Download MA2: Advanced Macroeconomics Prof. Orazio P. Attanasio Dr

MA2: Advanced Macroeconomics
Prof. Orazio P. Attanasio
Dr. Mariacristina De Nardi
Academic Year 2004/2005
Aims and Objectives
The aim of this course is to provide the students with an overview of some classic topics
in Macroeconomics, such as consumption, investment, business cycle models, asset
pricing. We will discuss some of the key facts that define each economic question, and
the most recent neoclassical theories offering a framework of analysis for the above facts.
We will also discuss the empirical evidence on such theories.
The tools used in the course include dynamic optimization in discrete time, as applied to
modern macroeconomic models. In the first week of the course we will cover some basic
concepts in dynamic programming, including the Maximum Principle. In investment, we
will also use continuous time techniques, for which we will provide the main tools. This
will enable you to read critically most of the recent macroeconomic literature, even the
more technical and rigorous articles.
We will use a textbook for some of the material in the course, Ljunqvist and Sargent
(2004): Recursive Macroeconomic Theory MIT press. However, some topics will be
taught using the articles in the reading list or alternative books, indicated below.
Timetable and Evaluation
During the course, you will be given several home-works on which you will receive
feedback, but that do not matter for the final mark. Only the score of the exam, held in
Term 3, will count for the final mark. However, home-works will have the same format
as the final exam, so it is strongly suggested to spend plenty of time on them. The final
exam is a 2 hour paper, with 2 compulsory questions out of 4.
The course meets for 10 weeks in Term 2, each Wednesday 11-1 in Drayton House,
starting from January 12. In the first week, to be able to cover the material on Dynamic
Programming, we will also meet on Friday (14/1) from 2 to 4 in the same room. The first
five weeks of the course will be taught by Professor Attanasio, while the last 5 weeks will
be taught by Dr Mariacristina De Nardi. There will be four hours of classes that will be
taught by Dr De Nardi. The times of the classes will be announced at a later date.
Syllabus
0. Dynamic Optimization
We will cover the basic tools of Discrete Time Stochastic Dynamic Programming. We
will use some notes prepared by Dr Gianluca Violante. Most of this material is covered in
the textbook Ljunqvist and Sargent (2004): Recursive Macroeconomic Theory (MIT
Press), which will be used throughout the course. Another useful source is Recursive
Methods in Economic Dynamics, by Nancy Stokey and Robert Lucas (Harvard University
Press).
1. Consumption
We look at the basic facts about how consumption evolves over the life cycle and we
formalize a few models to explain those features. We start from the permanent income
hypothesis, and move to more recent theories of consumption demand for liquidity
constraint households.
Attanasio, O., “Consumption”, chapter 11, Handbook of Macroeconomics, North
Holland, Elsevier.
Deaton, A., Understanding Consumption, Oxford University Press, 1992.
Flavin , M., “The Adjustment of Consumption to Changing Expectations about Future
Income”, Journal of Political Economy, 1981, 974-1009.
Hall, R., “Stochastic Implications of the Life Cycle Permanent Income Hypothesis,”
Journal of Political Economy, December 1978, 971-87.
Ljunqvist and Sargent (2004): Recursive Macroeconomic Theory Chapter 16.
2. Asset Pricing
In this lecture we sketch the Intertemporal Capital Asset Pricing Model and discuss some
of the problems associated with it.
Campbell J., “Asset Pricing, Consumption and the Business Cycle”, Handbook of
Macroeconomics, chapter 19, North-Holland, Elsevier.
Kocherlakota, N.: “The Equity Premium: it's still a puzzle”, Journal of Economic
Literature, 1996.
Hansen, L.P. and K. Jagannathan (1991): “Implications of Security Market Data for
Models of Dynamic Economies”, Journal of Political Economy, 99, 225-62.
Ljunqvist and Sargent (2004): Recursive Macroeconomic Theory Chapter 13.
