Subject Index

Adverse selection, 479–483 A‰ne no-arbitrage models, 475

Aggregate demand-aggregate supply (AD-AS) models, 340

Aggregate supply-demand (AS-IS-LM) models, 330, 414

Aggregate supply relationship, 273–274 Argentina, 140, 174

Asset exchange, 216–217 Austria, 30

Average inflation targeting, 372

Bank for International Settlements, 554 Banking. See also Central banks interbank market, 547

lending channel, 504–507, 543–547 and money supply, 10–11, 14 reserve market, 533–543

Bank of Japan, 374

Barro-Gordon model, 271–283, 302, 319, 322, 364

Barter exchange, 116

Bias, inflation. See Inflation bias Bonds

and inflation, 474

market segmentation, 216–217 search models, 124–125 Borrowers. See Credit markets Brazil, 28, 174

Budget identity, government, 136–142 Bundesbank, 374, 528, 554

Business cycles capital stock, 330

and money supply, 10–13 and policy shocks, 23–24, 218 political, 308

Cagan’s model, 156–159

Calvo model, 241–243, 251–252, 254, 256, 259– 260

Canada, 547, 554 Capital

DSGE models, 330 firm-specific, 259 Capital-labor ratio, 60–61, 65 Cash goods, 282–283

Cash-in-advance (CIA) models, 92, 98–115 cash and credit goods, 107–108

certainty case, 99–108 consumption, 98, 101–102, 105–106 inflation, 106–108, 135

interest rates, 104–105, 457–461 investment goods, 108

linear approximation, 112–113, 126–130 liquidity e¤ects, 210–211

marginal utility of money, 126

and MIU models, 104, 106, 112–115 optimal taxation, 182–184

search theory, 115–126

steady state, 108–109, 111–112, 127 stochastic, 108–115

timing, 99, 101

unanticipated shocks, 114–115

welfare costs of inflation, 106–107, 109 Central banks, 511. See also Inflation bias channel system, 543–547 commitment/discretion regimes, 357–366 credibility of, 288–289, 294

debt accommodation, 145 estimation, 377–378 incentives, 301–307, 317 independence, 299–300 institutional structure, 307–309 instruments, 373–375, 512–530

and interest rates, 454–456, 464–465, 513–514, 519–520, 548, 554

intermediate targets, 512, 521–529 liabilities, 137

objectives, 271–273, 352–355, 441

policy rules, 269–270, 275, 280–281, 357–366, 518–521

preferences, 297–301

short-term interest rates, 471, 511 targeting regimes, 370–373

Central banks (cont.)

targeting rules, 309–316, 321–322, 360–361 Taylor rule, 342–344, 370, 373–374 Treasury transfers, 140

types, 290–297, 321 weight conservatism, 298

Channel system model, 543–547 Chisel-proof credibility, 288 Competition, imperfect, 282

Constant elasticity of substitution (CES), 48 Consumption

CIA models, 98, 101–102, 105–106 and labor supply, 72

and leisure, 59–60, 66, 75–76 and market segmentation, 217

MIU models, 36, 43–44, 66, 72, 75–76, 81–82 new Keynesian models, 347–348, 354, 477 open economy models, 396, 411–412

and optimal taxation, 174 and policy rules, 518 shopping-time models, 93–95 Corridor system, 543–544

Corsetti-Presenti model, 412–413 Cost channel, 23, 343

Cost shocks, 349–350, 362 Credibility, chisel-proof, 288 Credit goods, 282–283 Credit markets, 477–508 adverse selection, 479–483

agency costs, 489–492, 497–502 bank lending channel, 504–507 broad credit channel, 507–508 credit rationing, 478–479, 488–489 farmers/gatherers, 493–497

general equilibrium models, 492–501 imperfect information, 508 incomplete collateralization, 491 monitoring costs, 484–489

