There are no textbooks for the course. Material will come from several sources. Readings by session are given below.

### Recommended Texts

Covers most bases, but is aging:

[BF] Blanchard, O., and S. Fischer. *Lectures on Macroeconomics*. Cambridge, MA: MIT Press, 1989. ISBN: 9780262022835.

Focuses more on open economy issues:

[OR] Obstfeld, M., and K. Rogoff. *Foundations of International Macroeconomics*. Cambridge, MA: MIT Press, 1996. ISBN: 9780262150477.

Focuses more on nominal rigidities, and the role of monetary policy:

[MW] Woodford, M. *Interest and Prices: Foundations of a Theory of Monetary Policy*. Princeton, NJ: Princeton University Press, 2003. ISBN: 9780691010496.

Macroeconomics is a rapidly changing field. To get a sense of the geography, you might find it useful to read two surveys (which are already on the verge of obsolescence…):

Blanchard, O. “What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?” *Quarterly Journal of Economics* 115, no. 4 (November 2000): 1375-1410.

Woodford, M. “Revolution and Evolution in Twentieth-Century Macroeconomics.” Paper presented at Frontiers of the Mind in the Twenty-First Century, U.S. Library of Congress, Washington, DC, June 1999.

For two more recent and more polemical, pieces, you may also want to read:

Chari, V. V. “Modern Macroeconomics in Practice: How Theory is Shaping Policy.” *Journal of Economic Perspectives* 20, no. 4 (2006): 3-28.

Mankiw, N. G. “The Macroeconomist as Scientist and Engineer.” *Journal of Economic Perspectives* 20, no. 4 (2006): 29-46.

### Readings by Session

TOPIC # | TOPICS | READINGS |
---|---|---|

1 |
## Fluctuations factsCovariance stationarity Trends/cycles decompositions Shocks and propagation mechanisms Wold representation ARMAs, VARs, SVARS Impulse responses Co-movements of GDP components Correlations between real wages, interest rates, and output The correlations of output and money Cycles, slumps, and depressions Nonlinearities |
## Required readingsBF, chapter 1. Stock, J., and M. Watson. “Business Cycle Fluctuations in U.S. Macroeconomic Time Series.” Chapter 1 in ## Additional readingsA nice refresher on time series and VARs: Cochrane, J. “Time Series for Macroeconomics and Finance.” mimeo University of Chicago, 2005, pp. 1-65. Blanchard, O., and D. Quah. “The Dynamic Effects of Aggregate Demand and Aggregate Supply Disturbances.’’ Christiano, L., M. Eichenbaum, and C. Evans. “Monetary Policy Shocks: What have we Learned and to What End?” Aguiar, M., and G. Gopinath. “Emerging Market Business Cycles,” and “The Cycle is the Trend.” |

2 |
## The basic model: The consumption/saving choiceSetting up the optimization problem Intertemporal choice, shocks, uncertainty The first order conditions The Keynes-Ramsey condition Solving the model numerically Value functions Log linearization Special cases and other short cuts Equivalence between centralized and decentralized economies The consumption problem in the decentralized economy |
## Required readingsBF, chapter 2 and section 6-2. ## Additional readingsOR, chapters 1 and 2. Campbell, J. “Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model.” Uhlig, H. “A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily.” mimeo University of Tilburg, 1997. (PDF) |

3 |
## Allowing for labor/leisure choice (the RBC model)Movements in employment/unemployment Interpreting the first order conditions Solving the model numerically, and by log linearization Special case: log and full depreciation Evidence on labor supply elasticity Evidence on high frequency technological shocks Solow residuals and their interpretation Alternative approaches |
## Required readingsBF, chapter 7. King, R., and S. Rebelo. “Resuscitating Real Business Cycles.” Chapter 14 in ## Additional readingsPrescott, E. C. “Theory Ahead of Business Cycle Measurement.” Rebelo, S. “Real Business Cycle Models: Past, Present and Future.” National Bureau of Economic Research Working Paper No. 11401, June 2005. Gali, J., and P. Rabanal. “Technology Shocks and Aggregate Fluctuations: How Well does the RBC Model Fit Postwar U.S. Data?” In Basu, S., J. Fernald., and M. Kimball. “Are Technology Improvements Contractionary?” Federal Reserve Bank of Chicago, WP-2004-20. Aghion, P., and P. Howitt. “Growth and Cycles.” Chapter 8 in Shleifer, A. “Implementation Cycles.” |

4 |
## Allowing for non-trivial investment decisionsCosts of adjustment for investment Investment, consumption, and interest rates in the decentralized economy The role of the term structure of interest rates The stock market and investment The effects of shocks on output, investment, the stock market, and the term structure The open economy version Shocks, investment, saving, and movements in the current account Asset price bubbles, investment, and fluctuations |
## Required readingsBF, sections 2-4 and 6-3. BF, sections 5-1 and 5-2. ## Additional readingsOR, chapter 3. Shiller, R. Blanchard, O., C. Rhee, and L. Summers. “The Stock Market, Profit, and Investment.” |

