Tufts University

Department of Economics

Masters Program in Economics

MACROECONOMIC THEORY II

Economics 206 E-mail: marcelo.bianconi@tufts.edu

Spring Semester URL: www.tufts.edu/~mbiancon

Professor M. Bianconi Office Hours: Tuesdays 11:30-1:45pm, or by appointment

111 Braker Hall

Ph: 617- 627 2677

Block K+ MW 4:30am-5:45PM – Braker 118

Course Materials Available @Trunk

General Objectives:

This course is designed for you to think about economics from a macro perspective. The course is

mostly based on the microeconomic principles of rationality and optimization, but with several

deviations from them considered. We shall examine some basic aspects of an economic system such

as:

(i) time structure: static versus dynamic

(ii) equilibrium structure: partial versus general

(iii) trade structure: real versus nominal trade

(iv) information structure: symmetric, differential, asymmetric information;

(v) risk structure: certainty equivalents, expectations and risk;

(vi) asset market structure: complete versus incomplete markets.

We shall study in some detail capital accumulation, labor markets, asset pricing and the structure of

asset markets, monetary policy, and fiscal policy, with attention to the relationship between

individual behavior and aggregate outcomes; and macroeconomics and finance interactions.

As a technical note, this course uses discrete time models only.

Course Requirements:

Mid-Term Exam I: One Hour-15 Min Exam (15%) – Monday, March 3 (~ at part IV of the course)

Mid-Term Exam II: One Hour-15 Min Exam (15%) – Wednesday, April 9 (~ at part V of the

course, cumulative)

One Two-Hour Final Exam (40%) – Friday, May 9, 8:30-10:30AM

Short Problem Sets, Readings and Quizzes (10%)

One Term Paper (Topics to be discussed individually) (20%) – Due on Wednesday, April 30.

{Exam and Problem Sets Policy: There are no make-up exams. Problem set is due at a prearranged

date; after the deadline, the problem set looses 20% of its value for each late day; problem sets

handed in six or more days after the deadline have no value. All grades in this class are curved.}

I encourage you to work with groups of your fellow colleagues to study and solve problem sets.

Group problem sets will be negotiated.

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Main Texts:

Bianconi, Marcelo (2012) Financial Economics, Risk and Information. Second Edition. World

Scientific Publishing Co., River Edge, NJ. This is a monograph that presents several of

the methods and models examined in the course.

Ljungqvist, Lars and Thomas J. Sargent (2012, third edition; 2004, second edition; 2000 first

edition) Recursive Macroeconomic Theory. The MIT Press, Cambridge, MA. The

sequence to Sargent's Dynamic Macroeconomic Theory with up-to-date examples and

applications of recursive methods. (All editions are useful).

Sargent, Thomas J. (1987) Dynamic Macroeconomic Theory. Harvard University Press,

Cambridge, MA. A classic macro text that presents the basics of some of the workhorse

models in the dynamic general equilibrium area.

Williamson, Stephen (2014) Macroeconomics, Fifth (or any) Edition. Addison-Wesley,

Reading, MA. This is an intermediate textbook with some more advanced materials,

mainly in the appendixes, useful for this class. It will be used as general reading and

background.

Required Readings (more readings will be tentatively assigned):

Mankiw, N. Gregory (2006) "The Macroeconomist as Scientist and Engineer." Journal of Economic

Perspectives, 20 (4), Fall 2006, 29-46. To be posted.

(http://www.economics.harvard.edu/faculty/mankiw/papers/Macroeconomist_as_Scientist.pdf)

Other Books and References at the end of the syllabus.

3

COURSE OUTLINE (Tentative)

I provide a brief and restricted set of references to articles in professional journals in the course

outline below. Many of the references to professional articles are available in the books referred. We

may examine some of those articles, and possibly others, more closely.

Note: Students should be familiar with the material in Bianconi (2012), Chapter 1 (1.1-1.5), and

read the Notes on the Literature at the end of each referred chapter.

I. GENERAL EQUILIBRIUM REAL MACROECONOMIC

THEORY WITH FULL INFORMATION:

DYNAMICS Some fundamental papers (this list is not exhaustive) (~ 4 classes)

(i) Real Investment, Competitive Equilibrium and Pareto Optimality - The Two-

Period Case:

Bianconi (2012, 2011); Notes;

Manuelli (2007), section 1.3;

Obstfeld and Rogoff (1996), Chapter 1.2;

Williamson (2014), Chapter 11 and Appendix;

Arrow (1972);

Debreu (1954, 1983).

(ii) Dynamic Programming and Blackwell's Contraction Mapping Theorem -

Optimal Economic Growth (Exogenous):

Bianconi (2012), Chapter 1 (1.7)

Obstfeld and Rogoff (1996), Chapter 7.1-7.2;

Sargent (1987), Chapter 1.1-1.3 and Chapter 1.4;

Benveniste & Scheinkman (1979);

Kreps (1990), Appendix II;

Ljungqvist and Sargent (2000), Chapter 11;

Williamson (2014), Chapters 7-8 and Appendix

[Solow(1956); Prescott (1988)].

