Political Economy
Textbook Background
For background on this week's topics, take a look at chapter 14 of Mankiw, or the various sections of Blanchard noted below — especially 9-4, 24-2, 25-1, 27-3, and the box on "Rational Expectations" on p. 363 (ch. 17).
- Mankiw: Ch. 14.
- Blanchard: Chs. 9-4, 9-5, 24-1, 24-2, 25-1, 25-2, and 27-3.
Time Inconsistency; Rules vs. Discretion
- N. Gregory Mankiw, "Time Inconsistency and the Tradeoff Between Inflation and Unemployment," Appendix to chapter 14 of Macroeconomics, 5th edition, Worth Publishers, 2003.
- Richard Dennis, "Time-Inconsistent Monetary Policies: Recent Research," Federal Reserve Bank of San Francisco Economic Letter 2003-10, April 11, 2003.
- John B. Taylor, "Inflation, Unemployment, and Monetary Policy," MIT Press, 1998, chapter 2, sections 3 – 5.
- Alan S. Blinder, "Central Banking in Theory and Practice," MIT Press, 1998, ch. 1, section 2; ch. 2, section 4.
Mankiw (2003) presents a simplified version of the Barro-Gordon (1983) in the appendix of his text, which is a useful place to start. In lecture we will study a slightly more sophisticated version of the model: not quite as extensive as the version in Walsh (1998) below (optional reading) — although skimming sections 8.1 and 8.2 would probably be helpful. Dennis (2003) notes some additional implications of this literature that we will revisit later in the course.
As for the Blinder (1998) and Taylor (1998) readings, focus on the nature of their disagreement about the importance of "time inconsistency" as a problem for monetary policy, and how their definitions of terms in the "rules vs. discretion" debate differ. Also read the comments by Ben Friedman and William Poole in the Solow and Taylor book (see chapter 3).
- Walsh, Carl E. Monetary Theory and Policy, MIT Press, 1998, section 8.1–8.4.
- Robert J. Barro; David B. Gordon, "A Positive Theory of Monetary Policy in a Natural Rate Model," The Journal of Political Economy, v. 91, n. 4 (August 1983), pp. 589–610.
- Finn E. Kydland and Edward C. Prescott, "Rules Rather than Discretion: The Inconsistency of Optimal Plans," The Journal of Political Economy, v. 85, n. 3 (June 1977), pp. 473–492.
Central Bank Independence
- Alan S. Blinder, "Central Banking in Theory and Practice," MIT Press, 1998, chapter 3.
Blinder (1998) discusses many aspects of central bank independence. For additional perspectives on this issue, see the optional readings below.
- Stanley Fischer, "Central-Bank Independence Revisited," The American Economic Review, v. 85, n. 2, (May, 1995) pp. 201–206.
- Bennett T. McCallum, "Two Fallacies Concerning Central-Bank Independence," The American Economic Review, v. 85, n. 2, (May, 1995) pp. 207–211.