moral hazard, 483–484

productivity shocks, 492–493, 496–497, 501 Credit view, 478

Debt, government, 168–169, 174 Debt accommodation, 145 Deficits

equilibrium seigniorage, 152–156 and hyperinflation, 156–162

and inflation, 144–145 and money supply, 145

Ricardian/non-Ricardian policies, 146–150 and taxation, 146

Deflation

and GDP, 6–8

and nominal interest rates, 462–463 Demand shocks, 8

Discount rate, 535–536

Discretionary policy, 271–283. See also Inflation bias

equilibrium inflation, 275–283, 322–323 objectives, 271–273

and policy rules, 281–282 sustainable plans, 289–290

time-consistent/time-inconsistent, 270, 317–318, 320, 323

Disinflation, 57 case studies, 30–31 Taylor model, 232

Double coincident of wants, 116–117

Dynamic stochastic general equilibrium (DSGE) models, 28–29, 33, 99, 226

Edgeworth complements and substitutes, 66 Elasticity of money, 48–52

Empirical evidence, 1–29 business cycles, 10–13 credit channels, 502–508

disinflation case studies, 30–31

fiscal theory of the price level, 169–170 Granger causality, 14–15

inflation bias, 318–319, 366

interest elasticity of money demand, 49–52 long-run relationships, 1–4 long-term/short-term interest rates, 467–468, 472 and monetary theory, 15–18

money supply measures, 531–533 narrative policy measures, 28–30 observationally equivalent equations, 16 and operating procedures, 530

price adjustment, 250–252 short-run relationships, 4–8

structural econometric models, 27–28, 32 vector autoregressions (VARs), 1, 18–26, 29 Employment

and labor supply, 240–241 and money supply, 201 England, Bank of, 547 Equilibrium

interest rate policies, 457–461 open-economy NK model, 437–438 and policy coordination, 418–422 types of, 293–297

Equilibrium inflation, 275–283 Equilibrium price level, 162–163, 168 Equilibrium seigniorage, 152–156 European Central Bank, 309, 528, 547 Excess reserve ratio, 532–533 Exchange economy, 116–118 Exchange rates, 289

fixed, 427–429 flexible, 424–428

and inflation rate, 428

open economy, 395, 403–405, 414–415 targeting, 310

Expectational traps, 283

Expectations theory of the term structure, 465– 468

Federal funds rate, 12, 15, 427, 533 and borrowed reserves, 540–542 and discount rate, 535–536

and monetary policy, 29, 472–473 and nonborrowed reserves, 549–551

operating procedure, 548–549, 551–552 and price puzzle, 22–23

Taylor rule, 373–375

Federal Open Market Committee (FOMC), 28–29, 308–309, 553

Federal Reserve, 427. See also Federal funds rate discount rate, 535–536

estimation, 378

and financial market crisis of 2007, 553 instrument rules, 374–375

and interest earnings, 136–137 and monetary policy, 10–11, 51

nonborrowed reserves, 537–542, 548–551 operating procedures, 533–543, 547–553 and reserve market, 533–538, 543 Feedback rules, 16–17, 26–27

Fiat money, 125–126 Financial accelerator e¤ect, 507

Financial markets. See Credit markets Fiscal dominance, 143–145, 191 Fiscal policy

and inflation rate, 152

and monetary policy, 141, 144–150 and money supply, 152, 169

and prices, 143

Ricardian/non-Ricardian, 146–150, 166–168 Fiscal theory of the price level, 46, 136, 143, 162–

170, 464

empirical evidence, 169–170 equilibrium price level, 162–163, 168 Fisher equation, 4

Fisher hypothesis, 475 Flexible-price models, 226 Flexible targeting rules, 310–313 Flight to quality, 508

France, 173, 554

Friedman’s rule, 175–176, 179–182, 184, 355–356

General equilibrium models. See Cash-in-advance (CIA) models; Money-in-the-utility function (MIU) model; New Keynesian models; Price adjustment models

