Monetary theory and policy

A new edition of the leading text in monetary economics, a comprehensive treatment revised and enhanced with new material reflecting recent advances in the field.

This text presents a comprehensive treatment of the most important topics in monetary economics, focusing on the primary models monetary economists have employed to address topics in theory and policy. It covers the basic theoretical approaches, shows how to do simulation work with the models, and discusses the full range of frictions that economists have studied to understand the impacts of monetary policy. Among the topics presented are money-in-the-utility function, cash-in-advance, and search models of money; informational, portfolio, and nominal rigidities; credit frictions; the open economy; and issues of monetary policy, including discretion and commitment, policy analysis in new Keynesian models, and monetary operating procedures. The use of models based on dynamic optimization and nominal rigidities in consistent general equilibrium frameworks, relatively new when introduced to students in the first edition of this popular text, has since become the method of choice of monetary policy analysis.

This third edition reflects the latest advances in the field, incorporating new or expanded material on such topics as monetary search equilibria, sticky information, adaptive learning, state-contingent pricing models, and channel systems for implementing monetary policy. Much of the material on policy analysis has been reorganized to reflect the dominance of the new Keynesian approach. Monetary Theory and Policy continues to be the only comprehensive and up-to-date treatment of monetary economics, not only the leading text in the field but also the standard reference for academics and central bank researchers.

Author Notes

Carl E. Walsh is Professor of Economics at the University of California, Santa Cruz. He is coeditor of the International Journal of Central Banking and Visiting Scholar at the Federal Reserve Bank of San Francisco.

Preface	p. xi
Introduction	p. xvii
1 Empirical Evidence on Money, Prices, and Output	p. 1
1.1 Introduction	p. 1
1.2 Some Basic Correlations	p. 1
1.3 Estimating the Effect of Money on Output	p. 9
1.4 Summary	p. 31
2 Money-in-the-Utility Function	p. 33
2.1 Introduction	p. 33
2.2 The Basic MIU Model	p. 35
2.3 The Welfare Cost of Inflation	p. 53
2.4 Extensions	p. 58
2.5 Dynamics in an MIU Model	p. 61
2.6 Summary	p. 75
2.7 Appendix: Solving the MIU Model	p. 76
2.8 Problems	p. 87
3 Money and Transactions	p. 91
3.1 Introduction	p. 91
3.2 Resource Costs of Transacting	p. 92
3.3 CIA Models	p. 98
3.4 Search	p. 115
3.5 Summary	p. 126
3.6 Appendix: The CIA Approximation	p. 126
3.7 Problems	p. 130
4 Money and Public Finance	p. 135
4.1 Introduction	p. 135
4.2 Budget Accounting	p. 136
4.3 Money and Fiscal Policy Frameworks	p. 142
4.4 Deficits and Inflation	p. 144
4.5 The Fiscal Theory of the Price Level	p. 162
4.6 Optimal Taxation and Seigniorage	p. 170
4.7 Summary	p. 191
4.8 Problems	p. 191
5 Money in the Short Run: Informational and Portfolio Rigidities	p. 195
5.1 Introduction	p. 195
5.2 Informational Frictions	p. 196
5.3 Limited Participation and Liquidity Effects	p. 209
5.4 Summary	p. 218
5.5 Appendix: An Imperfect-Information Model	p. 219
5.6 Problems	p. 223
6 Money in the Short Run: Nominal Price and Wage Rigidities	p. 225
6.1 Introduction	p. 225
6.2 Sticky Prices and Wages	p. 225
6.3 Assessing Alternatives	p. 250
6.4 Summary	p. 262
6.5 Appendix: A Sticky Wage MIU Model	p. 262
6.6 Problems	p. 264
7 Discretionary Policy and Time Inconsistency	p. 269
7.1 Introduction	p. 269
7.2 Inflation under Discretionary Policy	p. 271
7.3 Solutions to the Inflation Bias	p. 283
7.4 Is the Inflation Bias Important?	p. 316
7.5 Summary	p. 323
7.6 Problems	p. 323
8 New Keynesian Monetary Economics	p. 329
8.1 Introduction	p. 329
8.2 The Basic Model	p. 330
8.3 A Linearized New Keynesian Model	p. 336
8.4 Monetary Policy Analysis in New Keynesian Models	p. 352
8.5 Summary	p. 378
8.6 Appendix	p. 379
8.7 Problems	p. 387
9 Money and the Open Economy	p. 395
9.1 Introduction	p. 395
9.2 The Obstfeld-Rogoff Two-Country Model	p. 396
9.3 Policy Coordination	p. 413
9.4 The Small Open Economy	p. 422
9.5 Open-Economy Models with Optimizing Agents and Nominal Rigidities	p. 429
9.6 Summary	p. 443
9.7 Appendix	p. 444
9.8 Problems	p. 449
10 Financial Markets and Monetary Policy	p. 453
10.1 Introduction	p. 453
10.2 Interest Rates and Monetary Policy	p. 453
10.3 The Term Structure of Interest Rates	p. 465
10.4 Macrofinance	p. 475
10.5 Financial Frictions in Credit Markets	p. 477
10.6 Does Credit Matter?	p. 502
10.7 Summary	p. 508
10.8 Problems	p. 509
11 Monetary Policy Operating Procedures	p. 511
11.1 Introduction	p. 511
11.2 From Instruments to Goals	p. 512
11.3 The Instrument Choice Problem	p. 513
11.4 Operating Procedures and Policy Measures	p. 530
11.5 A Brief History of Fed Operating Procedures	p. 547
11.6 Other Countries	p. 553
11.7 Problems	p. 555
References	p. 559
Name Index	p. 597
Subject Index	p. 605

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