505 Macroeconomic Theory II

Transcription

1 505 Macroeconomic Theory II Learning Goals and Assesment: Economics 505 is the second semester of an integrated two-semester sequence in macroeconomics, required for first-year Ph.D. students in economics. This course is designed to provide a systematic exposition of modern theoretical and empirical techniques for conducting research on aggregate economic activities. In particular, the course is focused on the interactions between short-run economic fluctuations and government stabilization policies. To this end, it covers various workhorse models and examines implications for macroeconomic policies. Instructor: Jae Won Lee (jwlee@econ.rutgers.edu) Offi ce: 303B NJ Hall Class schedule: Monday and Thursday, 11:30-12:50, CA-A2. Offi ce hours: Thursday, 2 pm 4 pm. TA: Dong-Whan Ko (dko@econ.rutgers.edu) Recitation schedule: Tuesday, 11:30-12:50, CA-A1. Exam: Thursday, March 14 and Monday, May 6 (regular class time) Prerequisites: Students are expected to be familiar with the material in Economics 504, Macroeconomic Theory I. Requirements: Attendance at lectures and recitations; completion of a series of problem sets; one exam Slides: Copies of slides or notes in the form of PDF files will often be available. Problem sets: The problem sets will be graded and have about 30% weight in the final grade for the course. Students are allowed to cooperate on the solutions, but each student has to submit individual solutions. Assessment: Problem sets (30%), Exam I (30%) and Exam II (40%). Books: Ljungquvist and Sargent, Recursive Macroeconomic Theory D. Romer, Advanced Macroeconomics J. Gali, Monetary Policy, Inflation and the Business Cycle. C. Walsh, Monetary Theory and Policy. M. Woodford, Interest and Prices: Foundations of a Theory of Monetary Policy. Christopher A. Pissarides, Equilibrium Unemployment Theory. J. Gali, Unemployment Fluctuations and Stabilization Policies: A New Keynesian Perspective Robert Shimer, Labor Markets and Business Cycles. 1

2 Readings and course plan 0. Prerequisites: I assume you have a thorough understanding of the following materials. (a) Models 1. Stochastic Optimal Growth Model 2. RBC Model (b) Methods 1. Sequential Method (Lagrange Method) 2. Recursive Method (Dynamic Programming Method) 3. Stochastic Difference Equations (properties of AR processes) 4. Log linearization 5. Solving Linear Rational Expectation Models: Uniqueness and Boundedness (c) Some references 1. Ljungvist and Sargent chapter (2, 3 & 4) 2. Blanchard and Kahn, The Solution of Linear Difference Models Under Rational Expectations, Econometrica, 48, Sims, C., 2002, "Solving Linear Rational Expectations Models," Computational Economics 20, Business Cycle Facts & Evidence for Real Effects of Monetary Disturbances (a) *Gali (chapter 1) (b) *Walsh (chapter 1) (c) *Woodford (chapter 3, p ) (d) *Stock, J., and M. Watson (1999): "Business Cycle Fluctuations in U.S. Macroeconomic Time Series." Chapter 1 in Handbook of Macroeconomics. Vol 1A. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier, (e) Bernanke, Ben S., and Ilian Mihov (1998), "Measuring Monetary Policy," Quarterly Journal of Economics 113, (f) Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (1999), "Monetary Policy Shocks: What Have We Learned and To What End?" in Taylor, John B., and Michael Woodford, eds., Handbook of Macroeconomics, vol. 1A, North- Holland. (g) Sims (1980), Macroeconomics and Reality, Econometrica 48, no. 1, (h) Sims (1992), Interpreting Macroeconomic Time Series Facts: The Effects of Monetary Policy, European Economic Review 36, (i) Bills and Klenow (2004): Some Evidence on the Importance of Sticky Prices, Journal of Political Economy 112, no 5, (j) Nakamura and Steinsson (2008): Five Facts about Prices: A Reevaluation of Menu Costs Models, Quarterly Journal of Economics, 123(4),

3 2. A Historical Overview of Business Cycle Research (a) Mankiw, N. Gregory The Macroeconomist as Scientist and Engineer. Journal of Economic Perspectives, Vol. 20, pp (b) Akerlof, George A The Missing Motivation in Macroeconomics. American Economic Review, Vol. 97, pp (c) Romer (chapter 5) (d) Chris Sims Nobel Lecture, (e) Prescott, Edward C Nobel Lecture: The Transformation of Macroeconomic Policy and Research. Journal of Political Economy, Vol. 114, pp Flexible-Price Models: Classical Model of Monetary Economics (a) *Gali (chapter 2) (b) *Woodford (chapter 2) (c) *Walsh (chapter 2) (d) *Obstfeld and Rogoff (chapter 8.3) (e) Friedman, Milton (1969), "The Optimum Quantity of Money", in The Optimum Quantity of Money and Other Essays, Aldine. 4. Sticky-Price Models: Baseline New Keynesian Model (a) *Gali (chapter 3) (b) *Woodford (chapter 3) (c) *Walsh (chapter 6 & 8) (d) *Romer (chapter 6) (e) Goodfriend and King (1997): The New Neoclassical Synthesis, NBER Macroeconomics Annual 1997, (f) Dixit & Stiglitz (1977) "Monopolistic Competition and Optimum Product Diversity" (g) Blanchard & Kiyotaki (1987) "Monopolistic Competition and the Effects of Aggregate Demand" (h) Ball & Romer (1990) "Real Rigidities and the Nonneutrality of Money" (i) Mankiw (1985) "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly" (j) Calvo (1983): Staggered Prices in a Utility Maximizing Framework, Journal of Monetary Economics 12, (k) Yun (1996): Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles, Journal of Monetary Economics 37,

