Monetary Economics 2 (advanced)
(Lauree magistrali in Economics e in Finance and
Insurance)
2011-2012 Fabio C.
Bagliano
The course
deals with some key themes of modern monetary and financial economics,
exploring
both the relevant theory and the econometric techniques used in applied
research. The
course is not based
on a textbook. For each topic, some
papers, marked with (*) below, will be directly referred to in
the lectures; additional papers are suggested as complementary
readings. Finally, a list of further readings is provided
for those who are interested in pursuing the topics further. For
each topic, lecture
notes will be circulated. The
formal analysis of
economic and financial models requires familiarity with the
mathematical and
statistical tools acquired in a suitable three-year undergraduate
program. Moreover,
a good knowledge of the contents of the Econometrics I
and Econometrics
II is
an essential requirement for this course.
Lecture notes:
first part VAR_notes_1
-
second part VAR_notes_2 -
third part VAR_notes_3 -
(to be used together with J. Cochrane
(1994) - )
Nobel
prize for Economics 2011 awarded to T.J. Sargent and C.A. Sims for their
contributions to empirical macroeconomics (for the latter economist,
particularly for the development of Vector
Autoregression techniques and their application to policy): motivation
and scientific
background
Vector autoregressive
(VAR) models are one of the main tools
of applied econometric analysis in macroeconomics. A general
(non technical) introduction to the use of VAR models (with some
reference to monetary policy):
(*) Stock J. and M. Watson
(2001) "Vector Autoregressions", Journal of Economic Perspectives,
15, 4, 101-115 -
One of the main application of VAR techniques to monetary policy
concerns the empirical analysis of the monetary policy transmission mechanism.
The problem of "measuring" monetary policy actions a the associated
empirical strategies fot identifying monetary policy impulses are
extensively analyzed (with US applications) by:
(*) Christiano L.J., M.
Eichenbaum and C.L. Evans (2000) "Monetary policy shocks: what have we
learned and to what end?'', in J. Taylor and W. Woodford (eds.), Handbook
of
Macroeconomics, North-Holland, Volume 1A, 65-148 - working paper
version
(*) Bernanke B.S. and I.
Mihov (1998) "Measuring monetary policy'', Quarterly Journal of
Economics, 113, 3, 869-902 -
A general identification strategy based on long-run restrictions (that can be applied to monetary policy anaysis) is provided by:
(*) Blanchard O. and Quah
D. (1989) "The dynamic effects of aggregate supply and aggregate demand
disturbances", American Economic Review, 79, 655-673 -
An insightful application of VAR modelling (with cointegration) to the estimation of permanent and transitory component in GDP and stock prices fluctuations is given by:
(*) Cochrane J. (1994)
"Permanent and transitory components of GNP and stock prices", Quarterly
Journal of Economics, 109, 1, 241-265 -
Further readings: (Note:
papers in bold are suggested for presentation in class)
Bagliano F.-C. and C.A.
Favero (1998) "Measuring monetary policy with VAR models: an
evaluation'',
European Economic Review, 42, 6, 1069-1112 -
Bagliano F.-C. and C.A.
Favero (1999) "Information from financial markets and VAR measures of
monetary policy'', European Economic Review, 43, 6, 825-838
-
Blanchard
O.J. (1989)
"A traditional interpretation of macroeconomic fluctuations", American
Economic Review, 79, 5,
1146-1164 -
Stock J. and M. Watson
(1988) "Variable trends in economic time series", Journal of
Economic Perspectives, 2, 3, 147-174 -
King R., R. Plosser, J.
Stock and M. Watson (1991) "Stochastic trends and economic
fluctuations", American Economic Review, September -
2. Empirical analysis of the term structure of interest rates
Lecture notes:
first part Term_notes_1 -
(to be used together with R.
King e A.
Kurmann (2002) - )
second part Term_notes_2
-
(to be used together with F. Diebold F.X. e C. Li
(2006) - )
The study of the links between interest rates on bonds with different maturities is crucial for monetary policy and the analysis of financial markets. In this course, the main modelling techniques and empirical estimation and forecasting of the term structure of interest rates will be presented in the perspective of the “expectations theory” of the term structure. Several empirical testing strategies of this theory have been implemented in the existing literature, leading in many cases to statistical rejections but uncovering in the data several empirical regularities predicted by theory.
A survey of results is provided by:
(*) King R. G. and A.
Kurmann (2002) "Expectations and the term structure of interest rates:
evidence and implications", Federal Reserve Bank of Richmond
Economic
Quarterly, 88, 4, 49-95 -
On the empirical modelling and forecasting of the yield curve:
(*) Diebold F.X. and C. Li
(2006) "Forecasting the term structure of government bond yields", Journal
of Econometrics, 130, 337-364 -
Further readings:
Campbell J.Y. and R.J.
