time shock to one variable.

Impulse-Response Analysis: Interpretation

As an example, we can look at the last row of the Stock-Watson diagram. This is the result of impulse response analysis of a one-time positive shock to the interest rate. We see that this single one-time shock has no impact on inflation until after 4 quarters, after which the inflation will start to contract. Unemployment responds slowly also, with maximum impact felt after 8 quarters. The last graph shows that the model predicts the interest rate will gradually come down from the level at which it was shocked. Thus this type of analysis can help us quantify the time-lag involved after the policy variable changes, and also for us to check if the data really confirm our economic understanding that inflation should come down after interest rate is increased.

Why does unemployment come down eventually? Well, having done half a term of Friedman-Lucas-New Keynesian, this should not come as a surprise to us. We have pretty much reached a sure conclusion that monetary policy cannot affect real variables in the long-run. Once prices are allowed to adjust eventually, it does not matter if there's more money being printed, the unemployment should go back to its natural rate, and output should return to trend. VAR analysis gives us theorists confidence that our understanding is in line with the data.

How do I know from this graph, which transmission channel is more important?
Well we can't figure this out from this graph alone, because VAR here only includes interest rate, inflation and unemployment. For example, if you want to know how credit plays a part in the transmission mechanism, you simply add the credit variables into the VAR, and then see what kind of result the impulse-response analysis generates. If theory suggests interest rate shock should hit bank loans, and then shrinking loans hit the investment, and then investment hits GDP, then all these linkages can be checked within VAR framework. Dr.Piti's paper is an example of how this is done (page 14 onwards). For an end-user like us, life is very easy...we can readily infer from graphs what's going on.

What if there are many shocks at the same time?
We'd basically have to work that out in our head, as impulse-response only give us the marginal impact of each variable's one-time shock. The VAR developer can compute the net effect exactly in a special impulse-response exercise, but it would only be useful under special cases. Knowing marginal impact and the time lags involved tells us almost everything we need to know.

Other issues

What's 'Variance Decomposition' (e.g. Dr. Piti's paper, p.8)?
The impulse-response tells us how a shock to variable x affects variables z1, z2, z3... Variance decomposition tells us how variable x is responding to a shock to each of the other variables z1, z2, z3. E.g. does inflation respond more strongly to a shock to interest rate or a shock to unemployment? Variance decomposition basically gives you information on the other side of the coin.

What are stylised facts?
Stylised facts mean well-documented empirical facts, which can be taken as true beyond doubt. So any good theory should be able to at least replicate results that are in line with stylised facts. These are represented in short 'bullet-point' form, hence the term stylised. Recall earlier during the term, we noted that the traditional Keynesian model fails to explain the stylised fact that real wage, if anything, is weakly procyclical.

Is EE432 pretty much useless?

Here's a question from a student...

I question that all of the topics that we covered in the class are really applied in today banks or BOT, something like plug in the data in model and use its outcome to predict the economy? or they are just the model to form the idea for each topic, something like if you are inflation-bias type, the economy gonna be like blah blah blah without any need to use any data to plug in?

The main reason for my question is to answer myself that I know how useful of what I have learned for the whole semester because now I’m blanked with the practical uses of this course (may be it may takes time for me to use it in the future some day) and also if my friend ask me why they have to study this course, I still have no idea.

It's a very important and perfectly legitimate question. Here are my thoughts...

A lot of economics that's taught today is still pretty much a 'pure' rather than an 'applied' science. The sad fact is, there's still a lot about the economy or human behaviour that we economists have not fully understood, so we're pretty much in the stage of developing our understanding. So it would be wrong to approach economics like an applied science, like medicine or engineering, where after you finish a course, you expect to be able to build a bridge or cure a certain disease. Learning formal models does not promise you a complete recipe to solve all economic problems on earth. But it gives you an invaluable habit of a scientist...i.e. to approach a problem in a systematic way. To be able to differentiate key factors from trivial ones, and to come to conclusions that are free from emotions, personal bias, or political orientation. That's what makes properly trained economists different from economic commentators.

