Econ. 511b
Spring 1998
 George Hall and Chris Sims

Macroeconomic Theory

In most cases the readings cited do not cover everything that will be done in lecture and that you will be responsible for, and in some cases they go beyond what you will be responsible for. The relation of the readings to the lectures and what you are expected to get from the readings will be discussed in lecture. "NTBHO" stands for "notes to be handed out". "LS" stands for the Ljungquist-Sargent manuscript, which is available in postscript format at Thomas J. Sargent's web site.

There is a course web site, which will contain the most recent version of this reading list, notes, problem sets, answers, etc.

  1. Preliminaries (to be covered mostly in TA sections)
    1. Review of continuous time calculus of variations, or Hamiltonian approach (whichever is more familiar)
    2. Conditional expectations, iterated expectations
    3. Linear stochastic difference and differential equations(TA sessions)

      4. Readings:
      Gregory Chow, Analysis and Control of Dynamic Economic Systems, Wiley 1975, Chapters 2-4. This topic is standard and is treated well in other textbooks also.
      1. conditions for stability
      2. ACF, MA and AR representations, impulse responses. Spectral densities?
    4. Ito's Lemma

      5. Readings: There are many good references on continuous time stochastic processes that treat this topic, at various levels of mathematical rigor. One, that goes into considerably more mathematical detail than we will but is aimed at economics graduate students, is
      A.G. Malliaris and W.A. Brock, Stochastic Methods in Economics and Finance, North-Holland 1982, p. 1-96.
      If you have graduate-level training in mathematics and want to check loose assertions made in lectures, you might consult
      J. Jacod, Calcul Stochastique et Problemes de Martingales, Springer-Verlag 1979, or
      I. Karatzas and S. Shreve, Brownian Motion and Stochastic Calculus, 2nd Edition, Springer-Verlag 1991.
  2. Extending the Hamiltonian approach: Obtaining FOC's with stochastic Lagrange multipliers (CS, 2 lectures)
    1. Theory

      2. Readings: Notes to be handed out (NTBHO)
      1. Discrete Time
      2. Continuous Time
      3. Transversality
    2. Permanent income model

      3. Readings:
      Hall, R. E., "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, December 1978.
      NTBHO
      1. LQ case
        1. Critique of LQ modeling: we do not take this model's steady state seriously
      2. stochastic r case: linearization
    3. The stochastic growth model

      4. Readings: NTBHO,
    4. Asset Pricing

      5. Readings: NTBHO
  3. Solving linear equation systems involving expectations (CS, 3 lectures)

    4. Readings:
    Sims, Solving Linear Rational Expectations Models
    1. Permanent income model
      1. LQ case
      2. stochastic r case: linearization
    2. The stochastic growth model

      3. Readings:
      Campbell, John Y., "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model", NBER discussion paper No. 4188, 1992.
      Kydland, F. and E. Prescott, "Time to Build and Aggregate Fluctuations," Econometrica, November 1982.
      1. When does it imply the (Robert) Hall "random walk" model is a good approximation?
  4. Dynamic programming (GH, 3 lectures)

    5. Readings: LS chapters 1-2.
    1. solving by hand
      1. guess and verify
      2. value function iteration
      3. policy function iteration
    2. solving on the computer
      1. discretizing the state space
      2. Markov chains
      3. putting this on Matlab
  5. Search (Sargent DMT -- chapter 2) (GH, 3 lectures)

    6. Lucas, Robert E., Models of Business Cycles, BasilBlackwell, 1987, Chapter V.
    Sargent, Thomas J., Dynamic Macroeconomic Theory, HarvardUniversity Press, 1987, Chapter 2.
    1. Stigler -- nonsequential search

      2. Stigler, George J., "The economics of information,"' Journal of Political Economy, Vol 69 (June 1961) pp. 213-25.
    2. McCall -- sequential search

      3. McCall, J.J., "Economics of information and job search," Quarterly Journal of Economics, Vol 84 (February 1970) pp. 113-26.
    3. Jovanovic

