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
.
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