Advanced Macroeconomics II

Readings

Textbooks

There are no official textbooks for this course.

Readings by Topic

Part 1 - Professor Blanchard

TOPICS	READINGS
I. Shocks
Vector autoregression models (VARs). Wold representations and their limits (Underlying non-linear dynamics. Markov processes. Invertibility and fundamentalness. Finite-lag VAR representations. Number of shocks and number of variables.)	Required readings Hamilton, James D. Time Series Analysis. Princeton, NJ: Princeton University Press, 1994, chapters 10 and 11. ISBN: 9780691042893. Additional readings Fernández-Villaverde, Jesús, Juan Francisco Rubio-Ramírez, and Thomas Sargent. “A, B, C’s (and D’s) for Understanding VARs.” Federal Reserve Bank of Atlanta, Working Paper 2005-9, May 2005. (PDF) Chari, V. V., Patrick J. Kehoe, and Ellen R. McGrattan. “A Critique of Structural VARs Using Business Cycle Theory.” Federal Reserve Bank of Minneapolis Federal Reserve, Research Department Staff Report 364 (May 2007). (PDF)
Structural VARs (Short run/long run identification restrictions, inequality restrictions. Identifying a subset of shocks. Shocks in Organisation for Economic Co-operation and Development (OECD) economies versus shocks in small open economies.)	Required readings Blanchard, Olivier Jean, and Danny Quah. “The Dynamic Effects of Aggregate Demand and Aggregate Supply Disturbances.” American Economic Review 79, no. 4 (September 1989): 655-673. Galí, Jordi. “Technology, Employment and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?” American Economic Review 89, no. 1 (1999): 249-271. Additional readings Galí, Jordi. “How Well Does the IS-LM Model Fit Postwar U.S. Data?” The Quarterly Journal of Economics 107, no. 2 (May 1992): 709-738. Galí, Jordi, and P. Rabanal. “Technology Shocks and Aggregate Fluctuations; How Well Does the RBC Model Fit the Post-war U.S. Data?” (and comments by McGrattan and Ramey). In National Bureau of Economic Research Macroeconomics Annual. Edited by Mark Gertler and Kenneth Rogoff. Cambridge, MA: MIT Press, 2004, pp. 224-317. ISBN: 9780262572293. Erceg, Christopher J., Luca Guerrieri, and Christopher Gust. “Can Long-run Restrictions Identify Technology Shocks?” International Finance Discussion Paper 792, Federal Reserve Board (March 2005). (PDF) Uhlig, Harald. “What are the Effects of Monetary Policy on Output? Results From an Agnostic Identification Procedure.” Mimeograph, Humboldt University (May 2004). (PDF) Blanchard, Olivier J. “Consumption and the Recession of 1990-1991.” The American Economic Review 83, no. 2 (May 1993): 270-274. Labhard, Vincent. “What Caused the 2000/01 Slowdown? Results From a VAR Analysis of G7 GDP Components.” Working Paper no. 190, International Economic Analysis Division, Bank of England, 2003. (PDF)
A few major shocks or many? (What can we learn from factor models?)	Required readings Stock, James H., and Mark W. Watson. “Implications of Dynamic Factor Models for VAR Analysis.” National Bureau of Economic Research Working Paper No. 11467, July 2005. Additional readings Forni, M., D. Giannone, M. Lippi, and L. Reichlin. “Opening the Black Box: Structural Factor Models with Large Cross-sections.” European Central Bank Working Paper Series no. 712, January 2007. (PDF) Giannone, Domenico, and Lucrezia Reichlin, “Does Information Help Recovering Structural Shocks From Past Observations?” Journal of the European Economic Association 4, nos. 2-3 (2006): 455-465. Bernanke, Ben, Jean Boivin, and Piotr S. Eliasz. “Measuring the Effects of Monetary Policy; A Factor Augmented Vector Autoregressive (FAVAR) Approach.” The Quarterly Journal of Economics 120, no. 1 (2005): 387-422. Gabaix, Xavier. “The Granular Origins of Aggregate Fluctuations.” Mimeograph, Massachusetts Institute of Technology (December 2005). (PDF)
