Download ECON 7020-001 Macroeconomic Theory I

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Macroeconomic Theory I
Economics 7020
University of Colorado at Boulder
Professor JoAnne Feeney
Course Description
Topics
Macroeconomics is the study of the behavior of the aggregate economic variables of a nation. These
variables include aggregate output, consumption, investment, capital accumulation, and employment. The
study of macroeconomics also covers the behavior of national price variables, such as the Consumer Price
Index, real and nominal interest rates, and rates of inflation. We are interested in understanding how
these quantities and prices interact. We want to know the determinants of the level of each at a point in
time and the causes of their fluctuations over time. Not only do we want to explain aggregate behavior
within a country, but we also want to explain the persistent differences that aggregate variables exhibit
across countries. One area of primary importance to macroeconomists concerns cross-country disparity
in the per capita level of income and in growth rates of income. By contrast, we are also faced with
trying to explain the observed similarities in the properties of business cycles internationally. Finally,
we want to understand how government fiscal and monetary policies influence the aggregate economy.
Approach
It is obvious that a firm's output next year is a function of the level of investment in new equipment that
is undertaken this year. Similarly, a household's decision to borrow this year (to raise this year's
consumption) depends on how much it will have to pay in interest payments in the future. In order to
explain the behavior of output and consumption in the aggregate economy - which is comprised of lots
of households and firms - we need to understand this intertemporal dimension of economic decisions.
The study of macroeconomics thus becomes the study of intertemporal choices made in the aggregate.
A major part of the course will be devoted to building simple models of economic activity. ('Simple' is,
of course, a relative concept.) While the models will be simple, they will be relevant for understanding
a more complex world. Model building provides us with an "artificial economy" in which to carry out
experiments which are too costly (or impossible) to undertake in the actual economy. A simple model
allows us to focus on one particular question, and those factors that are excluded are only those which
are believed to be less important for resolving that particular question.
In our models we will assume that all prices (of goods and assets) are flexible and that they adjust
instantaneously so that there is never excess supply or demand (of goods or assets). We refer to this set
of models as "market-clearing" models. We make this assumption not because we necessarily believe
that it is true, but rather because it is useful first to understand the interdependence among
macroeconomic variables in this benchmark economy before we proceed to a more .complex world where
frictions exist. A thorough knowledge of how the market-clearing system behaves leaves us better
prepared to determine the source of existing frictions, to capture these frictions accurately in our models,
and to determine their implications.
Relation to other Economics Fields
The tools that you will learn in Macroeconomics will prepare you for future research in the areas of
international trade and finance, resource economics, and environmental economics, to name just a few.
In Macroeconomics you will gain a thorough understanding of intertemporal decision-making. In
virtually all fields of economics, you will encounter problems of a dynamic nature. In resource
economics and environmental economics, for example, the focus is on the depletion of some resource (oil,
clean air, etc.) over time. In international finance we would like to understand international capital flows.
To explain such cross-country investments we need to recognize that these investments take place in order
to generate future income, and we need to apply a model that incorporates this intertemporal decisionmaking process. These are just two examples of many. You will find that the skills you learn this term
will be exceedingly useful in your future economics courses as well.
Course Requirements
Problem sets will be assigned throughout the term. These assignments will draw from the packet of
'Review Questions' on file on the third floor . In addition, you will be asked to work through some
problems from Blanchard and Fischer and others to be distributed in class. While these problem sets will
not count in your final grade, it is imperative that you do them. The development of the skills needed
to analyze macroeconomic (and other) issues requires practice in constructing and solving problems. The
objective is to learn to understand an issue using the simplest appropriate economic model. I encourage
you to form study groups and to work on these assignments with some of your classmates. Review
sessions will be scheduled to go over each of these problem sets.
There will be three examinations - an in-class midterm (35% of final grade), a take-home midterm (30%)
and an in-class final (35%). The take-home exam allows you the opportunity to explore fully the
technical aspects involved in examining the problem and to connect that technical analysis with its
intuitive explanation. Some examples of past in-class exam questions can be found in the reviewquestions packet.
