Course Meeting Times
Lectures: 2 sessions / week, 1.5 hours / session
Recitations: 1 session / week, 1.5 hours / session
This half semester class will present an introduction to macroeconomic modeling, particularly economic growth. It will focus both on models of economic growth and their empirical applications, and try to shed light on the mechanics of economic growth, technological change and sources of income and growth differences across countries.
The course has a number of objectives: The first is to familiarize you with a set of issues and questions that are central to macroeconomics, and that are also (hopefully) exciting and important; the second is to develop some of the most important tools of dynamic economics useful in macroeconomics as well as in a number of other subdisciplines of economics including general equilibrium theory, political economy, industrial organization and contract theory; and the third is to provide a first introduction to some of the key empirical issues in economic growth.
The prerequisites for this course are 14.451 Dynamic Optimization Methods with Applications or permission of the instructor.
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Stylized Facts and Proximate and Fundamental Causes of Economic Development
This lecture will give a brief overview of the stylized facts of economic growth and show the large disparities in income per capita across countries. It will provide an example of how to investigate the relationship between a country level characteristic (in this instance democracy) and economic growth. It will also discuss briefly how the world distribution of income across countries has come to be so unequal.
Introduction to the Solow Growth Model
The Solow growth model is a workhorse for many macro applications, and it is the starting place for the modern theory of economic growth. Here we begin with the basics of this model, which will already be familiar to many of you.
The Solow Model and the Data; Growth Accounting, Levels Accounting, and the Facts
This lecture uses the Solow growth model to interpret the stylized facts we encountered in the first lecture. In the process, we will also discuss a number of popular empirical strategies used in cross-country work and also the methodology of growth accounting.
The neoclassical growth model differs from the Solow growth model in incorporating consumer optimization. These collectors will first introduce the foundations of consumer optimization in dynamic economies and discuss the assumption of representative households. We will then study the equilibria and the Pareto optimal allocations in the workhorse neoclassical growth model. We will characterize both the steady state equilibrium and the dynamic equilibrium path of the economy starting from an arbitrary level of capital stock.
Overlapping Generations and Dynamic Efficiency
The other workhorse model of dynamic macro is the overlapping generations model developed by Paul Samuelson and Peter Diamond. This lecture's focus is on this model. As a preliminary step, we'll discuss the first then the second welfare theorems in dynamic economies, and then turn to the overlapping generations model. This will enable us to understand sources of and conditions for dynamic inefficiency in overlapping generations model. We will also discuss various applications of overlapping generations models.
Neoclassical Endogenous Growth: Capital Accumulation, Externalities, and Human Capital
This lecture will first present a model of sustained growth using a variant of the neoclassical growth model. Next I will present the first example of a model with endogenous growth due to the knowledge-base or the technology stock of the society expanding over time. Finally we will discuss the reasons why modeling sustained economic growth with externalities is unsatisfactory, and what special set of issues emerge in modeling technological change. The lecture will also briefly discuss the role of human capital in economic growth, and introduce some basic models that are useful for thinking about human capital investments.
Endogenous Growth with Expanding Input Varieties
These lectures will introduce the first models of endogenous technological change, where sustained economic growth takes place as a result of purposeful R&D-type activities. We will also briefly discuss some of the evidence on knowledge spillovers and externalities and the innovation process.
Interdependences: Technology Diffusion, Trade and the World Income Distribution in an Open Economy
The models discussed up to this point in the class are closed economy models. These are not good approximations to the world we live in, where international trade and exchange of ideas are important. This lecture will provide an overview of major interdependences across countries that arise both because of technology diffusion and international trade. The emphasis will be on how these interdependences fundamentally affect the process of economic growth and the world distribution of income.
Directed Technical Change: Endogenous Skill-Bias and Endogenous Labor-Augmenting Technological Change
This lecture will introduce models of directed technological change, where not only aggregate technological change, but the direction of technological change is endogenous. These models will enable us to discuss why and when technological change may be skill biased (favoring more educated workers), and why we may expect technological change to be labor augmenting.
Competition and Technological Change
This lecture will discuss the relationship between competition and technological change, and present some of the evidence related to this question.