Course Catalogue

Code: ECO-6200/ ECO-4200-1

Faculty: Arghya Bhattacharya

This course primarily focuses on the liquidity or moneyness of assets. Fiat money is one such liquid asset, and various frictions in the economy determine its liquidity. We start the course by asking a fundamental question: what is money and why is it essential? We will briefly discuss a simple overlapping generations (OLG) model in which intrinsically worthless objects are valued at equilibrium. This is fiat money. After this, we will quickly graduate to Lagos and Wright (Journal of Political Economy, 2005) and Rocheteau and Wright (Econometrica, 2005) class of models a.k.a. New Monetarist models, and use them to understand different aspects of monetary economies and how a monetary economy interacts with different markets – labor markets, asset markets, and over-the-counter (OTC) markets. Time permitting, we will also study Choi and Rocheteau (2021) class of models, which are continuous time versions of LRW models and yield richer dynamics. As a useful digression, we might also discuss Duffie, Garleanu, and Pedersen's (Econometrica, 2005) OTC market for assets, the Diamond-Dybvig model of bank runs, and the Diamond-Mortensen-Pissarides model of the labor market.

In the last phase of the course, we will discuss selected papers on important and interesting issues in monetary economics. Some of these might be “current issues”, while the rest are perennial questions. Students taking the course must select a paper from a predefined list and present it in class. A Q&A will follow each presentation.

 I will teach selected chapters from the book Money, Payments, and Liquidity (MIT Press) by Rocheteau and Nosal, and a few relevant papers.

 

Prior knowledge of the following concepts will help you in this course:

1. Knowledge of incomplete markets, i.e., markets that are not complete. In a complete market, every agent can form a contract for every possible state of the world for every time period. We could either have time-0 trading of contracts (Arrow-Debreu) or sequential trading (Arrow securities). On the other hand, incomplete market models include Bewley-Huggett-Aiyagari models, which some of you may be familiar with, as well as OLG models of money, among others.
2. Ability to solve/ find FOCs of dynamic optimization problems, Bellman equations, Hamilton-Jacobi-Bellman equations, etc.
3. Be able to characterize the solution to a system of n variables, n nonlinear equations, or solve them numerically, i.e., solve them using some computer program (Python or Matlab). We will usually stick to n = 2, 3, 4.

↑↑ Knowledge of the concepts mentioned above will greatly enhance your ability to appreciate and excel in this course. Therefore, I highly encourage you to learn, relearn, or revise these concepts. A few resources which may help:

• Adda & Cooper: Ch 2 for dynamic programming and for value function iteration, Ch 3
• Ljungqvist & Sargent: Ch 3 for dynamic programming, Ch 4 for value function iteration, Ch 8 (8.1 to 8.6) for complete markets time-0 trading, Ch 17 for incomplete markets
• For Python in econ/ macro: https://python.quantecon.org/intro.html

We may not use everything from the chapters mentioned above, but students should have a reasonably good understanding of the topics mentioned above.