ECO0240  MONETARY ECONOMICS II  2022/2023
Topic outline

ECO0240  2022/2023  Fabio C. Bagliano (Lecturer)

Starting on Monday September 19, lectures will take place "in presence" only in room “O. Castellino” (third floor) according to the following weekly schedule:
Monday 24 pm Tuesday 1.304 pm
Any change of schedule will be communicated on this Moodle page in the “News” section. 
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 and as topics for class presentation at the end of the course. 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 threeyear undergraduate program. Moreover, a good knowledge of the contents of the Econometrics courses (at both the undergraduate and the master's level) is an essential requirement for this course.

A file with this syllabus can be found in the "Teaching material" section below.
1. Monetary policy analysis and VAR models
Lecture notes (available in the "Teaching material" section below): VAR_notes_1  VAR_notes_2  VAR_notes_3 (to be used together with J. Cochrane 1994)
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) is:
(*) Stock J. and M. Watson (2001) "Vector Autoregressions", Journal of Economic Perspectives, 15, 4, 101115  for replication: data file used in the paper are available in EViews workfile (WF1) format
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 and 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, NorthHolland, Volume 1A, 65148  working paper version
(*) Bernanke B.S. and I. Mihov (1998) "Measuring monetary policy'', Quarterly Journal of Economics, 113, 3, 869902
A general identification strategy based on longrun 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, 655673
More recent and complete treatments of the identification strategies are provided by:
Kilian L. (2013) "Structural vector autoregressions" in N. Hashimzade and M. Thornton (eds.), Handobook of Research Methods and Applications in Empirical Macroeconomics, Edward Elgar
Ramey V. (2017) "Macroeconomic shocks and their propagation" in Handbook of Macroeconomics vol. 2, NorthHolland, chapter 2 (working paper version)
Insightful applications of VAR modelling (with cointegration) to the estimation of the permanent and transitory components in GDP and asset price fluctuations are given by:
(*) Cochrane J. (1994) "Permanent and transitory components of GNP and stock prices", Quarterly Journal of Economics, 109, 1, 241265 (note that in the paper Figure II and Figure III are misplaced)
(a data file in EViews workfile (WK1) format, used in the lectures, is available: Cochrane_data.wf1 ; also a file with the slides used in the lecture presentation of Cochrane's analysis is available: Cochrane_slides.pdf)
Lettau M. and S. Ludvigson (2004) "Understanding trend and cycle in asset values: reevaluating the wealth effect on consumption", American Economic Review, 94, 1, 276299  the correct Figure 4 of the paper can be found here
The Nobel prize for Economics 2011 was 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: here are the prize motivation and scientific backgroundFurther readings:
Bagliano F.C. and C.A. Favero (1998) "Measuring monetary policy with VAR models: an evaluation'', European Economic Review, 42, 6, 10691112
Bagliano F.C. and C.A. Favero (1999) "Information from financial markets and VAR measures of monetary policy'', European Economic Review, 43, 6, 825838
Blanchard O.J. (1989) "A traditional interpretation of macroeconomic fluctuations", American Economic Review, 79, 5, 11461164
Stock J. and M. Watson (1988) "Variable trends in economic time series", Journal of Economic Perspectives, 2, 3, 147174
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 (available in the "Teaching material" section below): Term_notes_1 (to be used together with R. King and A. Kurmann 2002)  Term_notes_2 (to be used together with F. Diebold F.X. and 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, 4995
A recent survey of terms structure analysis, with a focus on empirical anomalies with respect to the expectations theory are discussed by:
Gurkaynak R.S. and J. H. Wright (2012) "Macroeconomics and the term structure", Journal of Economic Literature, 50, 2, 331367
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, 337364
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, 495514
Nelson C.R. and J. Siegel (1987) "Parsimonious modelling of yield curves", Journal of Business, 60(4), 473489
3. Financial returns, risk and consumption choices in a macroeconomic perspective
Lecture notes (available in the "Teaching material" section below): 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) "Consumptionbased asset pricing", in G. Costantinides, M. Harris and R. Stulz (editors), Handbook of the Economics of Finance, Elsevier, Volume IB, chapter 13, 803886
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, 298345
Standard consumptionbased asset pricing models and more recent extensions thereof are discussed by:
Schwartzmann F. (2014) "How can consumptionbased asset pricing models explain low interest rates?", Federal Reserve Bank of Richmond Economic Quarterly, 100, 3, 209240
