ECO 510: Macroeconomics I

Prof. Manoj V. Pradhan

SUNY at Stony Brook

Fall 2003

 

WHAT'S NEW (as of Monday, October 6, 11:15 p.m.):

  • We will continue with Gertler Chapter 7. Mark Gertler will be providing us with an updated version of chapter 8 so you may have to reprint it – its better to have the new version with fewer errors.

 

 

QUICK LINKS TO READING LISTS:

 

READINGS

  • Required readings are marked by *
  • Non-Technical readings are marked by NT
  • Readings available online are marked (at the end of the reference) by E. Links to the article are generally available by clicking on the E.
  • Most Journal articles and NBER Working Papers are available online from the library's website

 

Growth Models:

  • Class Notes for the Ramsey-Cass-Koopmans model (from Romer)
  • *Romer Chapter 1 & 2
  • Blanchard & Fisher, Chapter 2
  • (NT) Symposium on Growth Theory, Winter 1994, Journal of Economic Perspectives. Read the Solow (Solow synopsis) paper before the Romer (Romer synopsis) paper.

 

Rational Expectations:

  • *Mathematical preliminaries: Eigenvalues and Jordan decomposition issues, stability of the system and the stable manifold
  • *Class Notes: Selected Chapters from The Limits to Rational Expectations, H. Pesaran. An introduction to the REH and Linear RE Models
  • *Judd, excerpts on rational expectations from his book “Numerical Methods”. Calculations to accompany a contentious issue in Judd. (I've sent him this version and he says he's going to let us know once he resolves it)
  • Important Papers by Uhlig and Klein are referenced later since I use them later.
  • McCallum, 1998, “Solutions to Linear Rational Expecations Models: A Compact Exposition”, Economic Letters(?)
  • Shiller, 1997, “Human Behavior and the Efficiency of the Financial System”, Handbook of Macroeconomics, Taylor and Woodford (Eds.) (E)
  • Woodford, “The Pitfalls of Forward Looking Monetary Policy”, (E)
  • Pradhan, 2001, “Common Agency and Optimal Backward Looking Forecasts”, Mimeo SUNY at Stony Brook, (E)
  • Ball, 1999, "Near Rationality and Inflation in two Monetary Regimes", Mimeo Johns Hopkins (E), also available as NBER Working Paper #7988

 

Dynamic Optimization:

Optimal Control:

  • Chiang, 1992, Elements of Dynamic Optimization, Chapters 7 - 10

Dynamic Programming:

  • *Class notes: Mathematical preliminaries, Dynamic Programming under Certainty and Dynamic Programming under Uncertainty.
  • *Ljungqvist & Sargent, RMT, Chapters 2 (class notes) and 3 or Sargent, 1987, "Dynamic Macroeconomic Theory", Chapter 1. Class notes to accompany reading in Sargent, Chapter 1
  • *Stokey and Lucas with Prescott, 1993, Recursive Methods in Economic Dynamics, Chapters 2, 3, 4 and sections 6.3 and 6.4
  • *Greenwood, 2001, “Lectures Notes on Dynamic Competitive Analysis”, Chapter 1, (E)
  • Bertsekas, 1995, "Dynamic Programming and Optimal Control", Chapters 1, 4, 5 and 7. This is a technical reference and should be read only if you want to get into some seriously theoretical aspects of dynamic programming problems.

 

Consumption & Investment:

§        *Mark Gertler's notes on Chapter 1: Competitive Equilibrium. Notes on the procedure used by Gertler for his competitive equilibrium chapter.

§        *Mark Gertler's (NYU) notes on Chapter 2: consumption under certainty (along with class notes on the procedure for analyzing consumption under certainty) and Chapter 3: consumption under uncertainty (along with class notes for the procedure for analyzing consumption under uncertainty).

§        *Mark Gertler's notes on Chapter 4: Behavior of the Firm.