(iii) Time Consistency of Preferences: Hyperbolic Discounting - Optimal Economic

Growth (Exogenous)

Laibson (1997); Harris

and Laibson (2001).

Arrow, Kenneth J. (1972) “General Economic Equilibrium: Purpose, Analytic Techniques,

Collective Choice.” The Sveriges Riksbank Prize in Economic Sciences in Memory of

Alfred Nobel: Prize Lecture, December 12.

Benveniste, L M & Scheinkman, J A, (1979). "On the Differentiability of the Value Function in

Dynamic Models of Economics," Econometrica, vol. 47(3), pages 727-32, May.

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Bianconi, M. (2011) Transfer Programs under Alternative Insurance Schemes and Liquidity

Constraints," Journal of International Trade and Economic Development, available at

web page.

Debreu, Gerard. (1954) "Valuation Equilibrium and Pareto Optimum," Proceedings of the

National Academy of Science, 40: 588--92.

Debreu, Gerard (1983) “Economic Theory in the Mathematical Mode.” The Sveriges Riksbank

Prize in Economic Sciences in Memory of Alfred Nobel: Prize Lecture, December 8.

Harris, Christopher and David Laibson (2001) "Dynamic Choices of Hyperbolic Consumers."

Econometrica, 69, 935-957.

Laibson, David (1997) "Golden Eggs and Hyperbolic Discounting." Quarterly Journal of

Economics, 62, 443-478.

Prescott, Edward C. (1988) "Robert M. Solow's Neoclassical Growth Model: An Influential

Contribution to Economics". Scandinavian Journal of Economics 90, 7-12.

Solow, Robert M. (1956) “A Contribution to the Theory of Economic Growth.” Quarterly

Journal of Economics, 70, 65-94.

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II. GENERAL EQUILIBRIUM REAL MACROECONOMIC THEORY:

LABOR MARKETS

Some fundamental papers (this list is not exhaustive) (~ 3 classes)

(i) Dynamic General Equilibrium Theory and Labor Supply Campbell (1994)

Wallenius & Prescott (2011)

(ii) Indivisibilities and the Labor Market Wallenius & Prescott (2011)

Mas-Colell, Whinston and Green (1995), pages 170-175;

Kreps (1990), Chapter 3;

[Hansen (1985), Rogerson (1988); Townsend (1987), Bianconi (2001), Ljungqvist and Sargent (2007)].

(iii) Frictions and the Labor Market McCall (1970);

Sargent (1987), Chapter 1;

Diamond (1982);

Mortensen and Pissarides (1999);

Hall (2009).

Becker, Gary (1965) “A Theory of the Allocation of Time.” Economic Journal, 75, 493-517.

Bianconi, M. (2001) “Heterogeneity, Efficiency and Asset Allocation with Endogenous Labor Supply:

The Static Case," The Manchester School, 69(3), June, 253-268.

Bianconi, M. (2008) "Heterogeneity, Adverse Selection and Valuation with Endogenous Labor Supply."

International Review of Economics and Finance., 17, 113-126, 2008.

Campbell, John Y. (1994) “Inspecting the Mechanism: An Analytical Approach to the Stochastic

Growth Model.” Journal of Monetary Economics, 33, 463-506.

Diamond, Peter (1982) “Wage Determination and Inefficiency in Search Equilibrium,” Review

of Economic Studies, 49.

Hall, Robert E. (2009) Reconciling Cyclical Movements in the Marginal Value of Time and the

Marginal Product of Labor. Journal of Political Economy, Vol. 117, No. 2 (April), pp.

281-323

Hansen, Gary D. (1985) "Indivisible Labor and the Business Cycle". Journal of Monetary Economics,

16, 309-327.

Ljungqvist, Lars & Sargent, Thomas J, (2007) "Do Taxes Explain European Employment? Indivisible

Labour, Human Capital, Lotteries and Savings," CEPR Discussion Papers 6196, C.E.P.R.

Discussion Papers.

6

McCall, John J. (1970), 'Economics of information and job search'. Quarterly Journal of Economics 84,

pp. 113-126.

Mortensen, Dale and Pissarides, Christopher, (1999) “Job Reallocation, Employment

Fluctuations, and Unemployment,” in John B. Taylor and Michael Woodford eds.,

Handbook of Macroeconomics.

Phelps, Edmund S. (1990) Seven Schools of Macroeconomic Thought. The Arne Ryde Memorial

Lectures, Claredon Press. Oxford, UK.

Rogerson, Richard (1988) "Indivisible Labor, Lotteries and Equilibrium". Journal of Monetary

Economics, 21, 3-16.

Townsend, Robert M. (1987) "Arrow-Debreu Programs as Microfoundations of

Macroeconomics". Bewley, Truman F., Editor, Advances in Economic Theory; Fifth

World Congress. Cambridge University Press, Cambridge, UK.