All readings marked with an asterisk are required. The additional references are provided in the event
that you wish to learn more about one of the topics.
Questions and answers
I will hold office hours on Tuesdays from 5pm-6pm and on Wednesdays from 3pm-4:30pm. My office
is room 14B.
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Course Details
Textbooks
Required:
Olivier Blanchard and Stanley Fischer, Lectures on Macroeconomics, MIT Press,
1989. (BF)
Recommmended:
Robert Barro, Macroeconomics, 4th Edition, Wiley Press. (This book
can be used as background reading throughout the course.
Relevant chapters are given below in parentheses.)
Robert Barro, Modern Business Cycle Theory, Harvard University Press,
1989. (MBCT)
Avinash Dixit, Optimization in Economic Theory, Oxford University
Press, 2nd Edition, 1990.
Robert Lucas, Studies in Business Cycle Theory, MIT, 1981.
Thomas Sargent, Dynamic Macroeconomic Theory, Harvard, 1987.
Nancy Stokey and Robert Lucas, Recursive Methods in Economic
Dynamics, Harvard, 1989. (SL)
Requirements
Readings:
Required readings are marked with an asterisk. One copy of each article on this list is
on file in the filing cabinet in the graduate student lounge on the third floor.
Exams:
There will be two midterms and a final exam. Make-up exams will be given only under
extremely extenuating circumstances. Notification and arrangements must be made bfiloie the exam.
The final exam is scheduled for Tuesday, December 13, 3:30pm - 6:30pm.
Problem Sets;
Problem sets will be assigned throughout the course, but will not count towards your final
grade. Review sessions on these assignments will be conducted by your TA for this class, Don Morrow.
Don Morrow's office hours are 9am-10am and lpm-2pm MW. His office is room 309B.
Abbreviations
AER: American Economic Review
CJE: Canadian Journal of Economics
EMA: Econometrica
JEP: Journal of Economic Perspectives
JET: Journal of Economic Theory
JME: Journal of Monetary Economics
JPE: Journal of Political Economy
QJE: Quarterly Journal of Economics
RES: Review of Economic Studies
Course Outline and Readine List
I.
Introduction
*. BF, Cb. 1
* Barro MBCT, Introduction
II.
Review of the Basic Market-Clearing Model
A. The Role of Individual Choice in Production and Consumption Patterns
(Barro, Chs. 1-3)
* Supplemental Notes, sections I and II.
* Denslow and Rush,
"Supply Shocks and the Interest Rate," Economic
Inquiry, 1989, pp. 501-510.
Dixit, Chs. 1,2,4
B. Money and Inflation
(Barro, Chs. 4,5,7 ,8)
* Cagan,
"The Monetary Dynamics of a Hyperinflation," in M. Friedman,
Studies in the Quantity Theory of Money.
* BF, Ch. 4.7
Barro and Fischer, "Recent Developments in Monetary Theory," JME, April 1976. Sections
3,4
Friedman, "The Optimum Quantity of Money," in The Optimum Quantity of
Money and Other Essays.
· Sargent, "The Ends of Four Big Inflations, " in R. Hall, Inflation: Causes
and Effects.
Bailey, "The Welfare Cost of Inflationary Finance," JPE, April 1956.
Barro, "Inflationary Finance under Discretion and Rules," CJE, January
1983.
III.
Investment and Growth
A. Non-Monetary Models
(Barro, Chs. 9,10)
* Supplemental Notes, sections III and IV.
* BF, Ch. 2.1-2.2 (p.37-52)
* Solow, "A Contribution to the Theory of Economic Growth," QJE, Feb. 1956.
* Lucas,
"On the Mechanics of Economic Development," JME, 1988, 3-42.
SL, Ch. 2
(A more detailed analysis is contained in Chs. 4-6)
Romer, "Increasing Returns and Long-Run Growth, " JPE, 1986, 1002-1037.
Dix it, Chs. 10, 11
Romer, "Capital Accumulation and the Theory of Long-Run Growth," Ch. 2 in Barro MBCT.
