Readings

While there is no required textbook, the course does make frequent use of the following books:

Buy at MIT Press BF = Blanchard, Olivier J., and Stanley Fisher. Lectures on Macroeconomics. Cambridge, MA: MIT Press, 1989, ISBN: 0262022834.

Deaton = Deaton, Angus. Understanding Consumption. New York, NY: Oxford University Press, 1992, ISBN: 0198288247.

Buy at MIT Press LS = Ljungqvist, Lars, and Thomas J. Sargent. Recursive Macroeconomic Theory. 2nd ed. Cambridge, MA: MIT Press, 2004, ISBN: 026212274X.

Readings by Session

LEC # TOPICS READINGS
1 Intertemporal Preferences and Welfare Costs of Uncertainty

Backus, David, Bryan Routledge, and Stanley Zin. “Exotic Preferences for Macroeconomists.” NBER Working Paper No. 10597, June 2004.

Essential

Deaton. Chapter 1.

Lucas, Robert E., Jr. Models of Business Cycles. Reprint ed. Malden, MA: Blackwell, 1987, chapter 3. ISBN: 0631147918.

Further Readings

Epstein, Larry G., and Stanley E. Zin. “Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework.” Econometrica 57, no. 4 (1989): 937-969.

Lucas, Robert E., Jr. “Macroeconomic Priorities.” A. E. A. Presidential Address in American Economic Review 93, no. 1 (2003).

Weil, Philippe. “Non-expected Utility in Macroeconomics.” Quarterly Journal of Economics 105, no. 1 (1990): 29-42.

2-4 Complete Markets and Pareto Optima

Stokey, Nancy L., Robert E. Lucas, Jr. and Edward C. Prescott. Recursive Methods in Economic Dynamics. Cambridge, MA: Harvard University Press, 1989, chapter 15. ISBN: 0674750969.

Essential

LS. Chapter 8.

Townsend, Robert M. “Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies.” Journal of Economic Perspectives 9, no. 3 (1995): 83-102.

5-6 Asset Pricing: Arbitrage and CCAPM

Essential

LS. Chapters 8 and 13.

Kocherlakota, Narayana R. “The Equity Premium Puzzle: It’s Still a Puzzle.” Journal of Economic Literature 34, no. 1 (1996): 42-71.

Cochrane, John H., and Lars Peter Hansen. “Asset Pricing Explorations for Macroeconomics.” NBER Macroeconomics Annual. Cambridge, MA: MIT Press, 1992, pp. 115-169. (NBER Working Paper No. 4088.)

Further Readings

Cochrane, John. “Where is the Market Going? Uncertain Facts and Novel Theories.” Economic Perspectives XXI: 6 (1997). (NBER Working Paper No. 6207.)

Alvarez, Fernando, and Urban Jermann. “Using Asset Returns to Estimate the Costs of Business Cycle Fluctuations.” Journal of Political Economy 112, no. 6 (2004): 1223-1256.

Barro, Robert J. “On the Welfare Costs of Consumption Uncertainty.” NBER Working Paper No. 12763, December 2006.

———. “Rare Disasters and Asset Markets in the Twentieth Century.” Quarterly Journal of Economics 121 (2006): 823-866.

Mehra, Rajnish, and Edward C. Prescott. “The Equity Premium: A Puzzle.” Journal of Monetary Economics 15, no. 2 (1985): 145-161.

7-9 Precautionary Savings / Income Fluctuations Problem

LS. Chapters 16 and 17.

Krusell, Per, and Anthony A. Smith Jr. “Income and Wealth Heterogeneity in the Macroeconomy.” Journal of Political Economy 106, no. 5 (1998): 867-896.

Essential

Deaton. Chapters 6 and 7.

Aiyagari, S. Rao. “Uninsured Idiosyncratic Risk and Aggregate Savings.” Quarterly Journal of Economics 109, no. 3 (1994): 659-84. (See appendix in working paper version.)

