Economics 502, Autumn 2016
Macroeconomic Analysis I

Office: Savery 349
Instructor Home Page

Instructor: Yu-chin Chen
Time/Location: MW 1:30-2:50pm/ SAV 168
Office Hours: T 10:30-11:30am or by appointment

Teaching Assistant: Josh Ding
email: econjosh at


* Entering first years should make sure they are very comfortable with undergraduate macro material before the start of the quarter. A past TA has put together some questions that you may find useful as a review 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 gradually with MATLAB Tutorial and MATLAB Exercises by the middle of the quarter.

* LaTeX: it's also never too early to start getting used to it. There are plenty of tutorials online, but here's an introduction and template put together by an alum.

* Syllabus

* Academic integrity is the cornerstone of the Department’s rules for student conduct and evaluation of student learning.  Students accused of academic misconduct will be referred directly to the Office of Community Standards and Student Conduct for disciplinary action pursuant to the Student Conduct Code and, if found guilty, will be subject to sanctions. Sanctions range from a disciplinary warning, to academic probation, to immediate dismissal for the Department and the University, depending on the seriousness of the misconduct.  Dismissal can be, and has been, applied even for first offenses.  Moreover, a grade of zero can be assigned by the instructor for the course.  [Department Policy on Academic Conduct] -Translation: DO NOT COPY OTHERS' OR OLD HOMEWORK SOLUTIONS; DO NOT CHEAT ON EXAMS.


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. You should have easy access to them, e.g. you may want to purchase the first two.
1. Chs, 5, 6, 7, 8, 10, and 11 from Romer, D., Advanced Macroeconomics, 4th edition, McGraw-Hill, 2006.
2. Chs. 1-4 from DeJong and Dave, Structural Macroeconometrics, Princeton University Press, 2011.
3. Chs 6 & 8 from Blanchard, O. and S. Fischer, Lectures on Macroeconomics, MIT Press, 1989.
4. Chs. 5 - 8 from Walsh, C. Monetary Theory and Policy, The MIT Press; 3rd edition, 2010
5. Chs. 1-4 from Stokey, N., R. Lucas, and E. Prescott, Recursive Methods in Economic Dynamics, Harvard Univ. Press, 1989
6. Chs 2 & 3 from Gali, J. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton Press, 2008

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

* Ljungvist and Sargent, Recursive Macroeconomic Theory, 2nd Edition, MIT Press, 2004
* Woodford, Interest and Prices, Princeton University Press, 2003
* Ch 4 & Ch. 9 from Wichens, M., Macroeconomic Theory: A Dynamic General Equilibrium Approach, Princeton Press 2008

Course Schedule and Lecture Notes

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

Additional References & Handouts
(see readings list)

Assignments (due in section the following Fri)
Sept 28 Overview of Macro & Business Cycle Facts  

Please complete the Questionnaire; PS1

Sept 30* Imperfect Information and signal extraction
Oct 3 Nominal Rigidity Models: Contracting models    
Oct 5 Strategic complementarity & Taylor contract
Oct 10 Non-Market Clearing Models: Menu-costs CES handout; Walsh Ch. 6  
Oct 12 Blanchard-Kiyotaki & AD externalities
Oct 17 Real Rigidity in labor market: Efficiency Wage    
Oct 19 Dynamics of Price Adj: State contingent models
Oct 24 Calvo Pricing & NKPC Calvo handout  
Oct 26 Financial Frictions and the Credit Channel
Oct 31 Models of CC Walsh Ch.10.5; BGG 1999  
Nov 2 Dynamic Programming
Nov 7 Midterm DP handout; CMT+BSC  
Nov 9 Numerical solution for BE
Nov 14 Consumption DPex handout; code  
Nov 16 Empirics of Consumption
Nov 21 Consumption CAPM and Equity Premium Campbell 2003  
Nov 23 DSGE 1: Basic RBC model
Nov 28 DSGE 2: New Keynesian model LN19


Nov 30 DSGE 3: Time Consistency of Policy LN20
Dec 5 Review 1   Final exam: Mon. Dec 12, 230-530 pm, SAV 168
Dec 7 Review 2


Reading List:

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


A. Recent Issues and Debates

Olivier Blanchard, (2016). "Do DSGE Models Have a Future?"

Paul Romer, (2016). "The Trouble with Macroeconomics"


Macroeconomics is a broad and rapidly changing field. The following sets of surveys, pre and post-2008 provide a sense of the general landscape:

Olivier Blanchard, (2009). "The State of Macro," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 209-228, 05.

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

Woodford, M. (1999), "Revolution and Evolution in Twentieth-Century Macroeconomics," in P. Gifford, ed., Frontiers of the Mind in the Twenty-First Century, Harvard University Press.

