The NBER's Program on Monetary Economics, met in Cambridge on April 12. NBER
Research Associates Martin Eichenbaum and Lawrence Christiano, both of Northwestern
University, organized this program:
Michael Woodford, NBER and Princeton University, "Imperfect Common Knowledge and the
Effects of Monetary Policy" (NBER Working Paper No. 8673)
Discussant: V. V. Chari, University of Minnesota
Nobuhiro Kiyotaki, NBER and London School of Economics, and John Moore, MIT,
"Liquidity, Business Cycles, and Monetary Policy"
Discussant: Harold Cole, University of California, Los Angeles
George W. Evans, University of Oregon, and Seppo Honkapohja, University of Helsinki,
"Monetary Policy, Expectations, and Commitment"
Discussant: Marco Bassetto, University of Minnesota
Mark Bils, NBER and University of Rochester, and Yongsung Chang, University of
Pennsylvania, "Welfare Costs of Sticky Wages When Effort Can Respond"
Discussant: Miles S. Kimball, NBER and University of Michigan
Fernando Alvarez, NBER and University of Chicago; Andrew Atkeson, NBER and University
of California, Los Angeles; and Christian Edmond, University of California, Los Angeles,
"Can a Baumol-Tobin Model Account for Short-Run Behavior of Velocity?"
Discussant: Julio J. Rotemberg, NBER and Harvard University
Harold Cole and Lee Ohanian, University of California, Los Angeles, and Ron Leung,
University of Minnesota, "Deflation, Real Wages, and the International Great Depression: A
Discussant: Ben S. Bernanke, NBER and Princeton University
Woodford reconsiders the Phelps-Lucas hypothesis, according to which temporary real
effects of purely nominal disturbances result from imperfect information. He departs from the
assumptions of Lucas (1973) in two crucial respects, though. Because of monopolistically
competitive pricing, higher-order expectations are crucial for aggregate inflation dynamics, as
Phelps argued (1983). And, decisionmakers' subjective perceptions of current conditions are
assumed to be of imperfect precision, because of finite information processing capacity, as Sims
argued (2001). The model can explain highly persistent real effects of a monetary disturbance
and a delayed effect on inflation.
Kiyotaki and Moore provide a simple framework for modelling differences in liquidity
across assets. Their goal is to understand the interaction between asset prices and aggregate
economic activity, and to explain liquidity premiums. In so doing, they examine the role of
government policy, through open market operations, in changing the mix of assets held by the
private sector. They also show that certain anomalies of the real economy, such as low rates of
return on liquid assets, volatility of asset prices, and limited participation in asset markets, in fact
are normal features of an economy where money is essential for the smooth allocation of
In monetary policy, the equilibriums from full commitment are superior to those from
optimal discretionary policies. A number of interest rate reaction functions and instrument rules
thus have been proposed to implement or approximate full commitment policy. Evans and
Honkapohja assess these optimal reaction functions and instrument rules in terms of whether
they lead to an equilibrium that is both locally determinate and stable under adaptive learning by
private agents. They find that a reaction function that appropriately depends explicitly on private
expectations performs best on both counts.
Bils and Chang examine the impact of wage stickiness when employment has an effort
as well as an hours dimension. Despite wages being predetermined, the labor market clears
through the effort margin. Consequently, welfare costs of wage stickiness are potentially much,
Alvarez, Atkeson, and Edmond describe the link between money, velocity, and prices in
an inventory-theoretic model of the demand for money. They then explore the extent to which
such a model can account for the short-run volatility of velocity, the negative correlation of
velocity, the ratio of money to consumption, and the resulting "stickyness" of the aggregate price
level as measured by the relative volatility of the ratio of money to consumption and the price
level. They find that an inventory-theoretic model of the demand for money is a natural
framework for understanding these aspects of the behavior of velocity in the short run.
The high-real-wage story is one of the leading hypotheses for how deflation caused the
international Great Depression. Theoretically, world-wide deflation combined with incomplete
nominal wage adjustment raised real wages in a number of countries. These higher real wages
reduced employment as firms moved up their labor demand curves. This implies a strong
negative correlation between deviations in output and real wages, while the correlation in the
data is positive. The positive correlation implies the need for another shock to act as a shifter of
labor demand. Cole, Ohanian, and Leung assume that the other shock works through
productivity. They evaluate the relative contributions of productivity shocks and money shocks
(operating through high real wages) to output changes for 17 countries between 1930 and 1933.
They estimate that about two-thirds of output changes in the international cross section are
explained by a productivity or productivity-like shock which is orthogonal to deflation, and
about one-third of output changes are explained by money shocks.