I hope our course will have illustrated to you how each conclusion we reach is based on solid formulation, so that if there is any disagreement, we can always go back to check which step in our model or our assumption we disagree about. This provides a framework on which we can progressively learn something about the economy, and not just circling around the same issue over and over without knowing really what's right and what's wrong and why.

Are formal theories ever used in real life? A central banker does not differentiate their loss function before they arrive at a decision, that's certain. But you'd be surprised, for example, that not long ago countries with hyperinflation fail to understand this very basic truth that we take for granted in lectures...that you cannot push output beyond potential and hope nothing happens to inflation. In fact, you don't have to actually do the output expansion...once you reveal your intention to do it, inflation will be there almost immediately. Nowadays any properly trained economist in any central bank has this understanding engraved in his head. So global inflation has come down in recent years not because of pure luck, but it comes from our better understanding of economics. And it comes originally from models and theory, from discussions in classroom and universities.

In any given day at the central bank, we don;t go over maths and models. It is assumed that you have learned it in school. We study data and use econometrics a lot, in order to check if the working of the economy as appear in the data is in line with our understanding. But without any theoretical understanding, your econometric skills won't help much, as you will be lost about what to look for. Just like a surgeon who doesn't understand the anatomy...he may be good at cutting, but he will not be able to save lives!

Personally, I can definitely testify that, without my previous econ training, the quality of my work at the bank today will be far inferior. I can't pin point exactly what I have learned that makes such a huge difference...but it's unlikely to be Kiyotaki-Moore equation 3.4 or whatever. I'd say it's a combination of the ability to think critically, the tendency to think analytically (instead of looking for cheap explanation), confidence to tackle problems of quantitative/mathematical nature, ability to recognise the right solutions when you see them, habit of keeping up with recent research etc. These things, I think, are acquired slowly over time. I hope ee432, and other courses you take at TU, give you a good start!

Comments welcomed!

There are other 'exam' questions from other students, and I will post them here too...soon!

Questions on topic 4: Diamond-Dybvig model

The followings are the questions asked by one of your classmates. You can download my answers here. Or go to http://groups.google.com/group/economaru/files and find file Questions_DiamondDybvig.zip.

1. Under the Bank Run model, when we analyze the competitive equilibrium. Why the t=0 price of period 1 good is 1, period t=1 and t=0 price of period 2 good are 1/R? How can we figure out there numbers since the paper did not explain and show calculation on them? What method should I use (assume utility is equal with Autarky case??)?

2. For the social planner allocation, after we try to maximize the social utility function we will have U'(c1*) = RU'[......can't type here...]. So, what can we imply from this ugly equation? Since c1* is still being inside the utility function, so, how can we know the exact c1*? What are the conditions for c1* and c2*? (the paper use another equation so it does not really help)

3. On the Suspension of Convertibility model, why the fraction f^ for suspension must exceed 1/r1? (how could they get this number?) Also, to demonstrate the model, the paper say that let r1=c1* and let f^ is a set of [t, [(R-r1)/r1(R-1)]. Why the maximum boundary of f^ must be at [(R-r1)/r1(R-1)]? If this is a correct number, so can we put this in the V2 equation to show that V2 > V1?

====================================
And here are some questions from Hedhood in the chatter...

First, I dont quite understand about the integral and the outcome about the relative risk aversion. What is the difference between the absolute risk and relative risk aversion. and Second, why C1 and C2 that are allocated by policy planner can't be equal?????

Let me recall briefly the steps involved when we establish the social planner's solutions. Equation (3) on page 7 of the lecture note gives us the social planner's optimal allocation, which is essentially u'(c1)=Ru'(c2), only that I have substituted in the budget constraint for c2.