Germany, 173, 554 Government

budget identity, 136–143

and central bank independence, 298–306 debt, 168–169, 174

fiscal theory of the price level, 162–170 hyperinflation, 156–162

intertemporal budget constraint, 141–147, 150– 152, 162–163, 165, 168

optimal taxation, 170–191

revenue, 137–141, 156–157, 188, 190

Ricardian/non-Ricardian policies, 146–150, 166– 170, 191

seigniorage, 136, 138–144, 152–156, 171–175 types, 291, 293

Granger causality, 14–15 Great Depression, 503

Gross domestic product (GDP) and deflation, 6–8

and interest rates, 6–8 and money demand, 52

and money supply, 4–8, 10, 14 Growth. See Output growth

High-powered money, 137–139 Hungary, 156

Hybrid price level-inflation targeting, 372 Hyperinflation, 30, 46, 156–162

as bubble, 160–162 Cagan’s model, 156–159 explanations of, 159–160

Imperfect competition, 282

Imperfect information models, 219–223 Implementability condition, 186–187 Income

interest, 188–189

and labor-leisure choice, 62 and monetary policy, 13–14

nominal income targeting, 313–314, 372–373 Incomplete collateralization, 491

Indexation, 255–256 Indexed bonds, 474 Ine‰ciency gap, 356–357

Inflation. See also Optimal inflation rate and anticipated policy changes, 30 bank/government types, 291, 293

and bonds, 474

and capital-labor ratio, 60–61 CIA models, 106–108, 135 and deficits, 144–145 deflation, 6–8, 462–463

and discretionary policy, 271–283 disinflation, 30–31, 57, 232 equilibrium, 275–283, 322–323 and federal funds rate, 548

and government revenue, 190 hyperinflation, 30, 46, 159–162 inflation shocks, 349

and interest rates, 4, 57, 473–475 and intermediate targeting, 529

marginal cost of, 253, 259, 336–337, 351 and market segmentation, 216

and MIU model, 135

and monetary shocks, 195, 321

and money supply, 2–4, 30–31, 70, 114–115 and output growth, 2–3, 59, 259, 366 persistence, 254–257, 291, 320–321, 366–370 and prices, 233–234, 240, 251

Inflation (cont.)

and revenue, 138–140

and sticky information, 206 targeting, 310, 370–373

tax, 53–54, 61, 135–136, 153, 182–183 and trading, 124

unanticipated, 174–175

and unemployment, 4, 196, 319–322 welfare costs of, 53–58, 106–107, 109, 124 Inflation bias, 276, 281, 316–323

contract models, 301–307, 313 empirical evidence, 318–319, 366 institutional structure, 307–309 and open economy, 318–319 preference models, 297–301 relocation, 306

repeated games, 284–290 reputational models, 284–297, 320 stabilization bias, 358, 362–364 targeting rules, 309–316, 321–322 Inflation rate, 153–156

and central bank independence, 298 and deficit, 158

and exchange rates, 428

open economy, 413–414, 420, 436, 439–441 and seigniorage revenue, 153–158

and sticky prices, 232 Taylor principle, 343–344

Informational frictions, 196–209

imperfect information model, 196–197, 201–202, 219–223

learning model, 207–209 Lucas model, 197–203, 230

sticky information, 203–207, 261–262 Instantaneous utility functions, 55 Instruments, 373–375, 512–530

choice of, 513–518 instrument rule, 518

intermediate targets, 512, 521–529 policy rules, 518–521

Interest elasticity of money demand, 48–52 Interest rate gap, 344–345

Interest rate peg, 169, 454–456, 458–461 Interest rates, 8, 453–475. See also Nominal

interest rates

channel system, 543–544

and economic shocks, 513, 521 equilibrium policies, 457–461 expectations theory, 465–468 and GDP, 6–8

and inflation, 4, 57, 473–475 liquidity traps, 461–465 long-term/short-term, 467–468, 472

