Download MACROECONOMICS III 2013-2014 Dr. Pedro Gomes pgomes@eco

MACROECONOMICS III
2013-2014
Dr. Pedro Gomes
[email protected]
Syllabus
1. General Information.
Lectures:
Classes:
Office hours:
2. Goals.
The objective of the course is to introduce the students to the advance study of
macroeconomics, building on the notions covered in Macroeconomics I and Macroeconomics
II. The first part of the course introduces three types of frictions in a standard Real Business
Cycle model: nominal rigidities (New-Keynesian model); search and matching frictions
(Diamond-Mortensen-Pissarides model) and financial frictions (financial accelerator model).
The second part of the course focuses on Fiscal policy and some ongoing debates. We will
look at the effects of government spending and taxation and the interaction between fiscal
and monetary policy. We will also examine optimal policy under complete and incomplete
markets and the problem of time inconsistency.
The broader objective of the course is to give the students to a number of technical skills that
are going to be fundamental for a successful PhD. We will use Matlab and Dynare to solve
the dynamic stochastic general equilibrium models, STATA or Eviews for some empirical
applications and Latex for the preparation of assignments and presentations.
3. Textbooks.



Lars Ljungqvist and Thomas Sargent, Recursive Macroeconomic Theory, 3rd Edition, MIT
Press, 2004.
Christopher Pissarides, Equilibrium Unemployment Theory, 2nd edition. Cambridge: MIT
Press, 2000
Jordi Gali, Monetary Policy, Inflation and the Business Cycle, Princeton University Press,
2008.
4. Detailed course outline.
1. Introduction
a. Syllabus
b. Objectives and Methodology
2. Money and Monetary policy
a. Empirical evidence
b. Introducing money
i.
Money-in-utility
ii.
Cash-in-advance approach
c. Do we really need money? The New-Keynesian model
i.
New-Keynesian Phillips curve
ii.
Indeterminacy and the Taylor principle
d. Some basic extensions
3. Labour market
a. Why do we have unemployment?
b. Pissarides search and matching model
c. Efficiency and the Hosios condition
d. Worker flows
e. Shimer’s puzzle and possible solutions
4. Financial frictions
a. Collateral constraints
b. Bernanke-Gertler-Gilchrist and the Financial accelerator model
5. Fiscal policy – Positive analysis
a. Ricardian equivalence
b. Effects of government spending in theory and in the data
c. Monetary-fiscal policy interactions
i.
Fiscal dominance
ii.
Fiscal theory of price level
6. Fiscal policy – Normative analysis
a. Fiscal policy over the business cycle
i.
Barro’s tax smoothing
ii.
Optimal policy under complete markets
iii.
Optimal policy under incomplete markets
b. Capital versus labour income taxes
c. Commitment and time inconsistency
5. Bibliography




Introduction
Poterba, J. (2010). “Research Opportunities in Economics: Suggestions for the Coming
Decade”, National Science Foundation White Paper.
Rogoff, K. (2010). “Three Challenges Facing Modern Macroeconomics”, National Science
Foundation White Paper.
Reis, R. (2010). “Future Research in Macroeconomics”, National Science Foundation White
Paper.




Dynamic programming and the solution to dynamic expectation models
(*) Ljungqvist and Sargent, Chapters 2, 3 and 4.
Stokey and Lucas, Chapters 2 and 4.
Blanchard, O. and C. Kahn (2002): “The Solution of Linear Difference Models under
Rational Expectations”, Econometrica, 48, 1305-1311.