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
Cochrane J.H. (2011) "Presidential address: Discount rates", Journal of Finance, 66, 4, 10471108
Campbell J.H. (2000) "Asset pricing at the millennium", Journal of Finance, 55, 4, 15151567
Fama E.F. and K.R. French (2002) "The equity premium", Journal of Finance, 57, 2, 637659
Mehra R. (2003) "The equity premium: why is it a puzzle?", Financial Analyst Journal, January/February, 5469
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, 887936
Campbell J.H. and J.H. Cochrane (1999) "By force of habit: a consumptionbased explanation of aggregate stock market behavior", Journal of Political Economy, 107(2), 205251
An uptodate overview of macrofinance models, addressing the links between asset prices and economic fluctuations is provided by:
Cochrane J. (2017) "MacroFinance", Review of Finance, 945985
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Additional readings for class presentation :
(papers marked with (*) have already been chosen for presentation)
(1) VAR models
(*) Bernanke B.S. and I. Mihov (1998) "The liquidity effect and longrun neutrality", CarnegieRochester Conference Series on Public Policy (Journal of Monetary Economics)'', 49, 149194
(*) Giordani P. (2004) "An alternative explanation of the price puzzle", Journal of Monetary Economics, 51, 12711296
(*) Cover J.P., W. Enders and C. J. Hueng (2006) "Using the aggregate demandaggregate supply model to identify structural demandside and supplyside shocks: results using a bivariate VAR", Journal of Money, Credit and Banking, 38, 777790
(*) Souza J. and A. Zaghini (2008) "Monetary policy shocks in the Euro area and global liquidity spillovers", International Journal of Finance and Economics, 13, 205218
Faust J., E. Swanson and J. Wright (2004) "Identifying VARs based on high frequency futures data", Journal of Monetary Economics, 51, 11071131
(*) Bernanke B.S. and K.N. Kuttner (2005) "What explains the stock market reaction to Federal Reserve policy?", Journal of Finance, 60, 2, 12211257
Bagliano F.C. and C. Morana (2003) "Measuring US core inflation: a common trends approach", Journal of Macroeconomics, 25, 197212
(*) Boivin J. and M. Giannoni (2002) "Assessing changes in the monetary transmission mechanism: a VAR approach", Federal Reserve Bank of New York Economic Policy Review, May, 97111
(*) Ludvigson S., C. Steindel and M. Lettau (2002) "Monetary policy transmission through the consumptionwealth channel", Federal Reserve Bank of New York Economic Policy Review, May, 117133
(*) Lettau M. and S. Ludvigson S.C. (2014) "Shocks and crashes", in NBER Macroeconomics Annual 2013, 293354
(*) Beaudry P. and F. Portier (2006) "Stock prices, news and economic fluctuations", American Economic Review, 96, 4, 12931307
(*) 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), 126137
Coibion O. (2012) "Are the effects of monetary policy shocks big or small?", American Economic Journal: Macroeconomics, 4(2), 132
Barakchian S.M. and C. Crowe (2013) "Monetary policy matters: evidence from new shocks data", Journal of Monetary Economics, 60, 950966
Maio P. (2014) "Another look at the stock return response to monetary policy actions ", Review of Finance, 18, 321371
Gertler M. and P. Karadi (2015) "Monetary policy surprises, credit costs and economic activity", American Economic Journal: Macroeconomics, 7(1), 4476
(2) Term structure of interest ratesEllingsen T. and U. Soderstrom (2001) "Monetary policy and market interest rates", American Economic Review, 91, 6, 15941607 (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, 309338
(*) Carriero A., C.A. Favero and I. Kaminska (2006) "Financial factors, macroeconomic information and the expectations theory of the term structure of interest rates", Journal of Econometrics, 131, 339358
Diebold F.X., C. Li and V.Z. Yue (2008) "Global yield curve dynamics and interactions: a dynamic NelsonSiegel approach", Journal of Econometrics, 146, 351363
Afonso A. and M.M.F. Martins (2012) "Level, slope, curvature of the sovereign yield curve, and fiscal behaviour", Journal of Banking and Finance, 36, 17891807
(3) Returns, risk and consumption choicesCampbell J.Y. and J.H. Cochrane (2000) "Explaining the poor performance of consumptionbased asset pricing models", Journal of Finance, 55, 6, 28632878
Lettau M. and S. Ludvigson (2001) "Consumption, aggregate wealth and expected growth returns", Journal of Finance, 56, 3, 815849
Bansal R. and A. Yaron (2004) "Risks for the longrun: a potential resolution of asset pricing puzzles", Journal of Finance, 59, 4, 14811509
(*) Bansal R. , R.F. Dittmar and C.T. Lundblad (2005) "Consumption, dividends and the crosssection of equity returns", Journal of Finance, 60, 4, 16391672
Duffee G.R. (2005) "Time variation in the covariance between stock returns and consumption growth", Journal of Finance, 60, 4, 16731712
Campbell J.Y., S.W. Giglio, C. Polk and R. Turley (2018) "An intertemporal CAPM with stochastic volatility", Journal of Financial Economics , 128, 207233