Wallenius, Johanna & Edward C. Prescott, (2011) "Aggregate labor supply," Staff Report 457,

Federal Reserve Bank of Minneapolis.

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III. DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE)

REAL MACROECONOMIC THEORY WITH FULL INFORMATION

Some fundamental papers (this list is not exhaustive) (~1 ½ classes)

(i) Stochastic Growth (Exogenous) - Real Business Cycles, Calibration and Costs of

Economic Fluctuations:

Blanchard and Fischer (1989), Chapters 7.1-7.2;

McCallum (1989); Lucas (1987), Chapter 1-2;

Ljungqvist and Sargent (2000), Chapter 3, page 46;

Cooley and Prescott (1995), Chapter 1;

[Eichenbaum (1991); King et al (1988); Long and Plosser (1983); Kydland and Prescott

(1981); Stadler (1994); Summers (1986); Christiano (1988); Cochrane (1994); McGrattan

and Prescott. (2010)]

Campbell, John Y. (1994) “Inspecting the Mechanism: An Analytical Approach to the Stochastic

Growth Model.” Journal of Monetary Economics, 33, 463-506.

Christiano, Lawrence J. (1988) "Why Does Inventory Investment Fluctuate So Much? Journal of

Monetary Economics, 21, 247-280.

Cochrane, John (1994) “Shocks.” Carnegie-Rochester Conference Series on Public Policy, 41,

295-364.

Cooley, Thomas and Edward C. Prescott (1995) "Economic Growth and Business Cycles". In

Cooley, Thomas (Ed.) Frontiers of Business Cycle Research. Princeton University

Press, Princeton, NJ.

Eichenbaum, Martin (1991) "Real Business-Cycle Theory: Wisdom or Whimsy?" Journal of

Economic Dynamics and Control, 15, 4, 607-626.

King, Robert G., Charles I. Plosser, and Sergio T. Rebelo (1988) "Production, Growth, and

Business Cycles: I. The Basic Neoclassical Growth Model". Journal of Monetary

Economics, 21, 195-232.

King, Robert G., Charles I. Plosser, and Sergio T. Rebelo (1988) "Production, Growth, and

Business Cycles: II. New Directions". Journal of Monetary Economics, 21, 309-341.

Kydland, Finn E. and Edward C. Prescott (1982) "Time to Build and Aggregate Fluctuations".

Econometrica, 50, 6, 1345-1370.

Long, John B. and Charles I. Plosser (1983) "Real Business Cycles". Journal of Political

Economy, 91, 1, 39-69.

McCallum, Bennett T. (1989) "Real Business Cycle Models". Barro, Robert J., Editor, Modern

Business Cycle Theory. Harvard University Press, Cambridge, MA.

8

McGrattan, Ellen R., and Edward C. Prescott. (2010) "Unmeasured Investment and the Puzzling

US Boom in the 1990s." American Economic Journal: Macroeconomics, 2(4): 88–123.

Prescott, Edward C. (1986) "Theory Ahead of Business Cycle Measurement". Federal Reserve

Bank of Minneapolis Quarterly Review, 10, 9-22.

Stadler, George W. (1994) "Real Business Cycles". Journal of Economic Literature, 32, 1750-

1783.

Summers, Lawrence (1986) "Some Skeptical Observations of Real Business Cycle Theory".

Federal Reserve Bank of Minneapolis Quarterly Review, 10, 23-27.

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IV. GENERAL EQUILIBRIUM VALUATION AND INSURANCE Some fundamental papers (this list is not exhaustive) (~ 7 classes)

(i) Valuation with Full Information: Complete versus Incomplete Markets Bianconi (2012), Chapter 4 (e.g. Notes on the Literature);

(ii) Information Issues: Rational Expectations Equilibrium,

Risk Sharing and Revelation

Bianconi (2012), Chapter 4 (e.g. Notes on the Literature);

Grossman (1976);

Grossman and Stiglitz (1980);

Bolton, Santos and Scheinkman (2012).

(iii) Dynamic Valuation with Full Information: General Equilibrium and Asset

Pricing under Uncertainty with Complete Markets and Excess Returns

Bianconi (2012), Chapter 6 (6.4-6.10); Sargent (1987), Chapters 1.6-1.7, Chapter 3;

Obstfeld and Rogoff (1996), Chapters 5.1-5.4;

Lucas (1987), Chapters 3-5;

Deaton (1992), Chapters 1-3;

Altug and Labadie (1994), Chapter 1;

Ljungqvist and Sargent (2004);

[Hansen and Singleton (1983); Svensson (1988); Campbell (1998)].

Bianconi (2012), Chapter 6 (6.11-6.12);

Sargent (1987), Chapters 1.6-1.7;

Altug and Labadie (1994), Chapter 1;

Ljungqvist and Sargent (2000), Chapter 10;

Cochrane (2000), Chapter 21

[Barro (2005, 2009), Mehra and Prescott (1985), Hansen and Jagannathan (1991), Weil

(1991)].