The key question was, how are c1 and c2 under social planner's allocation different from those under Autarky? i.e. can c1=1, and c2=R? If yes, then we must have u'(1)=Ru'(R), as we must obey equation (3). If not, then perhaps the society wants people to be exposed to less risk, so their consumption is not too dependent on their type. In this case, we're interested in finding the conditions under which c1 is bigger than 1 and c2 is less than R, so that indeed people will be exposed to less risk.

If c1 is greater than 1 and c2 is less than R, then it must follow that Ru'(R) is less than u'(1) (using dimishing marginal utility). In other words, we have some risk sharing (or less exposure to risk), if Ru'(R)-u'(1)<0. Now Ru'(R)-u'(1) can be written as an integral as shown in the lectures...we just integrate 1 with respect to a variable ru'(r), and then evaluate the integral by the upper limit R and lower limit 1.

When you play with this integral, you find that it is negative whenever ru''(r)/u'(r)<-1 for all r. This expression ru''(r)/u'(r) turns out to be what microeconomists use as a measure of relative risk aversion. So as long as agents are risk averse according to the relative risk aversion definition, our social planner will find it optimal to do risk sharing.

Intuitively, greater relative risk aversion means agents are risk averse to percentage changes (rather than absolute changes) in their wealth. Namely agents prefer a certain percentage change in wealth to a lottery which gives the same expected change, but with uncertainty attached. Absolute risk aversion, as the name suggests, measures the degree of being risk averse to absolute changes in wealth. It is mathematically defined by u''(r)/u'(r), so it is not scaled by the consumption level r.

Lastly, we cannot have c1=c2 as the optimal social planner's outcome because this would imply from equation (3) that u'(c1)=Ru'(c1), which cannot be true because R>1.

Topic 7: The Science of Monetary Policy

Last of the series! Here's the reading pack.

The key readings are:
- Clarida, Gali and Gertler (1999) "The Science of Monetary Policy: A New Keynesian Perspective" JEL
- Blinder (1997) "What Central Bankers Could Learn from Academics--and Vice Versa" JEP
- Bernanke and Mishkin (1997) "Inflation Targeting: A New Framework for Monetary Policy?" JEP

The first paper should provide a comprehensive coverage of theoretical issues we will cover (and more). The next two papers will provide useful discussions in relation to the policy implications. I have also attached a few other papers which you may find useful.

Solutions to problem set 4: Time Inconsistency

...are available here.

You'd probably notice that I have not put anything up for problem set 3. It's unlikely that I will ever have the time to do anything about it, especially with a few stacks of homeworks I have accumulated so far, I guess we'd talk about it in class instead.

Fed's new tools, summarised

Fed new OMO tools as explained by Francisco Torralba, a blogger and grad student at Chicago. Very simple and easy-to-understand explanation...great for topic 6!

Topic 6 Part Deux: The Transmission Mechanism

Reading pack is now available at http://groups.google.com/group/economaru/files
or download here directly!

The key readings are:

- The symposium papers on Transmission Mechanism in Journal of Economic Perspectives (JEP) 1995 issue (The article authors include Mishkin, Bernanke&Gertler, Taylor, Obstfeld &Rogoff, and Meltzer)

Other readings included in the pack:
- Dr. Piti's paper
- More recent works using VAR

This Week Side Dish

I have mentioned in class that the following would be interesting to read...

• Fed's latest FOMC minutes which has recently been released
  
• The FOMC transcripts detailing everything Greenspan and others said in the FOMC meetings not too long ago
  
• Lastly, more of an add-on, a concise article on Thailand's new Bilateral Repo market

Ben Bernanke in the Joint Economic Committee hearing on April 2nd

This is an excerpt from Ben Bernanke's testimony, when he was explaining the Bear Stearn emergency rescue. For full text, see his Testimony on economic outlook and Testimony on Financial Markets Developments




In the next clip, we have a Q&A session where Bernanke discussed the sources of business cycles, and the Federal Reserve's influence on them. For real economic contents, just skip Ron Paul's ramblings and go straight to 4.46th minute in the video.