MIU model, 43–45, 47–49, 52, 58–59, 70–71 and monetary policy, 21, 453–461, 468–473 and money supply, 4, 15

and operating procedures, 454–456, 464–465, 513–514, 519–520, 530, 548, 554

and output, 6–8, 15, 21–22 and price level, 454–457, 548 smoothing, 375

term structure of, 465–477

Intertemporal budget constraint, 141–146, 150– 152, 162–163, 165, 168

Intertemporal nominal adjustment models, 231– 234

Intertemporal optimality, 172–173, 333 Islands model, 197–203

Israel, 174

Italy, 140

Japan, 173, 374, 554

Labor-leisure choice, 62 CIA models, 107

and monetary shocks, 75 Labor supply

CIA models, 112 and consumption, 72

and employment, 240–241

and real wages, 196–197, 214–215, 228, 237 shopping-time models, 94

Learning model, 207–209 Leisure

CIA models, 107

MIU models, 59–60, 75–76 shopping-time models, 92–94 Lending. See Credit markets Lending channel, 504–507, 543–547

Level factor. See Term structure of interest rates Limited-participation models, 211–215, 218–219 Liquidity e¤ects, 209–218. See also Portfolio

rigidities

CIA models, 210–211 interest rates, 70–71, 461–465

limited-participation models, 211–215, 218–219 liquidity-e¤ect model, 218

Liquidity services, 104 Long-run relationships, 1–4 Loss function, 272

Lucas model, 197–203, 230 Lucas supply function, 229

Macroeconomic models, 475–477

Marginal cost of inflation, 253, 259, 336–337, 351 Marginal utility of consumption, 43–44, 66, 72,

81–82, 347–348

Marginal utility of leisure, 59–60, 75–76 Markets. See Credit markets

Market segmentation, 215–218 Mechanism design theory, 307 Mixed-strategy equilibrium, 293–294, 297 Models, economic, 33–34

AD-AS, 340

a‰ne no-arbitrage models, 475 AS-IS-LM, 330, 414

Barro-Gordon model, 271–283, 302, 319, 322, 364 Calvo model, 241–243, 251–252, 254, 256, 259– 260

channel system model, 543–547 CIA, 92, 98–115 Corsetti-Presenti model, 412–413 flexible-price, 226

imperfect information, 196–197, 201–202, 219– 223

intertemporal nominal adjustment, 231–234 islands model, 197–203

learning model, 207–209 limited-participation, 211–215, 218–219 Lucas model, 197–203, 230 macroeconomic, 475–477

MIU, 35–89

new Keynesian, 329–394, 429 Obstfeld-Rogo¤ two-country model, 396–413, 444–447

open economy, 395–449 overlapping generations, 308–309 preference, 297–301

price adjustment, 237–250 principal agent, 301–302 rational-expectations, 207, 261–262 repeated game model, 284–290 representative-agent, 147, 168 reputational, 284–297, 320

Rogo¤ ’s model, 299–301, 312–313, 365–366 search models, 124–125

shopping-time, 53, 92–96

staggered nominal adjustment, 231–232, 237–243 state-dependent pricing (SDP), 243–252 structural econometric models, 27–28, 32 time-dependent pricing (TDP), 237–243, 249– 252

two-country model, 414–418, 421–422, 443 two-party model, 307–308

vector autoregressions (VARs), 1, 18–26, 29 vector error correction model (VECM), 146 Monetary base, 137, 516, 531–532 Monetary condition index, 424

Monetary dominance, 143

Monetary History of the United States, A, 6 Monetary policy. See also Discretionary policy;

