Download ECON 7020-001 Macroeconomic Theory I

....
r
MACROECONOMIC THEORY I
ECONOMICS 7020 .
FALL 1996
University of Colorado at Boulder
Professor JoAnne Feeney
Course Description
Topics
Economics is the study of the equilibrium allocation of resouces . In macroeconomics , we focus attention on
the aggregate allocation of resources over time . We are in particular interested in understanding the
behavior of national aggregates such as output, consumption, investment, capital accumulation, and
employment. Not only do we want to explain aggregate behavior within a country, but we also want to try
to understand the persistent differences that aggregate variables exhibit across countries. One area of
primary importance to macroeconomists concerns cross-country disparities in the per capita levels and
growth rates of income. Government fiscal policy may play a part in understanding these disparities. The
study of macroeconomics also addresses the sources of inflation and the relation between it and monetary
growth. This leads us to address the consequences of monetary policy for resource allocations over time,
and, thus, for economic growth ..
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 aggregate equilibrium resource allocations over time .
· The analysis of this decisionmaking process and the consequences of it for aggregate activity and policy
outcomes requires the construction of artificial economies . These theoretical models of economic activity
will be simple representations of the more complex world we wish to understand. Model building provides
us with a laboratory 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. If
the model we have created fails to explain the facts of interest or to reveal the implications of the policy
·
under consideration, we must reevalute the assumptions embedded in the model and try again.
We will begin in our models with the assumption that all prices (of goods and assets) are flexible a·nd 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 and then to 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 techniques that you will learn in Macroeconomic Theory I (and II) are not limited in usefulness to the
study of the fields of macroeconomics. A mastery of modeling intertemporal resource allocations is
necessary for future research in the areas of international trade and finance, public finance , resource
economics, and environmental economics, to name just a few. 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; the effects of
international trade on growth and growth on trade relies on investment decisions, research and development
spillovers, and comparative advantage shifts over time; in international finance it is important to understand
international capital flows -- to explain such cross-country investments we need to recognize that these
investments take place in order to generate ju,ture income, and we need to apply a model that incorporates
this intertemporal decision-making process. These are just a few examples of many. Consequently, you
will find that the analytical skills you learn this term create the necessary foundation for your future
economics courses and your future research endeavors as well.
Course Requirements
There will be three examinations - two midterms and a comprehensive final. One midterm will be held in
class and one will be a take-home exam. The take-home exam allows you the opportunity to explore fully
the technical and imaginative aspects required in modeling a problem and to connect the technical analysis
with its intuitive explanation. Make-up exams will be given only under extremely extenuating
circumstances. Notification and arrangements must be made before the exam.
Problem sets will be assigned throughout the term. Problem Sets 1 and 2 are embedded in the Supplemental
Notes (see Reading List). Other assignments will draw from the packet of Review Questions on file in the
third floor filing cabinet, from problems in Barro and Sala-I-Martin and in Blanchard and Fischer, and
others to be distributed in class. The development of the skills needed to analyze macroeconomic (and
other) issues requires practice in constructing models and solving problems. The objective is to learn to
understand an issue using the simplest appropriate economic model. I strongly encourage you to form study
groups and to work on these assignments with some of your classmates; everyone must, however, hand in
his or her own solution set.
Each midterm exam comprises 25 % of your course grade, the final exam is worth 35 %, and the problem
sets are collectively worth the remaining 15 %. The in-class midterm will be held on Thursday, October 10,
the take-home midterm will be distributed in class on Thursday, November ·14 and is due at 9:00am on
Tuesday, November 19. The final exam is scheduled by the College of Arts and Science for Saturday,
D.ecember 14, 7:30pm-10:30pm.
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 and Wednesdays from l:30prn-3:00pm. My office is Economics 102
and my office phone is 2-5923.
Rebecca Neumann is the TA for this class and will hold recitations on Mondays from 4:00 to 5:30 in a
room yet to be determined. These recitations will be used to go over problem sets and answer questions.
She will also hold office hours on Mondays and Wednesdays from 2:30-3:45 and on Tuesdays from 12:301:30. She is located in Economics 4B and her number is 2-2108.
'.
'
r
'
Course Details
Textbooks
Required Texts:
Robert J. Barro and Xavier Sala-I-Martin, Economic Growth, McGraw-Hill, Inc. (BS)
Olivier Blanchard and Stanley Fischer, Lectures on Macroeconomics , MIT Press, (BF)
Recommended:
Robert Barro, Macroeconomics, 4th Edition, Wiley Press. (This book is recommended
as background reading on the market-clearing class of models.)
