Unformatted text preview: COURSE NAME ADVANCED MACROECONOMICS II (1st half) PROFESSOR Thijs van Rens
Email: [email protected]
URL: www.crei.cat/~vanrens The second half of this course is taught by Jordi Galí. It is not possible to
take only one of the two parts of the course for credit.
PROGRAMS Master in Economics, Ph.D. in Economics TERM: 3 ECTS: 6
In this course, we study business cycles. In Advanced Macroeconomics I
you studied models of economic growth (and you may study this topic in
more detail in the course on Economic Growth in your second year). Here,
we ask ourselves why and how the economy fluctuates around its growth
path. In the first half of this course, we focus on the labor market, asking
the question: why is the unemployment rate sometimes 2% and
sometimes 12%? In this half, we consider only real models, i.e. models
without money, in which business cycles are driven by technology shocks.
We discuss the two dominant classes of models. The real business cycle
(RBC) model is basically the neoclassical growth model extended with a
labor supply choice. If we interpret hours worked by the representative
worker as a measure of aggregate employment, then we can use the
model to describe fluctuations on the labor market. In search and matching
models on the other hand, there is a continuum of workers and a
continuum of firms. In these models, labor fluctuates along the extensive
margin, i.e. the number of employed workers varies rather than the
number of hours that each employee works. Neither model performs well
at matching the data on business cycle fluctuations on the labor market.
We discuss various extensions that have been proposed to improve the
models. OVERVIEW COURSE OUTLINE 1. Real Business Cycle models
2. Solving linear(ized) Rational Expectations models
3. Business Cycles: Data and Facts
4. Empirical performance of the RBC model
5. Search and Matching models
6. Empirical performance of the search model PROBLEM SETS The problem sets are meant to help you understand the material and
prepare for the exam. There will be a problem set each week, posted on
the course website after the second lecture and due at the beginning of the
first lecture the week after. Solutions that are handed in late will not be
graded. You are encouraged to do the problem sets in groups of 2 or 3
students. Please hand in one copy of the solutions for the group. I strongly
recommend you not to divide up the problems, but rather to work on all
problems together. It will be hard to pass the exam without the practice
you get from doing all problems. The TA will discuss the problem sets in
the practice session. No written solutions will be made available, so you
should make sure to attend the practice sessions if you have problems
solving the problem sets. 1 GRADING Your grade for this half of the course will be based on weekly problem sets
(20%) and an exam (80%). Your final course grade will be the simple
average of your grades in the first and second halves of the course. READING LIST I will update the reading list as we go along, so please check the course
website for updates. Starred readings will be discussed in class. Nonstarred readings are classics for background reading; recent articles on the
topic or -in the case of textbooks- alternative readings. I will only briefly
discuss these in class and you are therefore responsible for the global
content but not for the details of these readings. 1. Real Business Cycle models
*David Romer (1996). Advanced Macroeconomics, chapter 4
Kydland, Finn E. and Edward C. Prescott (1982). Time to Build and
Aggregate Fluctuations. Econometrica, 50(6), pp.1345-1370.
*King, Robert G. and Sergio T. Rebelo (1999). Resuscitating Real
Business Cycles. In: John B. Taylor and Michael Woodford (eds),
Handbook of Macroeconomics, volume 1B, pp.927-1007.
2. Solving linear(ized) Rational Expectations models
*Roger E.A. Farmer (1999). Macroeconomics of Self-fulfilling Prophecies,
chapters 1-3 and 5
*Fabio Canova (2007). Methods for Applied Macroeconomic Research,
chapter 2 on DSGE Models, Solutions, and Approximations
Blanchard, O.J. and S. Fisher (1998), Lectures on Macroeconomics,
sections 5.1, 5.2 and appendix to chapter 5 (with chapter 2 as a summary
of things you should know already)
Maurice Obstfelt and Kenneth Rogoff (1996). Foundations of International
Macroeconomics, supplements A and C to chapter 2
Ljungqvist, L. and T.J. Sargent (2000). Recursive Macroeconomic Theory,
section 5.5 (with the rest of chapter 5 as background reading)
Marc Nerlove (1958). Adaptive Expectations and Cobweb Phenomena,
Quarterly Journal of Economics, 72(2), pp. 227-240
John F. Muth (1961). Rational Expectations and the Theory of Price
Movements, Econometrica, 29(3), pp. 315-335
Olivier Jean Blanchard; Charles M. Kahn (1980). The Solution of Linear
Difference Models under Rational Expectations, Econometrica, 48(5), pp.