Money and Monetary policy
(*) Gali, J. (2008), “Monetary Policy, Inflation and the Business Cycle”, Princeton University
Press, chapters 2,3 and 4.
(*) Christiano, L., M. Eichenbaum, and C. Evans (1998):“Monetary Policy Shocks: What
Have We Learned and to What End?”, in J.B. Taylor, and M. Woodford eds., Handbook of
Macroeconomics, 1A, 65-148.
(*) McCandless, G. and W. Weber (1995): “Some Monetary Facts”, Federal Reserve Bank
of Minneapolis, Quarterly Review.
(*) Clarida, R., J. Gali and M. Gertler (1999): “The Science of Monetary Policy: A NewKeynesian Perspective”, Journal of Economic Literature, 37, 1661-1707.
(*) Woodford, M. (2001): “The Taylor Rule and Optimal Monetary Policy”, American
Economic Review, 91(2), 232-237.
Cooley, T. and G. Hansen (1989)” “Inflation Tax in a Real Business Cycle Model”, American
Economic Review, 79(4), 733-748.
Adam, K. and R. Billi (2006): “Optimal Monetary Policy under Commitment with a Zero
Bound on Nominal Interest Rates”, Journal of Money, Credit and Banking, 38(7), 1877-1905.
Bullard J. and K. Mitra (2002): “Learning About Monetary Policy Rules”, Journal of
Monetary Economics, 49(6), 1105-1130.
Eggertsson, G., and M.Woodford (2003): “The Zero-Bound on Interest Rates and Optimal
Monetary Policy”, Brooking Papers on Economic Activity, 1(1), 139-211.
Orphanides, A. (2003): “The Quest for Prosperity Without Inflation”, Journal of Monetary
Economics, 50, 633-663.
Smets, F. and R. Wouters (2007): “Shocks and Frictions in US Business Cycles: A Bayesian
DSGE Approach.” American Economic Review, 97(3), 586-606.











Yun, T. (2005): “Optimal Monetary Policy with Relative Price Distortions”, American
Economic Review, 95(1), 89-109.



Labour market
(*) Pissarides, C. (2000), “Equilibrium Unemployment Theory”, 2nd edition, MIT Press.
(*) Merz, M. (1995), "Search in the labor market and the real business cycle," Journal of
Monetary Economics, 36(2), 269-300.
(*) Shimer, R. (2005), "The Cyclical Behavior of Equilibrium Unemployment and
Vacancies," American Economic Review, 95(1), 25-49.
(*) Pissarides, C. (2009), "The Unemployment Volatility Puzzle: Is Wage Stickiness the
Answer?," Econometrica, 77(5), 1339-1369.
(*) Den Haan W., G. Ramey and J. Watson (2000) “Job Destruction and Propagation of
Shocks”, American Economic Review, 90(3), 482-498.
(*) Gomes, P. (2012). "Labour market flows: Facts from the United Kingdom," Labour
Economics, 19(2), 165-175.
Hall, R. (2006). “Job loss, job finding, and unemployment in the U.S. economy over the past
fifty years”. In: Gertler, M., Rogoff, K., NBER Macroeconomics Annual 2005, 1, 101–137.
Shimer, R. (2012), "Reassessing the Ins and Outs of Unemployment," Review of Economic
Dynamics, 15(2), 127-148.
Elsby, M., Michaels, R., Solon, G. (2009), “The ins and outs of cyclical unemployment”,
American Economic Journal: Macroeconomics, 1 (1), 84–110.
Fujita, S., Ramey, G. (2009), “The cyclicality of separation and job finding rates”,
International Economic Review, 50 (2), 415–430.
Hagerdorn, M., Manovskii, I. (2008): “The Cyclical Behavior of Equilibrium Unemployment
and Vacancies Revisited,” American Economic Review, 98, 1692–1706.
Hall, R. (2005): “Employment Fluctuations With Equilibrium Wage Stickiness,” American
Economic Review, 95, 50–65.
Shimer, R. (2004): “The Consequences of Rigid Wages in Search Models,” Journal of the
European Economic Association, 2, 469–479.
Hosios, A. (1990). "On the Efficiency of Matching and Related Models of Search and
Unemployment," Review of Economic Studies, 57(2), 279-98.

















Financial frictions
(*) Bernanke, B., Gertler, M., Gilchrist, S. (1999), “The Financial Accelerator in a
Quantitative Business Cycle Framework.” in J. Taylor and M. Woodford, Handbook of
Macroeconomics, 1341-93.
Bernanke, B., Gertler, M. (1989), “Agency Costs, Net Worth, and Business Fluctuations”,
American Economic Review, 79(1), 14—31.
Carlstrom, C., and Fuerst, T. (1997), ‘Agency Costs, NetWorth, and Business Fluctuations: A
Computable General Equilibrium Analysis,’ American Economic Review, 87(5), 893-910.
Kiyotaki, N., Moore, J. (1997), “Credit Cycles,” Journal of Political Economy, 105, 211-248.




















