Topics in Applied Monetary Economics Chris Bowdler, Michaelmas 2016 Introduction The aim of this course is to provide an overview of the methods and results associated with some key topics in applied monetary economics. The starting point will be a discussion of the monetary policy identification problem that has dominated the field for many decades. Identification schemes based on vector autoregressions (VARs) will be presented and critically evaluated. The treatment will first consider the main elements in the VAR practitioner’s toolkit, including conditions for identification, calculations for impulse response functions and forecast error variance decompositions and methods for inference relating to those statistics. The focus then moves to issues addressed by researchers in the field, including the specification of the policy instrument, the policy-maker information set and the structure of contemporaneous linkages between variables in a monetary model. In the process, a review of empirical results in the field will be presented. The second half of the course will look at alternative approaches to the identification of structural shocks in VAR models, including the use of factor augmented VARs and sign restrictions. There will also be a discussion of policy identifications that do not employ the VAR framework and instead use some combination of narrative evidence, internal central bank forecasts and information from high frequency data (the latter to include the method of identification through heteroscedasticity). The lectures will highlight important recent methodological developments in empirical macro work, and also the most active areas of the literature. The core readings for each of the six lectures are listed below, and recommended items are denoted **. Note that the expected reading for this course is the lecture slides (which sometimes contain more detailed discussion than I shall provide in the lectures) plus the ** items. The other readings are for those wish to follow up topics in detail, e.g. because they wish to address them as part of their research. In the case of longer pieces, advice on what sections to concentrate on is provided. The readings are listed in (approximately) the order that they will be discussed in the course, rather than in alphabetical order. Note that the topics listed below may stretch across separate lectures in some cases. Finally, at the end of the reading list I have listed some interesting recent articles that span one or more of the six lecture topics.Online Resources Other resources that you may find useful when studying the topics covered in these lectures include the course pages for similar lecture series at other universities. The following are some examples that I have looked at: i. John Cochrane’s Monetary Economics PhD course at Chicago GSB: http://faculty.chicagobooth.edu/john.cochrane/teaching/Monetary%20Economics%20PhD%20course/ In the above see the notes under the sub-heading for ’10 week reading list’. ii. Oscar Jorda’s Monetary Economics course at UC Davis: http://www.econ.ucdavis.edu/faculty/jorda/class/235b/235b.html In addition to the above sites, see the webpages of Hilde Bjornland, Larry Christiano, Jon Faust, David Romer and Adrian Pagan.Lecture 1: Introduction and VAR Toolkit The first lecture will set out the problem of monetary policy identification, describe the perspectives on this problem that will be addressed during the course, and provide an overview of the concepts and methods that are important in order to be able to read the literature. The list of readings is therefore much shorter than in the case of other topics. The Christiano et al. piece spans almost 100 pages and touches upon most of the topics that will be addressed during the course. The material to be covered in the first lecture comes from sections 1-4.3 and 4.6. The material in sections 3 and 4.1 over-complicates the main points to be covered in relation to identification and innovation accounting. The core principles are set out in a less technical fashion in the chapter from Enders. The chapter from Favero’s book is a good alternative, although the organisation of the material is different to that in the lectures, in particular the discussion of the Bernanke-Mihov paper in section 2 is something that will not come up until lecture 2. The additional readings are from well known graduate texts in macroeconomics and provide background on the details of the monetary policy identification problem and some of the results established by applied researchers in the field. A reference for some of the more technical econometric points is also provided. A further option for extra reading is to turn to some of the items listed for lecture 2, for which the reading list is much longer. i. ** Christiano, L., M. Eichenbaum and C. Evans (1999). ‘Monetary Policy Shocks: What Have we Learned and to What End?’ in J. B. Taylor and M. Woodford (ed.) Handbook of Macroeconomics, volume 1, chapter 2, sections 1-4.3 and 4.6, Elsevier. ii. Enders, W. (1995). ‘Applied Econometric Time Series’, chapter 5, sections 5-8, Wiley. iii. Favero, C. (2001). ‘Applied Macroeconometrics’, chapter 6, OUP. Additional readings i. Romer, D. (2006). `Advanced Macroeconomics’, chapter 5.5, McGraw-Hill. ii. Walsh, C. (2003). ‘Monetary Theory and Policy’, chapter 1, MIT Press (this reference and the Romer reference immediately above mainly focus on the stylized facts from VAR analysis and devote less attention to the methods used to generate them). iii. Hamilton, J. (1994). ‘Time Series Analysis’, chapter 11, Princeton University Press (for further details concerning the rank condition for identification). iv. Canova, F. (2007). ‘Methods for Applied Macroeconomic Research’, chapter 4. Princeton University Press. I have not had the opportunity to look through this reference in detail, but the topics covered match those in this course quite well. v. Favero, C. (2008). ‘The Econometrics of Monetary Policy: An Overview’, Palgrave Handbook of Econometrics: Applied Econometrics and available via Favero’s webpage. This is not a piece that I will emphasise, but it does provide a nice overview of how VAR analysis fits into