      4. Jovanovic, Boyan, "Job matching and the theory of turnover," Journal of Political Economy, Vol 87 (December 1979) pp. 972-90.
    4. get on the computer
  6. Risk sharing and accumulation via asset markets (CS, 3 lectures)
    1. Two-agent/country model

      2. Readings:
      NTBHO
      Stockman, Alan C. and Linda L. Tesar [1995].  "Tastes and technology in a two-country model pf the business cycle:  Explaining international comovements", American Economic Review 85 (March), 168-85.
      Feldstein, Martin and Charles Horioka [1980].  "Domestic savings and international capital flows",Economic Journal 90 (June), 314-29.
      Cole, Harold L. and Maurice Obstfeld [1991].  "Commodity trade and international risk sharing:  How much do financial markets matter?",  Journal of Monetary Economics 28 (Aulgust), 3-24.
      1. Bonds only
      2. Complete Markets
      3. Bonds and "market-completing" equity
        1. approximate completeness
    2. Firm/consumer decentralization of the growth model

      3. Readings: NTBHO
      1. local completeness with bonds only
  7. Models with imperfect insurance and heterogeneous agents (GH, 5 lectures)

    8. LS, chapter 4.
    1. Simple Townsend turnpike type model (money)

      2. Townsend, Robert ``Money in models with spatially seperated agents'' in John Kareken and Neil Wallace (eds.) Models of Monetary Economies, Federal Reserve bank of Minneapolis, 1980, pp. 265-303.
    2. A savings problem with and without a non-negativity constraint
    3. Unemployment insurance

      4. Hansen, Gary and Ayse Imrohoroglu ``The role of unemployment insurance in an economy with liquidity constraints and moral hazard'' Journal of Political Economy, Vol 100 (1992) pp. 118-142.
    4. Money again

      5. Imrohoroglu, Ayse ``The welfare cost of inflation under imperfect insurance.'' Journal of Economic Dynamics and Control, Vol 16 (January 1992), pp. 79-92.
    5. Mortensen-Pissarides matching model

      6. Mortensen, Dale and Christopher Pissarides ``Job creation and job destruction in the thoery of unemployment, Review of Economic Statistics, 1994.
    6. Get on the computer -- define and solve for an equilibrium
  8. Models with price levels
    1. Fiscal Theory of the Price Level (CS, 3 lectures)

      2. Readings:
      Sims, "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory 4, 1994, 381-399.
      Woodford, M., "Doing Without Money: Controlling Inflation in a Post-Monetary World", Princeton Discussion Paper, 8/97.
      Leeper, Eric M., "Equilibria Under 'Active' and 'Passive' Monetary And Fiscal Policies," Journal of Monetary Economics 27, February 1991, 129-47.Sims, "Fiscal Foundations of Price Stability in Open Economies".
    2. Model with no money
    3. With money
    4. Exchange rates, currency union
  9. Stickiness (CS, 3 lectures)

    10. Readings: (citations to be completed)
    Sims, "Stickiness".  Note that the version of this paper accessible on the web as this first version of the syllabus is posted is very different from a revision that will be available before we reach this topic in lectures.
    Blanchard and Fischer, Chapter 8.
    Blanchard, Olivier and Nobuhiru Kiyotaki [1987].  "Monopolistic competition and the effects of aggregate demand", American Economic Review 77 (September), 647-66.
    Caplin, Andrew S. and Daniel F. Spulber, "Menu Costs and the Neutrality of Money," Quarterly Journal of Economics 102 (November 1987), 703-725. Reprinted in Mankiw and Romer, New Keynesian Economics, volume 1.
    Rotemberg, Julio J. [1982].  "Monopolistic Price Adjustment and Aggregate Output", Review of Economic Studies 49(4)(October), 517-31.
    Rotemberg, Julio J. [1996].  "Prices, Output, and Hours: An Empirical Analysis Based on a Sticky Price Model", Journal of Monetary Economics 37(3) (June), 505-33.
    1. Monopolistic Competition
      1. with contracting delay
      2. with menu costs
      3. with search
  10. Policy games (GH, 3 lectures)

    11. Readings: To be announced