Technology versus demand shocks (Actual or anticipated technological shocks? What are demand shocks?)	Required readings Beaudry, Paul, and Franck Portier. “Stock Prices, News, and Economic Fluctuations.” National Bureau of Economic Research Working Paper No. 10548, March 2004. Lorenzoni, Guido. “A Theory of Demand Shocks.” Mimeograph, Massachusetts Institute of Technology (November 2006). (PDF) Additional readings Franco, Francesco, and Thomas Philippon. “Firms and Aggregate Dynamics.” Mimeograph, New York University (October 2004). Beaudry, Paul, and Franck Portier. “The ‘News’ View of Economic Fluctuations; Evidence from Aggregate Japanese Data and Sectoral U.S. Data.” National Bureau of Economic Research Working Paper No. 11496, June 2005. Barsky, Robert, and Eric R. Sims. “Information Shocks, Animal Spirits, and the Meaning of Innovations in Consumer Confidence.” Mimeograph, University of Michigan (June 2006). Christiano, Lawrence, Roberto Motto, and Massimo Rostagno. “Monetary Policy and Stock Market Boom-Bust Cycles.” Mimeograph, (November 2006). (PDF) Jaimovich, Nir, and Sérgio Rebelo. “Can News About the Future Drive the Business Cycle?” Centre for Economic Policy Research Discussion Paper Series No. 5877 (October 2006).
The great moderation (Large decrease in aggregate volatility over the last 40 years. Due to smaller shocks, different propagation mechanisms, or better policy?)	Required readings Stock, James H., and Mark W. Watson. “Has the Business Cycle Changed and Why?’’ Mimeograph, (August 2002). Additional readings Blanchard, Olivier, and John Simon. “The Long and Large Decline in U.S. Output Volatility.” Brookings Papers on Economic Activity 2001, no. 1 (2001): 135-174. Ahmed, Shaghil, Andrew T. Levin, and Beth Anne Wilson. “Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?’’ Review of Economics and Statistics 86 (2004): 824-832. Canova, Fabio, and Luca Gambetti. “Structural Changes in the U.S. Economy: Bad Luck or Bad Policy?’’ Centre for Economic Policy Research Discussion Paper No. 5457 (January 2006). (PDF) Galí, Jordi, and L. Gambetti. “On the Sources of the Great Moderation.” (June 2007).  Stiroh, Kevin J. “Volatility Accounting: A Production Perspective on Increased Economic Stability.” Federal Reserve Bank of New York Staff Report no. 245 (April 2006). (PDF) Comin, Diego, and Thomas Philippon. “The Rise in Firm-Level Volatility; Causes and Consequences.” (with comments by Acemoglu, and by Eberly). National Bureau of Economic Research Macroeconomics Annual (2005): 167-228. Davis, Steven J., John Haltiwanger, Ron Jarmin, and Javier Miranda. “Volatility and Dispersion in Business Growth Rates; Publicly Traded Versus Privately Held Firms.” National Bureau of Economic Research Working Paper No. 12354, June 2006. Jaimovich, Nir, and Henry E. Siu. “The Young, the Old, and the Restless. Demographics and Business Cycle Volatility.” Mimeograph, Stanford (October 2006). (PDF)
II. Unemployment, institutions, and shocks
Basic (non-cyclical) facts about unemployment flows (Worker/job flows. Unemployment versus non participation. Unemployment incidence versus duration. Differences across countries. Differences across decades. Differences across sex and age groups. Differences in labor market institutions.)	Required readings OECD. OECD Employment Outlook 2006: Boosting Jobs and Incomes. Paris, France: OECD, 2006. ISBN: 9789264023840. Blanchard, Olivier. “European Unemployment: The Evolution of Facts and Ideas.” Economic Policy 21, no. 45 (January 2006): 7-59. Davis Steven, John Haltiwanger, and Scott Schuh. Job Creation and Destruction. Cambridge, MA: MIT Press, 1998, chapters 1 and 2. ISBN: 9780262540933. Additional readings Bartelsman, E., J. Haltiwanger, and S. Scarpetta. “Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries.” Mimeograph, Maryland (October 2004). (PDF) Ohanian Lee, Andrea Raffo, and Richard Rogerson. “Long Term Changes in Labor Supply and Taxes. Evidence from OECD Countries, 1956-2004.” National Bureau of Economic Research Working Paper No. 12786, December 2006.