Operating procedures and business cycles, 12–13 European, 554

and Federal Reserve, 10–11, 51 and fiscal policy, 141, 144–150 and funds rate, 29, 472–473

and interest rates, 21, 453–461, 468–473 new Keynesian models, 344–347

and nominal income, 13–14

and open economies, 395, 413–422, 443–444 and operating procedures, 555

and output, 318 policy rules, 269

and prices, 150–152

and time inconsistency, 316–318, 320 Money demand

and inflation rate, 154 interest elasticity of, 48–52

and intermediate targeting, 528–529 and nominal interest rate, 153

Money-in-the-utility function (MIU) model, 35–89. See also Solving MIU model

calibration, 71–72

and CIA models, 104, 106, 112–115 classical dichotomy, 228

consumption in, 36, 43–44, 66, 72, 75–76, 81–82 decision problem, 62–65

end-of-period holdings, 37 Fisher relationship, 39–41 Friedman’s rule, 180

imperfect information model, 197–201 and income, 189–190

and inflation, 135

interest elasticity of money demand, 48–52 interest rates, 43–45, 47–49, 52, 58–59, 70–71 limitations of, 52

linear approximation, 66–71 marginal utility of money, 126 neutrality of money, 42

and new Keynesian models, 329–330 nominal rigidities, 226–231, 262–264 representative households, 35–40, 52, 62–63 and shopping-time models, 92–96 simulations, 61–62, 72–75

steady-state equilibrium, 41–48, 61, 65–66 superneutrality/nonsuperneutrality of money, 42– 43, 59–61, 66, 69

time-varying money stock, 46–48 and transaction cost approach, 97–98 unanticipated growth, 70

wage rigidity, 226–231, 262–264 welfare cost of inflation, 53–58 Money multipliers, 531–533 Money supply, 10–11, 14

and business cycles, 10–13 and deficits, 145

and employment, 201

and equilibrium price level, 162

and Federal Reserve policy, 549–550 and fiscal policy, 152, 169

and GDP, 4–8, 10, 14 high-powered money, 137–139 and hyperinflation, 160

and inflation, 2–4, 30–31, 70, 114–115 measures of, 531–533

and monetary base, 516 nominal, 201–202

and nominal interest rate, 209–211, 230, 456–457, 468–473

nominal rigidities, 225–226, 230–232 open economy, 402–403, 412

Money supply (cont.)

and open market operations, 146–147 overshooting, 426–427

price and wage rigidities, 225–226, 230–232 and price level, 8, 146–148

variations in, 142

Money zero maturity (MZM), 50–52, 71–72 Monopolistic competition model, 234–237, 383–

385, 396

Multiplicative uncertainty, 376

Nash equilibrium, 419 Neoclassical growth model, 33 Neutrality of money, 42–43, 196

New Keynesian models, 329–394, 429 capital stock, 330

choice of instrument, 517–518 commitment/discretion regimes, 357–366 consumption, 347–348, 354, 477 economic shocks, 347–351

endogenous persistence, 366–370 equilibrium, 341–344

firms, 330–331, 333–335 households, 330–333, 381–386 instrument rules, 373–375 level/slope factors, 476–477 linearized IS curve, 339–341 linearized Phillips curve, 336–339 and MIU model, 329–330

nominal interest rate, 330, 341–343, 364 open economy model, 430–440, 444 policy objectives, 352–355

price stability, 355–357 real interest rate, 344–346

sticky wages and prices, 330, 333, 351–352, 355– 357

Taylor principle, 342–344 transmission mechanism, 344–347 two-equation model, 340 uncertainty in, 375–378

New Keynesian Phillips curve (NKPC), 241, 252– 262, 336

derivation of, 379–381

linearized Phillips curve, 336–339 marginal cost, 253, 259

nominal price rigidity, 258–261 persistence, 254–257

and SIPC, 261–262

New Zealand, 306, 309

Nominal income targeting, 313–314, 372–373 Nominal interest rates, 48, 52, 58–59. See also

