HT - 01. RBC and Money

Question 1

• Friedman (1969)

Answer 1

– Friedman rule keeping nominal rate at 0% = Opp Cost., floods market with liquidity and generates mild deflation

• Here, 0% nominal rates eliminate private and social opportunity costs of holding money.

Question 2

• Clower (1967), Cooley and Hansen (1989)

Answer 2

• Cash in advance constraints

Question 3

• Woodford (2003), Walsh (2010)

Answer 3

– money in utility

Question 4

• Romer and Romer (1989)

Answer 4

– Fed meetings –> response in real variables after meeting announcements

Question 5

McCandless and Weber (1995)

Answer 5

– support LR neutrality

Question 6

Jordá, Singh and Taylor (2020)

Answer 6

LR non-neutrality;

Question 7

• Friedman and Schwartz (1963), Christiano, Eichembaum and Evans (1999)

Answer 7

– assume some shocks have no impact on some vars, prices react with a lag and monetary aggregates respond consistently with a shock.

Question 8

Key Topic Points: (4)

Answer 8

• Classical dichotomy of “Super neutrality of money” (holds in and out of SS) – CBs use monetary policy to try and stabilise economic cycles, but this has no impact on real variables driven purely by technology shocks…this is clearly not true empirically!
• Plugging real money balances into the utility function (liquidity services) breaks neutrality without nominal rigidities, but quantitatively small and not relevant empirically.

• MP specified in terms of…
o Nominal money supply = Price determined; inflation determined
o Nominal interest rate = Inflation determined if Taylor Principle satisfied

• Empirical issue: MP is endogenous, VAR Approach , Choleski Identification can solve ID problem via zero contemporaneous restrictions