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York University Faculty of Liberal Arts & Professional Studies Department of Economics Fall 2013 AP/ECON4020 3.0 – Advanced Macroeconomics Calendar Course Description / Prerequisite / Co-Requisite This course surveys recent developments in macroeconomic research. Among the topics covered are rational expectation models, consumption theory, new Keynesian models of staggering wages and prices, menu costs, efficiency wages and imperfect competition, and new classical and new Keynesian business cycle theories. Prerequisites: AP/ECON 2400 3.00 and AP/ECON 2450 3.00 or equivalents. Recommended prior completion: AP/ECON 2300, AP/ECON 2350 3.00, and AP/ECON 3530 3.00. Course credit exclusions: None. PRIOR TO FALL 2009: Course credit exclusions: AK/ECON 4020 3.00, AS/ECON 4010 3.00, GL/ECON 4230 3.00. Course Instructor/Contact Instructor: David K. Lee, Ph. D. Office: 738 Atkinson College Email: [email protected] Phone: 416-736-2100 Ext. 33486 Course Consultation Hours: Tuesdays 1:00 pm – 3:00 pm Course Web Site: TBA Lecture Time and Location: Lecture: Tue/Thu 10:00am-11:30am, CB129 TA hours: TBA Expanded Course Description This course is intended to give a full coverage of modern macroeconomic theory and its application to stabilization policy. How, if at all, can government fight unemployment and inflation? Should they even try? The effectiveness of fiscal and monetary policies will be discussed from the points of view of Keynesians and Monetarists, and of those macroeconomists who believe that rational expectations on the part of economic agents render both types of stabilization policies ineffective. Organization of the Course This course involves formal lectures presented by the course instructor. The classroom technology will be used extensively, such as PowerPoint, or MS word format presentation. There will be extensive usages of the course web site. Reading assignments, practice problems, problem solving, etc., for each lecture session, tutorial sessions or TA availability, etc., will be announced on the course web site. Course Text / Readings Textbook (Required): Advanced Macroeconomics (4th edition) by David Romer. McGraw-Hill Publisher, 2012 (Third edition may be optional). There are supplementary materials that are not in the textbook. These supplementary materials will be discussed in class and the class notes might be posted on the course website. Evaluation * The grade for this course is composed of the mark received for each of the following components: Type of Assessment Problem Sets Midterm Exam Final Exam TOTAL Group/Individual Individual Individual Individual Percent/Weight 20 30 50 100% Date TBA Oct 17 TBA The final course grade (FG) will be determined based on the following formula: FG = Max {0.2×Problem Sets + 0.3×Midterm + 0.5×Final, 0.2×Problem Sets+0.8×Final} More detailed information is available on the course web site about each of the assessments. Students will receive the results of their first exam/term work before the final deadline for dropping courses without academic penalty. The Midterm Exam will cover Session 1 to 5 materials. The Final Exam will cover the entire semester. Two Problem Sets will be given (posted on the course web site) for this course. Students are required to be aware and follow the submission instruction that is announced with the problem sets postings. Please note that I strongly believe that the best learning experiences occur when there are healthy attendance and discussions in the classroom. Therefore, I have a policy to give some bonus points based on class attendance and participation (usually maximum of 5%) in order to encourage attendance and classroom discussion. Feel free to ask any questions or simply make comments on relevant topics at any time. The following conversions will be used in converting percentage grades to letter grades: 90-100 (A+), 80-89 (A), 75-79 (B+), 70-74 (B), 65-69 (C+), 60-64 (C), 55-59 (D+), 50-54 (D), 40-49 (E), 0-39 (F). Practice problems will be posted in the course web site throughout the semester. Some of them may be solved in class. These problems will not be