Flows, bargaining, and unemployment (Flows and matching, the role of wage setting. Efficiency. The role of tax wedges, replacement rates. Specificity and hold ups. Forensic tools: The matching function, the Beveridge curve.)	Required readings Pissarides, Christopher A. Equilibrium Unemployment Theory. 2nd ed. Cambridge MA: MIT Press, 2000, chapters 1 and 8. ISBN: 9780262161879. Caballero, Ricardo J. Specificity and the Macroeconomics of Restructuring. Cambridge, MA: MIT Press, 2007, chapter 3. ISBN: 9780262033626. Blanchard, Olivier, and Peter Diamond. “The Beveridge Curve.” Brookings Papers on Economic Activity 1989, no. 1 (1989): 1-76. Additional readings Shimer, Robert. Lecture notes for a course on “Labor Markets and Macroeconomics.” Acemoglu, K. Daron, and Robert Shimer. “Holdups and Efficiency with Search Frictions.” International Economic Review 40, no. 4 (November 1999). Fahr, René, and Uwe Sunde. “Did the Hartz Reforms Speed Up Job Creation? A Macro-evaluation Using Empirical Matching Functions.” IZA Discussion Paper 2470 (November 2006). (PDF)
Role of institutions I: Employment protection and the labor market (How does employment protection affect flows and unemployment duration? Should we think of separations as privately efficient? How should employment protection be designed? Does employment protection affect productivity levels, and/or productivity growth?)	Required readings Pissarides, Christopher A. Equilibrium Unemployment Theory. 2nd ed. Cambridge MA: MIT Press, 2000, chapters 2 and 9. ISBN: 9780262161879. Haltiwanger, John, Stephano Scarpetta, and Helena Schweiger. “Assessing Job Flows Across Countries; The Role of Industry, Firm Size, and Regulations.” World Bank Policy Research Working Paper No. 4070, November 2006. Additional readings Lazear, Edward P., and Robert E. Hall. “The Excess Sensitivity of Layoffs and Quits to Demand.” Journal of Labor Economics 2, no. 2 (April 1984): 233-257. Bertola, Giuseppe, and Richard Rogerson. “Institutions and Labor Reallocation.” European Economic Review 41 (June 1997): 1147-1161. Gielen, Anne C., and Jan C. van Ours. “Why Do Worker-Firm Matches Dissolve?’’ Centre for Economic Policy Research Discussion Paper 5739 (July 2006). (PDF) Blanchard, Olivier, and Pedro Portugal. “What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets.” American Economic Review (March 2001): 187-207. Pierre, Gaëlle, and Stefano Scarpetta. “Employment Regulations Through the Eyes of Employers; Do They Matter and How do Firms Respond to Them?” IZA Discussion Paper 1424 (December 2004). (PDF) L’Haridon Olivier, and Franck Malherbet. “Employment Protection Reform in Search Economies.” IZA Discussion Paper 2304 (September 2006). (PDF) Autor, David H., William R. Kerr, and Adriana D. Kluger. “Do Employment Protections Reduce Productivity? Evidence from U.S. States.” National Bureau of Economic Research Working Paper No. 12860, January 2007. Alesina, Alberto, and Joseph Zeira. “Technology and Labor Regulations.” National Bureau of Economic Research Working Paper No. 12581, October 2006.