5 |
## Allowing for two goodsWhy introduce two goods? The pitfalls of one-good models Capital/consumption goods Tradable/non tradable goods Domestic/foreign goods The consumer problem with two goods Intratemporal and intertemporal first order conditions Closing the model if tradables/non tradables The Balassa-Samuelson effect The transfer problem Effects of technological shocks on relative prices, and on the current account Global imbalances |
## Required readingsObstfeld, M., and K. Rogoff. “The Intertemporal Approach to the Current Account.” Chapter 34 in ## Additional readingsOR, chapter 4. Blanchard, O. “Current Account Deficits in Rich Countries.” mimeo MIT Department of Economics Working Paper No. 07-06, February 2007. |

6 |
## Introducing moneyDecentralized exchange and the use of money Cash-in-advance models Money in the utility function The effects of money growth on capital accumulation Dynamics of hyperinflation The Cagan model The budget deficit and money growth |
## Required readingsBF, sections 4.3-4.7 and 10.2. ## Additional readingsMW, chapter 2-1, and “Price Level Determination under Interest Rate Rules.” Dornbusch, R., F. Sturzenegger, H. Wolf, S. Fischer, and R. Barro. “Extreme Inflation: Dynamics and Stabilization.” |

7 |
## Introducing price settingDecentralized exchange, money, and price setters A yeoman farmer model of price setting under monopolistic competition The role of price above marginal cost, markups Predetermined prices The effects of money on output and welfare Role of wage versus price setting The behavior of real wages Revisiting the effects of technological and other shocks Indexation Macroimplications of the choice of numeraire The monetary policy problem Time consistency |
## Required readingsBlanchard, O. “Why Does Money Affect Output? A Survey.” In BF, sections 8-1 and 11-4. MW, chapter 3-1, and “Optimizing Models with Nominal Rigidities. A Basic Sticky-Price Model.” ## Additional readingsDhyne, E., L. Álvarez, H. Le Bihan, G. Veronese, D. Dias, J. Hoffmann, N. Jonker, P. Lünnemann, F. Rumler, and J. Vilmunen. “Price Changes in the Euro area and the United States: Some Facts from Individual Consumer Price Data.” |

8 |
## The “new Keynesian” modelStaggering of price decisions Fischer-Taylor-Calvo models Coordination problems The “modern Phillips curve” Inflation inertia? The “modern IS-LM model,” and the “modern AS-AD model” A second look at productivity booms |
## Required readingsBF, chapters 8-2 and 8-3. ## Additional readingsMW, chapter 3-2, “Optimizing Models with Nominal Rigidities,” and “Inflation Dynamics with Staggered Price Setting.” King, R. “The New IS-LM model: Language, Logic, and Limits.” Blanchard, O., and J. Gali. “Real Wage Rigidities and the New Keynesian Model.” mimeo MIT, February 2006. Beaudry, P., and F. Portier. “Stock Prices, News, and Economic Fluctuations.” mimeo University of British Columbia, March 2004. (PDF) Lorenzoni, G. “A Theory of Demand Shocks.” mimeo MIT, November 2006. Smets, F., and R. Wouters. “Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach.” Center for Economic Policy Research Discussion Paper No. 4750 (November 2004): 1-26. |

9 |
## Monetary policyTime consistency Inflation targeting Interest rate rules The liquidity trap |
## Required readingsClarida, R., J. Gali, and M. Gertler. “The Science of Monetary Policy: A New Keynesian Perspective.” ## Additional readingsMW, chapters 4-1 and 4-2, and “A Neo-Wicksellian Framework for the Analysis of Monetary Policy.” Gali, J. “New Perspectives on Monetary Policy, Inflation, and the Business Cycle.” National Bureau of Economic Research Working Paper No. 8767, February 2002: 1-52. King, M. “What has Inflation Targeting Achieved?” In Bernanke, B., V. Reinhart, and B. Sack. “Monetary Policy Alternatives at the Zero Bound. An empirical assessment.” Svensson, L. “Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others.” National Bureau of Economic Research Working Paper No. 10195 (December 2003): 1-24. |

10 |
## Fiscal policyEffects of spending and taxes in models with flexible or sticky prices Empirical evidence Perverse effects of fiscal expansions |
## Required readingsGalí, J., J. López-Salido, and J. Vallés. “Understanding the Effects of Government Spending on Consumption.” ## Additional readingsChari, V. V., and P. Kehoe. “Optimal Fiscal and Monetary Policy.” Baxter, M., and R. King. “Fiscal Policy in General Equilibrium.” Blanchard, O., and R. Perotti. “An Empirical Characterization of the Dynamic Effects of Government Spending and Taxes on Output.” Giavazzi, F., and M. Pagano. “Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience.” National Bureau of Economic Research Working Paper No. 5332 (October 1996): 1-50. |