Further Readings

Caballero, Ricardo J. “Earnings Uncertainty and Aggregate Wealth Accumulation.” American Economic Review 81, no. 4 (1991): 859-871.

Castañeda, Ana, Javier Díaz-Giménez, and José-Victor Ríos-Rull. “Accounting for the U.S. Earnings and Wealth Inequality.” Journal of Political Economy 111, no. 4 (2004): 818-857.

Deaton, Angus, and Christina Paxson. “Intertemporal Choice and Inequality.” Journal of Political Economy 102, no. 3 (1994): 437-467.

Heathcote, Jonathan, Kjetil Storesletten, and Giovanni Violante. “The Macroeconomic Implications of Rising Wage Inequality in the U.S.” CEPR Working Paper No. 4296, August 2004.

Harris, Christopher, and David Laibson. “Hyperbolic Discounting and Consumption.” Chapter 7 in Advances in Economics and Econometrics. Vol. 1. Edited by M. Dewatripont, L. P. Hansen, and S. J. Turnovsky. Cambridge, UK: Cambridge University Press, 2003. ISBN: 0521524113.

Krusell, Per, and Anthony A. Smith, Jr. “On the Welfare Effects of Eliminating Business Cycles.” Review of Economic Dynamics 2, no. 1 (1999): 245-272.

Laibson, David. “Golden Eggs and Hyperbolic Discounting.” Quarterly Journal of Economics 112, no. 2 (1997): 443-477.

Schechtman, Jack, and Vera L. Escudero. “Some Results on an Income Fluctuation Problem.” Journal of Economic Theory 16, no. 2 (1997): 151-166.

Weil, Philippe. “Precautionary Savings and the Permanent Income Hypothesis.” Review of Economic Studies 60, no. 2 (1993): 367-383.

Zeldes, Stephen P. “Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence.” Quarterly Journal of Economics 104, no. 2 (1989): 275-298.

10 Empirical Evidence, Tests and Quantitative Models

BF. Section 6.2.

Deaton. Chapters 2-5.

Essential

Attanasio, Orazio P. “Consumption.” In Handbook of Macroeconomics. Vol. 1B. Edited by John B. Taylor and Michael Woodford. Amsterdam, Netherlands: Elsevier Science, 1998. ISBN: 0444501568. (Also as NBER Working Paper No. 6466.)

Further Readings

Abel, Andrew. “Consumption and Investment.” In Handbook of Monetary Economics. Vol. 2. Edited by B. M. Friedman and F. H. Hahn. Amsterdam, Netherlands: Elsevier Science, 1990. ISBN: 0444880267.

Blundell, Richard, Luigi Pistaferri, and Ian Preston. “Consumption Inequality and partial insurance.” IFS Working Papers W04/28, Institute for Fiscal Studies, 2004.

Carroll, Christopher, and Lawrence Summers. “Consumption Growth Parallels Income Growth: Some New Evidence.” In National Savings and Economic Performance. Edited by Bernheim and Shoven. Chicago, IL: University of Chicago Press for NBER, 1991. ISBN: 0226044041.

Guvenen, Fatih. “Learning Your Earning: Are Labor Income Shocks Really Very Persistent?” American Economic Review. (Forthcoming)

Huggett, Mark, Gustavo Ventura, and Amir Yaron. “Sources of Lifetime Inequality.” Mimeo, 2006.

Gourinchas, Pierre-Olivier, and Jonathan Parker. “Consumption over the Life Cycle.” Econometrica 70, no. 1 (2002): 47-89.

Heathcote, Jonathan, Kjetil Storesletten, and Giovanni L. Violante. “Two Views of Inequality Over the Life-Cycle.” Journal of the European Economic Association 3, nos. 2-3 (2005): 765-775.

Storesletten, Kjetil, Chris Telmer, and Amir Yaron. “Consumption and Risk Sharing over the Life Cycle.” Journal of Monetary Economics 51, no. 3 (2004): 609-663.

Hall, Robert. “Stochastic Implications of the Life Cycle Permanent Income Hypothesis: Theory and Evidence.” Journal of Political Economy 86, no. 6 (1978): 971-987.

