Economics 502, Autumn 2009
Macroeconomic Analysis I

Announcements:

*11/9/09: Solutions to Old midterm for question 3 and part 4. Good luck everyone.

*11/7/09: Reformatted Monopolistic Competition handout here. 

*11/6/09: Old 2008 Midterm and Review sheet 

*10/22: a handout on Monopolistic Competition (& where the demand equation used in class comes from). David will go over parts of it in class tomorrow.

* 10/2: Relevant readings for PS1 are below on the reading list: K&R (1999), K&C&K.

* Entering first years should make sure they are very comfortable with undergraduate macro material before the start of the quarter. The TA from last year put together some questions that you may find useful as a guideline: Undergrad Macro Review Questions. You can get a good review from any of the major undergraduate macroeconomics textbooks.

* You may also want to familiarize yourself with MATLAB Tutorial and MATLAB Exercises

* Syllabus

 

Textbooks:

The material covered in the course will draw from many sources, including handouts, lecture notes, journal articles, and selected chapters from various textbooks.

Below is the list of chapters from different texts that we will rely on specifically. I have ordered the first two as "required" in the U Bookstore. Some of the others may also be available there as optional.

1. Chs. 1-5, DeJong and Dave, Structural Macroeconometrics, Princeton University Press, 2007
2. Chs, 5, 6, 7, &.9 from Romer, D., Advanced Macroeconomics, 3rd edition, McGraw-Hill, 2006.
3. Chs 6 & 8 from Blanchard, O. and S. Fischer, Lectures on Macroeconomics, MIT Press, 1989.
4. Ch. 5 from Walsh, C. Monetary Theory and Policy, The MIT Press; 2nd edition, 2003
5. Chs 2 & 3 from Gali, J. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton Press, 2008
6. Ch 4 & Ch. 9 from Wichens, M., Macroeconomic Theory: A Dynamic General Equilibrium Approach, Princeton Press 2008

Other useful references that you may want to have access to:

* Canova, Methods for Applied Macroeconomic Research, Princeton University Press, 2007
* Farmer, The Macroeconomics of Self Fulfilling Prophecies, 2nd Edition, MIT Press, 1999
* Ljungvist and Sargent, Recursive Macroeconomic Theory, 2nd Edition, MIT Press, 2004
* Obstfeld and Rogoff, Foundations of International Macroeconomics, The MIT Press, 1996
* Stokey, N., R. Lucas, and E. Prescott, Recursive Methods in Economic Dynamics, Harvard Press, 1989
* Woodford, Interest and Prices, Princeton University Press, 2003

Course Schedule and Lecture Notes

(schedule is tentative; please check for updates regularly)
* Notes will be posted AFTER each lecture

Date	Topics	Notes	Textbook References (see readings list in addition)	Assignments (due the following Fri in section)
Oct 1	Introduction and Review	LN1	Romer Ch.5.4-5.6.	PS1 , hpfilter , PS1 Solution
Oct 6	MBC: Imperfect Information	LN2	Romer Ch. 6.1-6.3, Walsh pp199-210; 256-261	PS2 , PS2 Solution .m
Oct 8	(cont.)	LN3
Oct 13	Contracting Models	LN4	Wickens Ch.9, B&F Ch.8	PS3, PS3 Solution
Oct 15	(cont.) : Fischer + Gray + Taylor	LN5
Oct 20	Non-Market Clearing Models: Menu-costs	LN6	Walsh pp216-225; Romer 6.4-6.12	PS4, PS4 Solution
Oct 22	(cont.) Menu cost: Mankiw	LN7
Oct 27	(cont.) Menu cost: AD externalities	LN8	Romer 9.1-9.4; Walsh pp225-230	PS5, PS5 Solution
Oct 29	Labor market stories; Efficiency Wage Theory	LN9
Nov 3	Dynamics of Price Adj: State contingent & Calvo	LN10	L&S Chs 1&2	PS6, PS6 Solution, .m
Nov 5	Dynamic Programming	LN11
Nov 10	Midterm	.	Romer Ch.7; B&F 6.2, Wichens Ch.4	PS7, PS7 Solution (Due December 4)
Nov 12	Solving the Bellman equation	LN12
Nov 17	Consumption	LN13
Nov 19	(cont.)	LN14
Nov 24	Asset Pricing and Consumption	LN15	D&D Chs.2 & 5
Dec 1	DSGE: Basic setup and linearization	LN16	Gali Chs. 2&3
Dec 3	RBC model	LN17
Dec 8	NK model	LN18	Walsh Ch5 pp230-256;
Dec 10	Analysis and estimation	LN19

