Syllabus
This is the second course in the
four-quarter graduate sequence in macroeconomics. Its purpose is to introduce the basic
models macroeconomists use to study fluctuations.
My email is blanchar@mit.edu. The TA for the course is Francisco Gallego. Francisco’s email is fgallego@mit.edu.
The web page is http://web.mit.edu/14.452/www. Topic notes from 2005 are
posted there. So will
the lecture notes I shall use during the course--as they are created.
Readings
It is essential that you be familiar with
macroeconomics at the intermediate undergraduate level. If you have not yet done so, read an intermediate macro text. (Take
this recommendation seriously.
If you are not familiar with macroeconomics, the risk is high that
you will perceive the course as a series of methods and models, not as an
attempt to understand fluctuations.)
There are no textbooks for the course.
However, I shall use material from:
Blanchard, O. and S. Fischer, Lectures
on Macroeconomics, MIT Press 1989. (BF in what follows) [covers most bases, but is aging].
Obstfeld, M. and K. Rogoff, Foundations
of International Economics, MIT Press 1996. (OR) [focuses more on open economy issues].
Woodford, M. Interest and Prices, Princeton University
Press, 2003. (MW) [focuses
more on nominal rigidities, and the role of monetary policy].
Macroeconomics is a rapidly changing
field. To get a sense of the geography, you might find it useful to read
two recent surveys (which are already on the verge of obsolescence…):
Blanchard, O., “What
Do We Know About Macroeconomics that Fisher and Wicksell Did Not?”
QJE, November 2000, 115:4, 1375-1410.
Woodford, M., “Revolution and
Evolution in Twentieth-Century Macroeconomics,” June 1999.
The course is organized around
ten topics/sections. For each topic, I have included basic readings, as
well as a few papers showing further applications or extensions. A star
(*) denotes required reading.
1. Fluctuations. Facts.
Covariance
stationarity • Trends/cycles decompositions • Shocks and propagation
mechanisms • Wold representation • ARMAs, VARs, SVARS • Impulse responses
•
Co-movements
of GDP components • Correlations between real wages, interest rates, and
output • The correlations of output and money • Cycles, slumps, and
depressions. • Non
linearities.
* BF,
Chapter 1.
* Stock, J. and M. Watson, “Business Cycle
Fluctuations in U.S. Macroeconomic Time Series”, Chapter 1, Volume
1A, Handbook of Macroeconomics, J. Taylor and M. Woodford eds, North
Holland, 1999.
Stock, J. and M. Watson, “Vector
Autoregressions”, JEP,
Fall 2001, 15-4, 101-115.
Blanchard, O., and D. Quah,
“The
Dynamic Effects of Aggregate Demand and Aggregate Supply Disturbances’’,
AER 79-4, 1989, 654-673.
Christiano, L, Eichenbaum M., and C Evans, “Monetary
Policy Shocks: What have we
Learned and to What End?”, Handbook of Macroeconomics, J. Taylor and
M. Woodford eds, vol 1A,
65-148
2. The Basic
model. The
Consumption/Saving Choice.
Setting up the optimization
problem • Intertemporal choice, shocks, uncertainty • The first order
conditions • The Keynes-Ramsey condition • Solving the model •
Numerically • Value functions • Log linearization • Special cases and
other short cuts •
Equivalence between centralized and decentralized economies • The
consumption problem in the decentralized economy.
* BF,
Chapter 2 and Section 6-2.
OR, Chapters 1 and 2.
Campbell J., “Inspecting
the Mechanism: An Analytical Approach to the Stochastic Growth Model”,
JME, 33, June 1994, 463-506.
Uhlig, H., “A Toolkit
for Analyzing Nonlinear Dynamic Stochastic Models Easily”, mimeo
Tilburg, 1997.
3. Allowing for a
Labor/Leisure Choice. (the
RBC model).
Why the extension? • Movements
in employment/unemployment • Interpreting the first order conditions •
Solving the model numerically, and by log linearization • Special case:
log and full depreciation • Evidence on labor supply elasticity •
Evidence on high frequency technological shocks • Solow residuals and
their interpretation • Alternative approaches.