Interest rates

CIA models, 104–105

and equilibrium price level, 163, 169

and government budget constraint, 150–152 liquidity e¤ects, 70–71, 464–465 long-term/short-term, 465–475

and market segmentation, 217–218

and money demand, 153

and money supply, 209–211, 230, 456–457, 468– 473

new Keynesian models, 330, 341–343, 364 open economy, 405–408, 415

and optimal inflation rate, 75, 188 and positive shocks, 73

search models, 123, 125 seigniorage, 139–140, 152 zero, 463–464

Nominal rigidities

and agency costs, 501–502 imperfect competition, 234–237

intertemporal nominal adjustment models, 231– 234

menu costs, 234, 252

MIU model, 226–231, 262–264

and money supply, 225–226, 230–232 monopolistic competition model, 234–237

new Keynesian models, 330, 333, 351–352, 355– 357

new Keynesian Phillips curve (NKPC), 258–261 open economy models, 408–413, 442–443 state-dependent pricing (SDP) models, 243–252 time-dependent pricing (TDP) models, 237–243, 249–252

Nonindexed tax systems, 188–191 Nonmonetary model, 33 Nonprice rationing, 535–536

Non-Ricardian regime, 144, 146–150, 166–167, 169–170, 191

Nonsuperneutrality of money, 59–61 No Ponzi condition, 141

Obstfeld-Rogo¤ two-country model, 396–413, 444–447

flexible prices, 401–408 interest parity, 405–408

linear approximation, 400–401 overshooting, 427

sticky prices, 408–413

Open economy models, 395–449

and closed-economy NK model, 440–442 consumption in, 396, 411–412 Corsetti-Presenti model, 412–413 exchange rates, 395, 403–405, 414–415 imperfect pass-through, 442–443

interest parity, 405–408 monopolistic competition, 396

new Keynesian model, 430–440, 444 nominal rigidities, 408–413, 442–443

Obstfeld-Rogo¤ model, 396–413, 427, 444–447 policy coordination, 413–422 small-open-economy model, 422–440, 447–449 Open market operations, 146–147

Operating procedures, 511–555 borrowed reserves, 551–552 channel system, 543–547

and empirical evidence, 530 federal funds rate, 548–549 Federal Reserve, 533–543, 547–553 instrument rules, 518

and interest rates, 454–456, 464–465, 513–514, 519–520, 530, 548, 554

intermediate targets, 512, 521–529 and monetary policy, 555

money multipliers, 531–533 nonborrowed reserves, 549–551 policy rules, 518–521

Poole’s analysis, 513–518, 552, 554 real e¤ects of, 529–530

reserve market, 533–543 Opportunity cost

CIA models, 99, 101 and leisure, 92

MIU models, 40, 53, 58–59 Optimal inflation rate, 53, 75, 108 equilibrium models, 126

Friedman’s rule, 175–176, 179–182, 184, 355–356 Optimal quantity of money, 53

Optimal taxation, 171–174 CIA model, 182–184

money as intermediate input, 184–188 nonindexed tax systems, 188–191 Ramsey problem, 176–182

Output growth

and exchange rates, 428–429 and inflation, 2–3, 59, 259, 366 and interest rates, 6–8, 15, 21–22 and monetary policy, 318

and money supply, 3–31, 195, 202, 278 neoclassical model, 33

and policy coordination, 421 and prices, 8

and productivity shocks, 73–75, 114 Overlapping generations model, 308–309 Overnight interbank interest rate, 534, 546–547 Overshooting, 426–427

Persistence, inflation, 254–257, 291, 320–321, 366– 370

Phillips curves, 205–207, 320, 336–337. See also New Keynesian Phillips curve (NKPC)

Pigou e¤ect, 346

Policy coordination, 413–422. See also Monetary policy

Policy instruments, 513. See also Instruments Policy irrelevance hypothesis, 202–203 Policy Targets Agreement (PTA), 306 Poole’s analysis, 513–518, 552, 554