§        *If you are unsure about log-linearization, read Gertler's notes on log-linearization OR Uhlig: section 2 and the worked example in section 3

Inventory behavior models:

  • *Ramey & West, 1997, “Inventories”, Chapter 13, Handbook of Macroeconomics, NBER WP# 6315
  • Kashyap, Lamont and Stein, 1994, “Credit Constraints and the Cyclical Behavior of Inventories”, Quarterly Journal of Economics

Investment behavior:

  • Zeira, 1994, “Informational Cycles”, Review of Economic Studies

Consumption behavior:

  • *Attanasio, 1998, “Consumption”, Chapter 11, Handbook of Macroeconomics, NBER WP#6466
  • *Fuhrer, 2000, "Habit Formation in Consumption and its implications for Monetary-Policy Models", Amercian Economic Review
  • (NT) Browning and Crossley, 2001, “The Life Cycle Model of Consumption and Savings, Journal of Economic Perspectives
  • (NT) Carroll, 2001, “A Theory of the Consumption Function, With and Without Liquidity Constraints”, Journal of Economic Perspectives
  • (NT) Poterba, 2000, “Stock Market Wealth and Consumption”, Journal of Economic Perspectives

 

RBC Models

  • *Gertler, Chapter 5: RBC Models
  • Salyer, “A Users Guide to Solving RBC Models Easily”, (E)
  • Greenwood, 2001, “Lectures Notes on Dynamic Competitive Analysis”, Chapter 2, (E)
  • Kydland and Prescott, 1982, "Time to Build and Aggregate Fluctuations", Econometrica
  • Long and Plosser, 1983, "Real Business Cycles", Journal of Political Economy
  • Cooley and Hansen, 1995, "Money and the Business Cycle, In Frontiers of Business Cycle Research, Cooley (Ed.)
  • Christiano & Eichenbaum, 1992, "Current Real Business Cycle Theories and Aggregate Labor Market Fuluctuations", American Economic Review
  • Grohe & Uribe, 2001, "Solving Dynamic General Equilibrium Models a using Second-Order Approximation to the Policy Function", Mimeo, UPenn, (E)
  • (NT) Stadler, 1994, "Real Business Cycles", Journal of Economic Literature
  • (NT) Plosser, 1989, "Understanding Real Business Cycles, Journal of Economic Perspectives

 

Goods Markets:

§        Mark Gertler's notes on Chapter 1: Competitive Equilibrium.

Imperfect Competition:

§        *Dixon & Rankin, 1994, “Imperfect Competition and Macroeconomics: A Survey”, Oxford Economic Papers, Vol. 46, No. 2

§        *Dixit, 2000, “Some Reflections on Theories and Applications of Monopolistic Competition”, Conference Paper, (E)

§        Rotemberg & Woodford, 1995, “Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets”, in Frontiers of Business Cycle Research, Cooley (Ed.)

§        Blanchard & Kiyotaki, 1987, "Monopolistic Competition and the Effects of Aggregate Demand”, American Economic Review

 

Money and Credit

  • *Walsh, Chapter 2 & 3 (MIU & CIA respectively)
  • *Uhlig, 1997, "A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily", Section 6 and 7 (E).
  • Gertler, Chapter 6: Money
  • Diamond & Dybvig, 1983, “Deposit Runs, Deposit Insurance and Liquidity”, Journal of Political Economy
  • Kashyap & Stein, 1994, “Monetary Policy and Bank Lending”, in Monetary Policy, Mankiw (Ed.)
  • Sack, 1999, “Deriving Inflation Expectations from Nominal and Inflation-Indexed Treasure Yields”, Federal Reserve Working Paper, (E)
  • Bryan, Cecchetti & O'Sullivan, 2002, "Asset Prices and the measurement of Inflation", NBER WP#8700 (NT) Shubik, 2000, “The Theory of Money”, Cowles Foundation Paper, (E)

 