graded, however, I encourage you to work through them. It will help you understanding the course material and consequently, increase the probability that you will do well in the course. Practice may not always make perfect, but it’s a good start. Missed Tests: There will be no deferred midterm exam. Students with a documented reason for missing a course test, such as illness, compassionate grounds, etc., which is confirmed by supporting documentation (e.g., doctor’s letter) may request accommodation from the Course Instructor. (State accommodation arrangement: e.g., allowed to write a make-up final examt on xx date.) Further extensions or accommodation will require students to submit a formal petition to the Faculty. TOPICS – TENTATIVE SEQUENCE AND SCHEDULE Week Topic 01 Sep 10, 12 A. Introduction and Traditional Keynesian Theories: *George Akerlof, "The Missing Motivation in Macroeconomics," American Economic Review, March 2007, pp. 5-36. *David Romer, Third Edition, Chapter 5, "Traditional Keynesian Theories of Fluctuations," Sections 5.1 and 5.3-5.6, pp. 222-231, and 242-270. 02 Sep 17, 19 Equilibrium Concepts: *David Romer, Fourth Edition, Chapter 6 Part B, "Microeconomic Foundations of Incomplete Nominal Adjustment. *Stanley Fischer, "Long-Term Contracts, Rational Expectations and the Optimal Money Supply Rate," Journal of Political Economy, February 1977, pp. 191-205. *Thomas Sargent and Neil Wallace,“ Rational Expectations and the Theory of Economic Policy,” Journal of Monetary Economics, Issue 2, 1976, pp. 169-183. Thomas Sargent, "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity 1973:2, pp. 429-472. John Taylor, "Staggered Wage Setting in a Macro Model," American Economic Review Papers and Proceedings, May 1979, pp. 108-113. Laurence Ball, "Credible Disinflation with Staggered Price Setting," American Economic Review, March, 1994, pp. 282-289. Dennis Carlton, "The Rigidity of Prices," American Economic Review, September 1986, pp. 637-658. Mark Bils and Peter Klenow, —Some Evidence on the Importance of Sticky Prices,“ Journal of Political Economy, October 2004, pp. 947-985. Steven Cecchetti, "Staggered Contracts and the Frequency of Price Adjustment," Quarterly Journal of Economics, Supplement, 1985, pp. 935-959. Daniel Kahneman, Jack Knetsch and Richard Thaler, "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, September 1986, pp. 728-741. Eldar Shafir, Peter Diamond, and Amos Tversky, "On Money Illusion," Quarterly Journal of Economics, May 1997, pp. 341-374. Franco Modigliani and Richard Cohen, “Inflation, Rational Valuation and the Market,” Financial Analysts Journal, March 1979, pp. 2444. John Campbell and Tuomo Vuolteenaho, “Inflation Illusion and Stock Prices,” American Economic Review, May 2004, pp. 19-23. Jay Ritter and Richard Warr, “The Decline of Inflation and the Bull Market of 1982¬1999,” Financial Analysts Journal, March 2002, pp. 29-61. 03 Sep 24, 26 Consumption: *David Romer, Fourth Edition, Chapter 8, "Consumption," *Chang-Tai Hsieh, "Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund," American Economic Review, March 2003, pp. 397-405. Milton Friedman, A Theory of The Consumption Function, Chapters I, II, and III, pp. 3-37. Robert Hall, "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, December 1978, pp. 971-987. Gary Becker and Kevin Murphy, "A Theory of Rational Addiction," Journal of Political Economy, August, 1988, pp. 675-700. David Laibson, Andrea Repetto and Jeremy Tobacman, "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, 1998:1, 91-196. Richard Thaler and Shlomo Benartzi, "Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving." Journal of Political Economy, 112:1 Pt.2, Feb. 2004, pp. S164-S187. George-Marios Angeletos, David Laibson, Andrea Repetto, Jeremy Tobacman, and Steven Weinberg, "The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, Summer 2001, pp. 47-68. David Gross and Nicholas Souleles, "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," Quarterly Journal of Economics, February 2002, pp. 149-185. 