(iv) Dynamic Valuation: Bubbles, Frictions, Macrofinancial Risk Bianconi (2012), Chapter 6

De Long et al (1990),

Basco (2009),

Kocherlakota (2009),

Brunnermeier et al (2012a), Brunnermeier and Oehmeke (2012b)

Gray, Merton and Bodie (2008)

Barro, Robert (2009) “Rare Disasters, Asset Prices and Welfare Costs.” American Economic Review,

99, 243-264.

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Barro, Robert (2005) "Rare Disasters and Asset Prices in the 20th Century." Working Paper,

Harvard University: Cambridge: MA (published at QJE,

2006).(http://www.economics.harvard.edu/faculty/barro/papers/equity%20premium%201

2-1-05.pdf).

Basco, Sergi (2009) "Globalization and Financial Development: A Model of the Dot-Com and

the Housing Bubbles." MIT, Department of Economics working paper.

Bianconi, M. (2003) "Private Information, Growth and Asset Prices with Stochastic

Disturbances," International Review of Economics and Finance, 12, 1-24.

Bolton, P. T. Santos and J. A. Scheinkman (2012) Shadow Finance. Working paper, Princeton

University. In Rethinking the Financial Crisis, A. Blinder, A. Lo and R. Solow (eds.).

Brunnermeier, Markus K., Eisenbach Thomas, and Sannikov Yuliy (2012a) Macroeconomics

with Financial Frictions: A Survey. Department of Economics, Princeton University

working paper, March.

Brunnermeier, Markus K., and Oehmke Martin (2012b) Bubbles, Financial Crises, and Systemic

Risk, Brunnermeier, Markus K., and Oehmke Martin , Handbook of the Economics of

Finance, Amsterdam (forthcoming).

Campbell, John Y. (1998) “Asset Prices, Consumption and the Business Cycle.” NBER

Working Papers Series No. 6485, March. In Taylor, John and Michael Woodford (Eds.)

Handbook of Macroeconomics. Volumes 1, 2, and 3; North Holland: Amsterdam.

De Long, B. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J.

Waldmann, (1990) "Noise Trader Risk in Financial Markets," Journal of Political

Economy, vol. 98(4), pages 703-38, August.

Gray, Dale F. Robert C. Merton, Zvi Bodie (2008) New Framework for Measuring and

Managing Macrofinancial Risk and Financial Stability. Working paper, Harvard Busines

School (subsequently, book available from Wiley with the same title).

Grossman, S. J. (1976). "On the Efficiency of Competitive Stock Markets Where Traders Have

Diverse Information". The Journal of Finance, 31 (2): 573–584.

Grossman, S. J. and J. E. Stiglitz (1980) “On the Impossibility of Informationally Efficient

Markets.” American Economic Review 70(3), June 1980, pp. 123-136.

Hansen, Lars P. and Kenneth Singleton (1983) "Stochastic Consumption, Risk Aversion, and the

Temporal Behavior of Asset Returns". Journal of Political Economy, 91, 249-265.

Hansen, Lars P. and Ravi Jagannathan (1991) "Implications of Security Market Data for Models

of Dynamic Economies". Journal of Political Economy, 99, 225-262.

Kocherlakota, Narayana R. (2009) Bursting Bubbles: Consequences and Cures. FRB-

Minneapolis, University of Minnesota working paper.

11

Mehra, Rajnish and Edward C. Prescott (1985) "The Equity Premium: A Puzzle". Journal of

Monetary Economics, 15, 145-162.

Miller, Merton and Franco Modigliani (1958) The Cost of Capital, Corporate Finance and the

Theory of Investment. American Economic Review, 48, 261-97.

Svensson, Lars E. O. (1988) “Trade in Risky Assets.” American Economic Review, 78, 375-394.

Weil, Phillipe (1991) "The Equity Premium Puzzle and the Risk-Free Rate Puzzle." Journal of

Monetary Economics, 24, 401-421.

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V. INTRODUCTION TO MONETARY AND FISCAL POLICY INTERACTIONS,

AND FINANCIAL ISSUES.

Some fundamental papers (this list is not exhaustive) (~ 11 classes)

(i) The Intertemporal Government Budget Constraint:

Sargent and Wallace (1981)

Hall, George J., and Thomas J. Sargent. (2011)

Cochrane (2011a, b; 2005)

Bianconi (2012), Chapter 6 (6.13-6.15);

Barro (1997), Chapters 7 and 8;

Sargent (1997), Chapters 4 and 5;

Blanchard and Fischer (1989), Chapter 4;

Ljungqvist and Sargent (2000), Chapter 17;

Williamson (2014), Chapter 9 and Appendix.

[Abel (1985); Stockman (1981); Woodford (1990); Bianconi (1992)].

