All material copyright 2003 Henrik Jensen (except where noted).
All rights reserved.
Material may only be used if due credit is given.


Monetary Economics:

Macro Aspects


Spring 2003
Henrik Jensen
Institute of Economics
University of Copenhagen


Welcome to the web page of the course "Monetary Economics: Macro Aspects," offered at the Masters Programme at Institute of Economics, University of Copenhagen.

On this page you will find a host of relevant information about the course, and the page will be regularly updated. You should therefore visit this page at least twice a week to stay up to date (so, bookmark it right away). For now, you can go to the following places:

Brief Course Description Breaking News Logistics and Contact Information
Downloadable Papers Lecture Slides, Notes, etc. Recap Information About the Course
Various Plans (tentative and
eventually final)
F.A.Q. Section Links

Brief Course Description

The aim of this course is to provide an understanding of how and why monetary policy conduct affects important aggregates in the economy, e.g., consumption, inflation and unemployment. Moreover, we will focus on the characteristics of "good" monetary policymaking in the sense of assessing the macroeconomic advantages and disadvantages of various monetary policy strategies. While the curriculum will be mainly theoretical, empirical relevance of the material will not be downplayed.

Particular subjects to be covered include: monetary policy transmission mechanisms; credibility problems in monetary policy; rules versus discretion; the importance of institutional frameworks for monetary policy; goals of monetary policy (which variables to target?); transparency of monetary policy conduct; international monetary policy coordination.

The curriculum will consist of a large part of Carl. E. Walsh (1998): "Monetary Theory and Policy" (The MIT Press), and a number of articles.

Recommended qualifications: As some of the material requires a good understanding of macroeconomic general equilibrium models, it is a prerequisite to have taken third-year Macroeconomics, i.e., to master economic theory at a level corresponding to David Romer (2002): "Advanced Macroeconomics." It is also recommended to be familiar with basic intertemporal optimization, and analyses of dynamic systems (difference and differential equations).

Assessment: Written 4-hour exam; closed book.

The teaching language was in English.

Important note: This course is offered for the first time, and according to plans, another monetary economics course (tentatively named "Monetary Economics: The Economics of Banking"), will be offered in the fall. These two courses can be taken independently, but of importance is that the previously offered course "Monetary Economics" (in Danish: "Kreditvęsen") will not be offered again. The two new courses should be seen as substitutes for that course, and given overlap in course material, one cannot take the present course if one has already taken the old "Monetary Economics" (whether the same rule will apply as regards to the Fall course is undecided for the moment). In short, "Monetary Economics" ("Kreditvęsen"), has been replaced by two brand new courses! (Your are, of course, welcome to show up, but you can't take the exam if you already have passed the old course.)

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Breaking News

The exam set and answers and comments (posted June 30 and July 10)

The June 20 exam (pdf file 77 Kb). Note that the minor typos have been corrected.
Answers and comments to the exam (pdf file 132 Kb).
The results from the exam are now available at

List of typos in slides and recaps are now available!

Available here is now a continuously updated list of typos found in the lecture slides and recap. Hopefully, the list will not grow too long, and hopefully the typos are not too serious, but it is nice to document these. I thank you very much for the input you have had one this!!!!

Hints and info about the exam, May 26 (pdf file, 40 Kb).

Revisions of slides, March 21

Note revisions in two sets of slides (both "only" of a technical nature relating to the elimination of the partial derivatives of value functions when doing dynamic programming).

Course evaluation, Week 12

To see the "percentages" of the web-based evaluations of the course in week 12, see the following html files: 1, 2 and 3, as well as my comments (pdf file, 16 Kb) regarding the evaluation, as discussed in class on April 2.

Course evaluation, Week 19

Here are the results from the web-based evaluations of the course in week 19 as a pdf file (95 Kb). Thanks for your comments and inputs!

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Logistics and Contact Information

Lectures were held on

    Mondays, 10-12
    Wednesdays, 10-12,

both days in HO 6 (main building on Vor Frue Plads).

