ENSAE Paris - École d'ingénieurs pour l'économie, la data science, la finance et l'actuariat

Monetary economics


LOISEL Olivier

Département : Economics


This course studies conventional and unconventional monetary policies in the New Keynesian framework, from the basic New Keynesian model to extended New Keynesian models (with sticky wages, small open economies, or financial frictions). It derives the main implications of these models for optimal monetary policy in normal times and in crisis times, highlighting in particular the importance of private agents’ expectations in the transmission and the conduct of monetary policy, and providing illustrations taken from the practice of various central banks.

At the end of the course, with the course-presentation slides in hand, students should be able to do the following things, in the context of the models studied in the course (the basic NK model and three of its extensions: sticky wages, small open economy, financial frictions) and in the context of similar models:

1/ write down the optimization problems of private agents (households, firms, financial intermediaries), derive the corresponding first-order conditions, and interpret these conditions,

2/ log-linearize the equilibrium conditions, derive the key log-linearized equations (IS equation, Phillips curve, wage-inflation equation, international-risk-sharing condition, uncovered interest-rate parity, etc.), and interpret these equations,

3/ write down the optimization problem of the social planner, solve it, and interpret the solution,

4/ identify the distortions, derive the condition for natural-allocation efficiency, and interpret the welfare-loss function,

5/ write down the optimization problem for interest-rate policy away from the ZLB under discretion and under commitment, solve it, and interpret the solution,

6/ derive the determinacy condition for a given interest-rate rule and explain how to estimate an interest-rate rule by GMM,

7/ explain the problem of non-implementability of the optimal feasible path and the problem of multiplicity of determinate projections,

8/ write down the optimization problem for forward-guidance policy at the ZLB under discretion and under commitment, and interpret the solution,

9/ explain date-based and state-based forward-guidance policies, and interpret optimal quantitative-easing and credit-easing policies.


General introduction

Part I: Conventional monetary policy in the basic New Keynesian model
Chapter 1: The basic New Keynesian model
Chapter 2: Optimal monetary policy
Chapter 3: Monetary-policy design

Part II: Conventional monetary policy in extended New Keynesian models
Chapter 4: The sticky-wages extension
Chapter 5: The small-open-economy extension

Part III: Unconventional monetary policy in New Keynesian models
Chapter 6: Forward guidance
Chapter 7: Quantitative vs. credit easing

General conclusion


  • Galí, J., 2015, “Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework and its Applications,” Princeton University Press
  • Woodford, M., 2003, “Interest and Prices: Foundations of a Theory of Monetary Policy,” Princeton University Press