Woodford (2011, 2012)

(ii) Short Discussion of The New Keynesian

Dynamic Stochastic General Equilibrium (DSGE) Model

Smets and Wouters (2007)

Calvo (1983)

Clarida, Gali and Gertler (1999): most influential article

Romer (1995, newest editions) Ch. 7

(iii) Time Consistency of Fiscal Policy:

Fisher (1980);

Barro (1997), Chapters 12-14;

Sargent (1987), Chapter 6;

Ljungqvist and Sargent (2000), Chapter 9;

Williamson (2014), Chapter 8 and Appendix

[Barro (1974, 1989); Baxter and King (1993); Chamley (1986); Cogan, John F. & Cwik,

Tobias & Taylor & Wieland(2009)].

(iv) Banking and Risk Sharing: Diamond and Dybvig (1983)

Mehra & Piguillem & Prescott (2011)

Lucas and Stokey (2011)

Lucas (2013)

(v) Debt, Leverage and Collateral: Geanakoplos (2009)

Fostel and Geanakoplos (2008)

Bardsley (1995)

Brunnermeier and Sannikov (2011)

Brunnermeier, Eisenbach and Sannikov (2011)

Shleifer and Vishny (2011)

13

Luttmer (1996)

(vi) The Term Structure of Interest Rates: Brunnermeier, M. and M. Oehmke (2010)

Cogley, Sargent and Surico (2011)

Sargent (1987)

Ljungqvist and Sargent (2012)

Abel, Andrew (1985) "Dynamic Behavior of Capital Accumulation in a Cash-in Advance

Economy". Journal of Monetary Economics, 16, 55-71.

Barro, Robert J. (1974) "Are Government Bonds Net Wealth?". Journal of Political Economy,

82, 1095-1117.

Barro, Robert J. (1989) “The Neoclassical Approach to Fiscal Policy.” In Barro, R. J. (Ed.)

Modern Business Cycle Theory, Harvard University Press, Cambridge, MA.

Bardsley, P. (1995) “Optimal leverage for the utility maximizing firm.” Journal of Economic

Behavior & Organization, Volume 26, Issue 2, Pages 237-251

Baxter, Marianne and Robert King (1993) "Fiscal Policy in General Equilibrium". American

Economic Review, 83, 315-334.

Bianconi, M. (1992) "Monetary Growth Innovations in a Simple Cash-in-Advance Asset-Pricing

Model". European Economic Review, 36, 1501-1521.

Brunnermeier, M. and M. Oehmke (2010) “The Maturity Rat Race.” Princeton University

working paper. Jounal of Finance, 2012.

Brunnermeier, M. and Y. Sannikov (2011) “A Macroeconomic Model with a Financial Sector.”

Princeton University working paper.

Brunnermeier, Markus K., Thomas Eisenbach, and Yuliy Sannikov. (2011) Macroeconomics

with Financial Frictions: A Survey. Princeton University, working paper.

Calvo, Guillermo A., (1983) "Staggered prices in a utility-maximizing framework." Journal of

Monetary Economics. Elsevier, vol. 12(3), pages 383-398, September.

Chamley, Christophe (1986) "Optimal Taxation of Capital Income in General Equilibrium with

Infinite Lives". Econometrica, 54, 607-622.

Cochrane, John H. (2011a) Determinacy and Identification with Taylor Rules. Journal of

Political Economy, Vol. 119, No. 3 (June), pp. 565-615

Cochrane, John H. (2011b) Understanding fiscal and monetary policy in the great recession:

Some unpleasant fiscal arithmetic. January, European Economic Review 55 2-30.

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Cochrane, John H. (2005) Money as Stock. Journal of Monetary Economics 52:3, 501-528.

Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker (2009)"New Keynesian

versus old Keynesian government spending multipliers," CEPR Discussion Papers 7236,

C.E.P.R. Discussion Papers.

Cogley, T., T. Sargent and P. Surico (2011) The Return of the Gibson Paradox. NYU working

paper.

Diamond D.W, and Dybvig PH (1983). "Bank runs, deposit insurance, and liquidity". Journal of

Political Economy 91 (3): 401–419.

Fischer, Stanley (1980) "Dynamic Inconsistency, Cooperation and the Benevolent Dissembling

Government". Journal of Economic Dynamics and Control, 2, 93-107.

Fostel, A. and John Geanakoplos (2008) “Levarage Cycles and the Anxious Economy.”

American Economic Review, 98:4, 1211–1244.

Geanakoplos, John (2009) “The Leverage Cycle.” Cowles Foundation Discussion Paper No.

1715.

Gertler, Mark & Jordi Gali & Richard Clarida, (1999). "The Science of Monetary Policy: A New

Keynesian Perspective," Journal of Economic Literature, American Economic

Association, vol. 37(4), pages 1661-1707, December.

Hall, George J., and Thomas J. Sargent. 2011. "Interest Rate Risk and Other Determinants of

Post-WWII US Government Debt/GDP Dynamics." American Economic Journal:

Macroeconomics, 3(3): 192–214.

Lucas, Jr. R. and Nancy L. Stokey (2011) Liquidity Crisis. University of Chicago working paper.

Lucas, Robert E. (2013). "Glass-Steagall: A Requiem." American Economic Review, 103(3):43-

47.