Pooling equilibrium, 293, 295–297 Portfolio rigidities

limited-participation models, 211–215, 218–219 market segmentation, 215–218

Price adjustment models, 237–250. See also New Keynesian Phillips curve (NKPC)

costs of adjustment, 247–248 empirical evidence, 250–252 firm-specific shocks, 247 monetary shocks, 240 quadratic costs model, 232–234 selection e¤ect, 244

speed of adjustment, 261

staggered nominal adjustment models, 231–232, 237–243

state-dependent pricing (SDP), 243–252 time-dependent pricing (TDP), 237–243, 249– 252

Price level targeting, 372–373, 465 Price markup, 357

Price puzzle, 22–25

Prices. See also Fiscal theory of the price level; Sticky prices

and fiscal policy, 143

and inflation, 233–234, 240, 251 and interest rates, 454–457, 548 and misperceptions, 197, 201–202 and monetary policy, 150–152 and money supply, 8, 146–148

small-open-economy model, 425–427, 442–443 and sticky information, 203–207

and wages, 196–197, 225–226, 231, 356–357 Price shocks, 349

Principal agent models, 301–302 Productivity shocks

and credit markets, 492–493, 496–497, 501 and money growth, 73–75, 114

and price adjustment, 247–249

Public finance, 135–191. See also Government deficits, 144–146

equilibrium seigniorage, 152–156 fiscal theory of the price level, 162–170

government budget identity, 136–143, 150–152 hyperinflation, 156–162

optimal taxation, 170–191 Ricardian/non-Ricardian fiscal policies, 146–150

Quantity theory of money, 2

Ramsey problem, 176–182 Rational-expectations models, 207, 261–262 Rational hyperinflation, 159–162

Real balance e¤ect, 464 Real interest rate, 344–346

Real wages, 196–197, 214–215, 228, 237 Repeated game model, 284–290 Representative-agent models, 147, 168 Reputational models, 284–297, 320

Reserve market, 533–543. See also Credit markets; Federal Reserve

borrowed reserves, 540–542 discount rate, 535–536

and Federal Reserve, 533–538, 543 nonborrowed reserves, 537–542

Revenue. See also Taxation

and inflation, 138–139, 156–157, 188, 190 and seigniorage, 139–141

sources of, 137

Reverse causation argument, 11

Ricardian regime, 143, 146–150, 167–170, 191 Risk sharing, international, 433–434

Rogo¤ ’s model, 299–301, 312–313, 365–366

Search models, 115–126 bonds, 124–125

day and night markets, 118–122 marginal utility of money, 126 trading, 116–126

Seigniorage, 136, 138–141, 143–144 equilibrium, 152–156

and inflation rate, 153–158

and nominal interest rate, 139–140, 152 optimal tax approach, 170, 171–174 and temporary shocks, 174–175 Separating equilibrium, 293–297 Sequential equilibrium, 291 Shopping-time models, 53

Friedman’s rule, 184–188 marginal utility of money, 126 and MIU models, 92–96 utility functions, 96

Short-run relationships, 4–8 Simulations, 61–62, 72–75, 115

Slope factor. See Term structure of interest rates Small firms, 506, 508

Small-open-economy model, 422–440, 447–449 and closed-economy NK model, 440–442 fixed exchange rates, 427–429

flexible exchange rates, 424–428 monetary condition index, 424

new Keynesian model, 430–440, 444 optimal policy, 441–442

prices, 425–427, 442–443 Solving MIU model, 76–87 capital accumulation, 79–80 Euler condition, 82

Fisher equation, 84–85 goods market clearing, 79 labor hours, 80–81

linear approximation, 78 linear-rational expectations, 86

marginal product and real return condition, 82–83 marginal utility of consumption, 81–82

Matlab programs, 87 money holdings, 83–84 production function, 79 real money growth, 84 Speed limit policy, 373

Stabilization bias, 358, 362–366 Stackelberg leader, 419

Staggered nominal adjustment models, 231–232, 237–243

State-dependent pricing (SDP) models, 243–252 Steady-state equilibrium

CIA models, 108–109, 111–112, 127 MIU models, 41–48, 61, 65–66 Sticky information, 203–207, 261–262

