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Macroeconomics 2 (ECO-CO-MACRO2)

ECO-CO-MACRO2

Purpose

>Learning Outcomes
This course studies dynamic stochastic equilibrium models with an emphasis on economic aggregates. The framework for the analysis is an overlapping generations model. This framework will be used to present results on the effects of monetary policy on real outcomes. The student who successfully completes the course will have the ability to use the overlapping generations model as a basis for policy evaluation.

Assessment Methods and Criteria
The student will be assessed on his/her demonstrated ability to understand the main contents of the course and to adapt them to specific cases to solve problems. This assessment will be through a single exam for the course given during exam week. Your final grade will be determined from this exam. There will be weekly homework assignments. They will be posted on Brightspace. The review sessions will cover the homework assignments. Though these homework exercises will not be part of your grade, you are strongly encouraged to solve these problems, even in a group with other students, and to attend the review sessions.

Logistics
You are expected to attend all lectures. If you are not able to attend a lecture, please email me in advance. My office hours will be posted on Brightspace. If these times are not convenient, you can reach me by email to schedule a meeting. I will use Brightspace to post course information and lecture notes. You are responsible to check there for updated information on assignments, lectures etc.
There are two outstanding teaching assistants for the course, Carla Revilla and Fleming Zimbalski. They will run the review sessions and also hold office hours, as indicated in the weekly calendar.

Description

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Readings
The entries listed with a * are key for the course. I will primarily lecture from the notes I will post for each section. You are expected to read the notes and key papers prior to
class. You are expected to ask questions and participate in class discussions. Material from the following books is related to the topics of this course. You are not required to buy any of these books, but they will prove to be useful references for this course and over the years.

P. Aghion and P. Howitt, Endogenous Growth Theory, MIT Press, 1998.
Jérôme Adda and Russell Cooper, Dynamic Economics: Quantitative Methods and Applications, MIT Press, 2003. (AC)
Costas Azariadis, Intertemporal Macroeconomics, Cambridge, Mass.: Blackwell, 1993. (CA)
R. Barro and Xavier Sala-i-Martin, Economic Growth, McGraw-Hill, 1995 (BS) 
Olivier Blanchard and Stanley Fischer, Lectures on Macroeconomics, Cambridge: MIT Press, 1989. (BF)
De La Croix, D and Michel, P. A Theory of Economic Growth: Dynamics and Policy in Overlapping Generations, Cambridge University Press, 2002. (DM)
A.K. Dixit, Optimization in Economic Theory, Oxford: Oxford University Press, 1991.
R. Farmer, The Macroeconomics of Self-Fulfilling Prophecies, MIT Press, 1993
Douglas Gale, Money: In Equilibrium, Cambridge: Cambridge University Press, 1982.
Douglas Gale, Money: In Disequilibrium, Cambridge: Cambridge University Press, 1983.
Jordi Gali, Monetary Policy, Inflation and the Business Cycle,Princeton University Press, 2015.
Lars Ljungquist and Thomas Sargent, Recursive Macroeconomic Theory, MIT Press, 2004. (LS)
George McCandless with Neil Wallace, Introduction to Dynamic Macroeconomic Theory Cambridge: Harvard University Press, 1991.
Andreu Mas-Colell, Michael Whinston and Jerry Green, Microeconomic Theory, Oxford University Press, 1995. (MWG)
David Romer, Advanced Macroeconomics, McGraw-Hill, 2001.(DR)
Thomas Sargent, Dynamic Macroeconomic Theory, Cambridge, Mass.: Harvard University Press, 1987. (TS)
Nancy Stokey and Robert E. Lucas, Recursive Methods in Economic Dynamics, Cambridge, Mass.: Harvard University Press, 1989. (SL)
N. Gregory Mankiw and David Romer, New Keynesian Economics, MIT Press, 1991.
Thomas Sargent, Macroeconomic Theory, New York: Academic Press, 1979.

COURSE PLAN
Part 0: Two Period Optimization Problems (Week -1)
• Cooper, R “Notes on Two Period Optimization Problems,” November 2023
• Cooper, R “Notes on Simple GE,” November 2023

