Brief history of macroeconomic thought on fluctuations - The New ...

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New Economics School

Macroeconomics Module 5
, 20
1
2

Dmitriy Stolyarov


Overview of the course

This is a course in macroeconomic modeling with a focus on business cycles, money and
unemployment.
To understand
the mechanisms underlying these
macroeconomic
phenomena,
modern

economists
are using

fully specified equilibrium models
that have

“microeconomic
foundations” and
feature explicit dynamics
. We will cover the
basic

macroeconomic models that
are used

to
understand fluctuations of economic activity

over t
he business cycle, the
possible
role
of money in the economy and the functioning of decentralized labor markets
.
The course

will
cover the relevant aspects of

theory

and
will
pay particular attention to
evaluat
ing

the empirical
success of these models. In
the process
, the students will be familiarized with
a set of

basic tools
used in modern macroeconomic
modeling
.


Course requirement and grading

There will be a midterm exam (40%

of the final grade
) and a final
exam
(60%

of the final grade
).

Passing the course requires all students to take two exams (at their regularly scheduled times),
unless an exam is missed for a documented reason approved by NES administration. There is no
make up for the midterm exam;

i
f the midterm exam is missed for a
n approved documented
reason, 100% of the final grade will be based on the final exam.


In addition, y
ou will be given
several

problem sets to help you prepare for the exams.

Students
are encouraged to form study groups to work on the problem sets. Subjec
t to teaching assistant
availability, problem sets may be collected and loosely
graded (check, check plus, check minus,
zero)

to give you feedback on how you keep up with the material
.


Contact:

E
-
mail:
stolyar@umich.edu

(please note that I will not be checking @nes.ru E
-
mail)


Office hours:

TBA


Exam dates:

Midterm exam



4
th

week (May
28
-
June
1
)

Final exam


June 2
3
-
29


Reading

Books:

As with most
graduate
courses in macroeconomics, there
is no single
text that covers all of the
topics in this course in sufficient detail
, but the book by


Romer, David
,
Advanced Macroeconomics
,
3d edition,
McGraw
-
Hill
2006



at least includes all
of
the course topics in some form.

In addition, s
tudents are encouraged to

consult the relevant parts of several
other excellent

graduate macr
oeconomics textbooks:


Handbook of Macroeconomics
. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier,
1999. ISBN: 9780444501561.


Ljungqvist
, Lars and

Sargent, Thomas
,

Recursive
Macroeconomic Theory
,
2
nd

edition,
MIT Press
2
004.


Blanchard
, Olivier

and Fischer
, Stanley
,
Lectures on Macroeconomics
, MIT Press, 1989.


Pissarides, Christopher
,
Equilibrium Unemployment Theory
, second edition, MIT Press, 2000.


Journal articles and
notes:

Each topic in the course outline has links to relevant downloadable

lecture notes authored by
well
-
known macroeconomists.

Some topics
require you to read journal articles; required articles are listed in the course outline.


Course Outline
1

Introduction

Brief history of macroe
conomic thought on fluctuations;

Q
uestions that macroeconomists are
working
on and would like to work on


Blanchard, O. "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?"
Quarterly Journal of Econom
ics

115, no. 4 (November 2000): 1375
-
1410.

Mankiw, N. G. "The Macroeconomist as Scientist and Engineer."
Journal of Economic
Perspectives

20, no. 4 (2006): 29
-
46.


Part I Real business cycle theory

(
5
-
6 lectures)

Business cycle facts


Romer 5.6


Stock, J.,

and M. Watson. "Business Cycle Fluctuations in U.S. Macroeconomic Time Series."
Chapter 1 in
Handbook of Macroeconomics
. Vol 1A. Edited by J. Taylor and M. Woodford. New
York, NY: Elsevier, 1999. ISBN: 9780444501561.



The basic business cycle model
.

Solution methods

Setting up the optimization problem. Intertemporal choice, shocks, uncertainty
;
The first order
conditions
;
Solving the model numerically
;
Value functions
;
Log linearization
;
Equivalence
between centralized and decentralized economies
.
Th
e consumption problem in the decentralized
economy


Romer

4.2
-
4.7





1

Some parts of this course are based on Olivier Blanchard, course materials for 14.452 Macroeconomic Theory II,
Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology.

Campbell, John, “Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth
Model,”
Journal of Monetary Economics
,

1994
, 33,
pp. 463
-
506.


Cochrane, John. “
Solving real busin
ess cycle models by solving systems of first order
conditions”, class notes
. (
PDF
)


Uhlig, H. "A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily." mi
meo
University of Tilburg, 1997. (
PDF
)


Real business cycle model with labor and leisure choice.
Evaluation and interpretat
ion of the
model

Movements in employment;
Interpreting the first order conditions
;
Solving the model
numerically, and by log linearization
;
Evidence on labor supply elasticity
;
Evidence on high
frequency technological shocks
;
Solow residuals and their interpretation


Romer

4.2
-
4.7


King, R., and S. Rebelo. "Resuscitating Real Business Cycles." Chapter 14 in
Handbook of
Macroeconomics
. Vol. 1B. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier,
1999, pp. 927
-
1007. ISBN: 9780444501578.


Extensions
and Propagation Mechanisms

C
apital adjustment costs, indivisible labor supply, capacity utilization

(time permitting
).

Costs of
adjustment for investment
;
Investment, consumption, and interest rates in the decentralized
economy
;
The role of the term structure of interest rates
;
The s
tock market and investment
;
The
effects of shocks on output, investment, the stoc
k market, and the term structure.


Romer 8

Blanchard and Fischer, 6.3


King, R., and S. Rebelo. "Resuscitating Real Business Cycles." Chapter 14 in
Handbook of
Macroeconomics
.

Vol. 1B. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier,
1999, pp. 927
-
1007. ISBN: 9780444501578.


Part II
Models of fluctuations based on incomplete nominal adjustment

(4
-
5 lectures)

Monetary neutrality results (cash
-
in
-
advance model, money
in utility function)
;
The basic sticky
price model
;
The new
Keyn
e
sian model
.


Romer 5.6
,

6

Blanchard and Fischer, 8.1
-
8.3


Gilchrist, Simon “A Dynamic New Keyn
e
sian model of the Business Cylce”, class notes, Boston
University (
PDF
)


Part III
Search and matching theory of unemployment (2
-
3 lectures)


Romer 9.8

Pissarides, Chapter 1
-
2

Ljungqvist

and

Sargent
, Chapter 6


Blanchard, Olivier, “Flows, Bargaining and Unemployment”, class
notes, MIT (
PDF
)


Mortensen
,

Dale T.
; Christopher A. Pissarides
,

Job Creation and Job Destruction in the Theory
of Unemployment


The Review of Economic Studies
, Vol. 61, No. 3. (Jul., 1994), pp. 397
-
415.


Andolfatto,
David “
Business Cycles and Labor Market Search
”,
The American Economic Review
,
Vol. 86, No. 1 (Mar., 1996), pp. 112
-
132
.