04 Oct 1, 3 Investment and Financial Markets: *David Romer, Fourth Edition, Chapter 9, "Investment." *Franco Modigliani and Merton H. Miller, "The Cost of Capital, Corporation Finance and the Theory of Investment," American Economic Review, June 1958, pp. 261-297. *Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics, February 1990, pp. 87-114. Michael C. Jensen and William H. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," Journal of Financial Economics, 3:4 (October 1976), pp.305-360. Franklin Allen and Douglas Gale, “Bubbles and Crises,” Economic Journal, January 2000, pp. 1-20. Jason Cummins, Kevin Hassett, and Glenn Hubbard, "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, 1994:2, pp. 75-138. Maurice Obstfeld and Kenneth Rogoff, Foundations of International Macroeconomics (Cambridge: MIT Press, 1996), pp. 105-113. Andrei Shleifer and Robert Vishny, “The Limits of Arbitrage,” Journal of Finance, March 1997, pp, 35-55. Jean Tirole, The Theory of Corporate Finance (Princeton, NJ: Princeton University Press, 2006). James Tobin, “A General Equilibrium Approach to Monetary Theory,” Journal of Money, Credit and Banking, February 1969, pp.15-29. 05 Oct 8, 10 The Stock Market: *David Romer, Fourth Edition, Chapter 8, Sections 8.5, "Consumption and Risky Assets”. *Lawrence H. Summers, "Does the Stock Market Rationally Reflect Fundamental Values?" Journal of Finance, July 1986, pp. 591-601. Robert E. Lucas, Jr., "Asset Prices in an Exchange Economy," Econometrica, November 1978, pp. 1429-1445. Robert J. Shiller, "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?" American Economic Review, June 1981, pp. 421-436. John Campbell and Robert Shiller, "Cointegration and Tests of Present Value Models," Journal of Political Economy, October 1987, pp. 1062-1088. J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann, "Noise Trader Risk in Financial Markets," Journal of Political Economy, August 1990, pp. 703-738. 06 Oct 15, 17 07 Oct 22, 24 Review (Oct 15) and Midterm Exam (Oct 17) Nature of Unemployment and Theories of Unemployment: *David Romer, Fourth Edition, Chapter 6, Section 6.8, "Coordination Failure Models and Real Walrasian Theories," and Chapter 10. Christopher Pissarides, Equilibrium Unemployment Theory, Cambridge, U.K.: Blackwell, 1990). Steven Davis and John Haltiwanger, "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Macroeconomics Annual, 1990, pp. 123-168. Olivier Blanchard and Justin Wolfers, "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, March, 2000, pp. C1-33. Lars Ljungqvist and Thomas Sargent, "The European Unemployment Dilemma," Journal of Political Economy, June 1998, pp. 514-550. Charles Bean, "European Unemployment: A Survey," Journal of Economic Literature, June 1994, pp. 573-619. Olivier Blanchard and Lawrence Katz, "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, Winter 1997, pp. 51-72. Peter Diamond, "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, October 1982, pp. 881894. 08 and 09 Oct 29 Nov5, 7 Monetary Policy, Inflation, and the Central Bank: *Merton Miller and Daniel Orr, "A Model of the Demand for Money by Firms," Quarterly Journal of Economics, August 1966, pp. 413435. *George A. Akerlof, "Irving Fisher on His Head," Quarterly Journal of Economics, May 1979, pp. 169-187. *David Romer, Advanced Macroeconomics, Chapter 10, "Inflation and Monetary Policy." *Michael Woodford, "Monetary Policy in a World Without Money," International Finance, July 2000, pp. 229-260. *Thomas J. Sargent and Neil Wallace, "Some Unpleasant Monetarist Arithmetic,“ Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981, pp. 1-17. Available at: http://www.minneapolisfed.org/research/common/pub_detail.cfm?p b_autonum_id=151 *Richard Clarida, Jordi Galí, and Mark Gertler, "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," Quarterly Journal of Economics, February 2000, pp. 147-180. *Robert Barro and David Gordon, "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, August 1983, pp. 589-610. *Douglas Diamond and Philip Dybvig, "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, June 1983, pp. 401-419. Andrew Caplin and Daniel Spulber, "Menu Costs and the Neutrality of Money," Quarterly Journal of Economics, November 1987, pp. 703725. Andrew Caplin and John