Goodfriend, Marvin; King, Robert G (1997), "The New Neoclassical Synthesis and the Role of Monetary Policy", NBER Macroeconomics Annual, NBER Chapters (National Bureau of Economic Research) 12: 231–83

Goodfriend, Marvin (2004), "Monetary Policy in the New Neoclassical Synthesis: A Primer", Richmond Fed

Woodford, M. (2009), "Convergence in Macroeconomics: Elements of the New Synthesis," American Economic Journal: Macroeconomics, 1(1): 267-79.

B. Business Cycle Facts

* 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.

* 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.

C. Financial Frictions and Other Current Agenda:

Matsuyama, Kiminori (2007), "Aggregate Implications of Credit Market Imperfections," NBER Macro Annual, 2007.

Gertler and Karadi (2011), "A Model of Unconventional Monetary Policy," Journal of Monetary Economics, 58(1), January, pp. 17-34.

Gertler and Kiyotaki (2010), " Financial Intermediation and Credit Policy in Business Cycle Analysis", Handbook of Monetary Economics, B.M Friedman and M. Woodford (eds.), vol 3, ch.11, 547-599. Elsevier.

Brunnermeier, Eisenbach and Sannikov (2012), "Macroeconomics with Financial Frictions: a Survey," Princeton University, mimeo

Romer and Stiglitz on the state of the macroeconomics from IMF's 2013 conference on "Rethinking Macro Policy II: First Steps and Early Lessons"

Things got quite interesting lately; below aresome casual pieces to give you a flavor:

Buiter, Willem (2009), "The unfortunate uselessness of most ‘state of the art’ academic monetary economics", FT

Woodford, M. (2011), "“What’s Wrong with Economic Models?” October 2011.

Eichengreen, B. (2013), "Our Children's Economics"

Rajan, Raghuram (2011), "Why did economists not foresee the crisis?"

S Wren-Lewis (2012), "The return of schools of thought in macroeconomics"

"'DSGE + Financial Frictions = Macro that Works?' 2013


A. Overview

* Romer, Sections 5.9, 6.3-6.4

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

A 2013 conference on "The First 100 Years of the Federal Reserve:The Policy Record, Lessons Learned, and Prospects for the Future"

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

Bordo, M. and H. Rockoff (2013), "Not Just the Great Contraction: Friedman and Schwartz's A Monetary History of the United States 1867 to 1960", NBER Working Paper 18828

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.

Christiano, L., Eichenbaum, M., and C. Evans, "Monetary Policy Shocks: What Have we Learned and to What End?" in J. Taylor and M. Woodford editors, Handbook of Macroeconomics, vol. 1A, North Holland.

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.

B. Imperfect-Information Models

* Romber Ch. 6.9-6.10

* Walsh Ch. 5

* Wickens Ch. 9

Golosov, M. and, R. Lucas, "Menu Costs and Philips Curves", Journal of Political Economy, 2007 (115), 171-199.

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

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.

* Walsh Ch.6

* Bils, M., and P. Klenow, "Some Evidence on the Importance of Sticky Prices", Journal of Political Economy, 2004 (112), 947-985.

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 6.5-6.7, 7.2-7.5

* 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 10.1-10.4.

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



A. Overview

* Romer Ch. 7

B. State-Contingent Models

Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, vol. 54,100-121.

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.6

* Gali Ch.3.1-3.3

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.



Ben Bernanke, Mark Gertler, and Simon Gilchrist. 1999. The Financial Acceleratorin a Quantitative Business Cycle Framework. In Handbook of Macroeconomics, ed. By John Taylor and Michael Woodford. Elsevier.

Bernanke, B. (2007) The Financial Accelerator and the Credit Channel, speech June 15, 2007, Federal Reserve publication

Bernanke, Ben and Mark Gertler. 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission." Journal of Economic Perspectives. 1995, 9. 27–48.

Brunnermeier, M, T. Eisenbach and Y. Sannikov (2012) "Macroeconomics with Financial Frictions: A Survey"

Quadrini, Vincenzo (2011), "Financial Frictions in Macroeconomic Fluctuations" Economic Quarterly—Volume 97, Number 3—Third Quarter 2011—Pages 209–254



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 8

* 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"

Carroll (2012), Theoretical Foundations of Buffer Stock Saving

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., “CONSUMPTION-BASED ASSET PRICING,” Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz, 2003

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 (2011). 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-

- 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

** Dynare and Dynare Manual

** Griffoli, T.M. (2011), "DYNARE User Guide"

** How to Use Dynare with Matlab



* Gali Ch. 2

* D&D Ch.2

* Romer Ch. 5

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.

Ramey, V. (2011), "A Brief History of the Real Business Cycle –Search & Matching Literature"

C. New Keynesian GE Models

* Gali Ch. 3

* D&D Ch.4

* Walsh Chs 7 & 8

Smets, F. and R. Wouters, "Shocks and Frictions US Business Cycles: A Bayesian DSGE Approach", American Economic Review, 2007 (97), 586-606.

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