Supply Side

  • *Blanchard, 2000, Selected material from “The Economics of Unemployment: Shocks, Institutions and Interactions”, Lionel Robbins lectures,
  • Blanchard, 1999, "Wage Dynamics: Reconciling Theory and Evidence", Mimeo MIT (E)
  • Walsh, 2002, “Labor Market Search and Monetary Shocks”, (E)
  • Card & Hyslop, 1997, “Does Inflation Grease the Wheels of the Labor Market”?, in Monetary Policy, Mankiw (Ed.)
  • Davis, Haltiwanger & Schuh, 1998, Job Creation and Destruction
  • Fleischman, 1999, “The Causes of Business Cycles and the Cyclicality of Real Wages”, Federal Reserve Working Paper, (E)
  • Basu, 1998, "Technology and Business Cycles: How well do Standard Models explain the Facts?", Boston Fed Conference on Causes of Business Cycles , (E)
  • (NT), Blanchard & Katz, 1997, “What We Do and Do Not Know about the Natural Rate of Unemployment”, Journal of Economic Persepectives

 

Frictions and Short-Run models of Money, Output and Inflation:

  • *Gertler, Chapters 7: Sticky Prices and Chapter 8: New Keynesian Models
  • *Walsh, Chapter 5, Money and Output in the Short Run
  • Fuhrer & Moore, 1995, "Inflation Persistence", Quarterly Journal of Economics
  • Ball & Romer, 1990, "Real Rigidities an the Non-Neutrality of Money", Review of Economic Studies
  • Christiano, Eichenbaum, & Evans, 1996, “Sticky Price and Limited Participation Models of Money: A Comparison”, NBER WP#5804
  • Woodford, Chapter 3 (Interest and Prices), (E)
  • McCallum & Nelson, 1997, "An Optimizing IS-LM specification for Monetary Policy and Business Cycle Analysis, NBER WP#5875
  • Christiano, Eichenbaum, & Evans, 1998, “Modeling Money”, NBER WP#6371
  • Calvo, 1983, "Staggered Prices in a Utility Maximizing Framework", Journal of Monetary Economics
  • Nelson, 1998, “Sluggish Inflation and Optimizing Models of the Business Cycle”, Journal of Monetary Economics
  • Cooley, 1999, “A Neoclassical Model of the Phillips Curve Relation”, Journal of Monetary Economics
  • Ball & Cecchetti, 1988, "Imperfect Informaiton and Staggered Price Setting", American Economic Review
  • Pradhan, 2003, “Asymmetric Information, Information Sharing and Staggered Price Setting”, mimeo, SUNY at Stony Brook
  • Mankiw & Reis, (E)
  • Kumhof, 2001, "Nominal Exchange Rate Anchoring under Inflation Inertia" (E)
  • (NT) Cooper, 1997, “Business Cycles: Theory, Evidence and Policy Implications”, Scandanavian Journal of Economics (forthcoming)

 

Policy:

  • *Clarida, Gali, & Gertler, 1999, “The Science of Monetary Policy: A New Keynesian Perspective”, Journal of Economic Literature OR Gertler, Chapter 9: Optimal Monetary Policy
  • *Christiano, Eichenbaum & Evans, 2001, "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy", NBER WP#8403
  • *Meyer, 2000, Remarks on Structural Change and Monetary Policy, Proceedings of a Joint Conference hosted by the San Francisco Fed and the Stanford Institute for Economic Policy Research, (E)
  • *Pradhan, 2003, “Common Agency, Central Bank Regimes and Risk Aversion, mimeo, SUNY at Stony Brook. (E)
  • Cecchetti and Ehrmann, ****************
  • Cecchetti et al, Asset Prices *****************
  • Woodford, 2001, “The Taylor Rule and Optimal Monetary Policy”, (E)
  • Bernanke & Gertler, “Should Central Banks Respond to Movements in Asset Prices?” (E)
  • Blinder, Central Banking in Theory and Practice, MIT Press
  • Erceg, Henderson, and Levin, 2000, "Optimal Monetary Policy with Staggered Wage and Price Contracts", Journal of Monetary Economics
  • Kim, 2000, “Constructing and Estimating a Realistic Optimizing Model of Monetary Policy”, Journal of Monetary Economics
  • Clarida, Gali & Gertler, 2001, “Optimal Monetary Policy in Open Versus Closed Economies: An Integrated Approach”, NBER WP#8604
  • Meyer, Swanson, Wieland, 2001, “NAIRU uncertainty and Nonlinear Policy Roles”, Federal Reserve Working Paper, (E)
  • Guthrie, 2000, “Open Mouth Operations”, Journal of Monetary Economics
  • Svensson and Woodford, 2000, “Indicator Variables for Optimal Policy” (E)
  • Woodford, 2001, “Imperfect Common Knowledge and the Effects of Monetary Policy”, (E)
  • Cecchetti, Genberg & Wadhwani, 2002, "Asset Prices in a Flexible Inflation Targeting Regimes", NBER WP#8970
  • (NT) Tobin, 2001, “Fiscal Policy: Its Macroeconomic Perspective”, Cowles Foundation Paper, (E)
  • (NT) Taylor, 2000, “Reassessing Discretionary Fiscal Policy”, Journal of Economic Perspectives
  • (NT) Blinder, 1997, “What Central Bankers could learn from Academics and vice versa”, Journal of Economic Perspectives
  • (NT) Bernanke and Mishkin, 1997, “Inflation Targeting: A New Framework for Monetary Policy?”, Journal of Economic Perspectives

 

 

Business Cycle Theory:

  • Selover & Jensen, 1999, “ ‘Mode-Locking’ and International Business Cycle Transmission”, Journal of Economics Dynamics and Control
  • Canova, 1998, “Detrending and Business Cycle Facts: A User’s Guide”, Journal of Monetary Economics
  • Bordo, Jonung & Bergman, 1998, "Historical Evidence on Business Cycles: The International Evidence", Boston Fed Conference on Causes of Business Cycles (E)
  • (NT) Basu and Taylor, 1999, “Business Cycles in the International Historic Perspective”, Journal of Economic Perspectives
  • (NT), Gordon, 1997, “The Time Varying NAIRU and its Implications for Economic Policy”, Journal of Economic Perspectives

 

Political Macroeconomics

  • Chapters 9 & 10: Agenor and Montiel

Central Bank Regimes

  • Kydland & Prescott, 1977, "Rules rather than Discretion: The Time Inconsistency of Optimal Plans", Journal of Political Economy
  • Barro & Gordon, 1983, "A Positive Theory of Monetary Policy in a Natural Rate Model, Journal of Political Economy
  • Barro & Gordon, 1983, "Rules, Discretion, and Reputation in a model of Monetary Policy", Journal of Monetary Economics
  • Rogoff, 1985, "The Optimal Committment to an Intermediate Monetary Target", Quarterly Journal of Economics
  • Cukierman & Meltzer, 1987, "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information", Econometrica
  • Alesina, Roubini and Cohen, 1998, Political Cycles and the Macroeconomy, MIT Press
  • Pradhan, 2002, "Common Agency, Risk Aversion and Central Bank Regimes", Mimeo SUNY Stony Brook (E)

Credibility Papers

  • Ball, Imperfect Credibility and Disinflation
  • Diebold, Inflation and Reputation
  • Meltzer & Drazen, Credibility of Policymakers
  • Blinder, Credibility and Central Bankers

 

 

Econometric Methods:

  • (NT) Stock and Watson, 2001, “Vector Autoregressions”, Journal of Economic Perspectives
  • (NT) Kydland and Prescott, 1996, “The Computational Experiment: An Econometric Tool”, Journal of Economic Perspectives
  • (NT) Hansen and Heckman, 1996, “The Empirical Foundations of Calibration”, Journal of Economic Perspectives
  • (NT) Sims, 1996, “Macroeconomics and Methodology”, Journal of Economic Perspectives
  • (NT) Engle, 2001, “GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics”, Journal of Economic Perspectives
  • Selected Readings from Business Cycles, Indicators and Forecasting, Stock and Watson (Eds.), 1993
    • Friedman and Kuttner, “Why Does the Paper-Bill Spread Predict Real Activity?”,
    • Stock, and Watson, “A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience”
  • Select Readings from Business Cycles: Durations, Dynamics and Forecasting, Diebold and Rudebusch (Eds.), 1999
    • Questions about Business Cycles
    • Shorter Recessions and Longer Expansions
    • Measuring Business Cycles: A Modern Perspective
    • Regime Switching and Time-Varying Transition Probabilities
    • The Past, Present, and Future of Macroeconomic Forecasting
    • Turning Point Prediction with the Composite Leading Index: An Ex Ante Analysis
    • Forecasting Output wit the Composite Leading Index: A Real-Time Analysis
  • Christiano, Eichenbaum & Evans, 1998, “Monetary Policy Shocks: What have we Learned and to What End?”
  • Sack and Wieland, 1999, “Interest Rate Smoothing and Optimal Monetary Policy: A Review of the Recent Empirical Literature”, Federal Reserve Working Paper, (E)
  • Gali and Gertler, 1999, “Inflation Dynamics: A Structural Econometric Investigation”, Journal of Monetary Economics
  • (NT) Non-Technical Readings from the Journal of Econometrics Issue (date???) on the state of macroeconometrics:
    • Hendry, “Achievements and Challenges in Econometric Methodology”
    • Heckman, “Econometrics and Empirical Economies”
    • Granger, “Macroeconometrics: Past and Future”
    • Phillips, “Trending Time Series and Macroeconomic Activity: Some Present and Future Challenges”
    • Stock, “Macroeconometrics”
    • Bollerslev, “Financial Econometrics: Past Developments and Future Challengs
    • Engle, “Financial Econometrics – A New Discipline with New Methods”
    • Diebold, “Econometrics: Retrospect and Prospect”
    • Tauchen, “Notes on Financial Econometrics”

 

GENERAL COMMENTS:

§        This is huge syllabus. Most of the references here are for future use. You do not have to read them. They are seminal contributions to the literature and included should you want to pursue a topic further during this semester or for future research.

§        The emphasis of this course will be on (i) methods used in macroeconomics and (ii) short-run macroeconomics. The sequence to this course will cover growth models intensively.

§        The one comment I have consistently received for this course is that there is an overload of information. I will do my best to keep things in perspective for you as the semester progresses. However, you must keep in mind that this semester is going to mean a drastic jump upward for many of you and struggle in inevitable and required.

§        The “general recommended readings” are exactly that – general introductions to macroeconomics. They are a must for students whose past background does not include an economics major.

 

TEXTS:

Required Texts

  • Ljungqvist and Sargent, Recursive Macroeconomic Theory, MIT Press, 2002
  • Gertler, Graduate Macroeconomics Online Text.

Reference Texts

  • Walsh, Monetary Theory and Policy, MIT Press, 1e, 1998
  • Romer, Advanced Macroeconomics, McGraw Hill, 2e, 2002
  • Blanchard and Fisher, Lectures on Macroeconomics, 1994
  • Blanchard, Unemployment, Manuscript, 2002 (E)
  • Chiang, Elements of Dynamic Optimization, 1992
  • Pesaran, Limits to Rational Expectations, 1987
  • Stokey and Lucas with Prescott, Recursive Methods in Economic Dynamics, 1993

 

CONTACT INFORMATION:

Office Hours: To be announced

Email: mpradhan@notes.cc.sunysb.edu 

 

GRADING:

Grades will be based on the following criteria:

§         2 Problem sets: 10% each. Group effort allowed.

§         Midterm Exam: In-class. 35%.