Topic 6: The Mechanics of Monetary Policy

We'll split this topic into 2 parts:
Part 1: The implementation of monetary policy
Part 2: The transmission mechanism

We've circled around issues related to the second part in the previous lectures, when we talked about the credit market (CC-LM analysis), and how the subprime crisis requires more innovative monetary policy measures (as I discussed in the latest lecture). We'll deal with the rest of the issues in the latter part of this topic.

Part 1: The implementation
There will be no lecture notes on this part. The key readings are

• Powerpoint slides
• Borio (1997) "The Implementation of Monetary Policy in Industrial Countries: A Survey" BIS Economic Papers

Reading pack ready at http://groups.google.com/group/economaru/files

The name of file is Topic6_Mechanics_Implementation.zip

Part 2: The Transmission Mechanism

Forthcoming. Check this space!

Problem set 4: Bank Runs and Time Inconsistency

Due date: Friday 11th April, 8.00am.

Downloadable from the usual place
http://groups.google.com/group/economaru/files

File name EE432_test4.zip

There are 2 questions, with 60% of marks allocated to the first and 40% to the second.

Topic 5: Time Inconsistency

Reading pack available at the usual place:
http://groups.google.com/group/economaru/files The lecture note on the topic has also been uploaded.
*Note that I have also uploaded Bernanke (1983) (file name Topic4_Creditextra.zip), the paper I mentioned will be useful for topic 4 but was not covered in the lectures.

The key readings for topic 5 is
David Romer "Advanced Macroeconomics", chapter "Inflation and Monetary Policy" (chapter 9 in the old edition), sections on dynamic inconsistency.
Barro and Gordon (1983) "Rules, Discretion and Reputation in a Model of Monetary Policy", JME
Kydland and Prescott (1977) "Rules Rather than Discretion: The Inconsistency of Optimal Plans", JPE
Readings are ordered in ascending order of difficulty, so read the first one first.

Problem set 3: On Credit

Due date: Friday 28th March, 8.00am

The essay question has been posted at http://groups.google.com/group/economaru/files

Name of file "EE432_test3.zip"

Topic 4: Credit and Banking

Reading pack is now available.
http://groups.google.com/group/economaru/files
Lecture note is being expanded, so the complete version will be uploaded later.

I've decided to include only 2 articles in the reading pack this time. These are:
Bernanke and Blinder (1988) "Credit, Money and Aggregate Demand" AER
Diamond and Dybvig (1983) "Bank Runs, Deposit Insurance, and Liquidity" JPE
The first article is technically easier and may be useful for subsequent materials, so should be the priority reading.

Solutions to problem set 2 (topics 2 and 3)

...have been uploaded to the usual place:
http://groups.google.com/group/economaru/files

File name "EE432test2_Answers.zip"

Note: These solutions are geared towards clarifying the maths elements of the questions, so details about the economics involved are often omitted. In exams, you may want to put on the 'economics hat' more often, while you may skip explaining the unimportant maths details (as long as the end result is correct!).

Happy revision, and good luck with all your exams!

Problem set 2: On topics 2 and 3

Due date: Friday 29th February, 8.00am

A copy is available for download at
http://groups.google.com/group/economaru/files

Name of the file "EE432_test2.zip"

Topic 3: New Keynesian Macroeconomics

Reading pack and lecture note is now available at the usual place:
http://groups.google.com/group/economaru/files
Solutions to Problem Set 1 have also been uploaded. Apologies for the delay!

The key readings are:
- Mankiw (1988) "Recent Developments in Macroeconomics: A Very Quick Refresher Course", JMCB
- Mankiw (1985) "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly", QJE
- Romer (1993) "The New Keynesian Synthesis", JEP

Other readings/recommendations:
- Journal of Economic Perspectives, Winter 1993 issue runs a special symposium on New Keynesian (Romer (1993) above is one of the articles). Some of the papers are also included in the reading pack.
- David Romer's book "Advanced Macroeconomics" is also a very useful source, especially the New Keynesian part in the chapter of Incomplete Nominal Adjustments.
- The big paper by Ball, Mankiw, Romer, Akerlof, Rose, Yellen, and Sims contains a very readable introduction and summary of the New Keynesian Macro, in the first 20 pages or so.