Shiller (1991) "Yield spreads and interest rate movements: a bird's eye
view", Review of Economic Studies, 58, 495-514 -
Nelson C.R. and A.F. Siegel
(1987) "Parsimonious modelling of yield curves", Journal of
Business, 60, 4, 473-489 -
3. Financial
returns, risk and consumption choices in a macroeconomic perspective
Lecture notes:
ccapm_notes -
(to
be used together with Campbell (2003) - and Mehra R. (2003) - )
The
analysis of financial returns, risk factors and the determinants of
return
differentials among financial assets are key themes of the literature
developed
from the Consumption Capital Asset
Pricing Model (CCAPM). Recent empirical
studies provided evidence in contrast with the implications of the
basic
theory, motivating several extensions. In this course, both the basic
models
and more recent extensions will be presented, with a focus on empirical
methodologies and results.
A thorough survey of theoretical models and empirical evidence is
found in:
(*) Campbell J.Y. (2003)
"Consumption-based asset pricing", in G. Costantinides, M. Harris and
R. Stulz (editors), Handbook of the Economics of Finance,
Elsevier,
Volume IB, chapter 13, 803-886 -
A multifactor model of return premia (with empirical application) is provided by:
(*) Campbell J.Y. (1996)
"Understanding risk and return", Journal of Political Economy,
104, 2, 298-345 -
Further readings:
Campbell J.H., A.W. Lo and
A.C. MacKinley (1997) The econometrics of financial markets,
Princeton
University Press, chapter 8
Cochrane J.H. (2005) Asset
Pricing, Princeton University Press, 2nd edition, chapters 9 and 21
Campbell J.H. (2000)
"Asset pricing at the millennium", Journal of Finance, 55, 4,
1515-1567 -
Fama E.F. and K.R. French
(2002) "The equity premium", Journal of Finance, 57, 2,
637-659 -
Mehra R. (2003) "The
equity premium: why is it a puzzle?", Financial Analyst Journal,
January/February, 54-69 -
Mehra R. and E.C. Prescott
(2003) "The equity premium in retrospect", in G. Costantinides, M.
Harris and R. Stulz (editors), Handbook of the Economics of Finance,
Elsevier, Volume IB, chapter 14, 887-936 -
Campbell J.Y. and J.H.
Cochrane (1999) "By force of habit: a consumption-based explanation of
aggregate stock market behavior", Journal of Political Economy,
107, 2, 205-251 -
Additional readings (for personal use):
(1) VAR models (Note: papers in bold are suggested for presentation
in class)
Bernanke B.S. and I. Mihov
(1998) "The liquidity effect and long-run neutrality",
Carnegie-Rochester Conference Series on Public Policy (Journal of
Monetary
Economics)'', 49, 149-194 -
Giordani P. (2004) "An
alternative explanation of the price puzzle", Journal of Monetary
Economics, 51, 1271-1296 -
Souza
J. and A. Zaghini
(2008) "Monetary policy shocks in the Euro area and global liquidity
spillovers", International Journal
of Finance and Economics, 13, 205-218
-
Faust
J., E. Swanson and J.
Wright (2004) "Identifying VARs based on high frequency futures
data", Journal of Monetary
Economics, 51, 1107-1131
-
Bernanke
B.S. and K.N.
Kuttner (2005) "What explains the stock market reaction to Federal
Reserve
policy?", Journal of Finance, 60, 2, 1221-1257 -
Bagliano F.-C. and C.
Morana (2003) "Measuring US core inflation: a common trends
approach", Journal of Macroeconomics, 25, 197-212 -
Boivin
J. and M. Giannoni
(2002) "Assessing changes in the monetary transmission mechanism: a VAR
approach", Federal Reserve Bank of
Ludvigson S., C. Steindel
and M. Lettau (2002) "Monetary policy transmission through the
consumption-wealth channel", Federal Reserve Bank of New York Economic
Policy Review, May, 117-133 -
D'Amico
S. and M. Farka (2011) "The Fed
and the stock market: an identification based on intraday futures
data",
Journal of
Business and Economics
Statistics, 29(1), 126-137 -
(2) Term structure of interest
rates (Note:
papers in bold are suggested for presentation in class)
Ellingsen T. and U.
Soderstrom (2001) "Monetary policy and market interest rates", American
Economic Review, 91, 6, 1594-1607 - (companion paper:
"Monetary policy and the bond market", working paper, 2003 - )
Diebold F.X., G.D.
Rudebusch and S.B. Aruoba (2006) "The macroeconomy and the yield curve:
a
dynamic latent factor approach", Journal of Econometrics, 131,
309-338 -
Carriero
A., C.A. Favero and
Diebold
F.X., C.
Li and V.Z. Yue (2008) "Global yield curve dynamics and interactions: a
dynamic Nelson-Siegel approach", Journal
of Econometrics, 146,
351-363 -
(3) Returns, risk and consumption choices
Campbell J.Y. and J.H.
Cochrane (2000) "Explaining the poor performance of consumption-based
asset pricing models", Journal of Finance, 55, 6, 2863-2878
-
Lettau
M. and
Bansal
R. and A. Yaron
(2004) "Risks for the long-run: a potential resolution of asset pricing
puzzles", Journal of Finance,
59, 4, 1481-1509 -
Bansal R. , R.F. Dittmar
and C.T. Lundblad (2005) "Consumption, dividends and the cross-section
of
equity returns", Journal of Finance, 60, 4, 1639-1672 -
Duffee G.R. (2005)
"Time variation in the covariance between stock returns and consumption
growth", Journal of Finance, 60, 4, 1673-1712 -