Leahy, "State-Dependent Pricing and the Dynamics of Money and Output," Quarterly Journal of Economics, August 1991, pp. 683-708. Ricardo Caballero, Eduardo Engel, and John Haltiwanger, "PlantLevel Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, 1995:2, pp. 1-39. Stephen Goldfeld, "The Demand for Money Revisited," Brookings Papers on Economic Activity, 1973:3, pp. 577-639. John Maynard Keynes, A Tract on Monetary Reform. London: Macmillan, 1923. Alberto Alesina and Lawrence Summers, "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, May 1993, pp. 151-162. Guillermo A. Calvo, —Staggered Prices in a Utility-Maximizing Framework,“ Journal of Monetary Economics, September 1983, pp. 383-398. John Taylor, "Discretion versus Policy Rules in Practice," Carnegie Rochester Series on Public Policy, December 1993, pp. 195-214. Kenneth Rogoff, "Globalization and Global Disinflation," in Monetary Policy and Uncertainty: Adapting to a Changing Economy (Kansas City, MO: Federal reserve bank of Kansas City, 2003), pp. 77-112. Available at: http://www.kc.frb.org/PUBLICAT/SYMPOS/2003/pdf/Rogoff2003. pdf Laurence Ball, "Efficient Rules for Monetary Policy," International Finance, April 1999, pp. 63-83. Paul R. Krugman, "It‘s Baaack: Japan‘s Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, 1998, no. 2., pp. 137-187, 204-205. Walter Bagehot, Lombard Street: A Description of the Money Market (London: Kegan, Paul & Co., 1873). Xavier Freixas and Jean-Charles Rochet, "The Macroeconomic Consequences of Financial Imperfections," chapter 6 in Microeconomics of Banking (Cambridge, MA: MIT Press, 1997). 10 Nov 12, 14 International Economics *David Romer, Third Edition, Chapter 5, Section 5.2, "The Open Economy," pp. 231-241. J. Marcus Fleming, "Domestic Financial Policies under Fixed and under Floating Exchange Rates," International Monetary Fund Staff Papers, November, 1962, pp. 369-379. *Rudiger Dornbusch, "Expectations and Exchange Rate Dynamics," Journal of Political Economy, December, 1976, pp. 1161-1176. *Paul Krugman, "Has the Adjustment Process Worked?“ in International Adjustment and Financing: The Lessons of 1985-1991, edited by C. Fred Bergsten (Washington, DC: Institute for International Economics, 1991), pp, 277- 322. Maurice Obstfeld and Kenneth Rogoff, “The Unsustainable U.S. Current Account Position Revisited,” in G7 Current Account Imbalances, edited by Richard Clarida (Chicago: University of Chicago Press, 2007), pp. 339-366. 11 Nov 19, 21 Unemployment (New Keynesian Theories): *David Romer, Fourth Edition, Chapter10.1-10.4, 10.9 "Unemployment," *David Romer, Third Edition, Chapter 6, Sections 6.4-6.6, "New Keynesian Economics," *Janet Yellen, "Efficiency Wage Models of Unemployment," American Economic Review, May 1984, pp. 200-205. *Carl Shapiro and Joseph E. Stiglitz, "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, June 1984, pp. 433-444. George Akerlof and Janet Yellen, "The Fair-Wage Effort Hypothesis and Unemployment," Quarterly Journal of Economics, May 1990, pp. 255-283. David Romer, Third Edition, Chapter 6, "Empirical Applications," and "Mankiw-Reis Model," Sections 6.12-6.13, pp. 328-339. Ernst Fehr and Jean-Robert Tyran, "Does Money Illusion Matter?" American Economic Review, December 2001, pp. 1239-62. N. Gregory Mankiw and Ricardo Reis, "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Quarterly Journal of Economics, November 2002, pp. 1295-1328. George Akerlof and Janet Yellen, "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?" American Economic Review, September 1985, pp. 708-720. Olivier Blanchard and Nobuhiro Kiyotaki, "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, September 1987, pp. 647-666. Laurence Ball and David Romer, "Are Prices too Sticky?" Quarterly Journal of Economics, August 1989, pp. 507-524. Alan Blinder, "Why are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, May 1991, pp. 89100. 