Luttmer, E. G (1996) Asset Pricing in Economies with Frictions Econometrica , Vol. 64, No. 6

(Nov.), pp. 1439-1467

Mehra, R. & Facundo Piguillem & Edward C. Prescott (2011). "Costly financial intermediation

in neoclassical growth theory," Quantitative Economics, Econometric Society, vol. 2(1),

pages 1-36, 03.

Sargent, T. and N. Wallace (1981) Some Unpleasant Monetarist Arithmetic. Federal Reserve

Bank of Minneapolis Quarterly Review. v. 5, p. 1-17.

Shleifer, A. and Robert Vishny (2011) Fire Sales in Finance and Macroeconomics. Journal of

Economic Perspectives—Volume 25, Number 1—Winter 2011—Pages 29–48.

15

Smets, Frank, and Rafael Wouters. 2007. "Shocks and Frictions in US Business Cycles: A

Bayesian DSGE Approach." American Economic Review, 97(3): 586-606.

Stockman, Alan C. (1981) "Anticipated Inflation and the Capital Stock in a Cash-in-advance

Economy". Journal of Monetary Economics, 8, 387-394.

Woodford, Michael (1990) "The Optimum Quantity of Money". Friedman, Benjamin M. and

Frank H. Hahn (Eds.) Handbook of Monetary Economics, Volume 2, Chapter 20. North

Holland: Amsterdam.

Woodford, Micheal (2011) “Simple Analytics of the Government Expenditure Multiplier,” AEJ

Macroeconomics, January 2011.

Woodford, Michael (2012)“Methods of Policy Accommodation at the Interest-Rate Lower

Bound,” presented at the Jackson Hole symposium, August.

TERM PAPER due, Friday, April 25

FINAL EXAM – Friday May 9 – Covers all course material

16

Book References:

There will be other texts that I may (or may not) refer in my lectures, but are good references for your

study in the masters program (this list is not exhaustive):

Adda, Jerome and Russell Cooper (2003) Dynamic Programming: Theory and Applications. The

MIT Press, Cambridge: MA. This is an up-to-date graduate book on the dynamic

programming methodology that is vastly used in modern macroeconomics.

Aghion, Philippe and Peter Howitt (1998) Endogenous Growth Theory. The MIT Press,

Cambridge, MA. A recent textbook that analyzes the new endogenous growth theory

with attention to research and development issues.

Aghion, Philippe and Steven Durlauf (Eds.) (2005) Handbook of Economic Growth. Volumes 1,

2, and 3; North Holland: Amsterdam. Solid, useful and most recent collection of surveys

in the field.

Altug, Sumru and Pamela Labadie (1994) Dynamic Choice and Asset Prices. Academic Press,

San Diego, CA. Basic dynamic macroeconomic theory.

Altug, Sumru, Jagjit S. Chandra and Charles Nolan, Eds. (2003) Dynamic Macroeconomic

Analysis: Theory and Policy in General Equilibrium. Cambridge University Press,

Cambridge, UK. A collection of recent articles and surveys focusing on dynamic

stochastic general equilibrium (DSGE) models.

Arrow, Kenneth J. and M. Kurz (1970) Public Investment, and Rate of Return, and Optimal

Fiscal Policy. Johns Hopkins University Press for Resources for the Future, Inc. The

classic on continuous time optimal control applications to macroeconomics, with

attention to fiscal policy.

Auerbach, Alan J. and Laurence J. Kotlikoff (1987) Dynamic Fiscal Policy. Cambridge

University Press, Cambridge. The life-cycle model examined theoretically and

quantitatively in great detail, with attention to fiscal policy.

Azariadis, Costas (1993) Intertemporal Macroeconomics. Basil Blackwell, Cambridge, MA. A

solid survey of modern macroeconomic theory, with a useful presentation of the technical

tools.

Bagliano, Fabio-Cesare and Guiseppe Bertola (2007) Models for Dynamic Macroeconomics.

Oxford University Press, NY, NY. A review of dynamic macroeconomic models.

Barro, Robert J. and Xavier Sala-i-Martin (1995) Economic Growth. McGraw Hill Book Co.,

New York, NY. A classic survey on the revival of growth theory in the last 15 years.

Barro, Robert J., (Ed.) (1989) Modern Business Cycle Theory. Harvard University Press,

Cambridge, MA. Series of articles discussing the important macroeconomic theories of

the time.

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Blanchard, Olivier J. and Stanley Fischer (1989) Lectures on Macroeconomics. The MIT Press,

Cambridge, MA. A classic textbook at its time.

Brunnermeier, M. (2001) Asset Pricing under Asymmetric Information - Bubbles, Crashes,

Technical Analysis and Herding. Oxford University Press. Classic on deviations from

market efficiency in asset markets.

Canova, Fabio (2007). Methods for Applied Macroeconomic Research (Princeton, NJ: Princeton

University Press). Applied macroeconomics and econometric methods.