*John Y. Campbell (1994). Inspecting the Mechanism: An Analytical
Approach to the Stochastic Growth Model, Journal of Monetary
Economics, 33, pp.463–506 (or NBER working paper No. 4188) 2 3. Business Cycles: Data and Facts *Stock, James H. and Mark W. Watson (1999). Business Cycle
Fluctuations in U.S. Macroeconomic Time Series. In: John B. Taylor and
Michael Woodford (eds), Handbook of Macroeconomics, volume 1A, pp.364 (also NBER WP 6528)
Agresti, Anna-Maria, and Benoît Mojon (2001): "Some Stylized Facts on
the Euro Area Business Cycle" in I. Angeloni, A. Kashyap, and B. Mojon
eds., Monetary Policy Transmission in the Euro Area, Cambridge
University Press. (also ECB WP #95)
Kydland, Finn, and Edward C. Prescott (1990): "Business Cycles: Real
Facts and a Monetary Myth," Quartely Review, Federal Reserve Bank of
*Stock, James, and Mark W. Watson (2005): "Understanding Changes in
International Business Cycle Dynamics" Journal of the European
Economic Association, September 2005, v. 3, iss. 5, pp. 968-1006
Ramey, Garey, and Valerie A. Ramey (1995): "Cross-Country Evidence on
the Link Between Productivity and Growth" American Economic Review,
vol. 85, no. 5., 1138-1151
Backus, David K., Patrick J. Kehoe (1992): "International Evidence on the
Historical Properties of Business Cycles," American Economic Review 82,
Stock, James, and Mark W. Watson (2002): "Has the Business Cycle
Changed and Why?," NBER Macroeconomics Annual 2002, MIT Press.
(also NBER WP #9127)
4. Empirical performance of the RBC model
*Jordi Gali (1999). Technology, Employment, and the Business Cycle: Do
Technology Shocks Explain Aggregate Fluctuations? American Economic
Review, 89(1), pp. 249-271
*Jonas D. M. Fisher (2005). The Dynamic Effects of Neutral and
Investment-Specific Technology Shocks, Working paper.
*Hall, Robert E. (1997). Macroeconomic Fluctuations and the Allocation of
Time. Journal of Labor Economics, 15(1), pp.S223-S250.
Rogerson, Richard (1988). Indivisible labor, lotteries and equilibrium.
Journal of Monetary Economics, 21(1), pp.3-16.
Hansen, Gary D. (1985). Indivisible Labor and the Business Cycle. Journal
of Monetary Economics, 16(3), pp.309-327.
Benhabib, Jess, Richard Rogerson and Randall Wright (1991). Homework
in Macroeconomics: Household Production and Aggregate Fluctuations.
Journal of Political Economy, 99(6), pp.1166-1187. 3 5. Search and Matching models *Richard Rogerson, Robert Shimer and Randall Wright (2005). Search
Theoretic Models of the Labor Market. Journal of Economic Literature, 43
Christopher Pissarides (2000). Equilibrium Unemployment Theory, 2nd
edition. Cambridge: MIT Press, chapters 1 and 2
6. Empirical performance of the search model
*Shimer (2006). Reassessing the Ins and Outs of Unemployment, mimeo,
University of Chicago.
Shigeru Fujita and Garey Ramey (2006). The Cyclicality of Job Loss and
Hiring, Philadelphia Fed Working Paper 06-17.
Shigeru Fujita and Garey Ramey (2007). Reassessing the Shimer Facts,
Philadelphia Fed Working Paper 07-2.
Robert E. Hall (2005). Job Loss, job Finding, and Unemployment in the
U.S. Economy over the Past Fifty Years, NBER Macro Annual.
Steve J. Davis (2005). Comments on “Job Loss, job Finding, and
Unemployment in the U.S. Economy over the Past Fifty Years” by Robert
E. Hall, NBER Macro Annual.
Jonathan L. Willis, Russell Cooper and John Haltiwanger (2007). Hours
and Employment Implications of Search Frictions: Matching Aggregate and
Establishment-Level Observations, Federal Reserve Bank of Kansas City
Working Paper No. 06-14
*Robert Shimer (2005). The Cyclical Behavior of Equilibrium
Unemployment and Vacancies, American Economic Review, 95(1): 25-49.
*Marcus Hagedorn and Iourii Manovskii (2008). The Cyclical Behavior of
Equilibrium Unemployment and Vacancies Revisited, American Economic
Review, v. 98, iss. 4, pp. 1692-1706
Cole, Harold L. and Richard Rogerson (1999). Can the MortensenPissarides Matching Model Match the Business-Cycle Facts? International
Economic Review, 40(4), pp.933-959. 4
COURSE NAME Advanced Macroeconomics II (second half) PROFESSOR/S Prof. Jordi Galí
e-mail: [email protected] PROGRAM Master in Economics TERM 3 OVERVIEW
(Objectives) This part of the course will provide an overview of the literature on
monetary aspects of the business cycle, with a special emphasis on
optimizing sticky price models, their associated inflation dynamics, and
their implications for monetary policy. We will cover both the main
theoretical models as well as some relevant empirical evidence. Lecture
notes and problem sets will be handed out during the course. COURSE OUTLINE ECTS 6 HOURS 40 1. The Classical Monetary Model
2. The Basic New Keynesian Model
3. Monetary Policy Design in the Basic New Keynesian Model
4. Extensions EXERCISES AND
ACTIVITIES There will be weekly problems sets.. EVALUATION
SYSTEM Final exam (80%), Problem sets (20%) REFERENCES The main textbook for the course is:
Galí, Jordi (2008): Monetary Policy, Inflation, and the Business Cycle. An
Introduction to the New Keynesian Framework, Princeton University Press
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