Be Mr. Chairman

Something for fun...
http://www.frbsf.org/education/activities/chairman/
Link working again!

Problem set 1: On OLG and Kiyotaki-Wright

Due date: Friday 8th February, 8.00am

A copy of questions has been posted at
http://groups.google.com/group/economaru/files

Name of file "EE432_test1.zip"

All the distributed lecture notes are also available there.

Topic 2: New Classical Macroeconomics

The reading pack:
http://groups.google.com/group/economaru/files

The key readings:
-The Nobel lectures by Friedman and Lucas. If you're interested, you may also check out Edmund Phelps' 2006 Nobel lecture
http://nobelprize.org/nobel_prizes/economics/laureates/2006/phelps-lecture.html
which is not included in the pack.
- Lucas (1973) "Some International Evidence on Output-Inflation Tradeoffs" AER

Other readings/recommendations:
- For a more lengthy discussions of rational expectations, check out a book by Attfield, Demery and Duck titled "Rational Expectations in Macroeconomics: An Introduction to Theory and Evidence". The book should be available in your library.

Questions/comments welcomed.

Milton Friedman defending free market

There's a distinction between policies with good intention, and policies that actually lead to good outcome.

Topic 1: Foundations of Monetary Theory

Here's the reading pack:
http://groups.google.com/group/economaru/files

Key readings:
Money as the store of value
CF ch.1, BF ch.4, section1.
Money as the medium of exchange
Kiyotaki&Wright (1993)
Demand for money (Cancelled)
Baumol(1952)

Questions/Discussions/Comments welcomed.

Course Outline: EE 432 Monetary Theory and Policy

Semester: 2/2007 (January 9th – April 25th , 2007)
Instructor: Dr. Phurichai Rungcharoenkitkul
Time: Wednesdays and Fridays, 8.00-9.30 am
Room: TBA, Faculty of Economics

Prerequisite: EE 312 Macroeconomics Theory

Course Objectives:
This course aims to provide a fundamental understanding of the most basic questions in monetary economics: What is the role of money? What causes inflation? How does monetary policy affect output? Insights into these questions underline some of the most important developments in macroeconomics in the 20th century. We will address them theoretically in the first part of the course. The second part then turns to the policy making aspect. We will see how knowledge from the first part can help us conduct the monetary policy in a more scientific and ‘optimal’ way, at least conceptually. We will also discuss issues related to credit and banking, as well as other non-resolved current issues in monetary economics that have been of interest to academics and policy makers in recent years.
EE432 is offered as an upper level theory course. As such, much of the course will be analytical in nature. The treatment of these topics will be at an advanced and sophisticated level, set in the context of fully specified monetary models with micro-foundations. Focus will be on depth rather than scope, so we would spend time learning important issues in details rather than trying to be comprehensive in coverage. Students are expected to read first-rate journal articles in order to sharpen their analytical adeptness, and to familiarize themselves with the theoretical way of thinking about economics. Do not give up if you do not understand everything after the first reading; it is very common. Consult other textbooks or survey articles which offer alternative treatments. Discuss the issues with your friends, and if all else fails, feel free to consult me.
Class attendance and participation are very important because each week's learning depends on accurate understanding of what had preceded it. I encourage you to ask questions in class - especially if you are confused or unclear about what we are doing and/or why we are doing it. Please also feel free to comment on any of the material we cover and even to ask questions about economic items of interest that aren't directly related to the course. If time permits, I'm always happy to take a detour.