Chow, Gregory (1997) Dynamic Economics: Optimization by the Lagrangean Method. Oxford

University Press, Oxford, UK. This is a solid advanced text that examines several

existing applications in dynamic economics and finance using the Lagrangean technique

as opposed to Dynamic Programming.

Cochrane, John H. (2001). Asset Pricing (Princeton, NJ: Princeton University Press, 2nd

Edition

available in 2005). The up-to-date review of finance, both in theory and econometric

practice.

Cooley, Thomas (Ed.) (1995) Frontiers of Business Cycle Research. Princeton University Press,

Princeton, NJ. Series of articles discussing the important contributions and advances of

the real business cycle research program.

Deaton, Angus (1992) Understanding Consumption. Claredon Lectures in Economics, Claredon

Press, Oxford. A primer on consumption theory.

Debreu, Gerard (1959) Theory of Value: An Axiomatic Analysis of Economic Equilibrium.

Cowles Foundation Monograph 17, Yale University Press, New Haven, CT. The classic

on general equilibrium analysis.

DeJong, David N. with Chetan Dave (2007). Structural Macroeconometrics Princeton, NJ:

Princeton University Press). Econometric methods and macroeconomics.

Dixit, Avinash K. (1990) Optimization in Economics, Second Edition. Oxford University Press,

New York, NY. A very well written monograph which gives a useful introduction to

some basic economic theories and problems.

Dixit, Avinash K. and Robert Pyndyck (1994) Investment Under Uncertainty. Princeton

University Press, Princeton, NJ. The classic on the subject.

Duffie, Darrell (1988) Security Markets: Stochastic Models. Academic Press, New York, NY.

An advanced text in finance theory and asset pricing.

Duffie, Darrell (1992) Dynamic Asset Pricing Theory. Princeton University Press, Princeton,

NJ. A follow up to Duffie (1988), it is an advanced text in finance theory and asset

pricing.

18

Evans, George and Seppo Honkapohja (2001) Learning and Expectations in Macroeconomics.

Princeton University Press, Princeton, NJ. This advanced book presents the research

agenda of the modern approach to expectation formation and learning activity by

economic agents.

Farmer, Roger E. A. (1993) The Macroeconomics of Self-Fulfilling Prophecies. The MIT Press,

Cambridge, MA. An useful survey of some of the main modern macroeconomic theories

and applications.

Friedman, Benjamin M. and Frank H. Hahn (Eds.) (1990) Handbook of Monetary Economics,

Volumes 1 and 2, North Holland: Amsterdam. Collection of surveys in the area of

monetary economics.

Gong, Gang and Willi Semmler (2006). Stochastic Dynamic Macroeconomics: Theory and

Empirical Evidence. (Oxford: Oxford University Press).

Gray, Dale F. and S. Malone (2007) Macrofinancial Risk Analysis. Wiley Finance, NY.

Harris, Milton (1987) Dynamic Economic Analysis. Oxford University Press, New York, NY.

More advanced, this is a monograph that gives a rigorous treatment of topics in capital

theory and the dynamics of capital accumulation.

Heijdra, Ben J. and Frederick Van Der Ploeg (2002) Foundations of Modern Macroeconomics.

Oxford University Press. Oxford UK. A recent and useful treatise in modern

macroeconomics covering a wide range of topics and models.

Huang, Chi-Fu and Robert H. Litzenberger (1988) Foundations for Financial Economics. North

Holland: Amsterdam. Classic on modern finance theory and asset pricing.

Judd, Kenneth L. (1999) Numerical Methods in Economics. The MIT Press, Cambridge, MA.

A classic on simulation methods in economic analysis.

Lucas, Jr., Robert E. (1987) Models of Business Cycles. Basil Blackwell, Cambridge, MA. An

in depth discussion of basic growth theory under uncertainty with special attention to the

role of money.

Mas-Colell, Andreu, Michael Whinston and Jerry Green (1995) Microeconomic Theory.

Oxford University Press, Cambridge, MA. The most modern synthesis of basic

economic theory from a rigorous perspective, it has some of the main microeconomic

applications. Highly recommended.

McCandless, George T. with Neil Wallace (1992) An Introduction to Dynamic Macroeconomic

Theory: An Overlapping Generations Approach. Harvard University Press, Cambridge,

MA. A low-level textbook the introduces the overlapping generations approach to

macroeconomic theory.

19

Obstfeld, Maurice and Kenneth Rogoff (1996) Foundations of International Macroeconomics.

The MIT Press, Cambridge, MA. The graduate textbook in macroeconomics with focus

on the international trade and international finance aspects of the field. The book is a

treatise on the subject and may be used as background.

Romer, David (1995) Advanced Macroeconomics. McGraw Hill Book Co., New York, NY. A

well-written and popular textbook of modern macroeconomics with a variety of topics

surveyed. (up to the fourth edition now).

Sargent, Thomas J. (1987) Macroeconomic Theory, Second Edition. Academic Press, San

Diego, CA. The first Sargent textbook, has impressive presentations of technical tools

and several discussions of classic useful topics.