 

Reading List

(* indicates required readings; for copy right reasons, the links below are password protected and only accessible to students registered for the course.)

I. REVIEW AND INTRODUCTION

Aggregate Demand Aggregate Supply, Expectations, and Microfoundations

Macroeconomics is a broad and rapidly changing field. Below are three very recent pieces about the debates and state of Macro:

* Paul Krugman 9/6/2009, NYT: "How did economists get it so wrong?"

* Cochrane, "How did Paul Krugman get it so Wrong?"

* Kocherlakota, "Some Thoughts on the State of Macro"

The following two surveys are a little older, but provide a sense of the general landscape:

Blanchard, O., "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?" QJE, November 2000, 115:4, 1375-1410.

Woodford, M., "Revolution and Evolution in Twentieth-Century Macroeconomics," forthcoming in P. Gifford, ed., Frontiers of the Mind in the Twenty-First Century, Harvard University Press.

A 2008 conference on the Phillips Curve: Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective

Romer, Sections 5.4, 5.5, 5.6.

II. MONETARY THEORIES OF THE BUSINESS CYCLE

A. Overview

Blanchard, O., "Why Does Money Affect Output? A Survey," Handbook of Monetary Economics, vol. 2, edited by Ben Friedman and Frank Hahn, 1990.

Lucas, R., “Nobel Lecture: Monetary Neutrality”, Journal of Political Economy, August 1996, 661-682.

Mankiw, N. G., "A QuickRefresher Course in Macroeconomics," Journal of Economic Literature, December 1990.

B. Imperfect-Information Models

* Lucas, R., "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, June 1973.

* Romer, Sections 6.1-6.3.

Barro, R., "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, 1977, 101-115.

Sargent, T., and N. Wallace, "Rational Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule" Journal of Political Economy, 1975, 241-254.

C. Contracting Models

* Blanchard and Fischer, Ch. 8.

Fischer, S., "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, 1977, 85(1).

Gray, J., "Wage Indexation: A Macroeconomic Approach," Journal of Monetary Economics, 1976, 221-235.

D. Menu-Cost Models

* Romer, Sections 6.4-6.12.

* Golosov, M. and R. Lucas, "Menu Costs and Phillips Curves," Journal of Political Economy, 2007, vol. 115, no. 2

Mankiw, N. G., "Small Menu Costs and Large Business Cycles," Quarterly Journal of Economics, May 1985.

Blanchard, O., and N. Kiyotaki, "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, September 1987.

E. Efficiency Wage Theory

* Romer, Sections 9.1-9.4.

Yellen, J., "Efficiency Wage Models of Unemployment," American Economic Review, May 1984.

 

III. DYNAMIC MODELS OF PRICE ADJUSTMENT

A. Overview

Romer, C., and D. Romer, "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz" NBER Macroeconomics Annual 1989, 121-170.

B. State-Contingent Models

Caplin, A., and D. Spulber, "Menu Costs and the Neutrality of Money," Quarterly Journal of Economics, 1987.

Caplin, A., and J. Leahy, "State Dependent Pricing and the Dynamics of Money and Output," Quarterly Journal of Economics, 1991.

C. Time-Contingent Models

* Walsh Ch.5

Taylor, J., "Staggered Wage Setting in a Macro Model," American Economic Review, May 1979.