Lecturer was Henrik Jensen. Contact info:

Phone: 35 32 30 43

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Downloadable papers

Jensen, H., 2000, Explaining an Inflation Bias without Using the Word "Surprise", working paper, University of Copenhagen (pdf file, 97 Kb, of updated version, February 2003)

Link to: Woodford, M., 1999, Commentary: How Should Monetary Policy Be Conducted in an Era of Price Stability?, in New Challenges for Monetary Policy, A symposium sponsored by the federal Reserve Bank of Kansas City (pdf file, 186 Kb).

Link to: Walsh, C. E., 2001, Teaching Inflation Targeting: An Analysis for Intermediate Macro, mimeo, University of California, Santa Cruz (pdf file, 81 Kb).

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Lecture Slides, Notes, etc.

Lecture slides

Lecture slides, February 17 (pdf file, 55 Kb).

Lecture slides, February 19 (pdf file, 112 Kb).

Lecture slides, February 24 (pdf file, 108 Kb). Revised, March 24. Corrected mistakes concerning elimination of partial derivatives of value functions. Old page 13 is now replaced by two new pages 13 and 14.

Lecture slides, February 26 (pdf file, 138 Kb). Revised, March 24. Corrected mistakes concerning elimination of partial derivatives of value functions. Old pages 12-13 are now rewritten.

Lecture slides, March 5 (pdf file, 92 Kb). Note that the mentioned correction of u into v in the optimizing shopping-time model has been implemented fully in this version of the slides. Also note that a "typo" on page 11 has been corrected on March 18, due to the following question.

Lecture slides, March 10 (pdf file, 97 Kb).

Lecture slides, March 12 (pdf file, 124 Kb).

Lecture slides, March 19 (pdf file, 93 Kb).

Lecture slides, March 24 (pdf file, 103 Kb).

Lecture slides, March 26 (pdf file, 103 Kb).

Lecture slides, March 28 (pdf file, 105 Kb).

Lecture slides, March 31 (pdf file, 113 Kb).

Lecture slides, April 2 (pdf file, 82 Kb).

Lecture slides, April 9 (pdf file, 87 Kb).

Lecture slides, April 11 (pdf file, 81 Kb).

Lecture slides, April 14 (pdf file, 111 Kb).

Lecture slides, April 23 (pdf file, 114 Kb). Note that the posted slides are slightly shorter than those distributed in class, as I had to postpone the material on Rogoff-conservativeness for the next lecture.

Lecture slides, April 28 (pdf file, 99 Kb).

Lecture slides, April 30 (pdf file, 111 Kb).

Lecture slides, May 5 (pdf file, 101 Kb). Note that the public budget constraint is correctly stated in the slides; in contrast with Walsh (1998, p. 244). Also note that the inflation rate introduced on page 4 should more precisely be defined as the rate of change in the Home consumer price index.

Lecture slides, May 7 (pdf file, 107 Kb).

Lecture slides, May 12 (pdf file, 117 Kb).

Lecture slides, May 14 (pdf file, 94 Kb). Link to accompanying New Zealand Parliament Background Note with recent information on which countries have adopted Inflation Targeting and "how" (pdf file, 921 Kb).

Lecture slides, May 19 (pdf file, 98 Kb).

Lecture slides, May 21 (pdf file, 142 Kb). Does this guy need the discipline of transparency? Does this one?

List of typos in lecture slides and recaps

The list. Last update, June 13 (pdf file 63 Kb).


Deriving equation (9.21) in Walsh (1998) (pdf file, 47 Kb)

Equivalence of (9.11) and (9.10) in Walsh (1998) when (9.11) involves linear projections of the shocks on the nominal interest rate (pdf file, 72 Kb)

The Obstfeld-Rogoff model: Derivation of relative demand and the price index (pdf file, 57 Kb)

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Recap Information

Here, I will post notes where the key concepts covered in recent lectures are listed. These notes will, along with lecture slides, hopefully provide valuable information about what is essential in the curriculum, and what is less essential. Also, in various circumstances, some discussion about what is relevant for the exam (in terms of exemplifying a potential exam question) will be provided.

Recap Information 1: Stylized facts, empirical problems and issues (pdf file, 50 Kb). This note contains general information on how exam questions will be designed, with emphasis on the degree of importance of math (this information will not be repeated in the subsequent Recaps). An example of an exam question is also included.