Role of institutions II: Trust, hold-ups, and bargaining (Why does the quality of labor relations appear to matter? Specificity, hold-ups, and inefficient reallocation.)	Required readings Caballero, Ricardo J. Specificity and the Macroeconomics of Restructuring. Cambridge, MA: MIT Press, 2007, chapters 4 and 5. ISBN: 9780262033626. Additional readings Blanchard, Olivier, and Thomas Philippon. “The Quality of Labor Relations and Unemployment.” Massachusetts Institute of Technology Department of Economics Working Paper 04-25, November 2006. Algan, Yann, and Pierre Cahuc. “The Roots of Low European Unemployment: Family Culture?” IZA Discussion Paper 1683 (July 2005). (PDF)
Cyclical movements in unemployment (How does unemployment respond to shocks? How does this depend on wage determination, on institutions? A return to real and nominal rigidities.)	Required readings Shimer, Robert. “The Cyclical Behavior of Equilibrium Unemployment and Vacancies.” American Economic Review 95, no. 1 (2005): 25-49. Hall, Robert E. “Employment Fluctuations with Equilibrium Wage Stickiness.” American Economic Review 95, no. 1 (2005): 50-64. Blanchard, Olivier J., and Jordi Galí. “A New-Keynesian Model with Unemployment.” MIT Department of Economics Working Paper No. 06-22, July 2006. Additional readings Blanchard, Olivier J., and Peter Diamond. “The Cyclical Behavior of the Gross Flows of U.S. Workers.” Brookings Papers on Economic Activity 1990, no. 2 (1990): 85-155. Davis, Steven J., R. Jason Faverman, and John Haltiwanger. “The Flow Approach to Labor Markets; New Data Sources and Micro-macro Links.” National Bureau of Economic Research Working Paper No. 12167, April 2006. Merz, Monika. “Search in the Labor Market and the Real Business Cycle.” Journal of Monetary Economics 36 (1995): 269-300. Gertler, Mark, and Antonella Trigari. “Unemployment Fluctuations with Staggered Nash Wage Bargaining.” National Bureau of Economic Research Working Paper No. 12498, August 2006.
Productivity growth versus unemployment. Trying to put things together (How does productivity growth get into wages? Preferences, collective bargaining, unemployment insurance. TFP versus labor productivity. Productivity growth, creation/destruction, and unemployment.)	Papers above, plus: Pissarides, Christopher, and Giovanna Vallanti. “The Impact of TFP Growth on Steady-state Unemployment.” Centre for Economic Policy Research Discussion Paper 5002. (April 2005). Pissarides, Christopher A. “Unemployment and Hours of Work: The North Atlantic Divide Revisited.” International Economic Review 48, no. 1 (February 2007): 1-36. Gordon, R., and I. Dew-Becker. “Europe’s Productivity Growth Slumps But Employment Growth Surges; Chicken and Egg?’’ Mimeograph, Northwestern University (December 2006).
III. Dynamic stochastic general equilibrium models (DSGE models)
Dynamic stochastic general equilibrium models (What they do, how they are identified, how they are estimated, how they fare, and what shocks they point to.)	Required readings Ireland, P. “Technology Shocks in the New Keynesian Model.” Review of Economics and Statistics 86, no. 4 (November 2004): 923-936. Christiano, Lawrence, Martin Eichenbaum, and Charles Evans. “Nominal Rigidities and the Dynamic Effects of Shocks to Monetary Policy.” Journal of Political Economy 113, no. 1 (February 2005): 1-45. Additional readings Taylor, John B. Macroeconomic Policy in a World Economy. New York, NY: W.W. Norton, 1994, chapters 1-3. ISBN: 9780393963168. Smets, Frank, and Raf Wouters. “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area.” Journal of the European Economic Association 1, no. 5 (2003): 1123-1175. Gertler, Mark, and Antonella Trigari. “An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Setting.” Mimeograph, New York University (November 2006). Del Negro, M., F. Schorfheide, F. Smets, and R. Wouters. “On the Fit and Forecasting Performance of New Keynesian Models.” European Central Bank, Working Paper Series No. 491, June 2005. (PDF - 1.0 MB) Canova, Fabio, and Luca Sala. “Back to Square One: Identification Issues in DSGE Models.” Mimeograph, Centre de Recerca en Economia Internacional (September 2006).