Calvo, G., "Staggered Prices in a Utility Maximizing Framework," Journal of Monetary Economics 12, 383-398, (1983).

Mankiw, N. G., and R. Reis, "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Quarterly Journal of Economics, November 2002.

 

IV. CONSUMPTION

A. Discrete Time Dynamic Programming

F. Collard, Dynamic Programming, Lecture Notes

C. Edmond, Dynamic Programming and the Growth Model, Lecture Notes

Sargent, T., Dynamic Macroeconomic Theory, Ch.1

Ljungqvist and Sargent, Chs. 2-3.

Stokey and Lucas Chs. 1-4. The material here is technical and not required for this course. Students who wish to see a rigorous treatment may want to do this reading.

B. Classical Consumption Models

* Romer, Chapter 7

* Blanchard and Fischer, 6.2.

Hall, R., “Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence.” Journal of Political Economy. Vol. 86 (6), pp. 971-87, 1978.

* Attanasio, O., “Consumption,” Handbook of Macroeconomics, V.1B, pp. 741-812, 1999.

Carroll, (2001), "A Theory of the Consumption Function: With or Without Liquidity Constraint"

Browning, M. and T. Crossley, “A Life Cycle Model of Consumption and Saving” Journal of Economic Perspectives, August 2001.

C. Asset Pricing and Consumption Beyond Certainty Equivalence

Campbell, J., “Asset Prices, Consumption, and the Business Cycle,” Handbook of Macroeconomics Vol. 1C, Elsevier B.V., pp. 1231-1303, 1999.

Mankiw, N. G. and S. Zeldes, “The Consumption of Stockholders and Non-Stockholders,” Journal of Financial Economics, 29, pp. 97-112, 1991.

Kocherlakota, N., “The Equity Premium, It’s Still a Puzzle.” Journal of Economic Literature, 34, pp. 42-71, 1996.

Lucas, R., “Asset Prices in an Exchange Economy,” Econometrica, 46(6), pp. 1429-1446, 1978.

Mehra, R. and E. Prescott, “The Equity Premium: A Puzzle,” Journal of Monetary Economics. Vol. 15 (2). p 145-61. March 1985.

IV. An Introduction to DSGE Models

A. General Methods

* DeJong & Dave, Chs. 2 & 5

* T. Griffoli (2007). Dynare Guide Chapters 1-4

- Blanchard O. and C. Kahn (1980), The Solution of Linear Di erence Models Under Rational Expectations. Econometrica 48, 1305-1311

- Campbell, J. (1994). Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model. Journal of Monetary Economics 33, 463-506.

- Klein, P. (2000). Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model. Journal of Economic Dynamics and Control 24, 1405-
1423

- Uhlig, H. (1999) A Toolkit for Analyzing Non-Linear Dynamic Stochastic Models Easily

- Sims, C. (2001). Solving Linear Rational Expectations Models. Computational Economics 20, 1-20.


Helpful DYNARE Resources:

- Juillard et al (2009) Dynare Manual

- Barillas et al. (2007) Practicing Dynare

- W. Den Haan (2009) Dynare programs

 

B. REAL BUSINESS CYCLE THEORY

* Gali Ch. 2

King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics.

Frontiers of business cycle research. Edited by T. Cooley. Princeton University Press, 1995. Chapters 1 and 2.

Rebelo, Sergio T., "Real Business Cycle Models: Past, Present and Future." Scandinavian Journal of Economics, Vol. 107, No. 2, pp. 217-238, June 2005.

Kydland, Finn E & Prescott, Edward C, 1996. "The Computational Experiment: An Econometric Tool," Journal of Economic Perspectives, vol. 10(1), pages 69-85.

Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics.

C. New Keynesian GE Models

* Gali Ch. 3

Gali J. (2001). New Perspectives on Monetary Policy, Inflation, and the Business Cycle.

Gali J. and M. Gertler (2008). Macroeconomic Modeling for Monetary Policy Evaluation., Journal of Economic Perspectives vol. 21 (4), 25-45