o; -webkit-text-stroke-width: 0px; > University of Warwick Department of EconomicsEC 924 Term 2, Winter 2016Monetary Economics Marija Vukoti ?cDeadline for the electronic submission of this assignment is Wednesday, 16 March,at 3:30pm. You are allowed to work in groups of maximum three people. All answersmust be typed.Assignment 21. Consider a standard baseline New Keynesian model described in New Perspectiveson Monetary Policy, Inflation, and the Business Cycle , by Jordi Gal ??¤.(a) Explain the difference between a traditional backward-looking Phillips curve andthe New Keynesian Phillips curve? Write down the expression for the NKPC andprovide some intuition behind it. What are the main criticisims of the NKPC?(20 marks)(b) In this model, the nominal interest rate (notice that in this paper it is denotedby rt and not it as in the class notes) can be written in the following way:rt ? = ?? 1 + ?£ 1! k X ?? =1 1 + ?£ ?£ !k ??1 Et { ??yt+k} + 1 + ?£ (1 ?m ?m) ??mtDerive this expression (equation (27) in Gali s paper, notice that it should have ??? on the LHS). (30 marks)(c) To the extent that money growth is positively serially correlated (assume ?m =0.5), the nominal rate will necessarily increase in response to a monetary expansion. Under what conditions the liquidity effect, which would imply negativerelationship between nominal interest rate and quantity of money in the economy,can be restored? (20 marks)(d) Using Dynare, replicate Figures 3 and 5 from Gali s paper. Explain the resultsand submit a copy of your dynare .mod file. (30 marks)1
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