Economics 5118: Advanced Macroeconomics
Winter 2017M. Shannon
Office: Regional Centre, RC3016DTelephone: 343-8382
e-mail:
Office Hours: Tuesday 12:00-2:00pm, Wednesday 10:30-11:30, Thursday 12:00-2pm
The course examines a number of topics in modern macroeconomics. Theoretical macroeconomics since the late-1980s has been dominated by approaches that stress "microfoundations" i.e. approaches in which aggregate macroeconomic relationships are derived from optimizing behavior of individual decision-makers. The course introduces and examines models that follow this approach.
Sources: There is no textbook for this course. Assigned readings are listed below – when possible copies will be made available on the course website. A few major texts will be available on reserve from Patterson Library. A list of sources by topic area is given below. Any updates to sources will be mentioned in class and in the course overheads.
Electronic Sources: Electronic sources will be made available through my webpage:
Marking Scheme:Assignments 30%
Midterm 25%
Final Exam 45%
The assignments will mainly have you work through the models discussed in class. In some cases questions will have you consider extensions to these models.
Tutorials: We will need a few extra tutorial sessions to consider mathematical methods. These tutorials will be scheduled as needed.
Outline:
1. Introduction
- Macroeconomics: an overview
- History of Macroeconomics
- New approaches: what are the newer approaches trying to achieve? - - Microfoundations, growth and dynamic general equilibrium approaches.
- Current disputes over the appropriate approach.
Sources:
E. Prescott (2004) The Transformation of Macroeconomic Policy and Research (Nobel Lecture).
R. Lucas (1980) ‘Methods and Problems in Business Cycle Theory” Journal of Money, Credit and Banking.
M. Wickens (2011) Macroeconomic Theory Ch. 1.
M. DeVroey (2016) A History of Macroeconomics from Keynes to Lucas and
Beyond. Cambridge University Press.
2. Preliminaries: Some Basic Models and Techniques
- Constrained optimization: a quick review of the Lagrangian.
Simon and Blume (1994) Mathematics for Economists (Ch. 18, 19)
Dixit Optimization in Economic Theory Ch. 2
- Robinson Crusoe: a one person general equilibrium model.
- A two-period model intertemporal model. Infinite period version.
Sources: M. Doepke. A. Lehnert and A Sellgren Macroeconomics Ch.2, 3.
S. Williamson Macroeconomics 4th edition, Mathematical Appendix.
R. Layard and A. Walters Microeconomic Theory Ch. 12, S. 12.1 Capital and
Interest
S. Chugh Modern Macroeconomics Ch. 1-3 introductions to static and two-
period models.
3. Dynamic Microeconomic Models: Consumer Theory
- Consumption smoothing results
- Interest rates, time preference and the Euler equation.
- Dynamic labour supply
- Extensions: Model of Perpetual Youth and Time Preference
Adding Government to the Intertemporal budget constraint
Sources: D. Romer Advanced Macroeconomics Ch.8
A. Deaton and J. Muellbauer (1980) Economics and Consumer Behavior Ch. 12
T. MaCurdy (1981) “An Empirical Model of Labor Supply in a Life-Cycle Setting” Journal of Political Economy 89, 1981, 1059-1085.
P. Cahuc, S. Carcillo and A. Zylberberg (2014) Labor Economics pp. 28-34.
4. Dynamic Microeconomic Models: Businesses and Investment
- Dynamic profit maximization and investment in capital.
- Determinants of investment spending.
- Investment spending, adjustment costs and Tobin’s Q.
- Dynamic labour demand
Sources: D. Romer Advanced Macroeconomics Ch.9
Notes from others? Wickens Ch. 4 for labour demand
Carter Ch. 7 (q example)
Chugh Ch. 6 (two-period models of the firm and capital demand)
5. Economic Growth: a first look
- Focus of macroeconomics: Growth or Business Cycles?
- Solow-Swan Model: basic discrete-time version and extensions
- The Importance of Diminishing Returns: AK Model; Two-sector model
Sources: G. McCandless The ABCs of RBCs Ch. 1
C. Jones and D. Vollrath Introduction to Economic Growth, Ch. 2
M. Wickens Macroeconomic Theory Ch. 3
S. Chugh Modern Macroeconomics Ch. 25 (discrete with tech. progress)
Supplementary references:
Barro and Sala-i-Martin (2004) Economic Growth Ch. 2,3 (authoritative)
D. Acemoglu Introduction to Modern Economic Growth Ch. 2, Section 2.2, 2.3.
6. Economic Growth with Endogenous Saving
- Optimization and savings: the Ramsey problem
- Ramsey model with and without labour supply
- Centralized (Planner) and Decentralized (Market) versions of the model.
- Dynamics
- Implications for growth
- Extensions (time permitting): an Endogenous growth model (Romer Ch. 3, S. 3.2;
or Jones and Vollrath Ch. 5)
Source:G. McCandless (2008) The ABCs of RBCs Ch.3 (a clear discrete time model)
D. Romer (2011)Advanced Macroeconomics Ch. 2 (useful on dynamics)
M. Wickens Macroeconomic Theory Ch. 2,4
S. Chugh Modern Macroeconomics Ch. 26 (a specific form: brief presentation)
7. Business Cycles and Growth Models: the Real Business Cycle Approach
- Business cycles from a stochastic growth model: is this all you really need?
- Method and Approach
- Results
- RBC models: for and against
Sources: McCandless The ABCs of RBCs Ch. 6 (Hansen’s model)
Romer Advanced Macroeconomics Ch. 5
Heijdra Foundations of Modern Macroeconomics Ch. 15
H. Uhlig A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily
(manuscript)
S. Rebelo (2005) Real Business Cycle Models: Past, Present and Future
NBER Working Paper 11401.
8. Extensions to Basic Business Cycle Models: an overview
- Money in Business Cycle Models
S. Chugh Modern Macroeconomics Ch. 17 (CIA and monetary policy)
- Price and Wage Rigidities
- Improving dynamics: adjustment costs
- Sources of shocks
- Recent work and response to the 2008 financial crisis.
Sources: S. Rebelo (2005) Real Business Cycle Models: Past, Present and Future
NBER Working Paper 11401.
9. Government Spending and Finance (time permitting)
- Financing Government: the government budget constraint.
- Fiscal policy and Ricardian Equivalence
- Sustainability of the Fiscal Stance
- Optimal Taxes and Finance, Tax Smoothing
- Main source: Wickens Ch. 5
- Supplementary references:
R. Shone (2001) An Introduction to Economic Dynamics Ch. 12 Fiscal Dynamics.
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