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Advanced Monetary Economics
Instructor: Daniel Sanches
E-mail: drsanche@wustl.edu
Classroom: TBA
Time: TBA
Office hours: TBA
OBJECTIVES
The goal of this course is to provide students with the tools to analyze how alternative monetary
and credit policies affect the equilibrium allocation of economies in which credit and monetary
arrangements play an important role in facilitating trade and commerce. Since the onset of the
global financial crisis in 2008, several central banks and other policymaking bodies around the
world have resorted to a variety of unconventional policies aimed at supplying enough liquidity
to financial markets to prevent significant and protracted disruptions in the functioning of the
credit and payment mechanisms. Thus, understanding how alternative policies influence the
equilibrium allocation in economies with financial frictions is crucial for the evaluation of the
effectiveness of current and future policies.
OVERVIEW
The course is divided into three parts. The first part of the course presents some basic models of
money and credit, emphasizing the methods used to solve and analyze equilibrium allocations.
The second part focuses on the role of government policy in alleviating liquidity shortages. The
third part studies the interplay between liquidity provision and asset markets.
METHOD
The lectures will be based on the list of papers provided below. The instructor will provide
lecture notes with a summary of each paper (including key derivations). The lecture notes will be
available well before the beginning of the course, so I encourage students to read them in
advance.
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ASSIGNMENTS
For each part of the course, there will be a problem set assigned to students. The questions will
be based on the papers presented in class. A take-home final exam combines with the problem
sets to form the final grade.
GRADES
The problem sets will play a key role in helping students understand the material covered in
class. I will also encourage participation in class. Thus, it is very important that students attend
all classes. In the special event of illness or family emergency, please contact me by e-mail as
soon as possible. To obtain the final grade, I will use the following weights:
Problem sets (50%)
Final exam (40%)
Participation (10%)
READING LIST
The list below contains the papers that will be covered in class. In the next section, I provide an
extended bibliography indicating other important papers in the literature.
PART I. Basic Models of Money and Credit
i. Pure Monetary Economy
1. R. Lagos, R. Wright. “A unified framework for monetary theory and policy analysis,” Journal
of Political Economy 113 (2005), pp. 463-84.
ii. Credit Arrangements
2. Chapter 2, E. Nosal, G. Rocheteau. Money, Payments, and Liquidity, MIT Press, 2011.
3. Chapter 19, T. Sargent, L. Ljungqvist. Recursive Macroeconomic Theory, MIT Press, 2004.
iii. Credit Cycles
4. C. Gu, F. Mattesini, C. Monnet, R. Wright. “Endogenous credit cycles,” Journal of Political
Economy 121 (2013), pp 940-65.
PART II. The Role of Monetary and Credit Policies
1. S. Freeman. “The payments system, liquidity, and rediscounting,” American Economic Review
86 (1996), pp. 1126-38.
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2. G. Antinolfi, E. Huybens, T. Keister. “Monetary stability and liquidity crises: The role of the
lender of last resort,” Journal of Economic Theory 99 (2001), pp. 187-219.
3. A. Berentsen, G. Camera, C. Waller. “Money, credit and banking,” Journal of Economic
Theory 135 (2007), pp. 171-95.
4. S. Williamson. “Liquidity, monetary policy, and the financial crisis: A New Monetarist
approach,” American Economic Review 102 (2012), pp. 2570-2605.
PART III. Liquidity and Asset Markets
1. J. Licari, J. Suarez-Lledo, A. Geromichalos. “Asset prices and monetary policy,” Review of
Economic Dynamics 10 (2007), pp. 761-79.
2. G. Rocheteau, R. Wright. “Liquidity and asset-market dynamics,” Journal of Monetary
Economics 60 (2013), pp. 275-94.
The list above contains the required papers. I encourage students to read the original
papers in preparation for the class. Do not worry if you do not fully understand everything in the
paper. We will go through each paper in detail during the lectures.
EXTENDED BIBLIOGRAPHY
Money as a Medium of Exchange
N. Kiyotaki, R. Wright. “On money as a medium of exchange,” Journal of Political Economy 97
(1989), pp. 927-954.
N. Kiyotaki, R. Wright. “A search-theoretic approach to monetary economics,” American
Economic Review 83 (1993), pp. 63-77.
S. Shi. “Money and prices: A model of search and bargaining,” Journal of Economic Theory 67
(1995), pp. 467-496.
A. Trejos, R. Wright. “Search, bargaining, money, and prices,” Journal of Political Economy
103 (1995), pp. 118-141.
S. Shi. “A divisible search model of fiat money,” Econometrica 65 (1997), pp. 75-102.
R. Lagos, R. Wright. “Dynamics, cycles, and sunspot equilibria in ‘genuinely dynamic,
fundamentally disaggregative’ models of money,” Journal of Economic Theory 109 (2003), pp.
156-171.
R. Lagos, R. Wright. “A unified framework for monetary theory and policy analysis,” Journal of
Political Economy 113 (2005), pp. 463-84.
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G. Rocheteau, R. Wright. “Money in search equilibrium, in competitive equilibrium, and in
competitive search equilibrium,” Econometrica 73 (2005), pp. 175-202.
Money and Credit
S. Shi, “Credit and money in a search model with divisible commodities,” Review of Economic
Studies 63 (1996), pp. 625-652.
N. Kocherlakota. “Money is memory,” Journal of Economic Theory 81 (1998), pp. 232-251.
R. Aiyagari and S, Williamson, “Money and dynamic credit arrangements with private
information,” Journal of Economic Theory 91 (2000), pp. 248-279.
D. Sanches, S. Williamson. “Money and credit with limited commitment and theft,” Journal of
Economic Theory 145 (2010), pp. 1525-1549.
L. Araujo, B. Camargo. “Imperfect Monitoring and the Coexistence of Money and Credit,”
working paper.
Dynamic Credit Arrangements
T. Kehoe, D. Levine. “Debt-constrained asset markets,” Review of Economic Studies 60 (1993),
pp. 868-88.
N. Kocherlakota, “Implications of efficient risk sharing without commitment,” Review of
Economic Studies 63 (1996), pp. 595-609.
D. Sanches. “A dynamic model of unsecured credit,” Journal of Economic Theory 146 (2011),
pp. 1941-64.
C. Gu, F. Mattesini, C. Monnet, R. Wright. “Endogenous credit cycles,” Journal of Political
Economy 121 (2013), pp 940-65.
Payments System
S. Freeman. “The payments system, liquidity, and rediscounting,” American Economic Review
86 (1996), pp. 1126-1138.
C. Kahn, W. Roberds. “Payment system settlement and bank incentives,” Review of Financial
Studies 11 (1998), pp. 845-870.
D. Mills. “Alternative central bank credit policies for liquidity provision in a model of
payments,” Journal of Monetary Economics 53(2006), pp. 1593-1611.
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