Contents
1 Money Demand (and some Supply) 4
1.1 Money Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 Overview of Money Demand . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Money Demand: A General Equilibrium Model with Money in the
Utility Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 The Mechanics of Money Supply . . . . . . . . . . . . . . . . . . . 16
2 The Price of Money 24
2.1 UIP, Fisher Equation, and the Expectations Hypothesis of the Yield
Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.2 The Price Level as an Asset Price: Cagan’s (1956) Model with Rational
Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.3 A Simple Model of Exchange Rate Determination . . . . . . . . . . . 31
A Derivations of the Pricing Relations 38
A.1 A Real Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
A.2 A Nominal Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
A.3 A Nominal Foreign Bond . . . . . . . . . . . . . . . . . . . . . . . . 41
A.4 Real Effects of Money? . . . . . . . . . . . . . . . . . . . . . . . . . 41
A.5 Empirical Evidence on the Pricing Relations . . . . . . . . . . . . . . 42
3 Money and Sticky Prices: A First Look 45
3.1 Basic Models of the Effects of Monetary Policy Surprises . . . . . . . 45
3.2 “Money and Wage Contracts in an Optimizing Model of the Business
Cycle,” by Benassy . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.3 “Money and the Business Cycle,” by Cooley and Hansen . . . . . . . 56
3.4 X Sticky Wages or Sticky Prices? . . . . . . . . . . . . . . . . . . . . 61
4 Money in Models of Monopolistic Competition 63
4.1 Monopolistic Competition . . . . . . . . . . . . . . . . . . . . . . . 63
5 Money and Price Setting 69
5.1 Dynamic Models of Sticky Prices . . . . . . . . . . . . . . . . . . . 69
5.2 Aggregation of One-Sided Ss Rule: A Counter-Example to 1M !
1Y  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
A Summary of Solution Method for Linear RE Models 81
A.1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
A.2 Special Case: Scalar Second Order Equation . . . . . . . . . . . . . . 82
A.3 An Alternative for the Scalar Second Order Equation: The Factorization
Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
B Calvo’s Model: An Alternative Derivation 85
6 Monetary Policy 88
6.1 The IS-LM Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.2 The Barro-Gordon Model . . . . . . . . . . . . . . . . . . . . . . . . 91
6.3 Recent Models for Studying Monetary Policy . . . . . . . . . . . . . 97
A Derivations of the Aggregate Demand Equation 104
7 Empirical Measures of the Effect of Money on Output 106
7.1 Some Stylized Facts about Money, Prices, and Exchange Rates . . . . 106
7.2 Early Studies of the Effect of Money on Output . . . . . . . . . . . . 107
7.3 Early Monetarist Studies of the Effect of Money on Output . . . . . . 108
7.4 Unanticipated or Anticipated Money . . . . . . . . . . . . . . . . . 115
7.5 VAR Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
7.6 Structural Models of Monetary Policy . . . . . . . . . . . . . . . . . 119
0 Reading List 123
0.1 Money Supply and Demand . . . . . . . . . . . . . . . . . . . . . . 123
0.2 Price Level and Nominal Assets . . . . . . . . . . . . . . . . . . . . 123
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0.3 Money and Prices in RBC Models . . . . . . . . . . . . . . . . . . . 124
0.4 Money and Monopolistic Competition . . . . . . . . . . . . . . . . . 124
0.5 Sticky Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
0.6 Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
0.7 Empirical Measures of the Effect of Money on Output . . . . . . . . . 126
0.8 The Transmission Mechanism from Monetary Policy to Output . . . . 126
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