Customer Reviews

Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework

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This is a good book as an introduction to the basics of New Keynsian DSGE models. Overall, it's a pretty good read, however it does have its flaws. The first one is that the book can be far too terse at times. Critical parts of the mathematical analysis are left out of the book. For example, you will not learn how to solve a DSGE model by reading this book. Nor will you learn how to estimate a DSGE model. You will not learn how to simulate a DSGE model by reading this book either. You will not learn how to check the stability of steady states. You will not learn how appropriate some of the quantitative methods used in this book, for example log-linearization, are. One could argue that the book was not written to teach any of these things anyway. The author's aim may have been to simply provide a brief, qualitative feel for how monetary policy models are constructed and what sort of insights they yield.

However, even by that goal, the book has some serious flaws. The author doesn't spend enough time in justifying some of the underlying assumptions that go into DSGE models, nor does he perform any sort of robustness check on these assumptions. For instance, after reading this book, I have no idea why Gali log-linearizes the first order conditions of his model before he proceeds to the solution. I know theorems like Hartman-Grobman allow linearization of the transition function in a neighbourhood of a hyperbolic steady state, but linearisation of the first-order conditions? Why is this legitimate? If so, HOW legitimate is it? Since we never actually get the solution to a real DSGE, we can't know how wrong the linearizations are. This issue is totally ignored by Gali. Likewise, what are the implications of the specific form of the utility function he picks for the agents(or should that be agent)? Why does the household have market power in setting its own wages? How robust is the numerical welfare analysis to a change in the underlying, arbitrarily chosen, welfare function? What are the implications of the outlandish assumption that there are an infinite number of identical countries each with measure zero? Why are we allowed to assume that the production function is linear in technology? Why do we use Calvo pricing over adjustment costs and what are the implications? Why do these models completely abstract away from capital and investment? Why is this legitimate and what are the implications? Surely a model studying interest rates should have meaningful investment/consumption decisions (in Gali's models, the representative consumer consumes all output in every period and there is never any savings, because capital is not required for production). These and many other pertinent issues are wholly ignored by Gali. He never indicates why many of the assumptions are made or what their potential consequences are.

Despite all these simplifications though, a lot of the analysis still ends up being numerical (rather than analytical), and I found this to be thoroughly disappointing. I can appreciate how such a heavily stylized model might tell you something qualitatively valuable, but I wouldn't put any weight on its quantitative predictions. As it turns out, the model's numerical predictions are basically all we get. After reading this book, I know vaguely *what* monetary theorists do, but I have no idea *why* they do it! Not only that, I wouldn't trust a DSGE model to tell me anything quantitatively relevant about the real economy.

On the plus side, Gali doesn't mince his words. The book is relatively short and it communicates its main ideas efficiently. This is in contrast to the excruciating exercise in verbosity put out by Michael Woodford.

This book is an indispensable introduction to modern New Keynesian macroeconomics. Exposition is very clear and accessible. Many students of macroeconomics will find this book very useful for understanding basics of sticky prices, business cycles and monetary policy in a simple but rigorous framework with optimizing households and firms. In a sense, this book helps to prepare for Woodford's "Interest and prices". Highly recommend for 1st year Ph.D. and advanced undergraduate students.

Its a great book. i is explain very book the new keynesian model. I fave de woodford interest and prices and Gali it is better than woodford.

The book is a good piece of new-keynesian modeling writen by one of the main contributors for this area. It is very updated and it refers to the literature in a very accurate and interesting way. The material is quite mathematical and it can a bit hard to follow for people who had never had some calculus.

this guy allows many important macro issues to slip
it appears he was more interested in deriving the equations thank god at olemiss my professor managed to provide the flesh

The book is interesting and contains good explanations of the new keynesian approach. It is good for a first understanding of the issues.

Nice overview of the new keynesian paradigm. Too bad the books only concentrates on monetary economics and fiscal policy is not analyzed in detail.

Let me begin with the good. Jordi Gali is obviously a talented writer who is very intelligent and capable of logical reasoning in the field of economics in general and monetary policy in particular. For a Keynesian he writes quite well and tries to be as clear as he can be, even though the book is written for a high level reader who is capable of dealing with a lot of jargon and wade through muddled language that is often used by authors who do not really know as much about the subject at hand as they think they do.

But the problem is that no amount of intellect and logic will help move forward an argument that is based on a false set of assumptions. For example, Mr. Gali seems to have no trouble with a secretive group of men meeting behind closed doors and decide what the interest rates should be. He has no trouble in policy wonks at the Treasury and Fed conspire to set monetary policies that would distort the market and create bubbles that end badly. He has no idea that the very ideas that he espouses are leading the US dollar towards the monetary graveyard that claims all fiat currencies.

No amount of mathematical manipulation will change the reality that Mr. Gali seems to wish to model. Human beings are not bullets shot out of a gun or falling water droplets. Unlike inanimate objects, they have an ability to respond to stimulus and will take steps to deal with anything that bureaucrats and central planners throw into the mix. Unless they are trying to pursue careers that need the type of muddled thinking that this book provides I could not recommend to readers strongly enough to stay away from it. Instead I will offer alternative recommendations that would be far more useful in understanding reality. In no particular order here they are:

The Theory of Money and Credit

Money, Bank Credit, and Economic Cycles

Ethics of Money Production

Man, Economy, and State with Power and Market - Scholars Edition

I would also like to add a few more recommendations that will shed a lot more light on the subject of the credibility of those pretending to be able to effectively model dynamic non-linear systems.

The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility"

The Misbehavior of Markets: A Fractal View of Financial Turbulence

Fractals and Scaling In Finance: Discontinuity, Concentration, Risk

Let me be clear about this review. We all have opinions and are all able to spin narratives to defend those opinions. But unless our defense is linked to empirical evidence or the ability to make accurate predictions about what is likely to happen our opinions are useless. I would like to go on record and predict that the Keynesian and Monetarist bureaucrats who have been driving economic policies for the better part of the last 50 years around the world will fail to solve the problems that their own meddling have created. If one steps back far enough it is easy to see that we are nearing the end of the grand experiment that began last century. All currencies around the world are fiat and all financial systems depend on fractional reserve banking that needs more and more money printing. With national debt levels being as high as they are and most countries having massive unfunded liabilities it is clear that we will see monetary policy failures across the board. Sovereign debt risks are extremely high and countries with large USD reserves are looking at ways to hedge their holdings. It would not surprise me to see that, thanks to the type of thinking that Mr. Gali represents, we could see massive devaluations and the eventual end to the forty year fiat experiment. Anyone who skims or reads through Mr. Gali's book and figures out that the New Keynesianism is no better than the original version or the previous versions of New Keynesianism should run to a bank and take out insurance in the form of the market's choice of money. Buy some gold and silver bullion, sit back, and enjoy the fireworks that we are going to witness over the next few years.