12 Nov 26, 28 Economic Growth and Business Cycle *David Romer, Fourth Edition, Chapter 1. Paul M. Romer, “Increasing returns and long-run growth,” Journal of Political Economy, Volume 94, No. 5, pp. 1002-37. Robert E. Lucas, “On the mechanics of economic development,” Journal of Monetary Economics, 22, 1988, pp. 3-42. *David Romer, Third Edition, Chapter 4 Finn E. Kydland, and Edward C. Prescott, “Time to build and aggregate fluctuations,” Econometrica, Volume 50, No 6, 1982, pp. 1345-70 Jeremy Greenwood, Zvi Hercowitz, and Gregory W. Huffman, “Investment, capacity utilization and the real business cycle,” American Economic Review, June 1988, Volume 78, No. 3, pp.40217. *George Akerlof and Janet Yellen, "A Near Rational Model of the Business Cycle, with Wage and Price Inertia," Quarterly Journal of Economics, September 1985, pp. 823-838. *N. Gregory Mankiw, "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," Quarterly Journal of Economics, May 1985, pp. 529-537. Final Exam (TBA, Covered the entire materials) New Information and Changes: The schedule is subject to change –sometimes there are unexpected absences or we bog down on an issue. Check your class notes, or contact me for up-dated work schedules. It may be very possible to make some adjustments of lectures and/or exams schedules. Students may also have handouts for the topics discussed in the class. It is students’ responsibility to be aware of any policy (or schedule change), or to collect handouts from classes. If you miss classes, contact the instructor before or immediate after, and check if there is any policy change or handout distributed. There is no excuse for not knowing course policies or schedule changes, or for not having handouts. Additional Information / Notes Important Course Information for Students All students are expected to familiarize themselves with the following information, available on the Senate Committee on Curriculum & Academic Standards webpage (see Reports, Initiatives, Documents) - http://www.yorku.ca/secretariat/senate_cte_main_pages/ccas.htm York’s Academic Honesty Policy and Procedures/Academic Integrity Website Ethics Review Process for research involving human participants Course requirement accommodation for students with disabilities, including physical, medical, systemic, learning and psychiatric disabilities Student Conduct Standards Religious Observance Accommodation IMPORTANT COURSE INFORMATION The Senate Academic Standards, Curriculum and Pedagogy (ASCP) provides a Student Information Sheet that includes: York's Academic Honesty Policy and Procedures / Academic Integrity Web site Access/Disability Ethics Review Process for Research Involving Human Participants Religious Observance Accommodation Student Code of Conduct Additional information: Academic Accommodation for Students with Disabilities Alternate Exam and Test Scheduling Grading Scheme and Feedback Policy The Senate Grading Scheme and Feedback Policy stipulates that (a) the grading scheme (i.e. kinds and weights of assignments, essays, exams, etc.) be announced, and be available in writing, within the first two weeks of class, and that, (b) under normal circumstances, graded feedback worth at least 15% of the final grade for Fall, Winter or Summer Term, and 30% for ‘full year’ courses offered in the Fall/Winter Term be received by students in all courses prior to the final withdrawal date from a course without receiving a grade. Important University Sessional Dates ( you will find classes and exams start/end dates, reading/co-curricular week, add/drop deadlines, holidays, University closings and more. http://www.registrar.yorku.ca/importantdates/index.htm "20% Rule" No examinations or tests collectively worth more than 20% of the final grade in a course will be given during the final 14 calendar days of classes in a term. The exceptions to the rule are classes which regularly meet Friday evenings or on Saturday and/or Sunday at any time, and courses offered in the compressed summer terms. Final course grades may be adjusted to conform to Program or Faculty grades distribution profiles. Services for Mature and Part-time Students The Atkinson Centre for Mature and Part-time Students (ACMAPS) maintains and strengthens York University’s ongoing commitment to welcome and to serve the needs of mature and part-time students. For further information and assistance visit: http://www.yorku.ca/acmaps