B. Monetary Models
* Stockman, "Anticipated Inflation and the Capital Stock in a
Cash-in-Advance Economy," JME, 1981, 387-393.
* Sidrauski, "Rational Choice and Patterns of Growth in a Monetary
Economy," AER, May 1967.
Johnson, "Money in a Neo-Classical, One-Sector Growth Model," in Essays in Monetary
~conomics, Ch. 4.
Brock, "A Simple Perfect Foresight Monetary Model," JME, 1975, 133-150.
C. Uncenainty and Asset Pricing
Lucas, "Interest Rates and Currency Prices in a Two-Country World," JME, 1982, 335-359.
(Sections 1 and 2 only)
BF, Ch. 6.1-6.3 (p. 275-301) and Ch. 10.1 (p. 505-512)
Sandmo, "The Effect of Uncertainty on Saving Decisions," RES, July 1970.
Levhari and Srinivasan, "Optimal Savings under Uncertainty," RES, 1969.
Dixit, Ch. 9 .
IV.
Public Policy
A. Government Expenditures, Taxes, and Debt
(Barro, Chs. 12-14)
* BF, Ch. 2.3
* Barro, "The Neoclassical Approach to Fiscal Policy," Cb. 5 in Barro MBCT. Barro,
"Government Spending in a Simple Model of Endogenous Growth," JPE, 1990, Sl03-Sl25.
* King and Rebelo,
"Public Policy and Economic Growth: Developing Neoclassical
Implications," JPE, 1990, S126-Sl50.
Barro, "Output Effects of Government Purchases," JPE, December 1981.
Barro, "Public Debt and Taxes, " Ch. 10 in Barro, Money, Expectations. and Business
Cycles, Academic Press, 1981.
Barro, "Are Government Bonds Net Wealth?" JPE, November 1974.
Barro, "On the Determination of the Public Debt," JPE, October 1979.
Plosser, "Government Financing Decisions and Asset Returns," JME May 1982
B. Rational Expectations and Policy Evaluation
* Lucas, "Econometric Policy Evaluation: A Critique," in The Phillps Curve and Labor
Markets, eds. K. Brunner and A. Meltzer, Carnegie-Rochester Conference Series on Public
Policy, vol. 1, North-Holland, 1976, pg. 19-46. Reprinted in Robert Lucas, Studies in
Business Cycle Theory, MIT Press, 1981.
Lucas, "Rules, Discretion, and the Role of the Economic Advisor," in Rational Expectations
and Economic Policy, ed. Stanley Fischer, University of Chicago Press, 1980. Reprinted in
Lucas (1981).
Chari, Kehoe, and Prescott, "Time Consistency and Policy," Ch. 7 in MBCT.
V.
An Introduction to Equilibrium Models of Business Cycles
King, Plosser, and Rebelo, "Production, Growth, and Business Cycles: I. The Basic
Neoclassical Model," JME, 1988, 195-232.
Kydland and Prescott, "Time to Build and Aggregate Fluctuations," EMA 50,
1982.
Prescott, "Theory Ahead of Business Cycle Measurement," Quarterly Review (Federal Reserve Bank of
Minneapolis), Fall 1986, 9-22.
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Lucas, "Understanding Business Cycles," Carnegie-Rochester Series on Public Policy, 19n.
Nelson and Plosser, "Trends and Random Walles in Macroeconomic Time Series," JME 10, 1982.
Long and Plosser, "Real Business Cycles," JPE 91, 1983.
Barro and King, "Time-Separable Preferences and Intertemporal Substitution Models of Business Cycles," QJE,
1984, 817-823.
Cooley and Hansen, "The Inflation Tax in a Real Business Cycle Model," AER, 1989, 733-748.
Hansen, "Indivisible Labor and the Business Cycle," JME, 1985, 309-28.
McCallum, "Real Business Cycle Models," Ch. 2 in Barro MBCT.
Plosser, "Understanding Real Business Cycles," JEP, Summer 1989.
Solow, "Technical Change and the Aggregate Production Function," RES 39, 1957.