Download Econ_421_CourseOutline_Spring 2009-10.V2

Lahore University of Management Sciences
B.Sc. (Honours) Programme
2009-2010
Course Outline
Econ 421
(4 units)
Advanced Macroeconomics
Instructor
Anjum Nasim
Office Hours: Tuesday: 4-5 and Thursday 4-5 or by appointment
E-mail: [email protected]
Description
This course is intended for students who plan to undertake graduate study
in economics. The course relies heavily on techniques of dynamic
programming and dynamic optimization. Students are advised to consult
the mathematical appendix of the textbook (placed at the library
reserve desk) to decide whether the level of mathematics is manageable
for them before registering for the course.
The course uses dynamic general equilibrium (DGE) approach to study
macroeconomics. It builds on microeconomic foundations of optimizing
consumers and producers operating under resource and technology
constraints. A central feature of these models is the inter-temporal nature of
optimizing decisions and forward-looking expectation formation. The DGE
macroeconomics provides a common framework for analysing business
cycles and long-run growth. It lends itself to analysis of both the real
business cycle models with their assumptions of competitive markets and
flexible prices, and the New Keynesian models, which allow monopolistic
competition and some form of price rigidity in macro modelling.
This course develops the DGE framework, starting with the Ramsey model
with a central planner, and then extending this to a decentralized model in
which coordination takes place through markets in goods, labour and
financial assets. A range of fiscal policy issues are studied in this
framework. The closed economy model is extended to an open economy,
and to include the role of money in macroeconomy. This leads to the study
of general price level, inflation and models with imperfectly flexible prices.
Financial assets play an important role in the intertemporal optimization of
individuals. Theories for the pricing of financial assets are developed and
then applied to the pricing of bonds, equity and foreign exchange. Models
of economic growth and of the real business cycles are also studied within
the same general framework.
Goals
Upon successful completion of the course, students should have a good
understanding of the following:
1. The DGE approach to macro modelling
2. The equivalence of optimal solutions (regarding consumption,
saving, investment etc.) in the DGE model with centralized planning
and under decentralized market arrangement.
3. Sustainability of fiscal deficit; optimal government expenditures and
optimal taxes
4. The sustainable level of current account in a static economy and in a
growing economy
5. The role of money in macro economy; models of demand for money
6. Microeconomics of imperfectly flexible prices in macroeconomic
models
7. Models of asset pricing including CAPM and the application of asset
pricing models to stocks, bonds and the foreign exchange
8. The Obstfeld-Rogoff redux DGE model of exchange rate
determination
9. Use of monetary policy for inflation targeting; the choice of policy
instrument; rule-based versus discretionary monetary policy
10. The methodology of the real business cycle models
Prerequisites
Econ 210, Econ 220, Econ 222 and preferably Econ 262
Texts and
Readings
The textbook for the course is: Michael Wickens, Macroeconomic Theory,
A Dynamic General Equilibrium Approach, Princeton University Press,
2008. Hereafter referred to as MW.
Additional readings are given in the Reading List (see below).
Lectures &
Tutorials
28 sessions of 100 minutes each including midterm exam. Classes meet
twice weekly on Tuesday and Thursday from 1200 hours to 1350 hours.
Grading
Midterm Exam: 45%
Final Exam: 55%
Exercises and problem sets will be distributed from time to time. Exercises
will not be graded but you are strongly advised to do the exercises for a
deeper understanding of the material that we cover in class and to be able to
do well in exams.
Attendance and
Punctuality
Classes will start exactly on time, and students who are late by more than
five minutes will not be allowed to enter the classroom. Unless there is an
emergency, I would expect that you would not disturb the class by leaving at
any time when the class is in session.
Schedule for Lectures and Exams
Topic
Relevant chapters
from textbook (MW)
Chap. 2
Session # 1-2
The Basic DGE Model in a Closed Economy
(The centralized economy)
Session # 3-4
Economic Growth
Chap. 3
Session # 5-6
DGE Model in a Decentralized Economy
Chap. 4
Session # 7-8
Government Expenditure and Public Finance
Chap. 5
Session # 9-10
Further Issues in Public Finance
Chap. 6
Session # 11-12
The Open Economy
Chap. 7
Session # 13-14
The Monetary Economy
Chap. 8
Session # 15
Midterm Exam
Session # 16-17
Imperfectly Flexible Prices, and New Keynesian
Economics
Chap. 9
Session # 18-19
Asset Pricing and Macroeconomics
Chap. 10
Session # 20-21
Financial Markets
Chap. 11
Session # 22-23
Nominal Exchange Rates
Chap. 12
Session # 24-25
Monetary Policy
Chap. 13
Session # 26- 27
Real Business Cycles
Chap. 14
Session # 28
Review
Final Exam
Reading List
1. Introduction
Oliver Blanchard, “What do we know about Macroeconomics that Fisher and Wicksell
Did Not?”, The Quarterly Journal of Economics, Vol. 115, No. 4 (November 2000), pp.
1375-1409.
N. Gregory Mankiw, “The Macroeconomist as Scientist and Engineer”, Journal of
Economic Perspectives, Volume 20, Number 4-Fall 2006, pp. 29-46.
2. The DGE Model (Centralized Economy)
Oliver J. Blanchard and Stanley Fischer, Chapter 2 (section 2.1) in Lectures on
Macroeconomics, Cambridge, MA: MIT Press, 1989.
