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r ( 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. r ( 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 . r r 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.