Textbooks:
There is no single set textbook, as the course will be based on various sources including selected chapters from textbooks and journal articles. Good undergraduate-level expositions on many topics to be covered can be found in:
· Modeling Monetary Economies by Bruce Champ and Scott Freeman, Cambridge University Press, 2001, 2nd edition. [CF]
As we venture into the realm of more advanced topics, you may find certain graduate-level textbooks instructive as sources of reference. Amongst those worth looking at are:
· Monetary Theory and Policy, 2nd Edition by Carl Walsh, MIT Press, 2003. [Wa]
· Interest and Prices: Foundations of a Theory of Monetary Policy by Michael Woodford, Princeton University Press, 2003. [Wo]
· Advanced Macroeconomics, 2nd Edition by David Romer, McGraw-Hill, 2000. [R]
· Lectures on Macroeconomics by Olivier J. Blanchard, and Stanley Fischer, MIT Press, 1989. [BF]

Course Requirements:
There will be 4-5 problem sets, 1 midterm, and a final.
The breakdown of the points is as follows:
- Problem sets: 10%
- Midterm: 30% (1.30 hours, towards end of February. Exact date TBA)
- Final: 60% (3 hours, towards mid-May. Exact date TBA)

Homework:
There will be 4-5 problem sets handed out during the course. Your answers will be due at the beginning of class one week after a problem set is assigned. Late problem sets will not be accepted. You are allowed, even encouraged to work together on all your assignments. However you are required to write down your assignments on your own. It is a good idea to attempt the problems on your own before meeting with a group. These problem sets are excellent preparation for exams.

Exams:
We will have one midterm and a final exam. The exams will be a mixture of essays and mathematical problems, and cover materials presented in class or used in problem sets and handouts distributed in class. All exams are closed-book.

Tentative Outline
Part 1: Monetary Theory

Topic 1: Foundations of Monetary Theory
· Money as the store of value
· Money as the medium of exchange
· Demand for money
Readings:
Baumol, W.J. (1952), “The Transactions Demand for Cash: An Inventory Theoretic Approach,” Quarterly Journal of Economics, Vol.66, November, 545-556.
Kiyotaki, N. and R. Wright (1989), “On Money as a Medium of Exchange,” Journal of Political Economy, Vol. 97, August, 927-954.
Kiyotaki, N. and R. Wright (1993), “A Search-Theoretic Approach to Monetary Economics,” American Economic Review, Vol. 83, March, 63-77.

Topic 2: New Classical Macroeconomics
· Does money affect output? An empirical review
· Money neutrality and flexible prices
· Lucas model of money illusion
Readings:
Friedman, M. (1977), “Nobel Lecture: Inflation and Unemployment,” Journal of Political Economy, Vol.85, June, 451-472.
Lucas, R.E., Jr. (1972), “Expectations and the Neutrality of Money,” Journal of Economic Theory, Vol.4, April, 103-124.
Lucas, R.E., Jr. (1973), “Some International Evidence on Output-Inflation Tradeoffs,” American Economic Review, Vol.63, June, 326-334.
Lucas, R.E., Jr. (1996), “Nobel Lecture: Monetary Neutrality,” Journal of Political Economy,” Vol.104, August, 661-682.
Sargent, T. and N. Wallace (1975), “’Rational Expectations,’ the Optimal Monetary Instrument, and the Optimal Money Supply Rule,” Journal of Political Economy,” Vol.83, April, 241-254.

Topic 3: New Keynesian Macroeconomics
· Imperfect competition and menu cost
· Nominal vs. real rigidities
· Staggered price setting
Readings:
Ball, L, N.G. Mankiw, D. Romer, G.A. Akerlof, A. Rose, J. Yellen, and C. A. Sims (1988), “The New Keynesian Economics and the Output-Inflation Tradeoff,” Brookings Papers on Economic Activity, Vol.1988, May, 1-82.
Ball, L, and D. Romer (1990), “Real Rigidities and the Non-Neutrality of Money,” Review of Economic Studies, Vol.57, April, 183-204.
Mankiw, N.G. (1985), “Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly,” Quarterly Journal of Economics, Vol.100, May, 529-539.+
Romer, D. (1993), “The New Keynesian Synthesis,” Journal of Economic Perspectives, Vol.7, Winter, 5-22.