3. Economic Growth
David Romer, Advanced Macroeconomics, Third Edition, McGraw-Hill, 2006, Chapter
1, Chapter 2 (Part A) and Chapter 3 (Part A)
Robert J. Barro and Xavier Sala-i-Martin, Economic Growth, Second Edition
(Cambridge: MIT Press, 2004), Chapter 2 and Appendix A.3 (at end of
book).
Robert E. Hall and Charles I. Jones, “Why Do Some Countries Produce So Much
More Output per Worker than Others?” Quarterly Journal of Economics,
February 1999, pp. 83-116.
Robert M. Solow, “A Contribution to the Theory of Economic Growth,” Quarterly
Journal of Economics, February 1956, pp. 65-94..
Michael Kremer, “Population Growth and Technical Change: One Million B.C. to
1990,” Quarterly Journal of Economics, August 1993, pp. 681-716.
Paul M. Romer, “Endogenous Technical Change,” Journal of Political Economy,
October 1990 (Part 2), pp. S71-S102.
4. DGE Model in a Decentralized Economy
Oliver J. Blanchard and Stanley Fischer, Chapter 2 (section 2.2) in Lectures on
Macroeconomics, Cambridge, MA: MIT Press, 1989.
5. Government Expenditure and Public Finance
Oliver J. Blanchard and Stanley Fischer, Chapter 2 (section 2.3) in Lectures on
Macroeconomics, Cambridge, MA: MIT Press, 1989.
Robert J. Barro, “Are Government Bonds Net Wealth?” Journal of Political Economy 82:
1974, 1095-1117.
Robert J. Barro, “On the Determination of Public Debt”, Journal of Political Economy,
87: 1979, 940-71.
V.V. Chari, L.J. Christiano and P.J. Kehoe, “Optimal Fiscal Policy in a Business Cycle
Model”, Journal of Political Economy, 102, 1994: 617-652.
Peter A. Diamond, “National Debt in a Neoclassical Growth Model,” American
Economic Review, December 1965, pp. 1126-1150.
6. The Open Economy
Maurice Obstfeld, “International Macroeconomics: Beyond the Mundell-Fleming
Model”, First Annual Conference, International Monetary Fund Mundell-Fleming
Lecture, 2001.
7. The Monetary Economy
Robert E. Lucas, Nobel Lecture: Monetary Neutrality, Journal of Political Economy 104,
1996, 661-682.
Carl E. Walsh, Monetary Theory and Policy, Second Edition, The MIT Press, 2003,
Chapters 2 and 3.
8. Imperfectly Flexible Prices
John Taylor, “Staggered Wage Setting in a Macro Model”, The American Economic
Review, Papers and Proceedings, Vol. 69, No. 2 , May, 1979, pp. 108-113.
David Romer, “The New Keynesian Synthesis”, Journal of Economic Perspectives 7
(Winter) 1993, pp. 5-22.
9. Asset Pricing and Macroeconomics
J.H. Cochrane, Asset Pricing, Princeton University Press, 2001.
J.J. Campbell, A.W. Lo, and A.C. MacKinlay, The Econometrics of Financial Markets,
Princeton University Press, 1997, Chapter 5 and 8.
10. Financial Markets
J.H. Cochrane, Asset Pricing, Princeton University Press, 2001.
J.J. Campbell, A.W. Lo, and A.C. MacKinlay, The Econometrics of Financial Markets,
Princeton University Press, 1997.
11. Exchange Rates
Maurice Obstfeld and Kenneth Rogoff, “Exchange Rate Dynamics Redux, Journal of
Political Economy 103, 1995, pp. 624-60.
Carl E. Walsh, Monetary Theory and Policy, Second Edition, The MIT Press, 2003,
Chapter 6, Section 6.2.
12. Monetary Policy
Robert G. King, “The New IS-LM Model: Language Logic and Limits”, Federal Reserve
Bank of Richmond Economic Quarterly 86, no. 3 (summer 2000): 45-103.
Alberto Alesina and Lawrence H. Summers, "Central Bank Independence and
Macroeconomic Performance: Some Comparative Evidence," Journal of
Money, Credit and Banking, May 1993, pp. 151-162.
Paul R. Krugman, "It’s Baaack: Japan’s Slump and the Return of the Liquidity
Trap," Brookings Papers on Economic Activity, 1998:2, pp. 137-187, 204-205.
Thomas J. Sargent and Neil Wallace, "Some Unpleasant Monetarist Arithmetic,”
Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981, pp. 117. Available at:
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=151
Carl E. Walsh, Monetary Theory and Policy, Second Edition, The MIT Press, 2003.
Michael Woodford, "Monetary Policy in a World without Money," International
Finance, July 2000, pp. 229-260.
13. Real Business Cycles
David Romer, Advanced Macroeconomics, Third Edition, McGraw-Hill, 2006, Chapter
4.
Charles, I. Plosser, “Understanding Real Business Cycles”, Journal of Economic
Perspectives, Volume 3, No. 3, pp.51-77.
N. Gregory Mankiw, Real Business Cycles: A New Keynesian Perspective” Journal of
Economic Perspectives, Volume 3, No. 3, pp. 79-90.
D.K. Backus, S. Foresi, P.J. Kehoe, and F.E. Kydland, “International Real Business
Cycles”, Journal of Political Economy, 100, 1992, pp. 745-75.