Sticky information Phillips curve (SIPC), 261– 262

Sticky prices, 232, 235, 261–262, 351–352. See also New Keynesian models; New Keynesian Phillips curve (NKPC); Nominal rigidities

and agency costs, 501–502

open economy models, 408–413, 442–443 and wages, 225–226, 356–357

St. Louis equations, 13–14

Stochastic models. See Dynamic stochastic general equilibrium (DSGE) models

Strict targeting rules, 313–316 Structural econometric models, 27–28

Superneutrality of money, 42–43, 59–61, 66, 69 Supply shocks, 8, 321

Surplus, fiscal, 170 Sweden, 28 Switzerland, 528, 554

Targeting regimes, 370–373

Targeting rules, 309–316, 321–322, 360–361 Taxation. See also Optimal taxation

and deficits, 146

inflation tax, 53–54, 61, 135, 153, 182–183 and interest on money, 58–59 nonindexed, 188–191

Ricardian regime, 168 Tax-smoothing model, 173–174

Taylor model, 231–232, 237–241, 243, 251–252 Taylor principle, 342–344, 374, 462

Taylor rule, 462, 472, 552

central banks, 342–344, 370, 373–374 federal funds rate, 373–375 Technology shocks, 75

Term structure of interest rates a‰ne no-arbitrage model, 475 expectations theory, 465–468 level factor, 476–477

slope factor, 476–477

Theoretical models. See Models, economic 3-month Treasury bill rate (3MTB), 8, 12, 52 Time-dependent pricing (TDP) models, 237–243,

249–252

Time inconsistency, 270, 316–318, 320, 323 Timeless perspective commitment policy, 359–

360

Time series estimates, 252–253 Tobin e¤ect, 60–61

Trading model, 116–126 Transactions, 91–126 CIA models, 92, 98–115 costs models, 91

and MIU models, 92–98

resource costs of, 92–98 search models, 115–126 shopping-time models, 92–96 and utility, 91

Transfer function, 304 Treasury, U.S.

bills, 8, 12, 52

budget constraint, 136 central bank transfers, 140

Trigger strategy, 284–285, 287–288 Two-country model, 414–418, 421–422, 443. See

also Obstfeld-Rogo¤ two-country model Two-party model, 307–308

Uncovered nominal interest parity, 406–408, 435 Unemployment

and inflation, 4, 196, 319–322 persistence, 305–306

and policy, 21

United Kingdom, 173, 473, 554 United States. See also Federal Reserve bank lending in, 506

estimated money demand, 51 GDP and money supply, 10 Great Depression, 503 inflation in, 156, 160, 319 instrument rules, 374 interest rates, 12, 15, 408 monetary base in, 532

monetary policy in, 10–11, 22 optimal finance policy, 173–174 price behavior, 250 seigniorage, 140–141, 175 short-run correlations, 4–8 welfare cost of inflation, 55–57 Utility, 91

Utility functions Cobb-Douglas, 60

constant elasticity of substitution (CES), 48 instantaneous, 55

MIU models, 35–36 and separability, 67, 69

shopping-time models, 96

Vector autoregressions (VARs), 1, 18–26, 29 Vector error correction model (VECM), 146

Wage markup, 357, 433

Wage rigidities. See also Nominal rigidities MIU model, 226–231, 262–264

and monetary shocks, 230–231

new Keynesian models, 351–352, 356 small-open-economy model, 424 Wages

flexible, 423

and prices, 196–197, 225–226, 231, 356–357 real, 196–197, 214–215, 228, 237

Weight conservatism, 298

Welfare costs of inflation CIA models, 106–107, 109 MIU models, 53–58

and trading, 124 Wicksellian policies, 461

Wicksellian real interest rate, 345

Zero nominal interest rate, 463–464