* BF, Chapter 7.
Prescott, E. C., “Theory Ahead
of Business Cycle Measurement”, Quarterly Review, Federal Reserve
Bank of Minneapolis, Fall 1986, 9-22.
* King, R. and S. Rebelo, “Resuscitating Real Business Cycles”,
Chapter 14, Volume 1B, Handbook of Macroeconomics, J. Taylor and M.
Woodford eds, North Holland, 927-1007.
Rebelo, S. “Real Business Cycle
Models: Past, Present and Future”, NBER WP 11401, June 2005.
Gali, J. and P. Rabanal, “Technology
shocks and aggregate fluctuations:
How well does the RBC Model Fit Postwar U.S. Data?”, NBER Macroeconomics Annual 2004.
Basu, S. and Fernald, J., “Are
Technology Improvements Contractionary?”, Federal Reserve Bank of
Chicago, WP 2004-20.
Aghion, P. and P. Howitt,
“Growth and Cycles”, Chapter 8, Endogenous Growth Theory, MIT Press,
1998.
Shleifer, A., “Implementation
Cycles,” JPE, 94-6, December 1986, 1163-1190.
Gabaix, X. “The
Granular Origins of Aggregate Fluctuations”, mimeo MIT, December
2005.
4. Allowing for Non-trivial Investment
Decisions.
Costs
of adjustment for investment • Investment, consumption, and interest
rates in the decentralized economy • The role of the term structure of
interest rates • The stock market and investment • The effects of shocks
on output, investment, the stock market, and the term structure • The
open economy version • Shocks, investment, saving, and movements in the
current account • Asset price bubbles, investment, and fluctuations.
* BF,
Sections 2-4, 6-3.
* BF, Sections 5-1,
5-2.
OR, Chapter 3.
Shiller, R., Irrational Exuberance, Princeton
University Press, 2000.
Blanchard, O.,
Rhee, C. and L. Summers, “The
Stock Market, Profit, and Investment”, QJE, 108-1, February 1993,
115-136.
5. Allowing for Two Goods.
Why
introduce two goods? • The pitfalls of one-good models •
Capital/consumption goods • Tradable/non tradable goods •
Domestic/foreign goods • The consumer problem with two goods •
Intratemporal and intertemporal first order conditions • Closing the
model if tradables/non tradables • The Balassa-Samuelson effect • The
transfer problem • Effects of technological shocks on relative prices,
and on the current account
• Global imbalances.
OR, Chapter 4.
* Obstfeld, M. and K. Rogoff, "The Intertemporal Approach to the
Current Account'', Chapter 34,
Volume 3, Handbook of International Economics, G. Grossman and K.
Rogoff eds, 1731-1799.
Obstfeld, M. and K.
Rogoff, “The Unsustainable
U.S. Current Account Position Revisited”, NBER WP 10869,
October 2004.
Caballero, R., E. Farhi, and P.O. Gourinchas, “An
Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates”,
mimeo MIT, February 2006.
Blanchard, O., F. Giavazzi,
and F. Sa, “The
U.S. Current Account and the Dollar”, BPEA 2005.
6. Introducing Money.
Decentralized
exchange and the use of money • Cash-in-advance models • Money in the
utility function • The effects of money growth on capital accumulation •
Dynamics of hyperinflation • The Cagan model • The budget deficit and
money growth.
* BF,
Sections 4.3 to 4.7; and Section 10.2.
Woodford, M. Chapter 2-1, “Price Level
Determination under Interest Rate Rules”.
Dornbusch, R.,
Sturzenegger, F., and H. Wolf, “Extreme
Inflation: Dynamics and
Stabilization”, Brookings Papers on Economic Activity, 1990-2, 1-84.
7. Introducing Price
Setting.
Decentralized exchange, money, and price
setters • A yeoman farmer model of price setting under monopolistic
competition • The role of price above marginal cost, markups •
Predetermined prices • The effects of money on output and welfare • Role
of wage versus price setting • The behavior of real wages • Revisiting
the effects of technological and other shocks • Indexation • Macro-implications
of the choice of numeraire • The monetary policy problem • Time
consistency.