Part 2: Professor Lorenzoni

TOPICS	READINGS
I. Imperfect information and demand shocks
Imperfect information and demand shocks	Required readings Beaudry, P. and F. Portier. “Stock Prices, News, and Economic Fluctuations.” National Bureau of Economic Research Working Paper No. 10548, March 2004. Lorenzoni, G. “A Theory of Demand Shocks.” Mimeograph, MIT (November 2006). Additional readings Franco, F. and T. Philippon. “Firms and Aggregate Dynamics.” Mimeograph, New York University (October 2004). Beaudry, P. and F. Portier. “The ‘News’ View of Economic Fluctuations; Evidence from Aggregate Japanese Data and Sectoral U.S. Data.” National Bureau of Economic Research Working Paper No. 11496, June 2005. Barsky, R. and E. Sims. “Information Shocks, Animal Spirits, and the Meaning of Innovations in Consumer Confidence.” Mimeograph, University of Michigan (June 2006). Christiano, L., R. Motto, and M. Rostagno. “Monetary Policy and Stock Market Boom-Bust Cycles.” Mimeograph, November 2006 (PDF) Jaimovich, J., and S. Rebelo. “Can News the Future Drive the Business Cycle?” Centre for Economic Policy Research Discussion Paper Series No. 5877, October 2006.
II. Financial frictions and investment
Financial frictions: Limited pledgeability and richer models	Required readings Kiyotaki, Nobuhiro, and John Moore. “Credit Cycles.” Journal of Political Economy 105, no. 2 (1997): 211-248. Tirole, Jean. The Theory of Corporate Finance. Princeton, NJ: Princeton University Press, 2005, chapters 3 and 5. ISBN: 9780691125565. Clementi, Gian Luca, and Hugo A. Hopenhayn. “A Theory of Financing Constraints and Firm Dynamics.” Quarterly Journal of Economics 121, no. 1 (2006): 229-265. Dow, James, Gary Gorton, and Arvind Krishnamurthy. “Equilibrium Investment and Asset Prices under Imperfect Corporate Control.” American Economic Review 95, no. 3 (2005): 659-681. (PDF) Additional readings Bernanke, Ben, Mark Gertler, and Simon Gilchrist. “The Financial Accelerator in a Quantitative Business Cycle Framework.” Chapter 21 in Handbook of Macroeconomics. Vol. 1C. Edited by John B. Taylor and Michael Woodford. Amsterdam, The Netherlands: North Holland, 1999. ISBN: 9780444501585. Carlstrom, Charles T., and Timothy S. Fuerst. “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis.” American Economic Review 87, no. 5 (1997): 893-910. Holmstrom, Bengt, and Jean Tirole. “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics 112, no. 3 (1997): 663-91. Cooley, Thomas, Ramon Marimon, and Vincenzo Quadrini. “Aggregate Consequences of Limited Contract Enforceability.” Journal of Political Economy 112, no. 4 (2004): 817-847. DeMarzo, Peter M., and Michael J. Fishman. “Optimal Long-Term Financial Contracting with Privately Observed Cash Flows.” Working Paper, 2004.
Q theory	Required readings Abel, Andrew B., and Janice C. Eberly. “Q Theory without Adjustment Costs & Cash Flow Effects without Financing Constraints.” Society for Economic Dynamics, 2004. (PDF) Lorenzoni, Guido, and Karl Walentin. “Financial Frictions, Investment and Tobin’s q.” MIT Department of Economics Working Paper No. 07-16, April 2007. Additional readings Hayashi, Fumio. “Tobin’s Marginal q and Average q: A Neoclassical Interpretation.” Econometrica 50, no. 1 (1982): 213-224. Fazzari, Steven M., R. Glenn Hubbard, and Bruce C. Petersen. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity no. 1 (1988): 141-206. Gomes, Joao F. “Financing Investment.” American Economic Review 91, no. 5 (2001): 1263-1285. Cooper, Russell, and João Ejarque. “Financial Frictions and Investment: Requiem in Q.” Review of Economic Dynamics 6, no. 4 (2003): 710-728. Jovanovic, Boyan, and Peter L. Rousseau. “The Q-Theory of Mergers.” American Economic Review 92, no. 2 (2002): 198-204.