Topic 4: Credit and Banking
· Bank runs
· Credit crunch
· Agency costs
Readings:
Bernanke, B.S., and A.S. Blinder (1988), “Credit, Money and Aggregate Demand,” American Economic Review, Papers and Proceedings, Vol.78, May, 435-439.
Bernanke, B.S., and M. Gertler (1989), “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, Vol.79, March, 14-31.
Bernanke, B.S., and C.S. Lown (1991), “The Credit Crunch,” Brookings Papers on Economic Activity, Vol.1991, 205-247.
Diamond, D.W., and P.H. Dybvig (1983), “Bank Runs, Deposit Insurance, and Liquidity,” Journal Political Economy, Vol.91, June, 401-419.

Part 2: Monetary Policy

Topic 5: Time Inconsistency
· Inflation bias of discretionary policy
· Solutions
Readings:
Barro, R.J., and D.B. Gordon (1983), “Rules, Discretion, and Reputation in a Model of Monetary Policy,” Journal Monetary Economics, Vol.12, June, 101-121.
Kydland, F.E., and E.C. Prescott (1977), “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy, Vol.85, June, 473-491.

Topic 6: The Mechanics of Monetary Policy
· Monetary Operation
· Monetary Transmission Mechanism
Readings:
Bernanke, B.S., and M. Gertler (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal Economic Perspectives, Vol.9, Autumn, 27-48.
Borio, C.E.V. (1997), “The Implementation of Monetary Policy in Industrial Countries: A Survey,” BIS Economic Papers, No.47.
Disyatat, P. (2002), “Monetary Policy and the Transmission Mechanism in Thailand,” BOT Research Symposium 2002.
Poole, W. (1970), “The Optimal Choice of Policy Instruments in a Simple Stochastic Macro Model,” Quarterly Journal of Economics, Vol.84, May, 197-216.


Topic 7: The Science of Monetary Policy
· Monetary policy framework
· Optimal monetary policy
· Inflation targeting
Readings:
Bernanke, B.S. and F. Mishkin (1997), “Inflation Targeting: A New Framework for Monetary Policy?” Journal of Economic Perspectives, Vol. 11, Spring, 97-116.
Blinder, A.S. (1997). “What Central Bankers Can Learn from Academics—and Vice-Versa,” Journal of Economic Perspectives, Vol.11, 3–19.
Clarida, R.J., J. Gali, and M. Gertler (1999), “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature, Vol.37, December, 1661-1707.
Svensson, Lars E.O. (1997), “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets,” European Economic Review, Vol.41, 1111-1146.
Svensson, Lars E.O. (1999), “Inflation Targeting as a Monetary Policy Rule Inflation,” Journal of Monetary Economics, Vol.43, 607-654.
Woodford, M. (2004), “Inflation Targeting and Optimal Monetary Policy,” Federal Reserve Bank of St. Louis Review, 15-41.

Topic 8: Current Issues in Monetary Policy
· Liquidity trap
· Great moderation
· Roles of asset prices
· Fiscal-Monetary-Exchange rate policies mix
Readings:
Bernanke, B.S. and M. Gertler (1999), “Monetary Policy and Asset Price Volatility,” Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter, 17-51.
Krugman, P. (1998), “Japan’s Trap,” mimeo.

Have a good semester!

Contact me

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About the blog and me

About the blog

The original (and still primary) use of this weblog is to serve as the teaching resource and contact point for the courses that I teach part-time at Thammasat and Chulalongkorn Universities.

Apart from that, the blog also serves as my personal playground, so other random posts shall appear from time to time.

About myself

My full-time professional commitment is with a government agency, specifically the one entrusted with printing money. I spent a few years in the financial market side, and recently switched to the policy making.

My schooling background is in the dismal science. My focus of study was on how people's interactions can help explain all sorts of volatility we observe in the world.