*
Blanchard, O., “Why Does Money Affect Output? A Survey,” in B. Friedman
and F. Hahn eds, Handbook of Monetary Economics, North Holland, 1990,
779-835.
* BF, Sections 8-1, 11-4.
*
Woodford, M., Chapter 3-1 “Optimizing Models with Nominal Rigidities. A
Basic Sticky-Price Model”.
8. The “New Keynesian” Model.
Staggering
of price decisions • Fischer-Taylor-Calvo models • Coordination problems
• The “modern Phillips curve” • Inflation inertia? • The “modern IS-LM
model”, the “modern AS-AD
model” • A second look at productivity booms.
*
BF, Chapter 8-2, 8-3.
Woodford, M., Chapter 3-2
(“Optimizing Models with Nominal Rigidities. Inflation Dynamics with Staggered Price Setting.”)
King, R., “The New
IS-LM model: Language,
Logic, and Limits”, Economic Quarterly, Federal Reserve Bank of
Richmond, 86-3, Summer 2000, 45-103.
Blanchard, O. and J. Gali, “Real
Wage Rigidities and the New Keynesian Model”, mimeo MIT, February
2006.
Jorgenson, D. and K.
Stiroh, “Raising
the Speed Limit: U.S. Economic Growth in the Information Age”, BPEA,
2000-1, 125-235.
Beaudry, P. and F. Portier, “Stock
Prices, News, and Economic Fluctuations”, mimeo UBC, January 2003.
Lorenzoni, G., “Imperfect
Information, Consumers’ Expectations, and Business Cycles”, mimeo
MIT, May 2005.
Smets,
F. and R. Wouters, “Comparing
Shocks and Frictions in US and Euro Area Business Cycles; A Bayesian DSGE Approach”, CEPR DP 4750, 2004.
9. Monetary Policy.
Time
consistency • Inflation targeting • Interest rate rules • The liquidity
trap
Woodford, M., Chapter
4-1, 4-2 (“A Neo-Wicksellian Framework for the Analysis of Monetary
Policy”).
* Clarida, R., J. Gali, and M. Gertler, “The Science of Monetary Policy: A New Keynesian
Perspective”, JEL, December 1999, 1661-1707.
Gali, J., “New
Perspectives on Monetary Policy, Inflation, and the Business Cycle”,
NBER WP 8767, February 2002.
King, M. “What has
Inflation Targeting Achieved”, in “The Inflation Targeting Debate”, B.
Bernanke and M. Woodford, “Inflation Targeting”, NBER and U. of Chicago
Press, 2005.
Bernanke, B, V. Reinhart, and B. Sack, “Monetary
Policy Alternatives at the Zero Bound. An empirical assessment”, BPEA, 2004-1.
Svensson, L. “Escaping from a Liquidity Trap
and Deflation; The Foolproof Way and Others”, NBER WP 10195, December 2003.
10. Fiscal Policy.
Effects of spending and taxes in
models with flexible or sticky prices • Empirical evidence • Perverse
effects of fiscal expansions.
Chari, V.V. and P.
Kehoe, “Optimal
Fiscal and Monetary Policy”,
Federal Reserve Bank of Minneapolis, Staff Report 251, July 1998.
Baxter, M. and R. King, “Fiscal
Policy in General Equilibrium”,
AER, June 1993, 315-334.
* Gali, J. J. Lopez_Salido, and J. Valles, “Understanding the
Effects of Government
Spending on Consumption”,
mimeo September 2003.
Blanchard, O. and R.
Perotti, “An
Empirical Characterization of the Dynamic Effects of Government Spending
and Taxes on Output”,
QJE , 117-4, 2002, 1329-1368.
Giavazzi, F., and M. Pagano, “Non-Keynesian Effects of Fiscal Policy Changes: International
Evidence and the Swedish Experience”, NBER W5332, October
1996.
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