Fiscal policy – Positive analysis
(*) Barro, R. (1974), “Are Government Bonds Net Wealth?,” Journal of Political Economy,
82(6), 1095-1117.
(*) Baxter, M. and King R. (1993), “Fiscal Policy in General Equilibrium”, American
Economic Review, 83(3), 315-34.
(*) Linnemann, L. and Schabert, A. (2003), “Fiscal Policy in the New Neoclassical
Synthesis”, Journal of Money, Credit and Banking, 35(6), 911-29.
(*) Sargent, T. and Wallace, N. (1981), “Some Unpleasant Monetarist Arithmetic, Quarterly
Review, 5, 117.
(*) Leeper, E. (1991), “Equilibria Under Active and Passive Monetary and Fiscal Policies,”
Journal of Monetary Economics, 27(1), 129-147.
(*) Perotti, R. (2008), “In Search of the Transmission Mechanism of Fiscal Policy,” in NBER
Macroeconomics Annual 2007, 22, 169-226.
Finn, M. (1998), “Cyclical Effects of Governments Employment and Goods Purchases”,
International Economic Review, 39(3), 635-57.
Gomes, P. (2010), “Fiscal Policy and the Labour Market: The Effects of Public Sector
Employment and Wages”, IZA Discussion Papers 5321.
Leeper, E.; Walker, T. and Yang, S. (2010), “Government investment and fiscal stimulus,"
Journal of Monetary Economics, 57(8), 1000-1012.
Monacelli, T.; Perotti, R. and Trigari, A. (2010), “Unemployment fiscal multipliers," Journal
of Monetary Economics, 57(5), 531-553.
Gali, J.; Lopez-Salido, J. and Valles, J. (2007), “Understanding the Effects of Government
Spending on Consumption,” Journal of the European Economic Association, 5(1), 227-270.
Christiano, L.; Eichenbaum, M. and Rebelo, S. (2011), “When Is the Government Spending
Multiplier Large?," Journal of Political Economy, 119(1), 78 - 121.
Christiano, L. and Fitzgerald, T. (2000), “Understanding the fiscal theory of the price level,"
Economic Review, Federal Reserve Bank of Cleveland, Q II, 2-38.
Blanchard, O. and Perotti, R. (2002), “An Empirical Characterization of the Dynamic Effects
of Changes in Government Spending and Taxes On Output,” Quarterly Journal of
Economics, 117(4), 1329-1368.
Ramey, V. and Shapiro, M. (1998), “Costly capital reallocation and the effects of government
spending,” Carnegie-Rochester Conference Series on Public Policy, 48(1), 145-194.
Ramey, V. (2011), “Identifying Government Spending Shocks: It's all in the Timing,"
Quarterly Journal of Economics, 126(1), 1-50.
Fiscal policy – Normative analysis
(*) Barro, R. (1979), “On the determination of the public debt," Journal of Political
Economy, 87, 940-71.
(*) Lucas, R. and Stokey, N. (1983), “Optimal Fiscal and Monetary Policy in an Economy
without capital," Journal of Monetary Economics, 12, 55-93.






(*) Aiyagari, R.; Marcet, A.; Sargent, T. and Seppala, J. (2002), “Optimal taxation without
state-contingent debt", Journal of Political Economy, 110(6), 1220-1254.
(*) Chamley, C. (1986), “Optimal taxation of capital income in general equilibrium with
infinite lives," Econometrica, 54, 607-622.
Angeletos G. (2002), “Fiscal policy with non-contingent debt and optimal maturity
structure", Quarterly Journal of Economics, 117(3), 1105-1131.
Klein, P. and Rios-Rull, J. (2003), “Time-consistent optimal fiscal policy," International
Economic Review, 44(4), 1217-1245.
Debortoli, D. and Nunes, R. (2010), “Fiscal policy under loose commitment," Journal of
Economic Theory, 145(3), 1005-1032.
Chari, V.; Christiano, L. and Kehoe, P. (1994), “Optimal Fiscal Policy in a Business Cycle
Model". Journal of Political Economy, 102, 617-652.