Starr, Ross M. (1997) General Equilibrium Theory: An Introduction. Cambridge University

Press, Cambridge, UK. A valuable and accessible introduction to abstract general

equilibrium theory. Low to medium level.

Stokey, Nancy L., Robert E. Lucas, with Edward C. Prescott (1989) Recursive Methods in

Economic Dynamics. Harvard University Press, Cambridge, MA. Advanced book on

mathematical methods for economics. This is a book with an in depth presentation of the

recursive approach to economics, I recommend it highly. Note: the Harris (1987) book is

a “baby” version of some of the chapters in this book.

Sundaram, Rangarajam K. (1996) A First Course in Optimization Theory. Cambridge

University Press, Cambridge, UK. This is a very good introduction to the mathematics of

(mostly static) optimization used in economics.

Taylor, John and Michael Woodford (Eds.) (2000) Handbooks of Macroeconomics. Volumes 1,

2, and 3; North Holland: Amsterdam. Solid, useful and most recent collection of surveys

in the field.

Turnovsky, Stephen J. (1997) International Macroeconomic Dynamics. The MIT Press,

Cambridge, MA. A solid book presenting the research program of Turnovsky and many

of his co-authors in the areas of monetary and fiscal policy with attention to the

international aspects. Several analytical technical tools are presented in great detail.

Covers mostly continuous time macroeconomic theory.

Turnovsky, Stephen J. (2000) Methods of Macroeconomic Dynamics, Second Edition The MIT

Press, Cambridge, MA. A solid book presenting the research program of Turnovsky and

many of his co-authors in the areas of monetary and fiscal policy. Several analytical

technical tools are presented in great detail. Covers mostly continuous time

macroeconomic theory.

Walsh, Carl E. (2003). Monetary Theory and Policy (Cambridge, MA: IT Press). Basic coverage

of monetary theory and policy, useful discussion of time consistency issues.

20

Wickens, Michael (2008) Macroeconomic Theory: A Dynamic General Equilibrium Approach.

Princeton University Press. A simple and modern survey of dynamic macroeconomic

theory.

Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy.

Princeton University Press, Princeton, NJ. This is an important recent book. It presents a

synthesis of one school of macroeconomic thought, the New-Keynesian approach (AKA

the New Keneysian bible), and expands into new approaches of price level determination

and interaction between monetary and fiscal policy.

General References:

Durlauf, Stephen et al (2002) The New Palgrave Dictionary of Economics. This is a new edition. The

older edition is also available. Eatwell, John, M. Milgate and P. Newman (1987) The New

Palgrave Dictionary of Economics. The Macmillan Press, New York, NY. A good reference for

some topics you where may want to learn the basics. Available at the Tisch Library.

Newman, Peter, M. Milgate, and J. Eatwell, Eds. (1992) The New Palgrave Dictionary of Money and

Finance. Stockton Press, New York, NY. A good reference for some topics here you may want

to learn the basics. Available at the Tisch Library.

An important annual publication is the NBER(National Bureau of Economic Research)

Macroeconomics Annual; various editors, 1986-present. Available at the library.

Another important publication is the NBER Working Papers Series; various authors, 1981-

present. Available at the library and on the web: www.nber.org

Software Reference: Available at the Tisch Library:

Hamilton, Lawrence H. (2012) Statistics with STATA.Thomson, Belmont, CA.

Wolfram, Stephen (1996) The Mathematica Book. Cambridge University Press, Cambridge, UK.

21

Spring 2014 Term Schedule: EC206: Macro Theory II

January Tentative Effective

15 W First Class:

16 Th

17 F

18 S

19 Su

20 M No Class-University Holiday

21 T

22 W Monday Schedule - Class:

23 Th

24 F

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28 T

29 W Class:

30 Th

31 F

February

1 S

2 Su

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4 T

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6 Th

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10 M Class:

11 T

12 W Class:

13 Th

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15 S

16 Su

17 M No Class – University Holiday

18 T

19 W Class:

20 Th Monday Schedule - Class:

21 F

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23 Su

24 M Class:

22

25 T

26 W Class:

27 Th

28 F

March

1 S

2 Su

3 M Class: Mid-term I

4 T

5 W Class:

6 Th

7 F

8 S

9 Su

10 M Class:

11 T

12 W Class:

13 Th

14 F

15 S Spring break

16 Su Spring break

17 M Spring break

18 T Spring break

19 W Spring break

20 Th Spring break

21 F Spring break

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23 Su Spring break

24

M

Class:

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April

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3 Th

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8 Tu

9 We Class: Mid-Term II

10 Th

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13 Su

14 Mo No Class – University Holiday

15 Tu

16 We Class:

17 Th

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20 Su

21 Mo Class:

22 Tu

23 We Class:

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28 M Last Class:

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30 W Paper Course due by 5:00PM

May

1 Th

2 Fr

3 Sa

4 Su …

9

F

Final Exam: 8:30-10:30AM

All Material included

M. Bianconi January 2014