Recap Information 2: The Tobin effect and micro-founded, flexible-price models with money in the utility function (pdf file, 75 Kb). An example of a technical exam question is included. Note that in the sample question there is a stupid typo in the definition of the functional form of the utility function. There should, of course, be a plus sign in front of the term involving labor supply! See typos for an further explanation. 1000*sorry!

Recap Information 3: Shopping-time models and Cash-in-Advance models (pdf file, 26 Kb).

Recap Information 4: Inflation as a tax (pdf file, 40 Kb).

Recap Information 5: Money's role with incomplete nominal adjustment (pdf file, 39 Kb).

Recap Information 6: Rules versus discretion: Credibility problems (I) (pdf file, 64 Kb). An example of an exam question is included.

Recap Information 7: Operating procedures, interest rates and monetary policy (pdf file, 42 Kb).

Recap Information 8: Monetary policy conduct in "New Keynesian" settings: Credibility problems (II) (pdf file, 41 Kb).

Recap Information 9: Open-economy aspects and monetary policy coordination (pdf file, 50 Kb).

Recap Information 10: Inflation targeting (pdf file, 42 Kb).

Recap Information 11: Transparency of monetary policymaking (pdf file, 67 Kb). An example of a sample exam question is included. This is a question that is slightly "outside" the curriculum, but with your skills, together with what you have learned during the course, it should not be too difficult for you to answer.

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Various Plans (tentative and eventually final)

Preliminary course plan and reading list, February 2 (pdf file, 14 Kb).

Final curriculum, May 2 (pdf file, 14 Kb).

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F.A.Q. Section

In this section, I will post questions and answers that arise during the course. A fruitful way of communication if you have problems with some of the curriculum, is to e-mail me the problem/question. First, one often solves the issue by oneself by formulating it in writing. Secondly, by writing me an e-mail question, I can provide a much clearer answer than is usually the case in verbal exchange. Finally, when everything is written down, one can make the issue available to all students. This is valuable, as it is quite likely that fellow students have had similar problems with the issue. Therefore, feel free to e-mail questions. I will then make the question and answer publicly available here for everyone's benefit. Of course, your name will not be mentioned (unless you demand so); hence, there is nothing to lose by posing a "silly question" (and by the way: there is no such thing as a "silly question").

February 28: A few questions relating to Walsh (1998, Chapter 2) as well as the exam (pdf file, 27 Kb)
March 17
Some questions concerning the lecture slides from March 5 (pdf file, 67 Kb)
May 27: Some hints for understanding Appendix B in Svensson (1997, European Economic Review) (pdf file, 87 Kb)
May 28: A question concerning the lecture slides from February 26 (pdf file, 60 Kb)
June 2: A question concerning use of envelope theorem on p. 12 on slides of March 5 (pdf file, 78 Kb).
        (Note that when addressing this question, I discovered a few - inconsequential - typos regarding the time
         subscripts on inflation in the budget constraint and CIA constraint in the slides; these are corrected.)
June 4: Questions about solving for prices with staggered price setting (Walsh, 1998; Subsection (pdf file, 80 Kb).
June 5: On the first-order conditions in the Islands model of Chapter 5 in Walsh (1998) (pdf file, 71 Kb).
June 10: On the first-order condition for profit maximization in emperfect competition model (pdf file, 59 Kb).
June 16: On the examples of exam questions in the recaps: GIVE US ANSWERS! (pdf file, 73 Kb).
June 17: On the welfare effects of an asymmetric shock in the Obstfeld-Rogoff model (pdf file, 48 Kb).
June 17: On the solution of the simple New Keynesian model when k>0 (pdf file, 60 Kb).
June 17: On linearizations in chapter 6 (pdf file, 64 Kb).
June 17: On the private sector's signal extraction problem under transparency in slides of May 21 (pdf file, 58 Kb).

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Here is a link to my own list of (some) of the economists whose material we will be reading.
Here is the link to Lars Svensson's more comprehensive list of economists.

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Created February 2, 2003.
Very last update: July 10, 2003.
Send suggestions for improvements to me.
To Henrik Jensen's home page.
To Institute of Economics' home page.