Course Meeting Times
Lectures: 2 sessions / week, 1.5 hours / session
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.
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.
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.
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.
The course is organized around ten topics or sections with subsections listed below.
Shocks and propagation mechanisms Wold representation
ARMAs, VARs, SVARS
Co-movements of GDP components
Correlations between real wages, interest rates, and output
The correlations of output and money
Cycles, slumps, and depressions
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
Special cases and other short cuts
Equivalence between centralized and decentralized economies
The consumption problem in the decentralized economy
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
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
Allowing for two goods
Why introduce two goods?
The pitfalls of one-good models
Tradable/non tradable 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
Decentralized exchange and the use of money
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
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
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
Macroimplications of the choice of numeraire
The monetary policy problem
The “new Keynesian” model
Staggering of price decisions
The “modern Phillips curve”
The “modern IS-LM model,” and the “modern AS-AD model”
A second look at productivity booms
Interest rate rules
The liquidity trap
Effects of spending and taxes in models with flexible or sticky prices
Perverse effects of fiscal expansions