Robert Barro (ed.), Modern Business Cycle Theory, Harvard University Press, 1989.
(MBCT)
Avinash Dixit, Optimization in Economic Theory, Oxford University Press, 2nd Edition,
1990.
Thomas Sargent, Dynamic Macroeconomic Theory , Harvard, 1987.
Nancy Stokey and Robert Lucas, Recursive Methods in Economic Dynamics, Harvard,
1989.
Logistics
The readings will draw from the above sources and from journal articles. Required readings are marked
with an asterisk on the reading list that follows. One copy of each required journal article on this list is on
file in the filing cabinet in the graduate student lounge on the third floor . One copy of the Supplemental
Notes is also available in the filing cabinet Complete citations are given in the reading list for those that
wish to copy the article from the original source at the library .
Useful Journal Abbreviations
AER:
CJE:
EMA:
EI:
FRM:
JEP:
JET:
JME:
JPE:
QJE:
RES:
American Economic Review
Canadian Journal of Economics
Econometrica
Economic Inquiry
Quarterly Review, Federal Reserve Bank of Minneapolis
Journal of Economic Perspectives
Journal of Economic Theory
Journal of Monetary Economics
Journal of Political Economy
Quarterly Journal of Economics
Review of Economic Studies
,
.
r
Course Outline and Reading List
I.
Introduction
* BF, Ch. 1
* BS , Introduction
II.
Review of the Basic Market-Clearing Model
* Supplemental Notes, sections I and II.
* Denslow and Rush, "Supply Shocks and the Interest Rate,"
EI 1989, pp . 501-510.
III. Investment, Capital Accumulation, and Growth in Non-Monetary Economies
A. Individual Optimization Over Time: Saving and Investment Decisions, Part 1
(individual optimization over time without steady-stale growth)
* Supplemental Notes,
Section III (a simple discrete-time model with infinitely-lived agents)
B. Growth through Population Expansion and Exogenous Technological Progress
1. The Solow-Swan Growth Model
(a simple look at growth that abstracts from individual optimization by assuming exogenous saving rates)
* BS, Ch.
1 (excluding section 1.3)
Solow, "A Contribution to the Theory of Economic Growth," QJE, Feb . 1956.
2. Individual Optimization Over Time: Saving and Investment Decisions, Part 2
(intertemporal optimization with growth for an infinite-horizon setting with (i) infinitely-lived agents and (ii)
two-period-lived agents)
* Supplemental Notes,
* BS , Ch. 2
* BF, Chs . 2, 3
Section IV (a discreie-time presentation with infinitely-lived agents)
* Lucas , "On the Mechanics of Economic Development," JME,
1988, 3-42.
IV. Investment, Capital Accumulation, and Growth in Monetary Economies
* Alan Stockman,
"Anticipated Inflation and the Capital Stock in a Cash-in-Advance
Economy," JME, 1981, 387-393.
* Miguel Sidrauski, "Rational Choice and Patterns of Growth in a Monetary Economy," AER
57(2), May 1967, 534-544.
* BF, Ch. 4
Peter Diamond, "National Debt in a Neoclassical Growth Model ," AER 55(5), Dec. 1965,
1126-1150.
Paul A. Samuelson, "An Exact Consumption-Loan Model of Interest with or without the
Social Contrivance of Money," JPE 66(6), Dec. 1958, 467-482.
Brock, "A Simple Perfect Foresight Monetary Model," JME, 1975, 133-150.
Cagan, "The Monetary Dynamics of a Hyperinflation," in M. Friedman, Studies in the
Quantity Theory of Money.
..
V.
Models of Endogenous Growth
* BS, Ch . 1, section 1.3, Chs. 4, 12
* Lucas, "On the Mechanics of Economic Development, " JME,
1988, 3-42.
Parente and Prescott, "Changes in the Wealth of Nations ," FRM, Spring 1993, 3-16.
Barro and Sala-i-Martin, "Convergence," JPE 100(2), 1992, 223-251.
Romer, "Increasing Returns and Long-Run Growth, " JPE, 1986, 1002-1037.
Romer, "Capital Accumulation and the Theory of Long-Run Growth," Ch. 2 in MBCT.
VI. Public Policy and Economic Growth
* BF, Ch. 2.3
* Barro, "The Neoclassical Approach to Fiscal Policy,"
Ch. 5 in MBCT.
"Government Spending in a Simple Model of Endogenous Growth," JPE, 1990,
S103-Sl25.
* King and Rebelo, "Public Policy and Economic Growth: Developing Neoclassical
Implications," JPE, 1990, S126-Sl50.
* Barro,