3. Investment
We look at the basic facts on investment, drawn from aggregate data and from firm and
plan level data and we formalize a few models to explain those features. We start from
the neoclassical Tobin's Q model, we list its failures and we move on to more recent
theories where irreversibility and uncertainty have a crucial role.
Abel A. and J. Eberly, ``A Unified Model of Investment under Uncertainty'', American
Economic Review, 1994, 1369-1384.
Caballero, Ricardo J, Aggregate Investment, chapter 12, Handbook of Macroeconomics,
North Holland, Elsevier
Doms M. and T. Dunne, “Capital Adjustment Patterns in Manufacturing Plants”, Review
of Economic Dynamics, 1998, pp.409-429.''
Hayashi, F., “Tobin's Marginal q and Average q: A Neoclassical Reinterpretation,”
Econometrica (50), 213-224, 1982.
Hubbard, Glenn, “Capital-Market Imperfections and Investment”, Journal of Economic
Literature, 36(1), March 1998, pages 193-225.
4. Real Business Cycle Models
In this part of the course we look at the main attempts at explaining economic
fluctuations by equilibrium models, without appealing to imperfections and nominal
rigidities. While not very successful, the Real Business Cycle theory has stimulated a
large volume of research and has made important methodological contributions.
T.F. Cooley and E.C. Prescott (1995): ''Economic Growth and Business Cycles'' in
T.F.Cooley (ed.) Frontiers of Business Cycle Research, Princeton University Press.
F. Kydland and E. Prescott (1982): “Time to Build and Aggregate Fluctuations”,
Econometrica, 50, 1345-70.
Ljunqvist and Sargent (2004): Recursive Macroeconomic Theory Chapters 7 & 8.
5. The Government in the Neoclassical Growth Model
We introduce the government in the neoclassical growth model to understand what are
the effects of permanent/transitory and expected/unexpected changes in the tax regime on
the equilibrium consumption and investment allocations. We ask how would taxes be set
by a benevolent government who is forced to choose distortionary taxes to finance
expenditures, but aims at maximizing social welfare, and through this framework we
develop the basic theory of optimal taxation.
Barro, Robert J., “Are government bonds net wealth?”, Journal of Political Economy, 81,
1974, pp.1095-1117.
Chari V.V., Kehoe P., “Optimal Fiscal and Monetary Policy”, chapter 26, Handbook of
Macroeconomics, North Holland, Elsevier.
Ljunqvist and Sargent (2004): Recursive Macroeconomic Theory Chapters 10, 11, 12 &
15.
6. Overlapping Generations: An Application to the Analysis of Social Security
Reform.
In this part of the course we discuss one of the work horses of macroeconomic analysis:
the overlapping generation model. We also use it to discuss social security reform.
Auerbach, A. and L. Kotlikoff (1987): Dynamic Fiscal Policy Cambridge University
Press.
P. Diamond (1965): ''National Debt in a Neoclassical Growth Model'' Journal of Political
Economy, 55, 1126-1150.
P. Diamond (1998): “The Economics of Social Security Reform”, NBER Working Paper
No 6719.
7. Macroeconomics of Labor Markets
We describe the key facts about workers and job flows in the labor market and we study
equilibrium unemployment models that are consistent with those facts, essentially
matching models which are equilibrium two-sided search models. The key features of
these models are two: the aggregate matching function, and the Nash bargaining rule.
These models generally yield allocations which are not Pareto optimal. Time permitting,
we extend our analysis to competitive search models.
Davis S., Haltiwanger J., and Schuh, S., Job Creation and Destruction, MIT Press, 1996.
Mortensen D., and C. Pissarides, ”Job Reallocation, Employment Fluctuations, and
Unemployment”, chapter 18, Handbook of Macroeconomics, North Holland.
Ljunqvist and Sargent (2004): Recursive Macroeconomic Theory Chapters 6 and 26.