Download ECON 7040-001 Macroeconomic Theory II

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University of Colorado at Boulder
Department of Economics
ECON 7040 - Macroeconomic Theory II
Spring 1999
Professor:
Ken Beauchemin
Office:
14A Economics, 2-2651
Office Hours: Tu & Th 4:00 - 5:30
Objective
This course studies various topics in macroeconomics within the context of dynamic and stochastic general
equilibrium models. The ability of agents to transfer resources across time periods and states of nature will
be of particular interest. We will study highly stylized environments, or artificial economies, to understand
basic economic concepts and to address specific macroeconomic questions.
Requirements
There will be two midterms (25 percent each) and a final (40 percent). T he midterms are tentatively
scheduled for Feb. 18 and Apr. 8; the final is scheduled during the exam period for Friday, May 7, 11 :302:30. I will a lso assign a series of problem sets (IO percent). Course T.A., Cui L ing, will go over the
problems in a biweekly recitation.
Texts
There is no required text although I highly recommend the "Frontiers ... " book edited by Cooley (below). It
is available at the UMC bookstore. The reading list references sections from the following books that you
may find useful companions to the lectures. All texts are placed on reserve at Norlin.
(C) Cooley, Thomas ( 1995), Frontiers of Business Cycle Research, Princeton: Princeton University Press.
(MWG) Mas-Cole ll, A., Whinston, M., and Green, J. (1995), Microeconomic Theory, Oxford: Oxford
University Press.
(S) Sargent, Thomas ( 1987), Dynamic Macroeconomic Theory, Cambridge: Harvard University Press.
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Course Outline and Reading List
We will proceed according to the following outline. There will be a rough correspondence between the
readings and my lectures; in general, however, we will not cover individual papers, per se. Readings
marked with an asterisk (*) are more advanced and generally go beyond the lecture material.
I. Intertemporal Choice
(MWG) Ch. 6, (S) Ch 1,
Deaton, Angus (1992), Understanding Consumption, Ch. 1, Oxford: Oxford University Press.
Pratt, John (1964), "Risk Aversion in the Small and in the Large," Econometrica, 32, 122-136.
Leland, Hayne (1968), "Saving and Uncertainty: The Precautionary Demand for Saving," Quarterly
Journal ofEconomics, 82, 465-473.
Sandmo, Agnar (1970), "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies,
37, 353-360.
Il. General Equilibrium, Complete Markets, and Risk-Sharing
(MWG) Chs. 15, 16, 19, (S) Ch. 3
Debreu, Gerard (1959), Theory of Value, Ch. 7, New Haven: Yale University Press.
Arrow, Kenneth J. (1964), " The Role of Securities in the Optimal Allocation of Risk-Bearing," Review of
Economic Studies, 3 1, 9 1-96.
Flood, Mark ( 1991 ), "An Introduction to Complete Markets," Federal Reserve Bank of St. Louis Review,
32-56.
Radner, Roy (1972), "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of
Markets," Econometrica, 40, 289-303.
Lucas, Robert E . (1978), " Asset Prices in an Exchange Economy," Econometrica, 46, 1429- 1445.
m.
Real Business Cycle Models
(C) Chs. 1, 2, 11.
Kydland, Finn E . and Edward C . Prescott (1982), " Time to Build and Aggregate Fluctuations,"
Econometrica, 50, 1345-1370.
Hansen, Gary D. (1985), "Indivisible Labor and the Business Cycle," Journal ofMonetary Economics, 16,
309-327 .
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Backus, David K., Kehoe, Patrick J. and Finn E. Kydland (1992), "International Real Business Cycles,"
Journal ofPolitical Economy, 101, 745-775.
IV. Incomplete Markets and Heterogeneous Agents
(C) Chs. 3, 4.
Aiyagari, S. Rao (1994), "Macroeconomics with Frictions," Federal Reserve Bank ofMinneapolis
Quarterly Review, Summer.
Aiyagari, S. Rao (1994), "Uninsured Idiosyncratic Risk and Aggregate Saving," Quarterly Journal of
Economics, 109, 659-684.
Krusell, Per and Anthony A. Smith Jr. (1998), "Income and Wealth Heterogeneity in the Macroeconomy,
Journal ofPolitical Economy, I 06, 867-896.
*Atkeson, Andrew and Robert E. Lucas (1992), "On Efficient Distribution with Private Information,"
Review ofEconomic Studies, 59, 427-523.
*Kocherlakota, Narayana R. (1996), "Implications of Efficient Risk Sharing without Commitment,"
Review ofEconomic Studies, 63, 595-609.
V. Macroeconomic Policy
(C) Ch. 12.
A. The Lucas Critique
Lucas, Robert E. (1976), "Econometric Policy Evaluation: A Critique," Carnegie-Rochester Conference
Series on Public Policy, 1, 19-46.
B. Optimal Policy
Chari, V. V., Patrick J. Kehoe (1998), "Optimal Fiscal and Monetary Policy," Federal Reserve Bank of
Minneapolis Research Dept. Staff Report 251.
Lucas, Robert E. and Nancy L. Stokey (1983), "Optimal Fiscal and Monetary Policy in an Economy
without Capital," Journal ofMonetary Economics, 12, 55-94.
Chamley, Christopher (1986), "Optimal Taxation of Capital Income in a General Equilibrium Model with
Infinite Lives," Econometrica, 54, 607-622.
C. Time Consistency and Policy
Kydland, Finn and Edward C. Prescott (1977) "Rules Rather than Discretion: The Inconsistency of
Optimal Plans," Journal ofPolitical Economy, 85, 473-491.
Calvo, Guillermo (1978), "On the Time Consistency of Optimal Policy in a Monetary Economy,"
Econometrica, 46, 1411-1428.
Chari, V. V., Kehoe, Patrick J. and Edward C. Prescott (1989), "Time Consistency and Policy," in R.J.
Barro (ed.), Modem Business Cycle Theory, Cambridge, Mass.: Harvard University Press.
Chari, V.V. and Patrick J. Kehoe (1990), " Sustainable Plans," Journal of Political Economy, 98, 783-802.
*Phelan, Christopher and Ennio Stacchetti (1997), "Subgame Perfect Equilibria in a Ramsey Taxes
Model," manuscript, Northwestern University.
*Chang, Roberto (1998), "Credible Monetary Policy in an Infinite Horizon Model: Recursive
Approaches," Journal ofEconomic Theory, 81, 431-461.
D. Political Economy
Krusell, Per, Quadrini, Vincenzo and Jose-Victor Rios-Rull (1997), "Politico-economic Equilibrium and
Economic Growth," Journal ofEconomic Dynamics and Control, 21 , 243-272.
Meltzer, Allan H. and Scott F. Richard (1981), "A Rational Theory of the Size of Government," Journal of
Political Economy, 89, 914-927.
Krusell, Per and Jose-Victor Rios-Rull (1997), "On the Size of the U.S. Government: Political Economy in
the Neoclassical Growth Model," manuscript, University of Rochester.