Part 1: Intro to Overlapping Generations Models (Week 1)
• Azariadis, Ch. 7,9,11,12,13
• BF Ch. 3,4,5
• Barro, R. "Are Government Bonds Net Wealth?" Journal of Political Economy, 82 (1974),
1095-1117.
• DR Ch. 3,4,5
• * Cooper, R. "Notes on Real Overlapping Generations Models," November 2023.
• DM, Ch. 1-4
• *Diamond, P. “National Debt in a Neoclassical Growth Model,” American Economic
Review, 55 (1965), 1126-50.
• * Gale, D. "Pure Exchange Equilibrium of Dynamic Economic Models," Journal of
Economic Theory, 1973.
• LS, Ch. 8.
• MWG, 15.B, 15.C, 16.B, 16.C,16.D, 19.B, 20.H
• Samuelson, P. "An Exact Consumption Loan Model of Interest with or without the
Social Contrivance of Money," Journal of Political Economy, 1958, 467-82.
• * Shell, K. "Notes on the Economics of Infinity," Journal of Political Economy, 79
(1971), 1002-1011.
Part I Money and Stationary Rational Expectations Equilibria
A. Flexible Prices and Wages (3 weeks)
• * Azariadis, C. "A Re-examination of Natural Rate Theory," American Economic
Review, 71, 1981, 946-60.
• Barro, R. "Unanticipated Money Growth and Unemployment in the United States,"
American Economic Review, 67, 1977, 101-15.
• * Cooper, R. "Notes on Overlapping Generations Monetary Models," November 2023.
• * Cooper, R. "Notes on Money and Business Cycles," November 2023.
• * Cooper, R. "Notes on Stationary Rational Expectations Equilibria,” November 2023
• Friedman, M."The Role of Monetary Policy," American Economic Review, 58, 1968,
1-17.
• * Lucas, R. "Expectations and the Neutrality of Money," Journal of Economic Theory, 4,
1972, 103-24.
• Lucas, R. "Some International Evidence on Output-Inflation Tradeoffs," American
Economic Review, 63, 1973, 326-334.
• Sargent, T. and N. Wallace, "Rational Expectations, the Optimal Money Supply Rule and
the Optimal Money Supply Instrument," Journal of Political Economy, 83, 1975, 241-54.
B. Sticky Prices and Wages (1 week)
• *Blanchard, Olivier Jean, and Nobuhiro Kiyotaki. 1987. Monopolistic Competition and
the Effects of Aggregate Demand. The American Economic Review 77, no. 4: 647-666.
• Caplin, Andrew, and John Leahy. 1991. State-Dependent Pricing and the Dynamics of
Money and Output. The Quarterly Journal of Economics 106, no. 3: 683-708.
doi:10.2307/2937923.
• Caplin, Andrew S., and Daniel F. Spulber. 1987. Menu Costs and the Neutrality of
Money. The Quarterly Journal of Economics 102, no. 4 (November 1): 703-726.
doi:10.2307/1884277.
• Chari, V. V., Patrick J. Kehoe, and Ellen R. Mcgrattan. 2000. Sticky Price Models of the
Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?
Econometrica 68, no. 5 (9): 1151-1179. doi:10.1111/1468-0262.00154.
• -------- “Business Cycle Accounting,” Econometrica, 75.3 (2007), 781-836.
• Christiano,L., M. Eichenbaum and C. Evans. 2005. Nominal Rigidities and the Dynamic
Effects of a Shock to Monetary Policy. Journal of Political Economy
• *Cooper, R. “Notes on Sticky Prices and Wages,” November 2020.
• Cooper, Russell. 1990. Predetermined Wages and Prices and the Impact of Expansionary
Government Policy. The Review of Economic Studies 57, no. 2 (April 1): 205-214.
doi:10.2307/2297378.
• *Dotsey, Michael, Robert G. King, and Alexander L. Wolman. 2011. State-Dependent
Pricing and The General Equilibrium Dynamics of Money and Output. Quarterly Journal
of Economics 114, no. 2 (January 10): 655-690. doi:10.1162/003355399556106.
• Fischer, Stanley. 1977. Long-Term Contracts, Rational Expectations, and the Optimal
Money Supply Rule. The Journal of Political Economy 85, no. 1 (February 1): 191-205.
• * Galí, Jordi. 2015. Monetary Policy, Inflation, and the Business Cycle: An Introduction
to the New Keynesian Framework. Princeton: Princeton University Press. (Ch. 3).
• Golosov, M., and R. Lucas. 2007. Menus Menu Costs and Phillips Curves. Journal of
Political Economy 115: 171–199.
• Klenow, Peter J., and Jonathan L. Willis. 2007. Sticky information and sticky prices.
Journal of Monetary Economics 54, no. Supplement 1 (September 1): 79-99.
doi:10.1016/j.jmoneco.2007.06.003.
• Mankiw, N. Gregory. 1985. Small Menu Costs and Large Business Cycles: A
Macroeconomic Model of Monopoly.The Quarterly Journal of Economics 100, no. 2
(May 1): 529-537. doi:10.2307/1885395.
• Mankiw, N. Gregory, and Ricardo Reis. 2011. Sticky Information Versus Sticky Prices: A
Proposal to Replace the New Keynesian Phillips Curve*. Quarterly Journal of
Economics 117, no. 4 (January 10): 1295-1328. doi:10.1162/003355302320935034.
• Smets, Frank, and Rafael Wouters. 2007. Shocks and Frictions in US Business Cycles: A
Bayesian DSGE Approach. American Economic Review 97, no. 3 (6): 586-606.
doi:10.1257/aer.97.3.586.
• Taylor, John B. 1980. Aggregate Dynamics and Staggered Contracts. The Journal of Political Economy 88, no. 1

Part III Money and Search (if time permits)
• Johri, Alok. "Search, money, and prices." International Economic Review 40.2 (1999): 439-454.
• Kiyotaki, Nobuhiro, and Randall Wright. "On money as a medium of exchange." Journal of political Economy 97.4 (1989): 927-954.
• Ricardo Lagos, Guillaume Rocheteau, Randall Wright, Liquidity: A New Monetarist Perspective, Journal of Economic Literature, 10.1257/jel.20141195, 55, 2, (371-440), (2017).
• Trejos, Alberto, and Randall Wright. "Search, bargaining, money, and prices." Journal of political Economy 103.1 (1995): 118-141.

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