Macroeconomic Theory II

Syllabus

Course Meeting Times

Lectures: 2 sessions / week, 1.5 hours / session

Description

This is the second course in the four-quarter graduate sequence in macroeconomics. Its purpose is to introduce the basic models macroeconomists use to study fluctuations. Topics include the basic model or the consumption/saving choice, the RBC model or the labor/leisure choice, non-trivial investment decisions, two-good analysis, money, price setting, the “new Keynesian” model, monetary policy, and fiscal policy.

Textbooks

It is essential that you be familiar with macroeconomics at the intermediate undergraduate level. If you have not yet done so, read an intermediate macroeconomics text. (Take this recommendation seriously. If you are not familiar with macroeconomics, the risk is high that you will perceive the course as a series of methods and models, not as an attempt to understand fluctuations.)

There are no textbooks for the course. Material will come from several sources.

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.” June 1999. 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.

MATLAB®

Finally, I shall assume basic familiarity with MATLAB®. Dynare, a set of MATLAB® based programs freely available on the net, is particularly useful to simulate the models we shall see in the course.

Course Outline

The course is organized around ten topics or sections with subsections listed below.

TOPIC #	TOPICS
1	Fluctuations facts Covariance 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
2	The basic model: The consumption/saving choice Setting 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
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
4	Allowing for non-trivial investment decisions Costs 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
5	Allowing for two goods Why 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
6	Introducing money Decentralized 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
7	Introducing price setting Decentralized 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
8	The “new Keynesian” model Staggering 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
9	Monetary policy Time consistency Inflation targeting Interest rate rules The liquidity trap
10	Fiscal policy Effects of spending and taxes in models with flexible or sticky prices Empirical evidence Perverse effects of fiscal expansions