11

Empirical Evidence, Tests and Quantitative Models (cont.)

Imperfect Insurance with Frictions

Kocherlakota, Narayana R. “Implications of Efficient Risk Sharing without Commitment.” Review of Economic Studies 63, no. 4 (1996): 595-609.

Townsend, Robert M. The Medieval Village Economy: A Study of the Pareto Mapping in General Equilibrium Models. Princeton, NJ: Princeton University Press, 1993, chapters 4-6. ISBN: 0691042705.

———. “Risk and Insurance in Village India.” Econometrica 62, no. 3 (1994): 539-591.

Essential

LS. Chapters 19, 20, and 21.

Lucas, Robert E., Jr. “On Efficiency and Distribution.” Economic Journal 102, no. 411 (1992): 233-247.

Further Readings

Alvarez, Fernando, and Urban J. Jermann. “Quantitative Asset Pricing Implications of Endogenous Solvency Constraints.” Review of Financial Studies 14, no. 4 (2001). Especially sections 2, 4, and 5.1.

Atkeson, Andrew, and Robert E. Lucas, Jr. “On Efficient Distribution with Private Information.” Review of Economic Studies 59, no. 3 (1992): 427-453.

12 Imperfect Insurance with Frictions (cont.)  
13 Investment with Convex Adjustment Costs / Q-Theory

Abel, Andrew. “Consumption and Investment.” In Handbook of Monetary Economics. Vol. 2. Edited by B. M. Freeman and F. H. Hahn. Amsterdam, Netherlands: Elsevier Science, 1990. ISBN: 0444880267.

Essential

BF. Section 6.3.

Hayashi, Fumio. “Tobin’s Marginal q and Average q: A Neoclassical Interpretation.” Econometrica 50, no. 1 (1982): 213-224.

14 Irreversibility, Fixed-Costs and (S, s) Rules

Dixit, A. K., and R. S. Pindyck. Investment Under Uncertainty. Princeton, NJ: Princeton University Press, 1994, chapter 2. ISBN: 0691034109.

Essential

Bentolila, Samuel, and Giuseppe Bertola. “Firing Costs and Labour Demand: How Bad is Eurosclerosis?” Review of Economic Studies 57, no. 3 (1990): 381-402.

Caballero, Ricardo J. “Aggregate Investment.” In Handbook of Macroeconomics. Vol. 1B. Edited by John B. Taylor and Michael Woodford. Amsterdam, Netherlands: Elsevier Science, 1999. ISBN: 0444501576.

Hopenhayn, Hugo, and Richard Rogerson. “Job Turnover and Policy Evaluation: A General Equilibrium Analysis.” Journal of Political Economy 101, no. 5 (1993): 915-938.

Further Readings

Abel, Andrew B., and Janice C. Eberly. “Optimal Investment with Costly Reversibility.” Review of Economic Studies 63, no. 4 (1996): 581-593.

Bachmann, Ruediger, Ricardo J. Caballero, and Eduardo M. R. A. Engel. “Lumpy Investment in Dynamic General Equilibrium.” NBER Working Paper No. 12336, 2006.

Caballero, Ricardo J., and Eduardo M. R. A. Engle. “Explaining Investment Dynamics In U.S. Manufacturing: A Generalized (S,s) Approach.” Econometrica 67, no. 4 (1999): 783-826.

Caballero, Ricardo J., and John V. Leahy. “Fixed Costs: The Demise of Marginal q.” NBER Working Paper No. 5508, 1996.

Thomas, Julia K. “Is Lumpy Investment Relevant for the Business Cycle?” Journal of Political Economy 110, no. 3 (2002): 508-534.

Veracierto, Marcelo L. “Plant-Level Irreversible Investment and Equilibrium Business Cycles.” American Economic Review 92, no. 1 (2002): 181-197.

Course Info

Learning Resource Types

assignment_turned_in Problem Sets with Solutions
grading Exams
notes Lecture Notes