Bubbly asset prices and investment	Required readings Gilchrist, Simon, Charles P. Himmelberg, and Gur Huberman. “Do Stock Price Bubbles Influence Corporate Investment?” Journal of Monetary Economics 52, no. 4 (2005): 805-827.  Chirinko, Robert S., and Huntley Schaller. “Business Fixed Investment and “Bubbles”: The Japanese Case.” American Economic Review 91, no. 3 (2001): 663-680. Angeletos, George-Marios, Guido Lorenzoni, and Alessandro Pavan. “Beauty Contests: Micro-foundations and Policy Implications.” Working paper, MIT/Northwestern University, 2007. Additional readings Panageas, Stavros. “The Neoclassical Theory of Investment in Speculative Markets.” Mimeograph, University of Pennsylvania (April 2005). Farhi, Emmanuel, and Stavros Panageas. “The Real Effects of Stock Market Mispricing at the Aggregate: Theory and Empirical Evidence.” Mimeograph, Harvard University (December 2004). Blanchard, Olivier, and Changyong Rhee. “The Stock Market, Profit, and Investment.” Quarterly Journal of Economics 108, no. 1 (1993): 115-136. Morck, Randall, Andrei Shleifer, and Robert W. Vishny. “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity no. 2 (1990): 157-202. Bond, Stephen, and Jason Cummins. “Noisy Share Prices and the Q Model of Investment.” Institute for Fiscal Studies, 2001. Baker, Malcolm, Jeremy C. Stein, and Jeffrey Wurgler. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” The Quarterly Journal of Economics 118, no. 3 (2003): 969-1005. Bernanke, Ben, and Mark Gertler. “Monetary Policy and Asset Price Volatility.” National Bureau of Economic Research Working Paper No. 7559, February 2000. Dupor, William. “Nominal Price versus Asset Price Stabilization.” Wharton School of the University of Pennsylvania Working Paper, August 2002.  Bordo, Michael D., and Olivier Jeanne. “Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy.” National Bureau of Economic Research Working Paper No. 8966, May 2002.
III. Liquidity and aggregate activity
Limited supply of liquidity	Required readings Diamond, Douglas W., and Philip H. Dybvig. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91, no. 3 (1983): 401-419. Holmström, Bengt, and Jean Tirole. “Private and Public Supply of Liquidity.” Journal of Political Economy 106, no. 1 (1998): 1-40. Scheinkman, Jose A., and Laurence Weiss. “Borrowing Constraints and Aggregate Economic Activity.” Econometrica 54, no. 1 (1986): 23-46.
Search models
Countercyclical liquidity premia	Guerrieri, Veronica, and Guido Lorenzoni. “Liquidity and Spending Dynamics.” Mimeograph, University of California, Los Angeles (2007). (PDF)
Liquidation and asset prices	Required readings Gorton, Gary, and Lixin Huang. “Liquidity, Efficiency, and Bank Bailouts.” American Economic Review 94, no. 3 (2004): 455-483. Lorenzoni, Guido. “Inefficient Credit Booms.” Mimeograph, Massachusetts Institute of Technology (February 2007). Additional readings Shleifer, Andrei, and Robert W. Vishny. “Liquidation Values and Debt Capacity: A Market Equilibrium Approach.” The Journal of Finance 47, no. 4 (1992): 1343-1366. Caballero, Ricardo J., and Arvind Krishnamurthy. “International and Domestic Collateral Constraints in a Model of Emerging Market Crises.” Journal of Monetary Economics 48, no. 3 (2001): 513-548. Eisfeldt, Andrea L., and Adriano A. Rampini. “Capital Reallocation and Liquidity.” Journal of Monetary Economics 53, no. 3 (2006): 369-399.