§         Final Exam: In-class. 45%

 

GENERAL RECOMMENDED READINGS:

  • Bennett McCallum, 1999, “Recent Developments in Monetary Policy Analysis: The Roles of Theory and Evidence”, Journal of Economic Methodology. An excellent economic history of theory and empirics and the feedback between the two. (E)
  • Michael Woodford, 1999, “Revolution and Evolution in 20th Century Macroeconomics” (E). Identifies challenges and accomplishments.
  • Blanchard, 2000, "What do we know about Macroeconomics that Fisher and Wicksell did not?", NBER WP#7550
  • David Romer, 2000, “Keynesian Macroeconomics without the LM Curve”, Journal of Economic Perspectives. Alternate: NBER WP#7461. The graphical successor of the IS-LM framework and the intuitive companion of most short-run models that you will see in this course.
  • Robert Solow, “Toward a Macroeconomics of the Medium Run”, Journal of Economic Perspectives, 2000
  • Robert Lucas, “Some Macroeconomics for the 21st Century”, Journal of Economic Perspectives, 2000
  • M. Mitchell Waldrop, Complexity. Excellent exposition of organization, behavior and the complexity of systems. Asks thought-provoking questions about simple rules, non-linearity and the behavior of social systems in general. Read this during the summer.
  • Bertrand Russell, An Introduction to the Philosophy of Mathematics. A great first step towards really understanding mathematics.

 

GENERAL TOPICS TO BE COVERED:

  • Growth Models: The Ramsey-Cass-Koopman model will be introduced. This model will not be covered rigorously or intensively. (reading list)
  • Basic Math Tools and Rational Expectations: Difference equations and the concept of rational expectations will be introduced. (reading list)
  • Optimization: Dynamic Programming (and an intro to Optimal Control) tools are introduced at this stage. You are now equipped with most of the tools you need to solve problems by hand. (reading list)
  • Consumption and Investment: Since these are the two largest spending components in most economies, the behavior of households and firms is given attention. These models will be the basis of the decisions made by the representative agent in models of the economy. (reading list)
  • RBC Models: These are the direct short-run equivalents of neoclassical models. These models will generally include flexible prices and wages and pay attention to changes in real variables and real frictions in order to explain short-run changes in the economy. We will not pursue this strand of the literature much because you are going to see it during later classes on computational economics. (reading list)
  • Goods Markets: This is the most important component of the demand side of the economy since growth of output is usually a very good proxy for increase in standards of living. The impact of models of Monopolistic Competition will be discussed here. Treating these models as deviations from perfectly competitive markets gives you an idea of the impact of imperfect competition. (reading list)
  • Money and Credit Markets: The other element of the demand side is a combination of these markets. The role of financial assets and financial markets in driving growth and short-term fluctuations has been at the forefront of macroeconomics and monetary economics for the last 25 years so discussing these issues is an important end in itself. (reading list)
  • Supply Side: Importance will be given primarily to labor markets even though capital and energy markets play an important role in macroeconomics. The reason is that labor markets are more difficult to comprehend because of a complex set of contracts and events. Labor markets are important enough to induce significant policy action and are complex enough to induce major mistakes if not analyzed properly. (reading list)
  • New Keynesian Models: These are short-run models that are fully microfounded but introduce nominal as well as real frictions to the story. Imperfect competition also plays an important role in the story. These models provide an incredibly strong role for monetary policy in the short and medium run. (reading list)
  • Policy Issues: Current topics in policy like Taylor Rules, optimal monetary and fiscal policies, etc. will be examined. (reading list)
  • Business Cycles (if time permits): Material related to analyzing business cycles as well as their international transmission. (reading list)
  • Political Economy (if time permits): Importance will be paid to models of central banking and interaction between political parties and the central bank. (reading list)
  • MacroEconometrics (During extra classes): Econometric topics of special importance to macroeconomics will be addressed. Macroeconomics is highly empirically oriented and empirics are looked upon as a crucial litmus test for theory. Thus, you will be getting readings from this section throughout the semester. (reading list)

 

 

Sbordone WP, Sbordone ULC, Kim – Minn Fed, Huang Liu