4 (l) Rotemberg, Julio J. and Michael Woodford Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets. In Frontiers of Business Cycle Research, edited by Thomas F. Cooley. Princeton University Press. (m) Kimball, Miles S The Quantitative Analytics of the Basic Neomonetarist Model. Journal of Money, Credit, and Banking, Vol. 27, pp (n) Chari, V.V., Patrick J. Kehoe, and Ellen R. McGrattan Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem? Econometrica, Vol. 68, pp (o) Taylor, John B Aggregate Dynamics and Staggered Contracts. Journal of Political Economy, Vol. 88, pp (p) Rotemberg, Julio J Sticky Prices in the United States. Journal of Political Economy, Vol. 90, pp (q) Christiano, Lawrence J., Martin Eichenbaum, and Charles L.Evans Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy, Vol. 113, pp (r) Smets, Frank R. and Raf Wouters Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach. American Economic Review, 97(3): Monetary Policy I: Interest Rate Rules (a) *Gali (chapter 4) (b) *Woodford (chapter 1 & chapter 4) (c) *Walsh (chapter 8) (d) Taylor (1993): Discretion versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy 39, (e) Clarida, Gali, and Gertler (2000): Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory, Quarterly Journal of Economics 115, (f) Lubik, Thomas A. and Frank Schorfheide Testing for Indeterminacy: An Application to U.S. Monetary Policy. American Economic Review, 94(1): Monetary Policy II: Optimal Policy (a) *Gali (chapter 4) (b) *Woodford (chapter 6) (c) *Walsh (chapter 8) (d) *Clarida, Gali, and Gertler (1999): The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature 37, (e) Gali, Jordi and Mark Gertler Macroeconomic Modeling for Monetary Policy Evaluation. Journal of Economic Perspectives, Vol. 21, pp

5 (f) Erceg, Christopher J., Dale W. Henderson, and Andrew Levin Optimal Monetary Policy with Staggered Wage and Price Contracts. Journal of Monetary Economics, Vol. 46, pp (g) Chari, V.V., Patrick J. Kehoe, and Ellen R. McGrattan The New Keynesian Model is Not Yet Ready for Policy Analysis. AEJ: Macroeconomics, Vol. 1, p Monetary Policy III: Commitment vs. Discretion (a) *Gali (chapter 5) (b) *Woodford (chapter 7) (c) *Walsh (chapter 7 & 8) (d) *Clarida, Gali, and Gertler (1999): The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature 37, (e) *Kydland and Prescott (1977): Rules Rather than Discretion: The Inconsistency of Optimal Plans, Journal of Political Economy, 85, (f) Barro and Gordon (1983): A Positive Theory of Monetary Policy in a Natural Rate Model, Journal of Political Economy, 91, Monetary-Fiscal Policy Interactions and the Price Level (a) *Walsh (chapter 4) (b) *Woodford (chapter 4, ) (c) *Sargent, Thomas J. and Neil Wallace Some Unpleasant Monetarist Arithmetic. Quarterly Review, Federal Reserve Bank of Minneapolis, 5(3): (d) *Leeper, E. M. (1991): Equilibria Under Active and Passive Monetary and Fiscal Policies, Journal of Monetary Economics, 27(1), (e) Canzoneri, Matthew, Robert Cumby, and Behzad Diba The Interaction Between Monetary and Fiscal Policy. In Handbook of Monetary Economics, Vol. 3B, ed. Benjamin M. Friedman and Michael Woodford, Amsterdam: Elsevier Science, North-Holland. (f) Sims (1994): A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy, Economic Theory, 4(3), (g) Sims (2008): Stepping on a Rake: The Role of Fiscal Policy in the Inflation of the 1970 s, Manuscript, Princeton University. (h) Woodford, Michael Price-level Determinacy Without Control of a Monetary Aggregate. Carnegie-Rochester Conference Series on Public Policy, 43(1): (i) Davig, Troy and Eric M. Leeper Monetary-fiscal Policy Interactions and Fiscal Stimulus. European Economic Review, 55(2):

6 (j) Traum, Nora and Shu-Chun S. Yang Monetary and Fiscal Policy Interactions in the Post-war U.S. European Economic Review, 55(1): (k) Bhattarai Saroj, Jae Won Lee and Woong Yong Park Monetary-Fiscal Policy Interactions and Indeterminacy in Post-War U.S. Data, American Economic Review, 102(3): Various Topics on Fiscal Policy and Overlapping Generations Models Ricardian Equivalence; Fiscal Multiplier; Overlapping Generations Models; Optimal Taxation; Sustainability of Fiscal Stance; Time Inconsistency Problem (a) Ljungquvist and Sargent (chapter 9,10, 11 and 16) (b) Romer (chapter 12) (c) Barro, Robert J, "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives 3(2), pages (d) Barro, Robert J, "Are Government Bonds Net Wealth?," Journal of Political Economy 82(6), pages (e) Michael Woodford, "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics 3(1), pages 1-35 (f) Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, "When Is the Government Spending Multiplier Large?," Journal of Political Economy 119(1), pages (g) Gauti B. Eggertsson & Paul Krugman, "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics 127(3), pages (h) Ramsey, Frank A Contribution to the Theory of Taxation. Economic Journal, Vol. 37, pp (i) Chamley, Christophe The Welfare Cost of Capital Income Taxation in a Growing Economy. Econometrica, Vol. 54, pp (j) S. Fischer, "Dynamic Inconsistency Cooperation, and the Benevolent, Dissembling Government," JEDC 2: (k) Samuelson, Paul A., An exact consumption loan model of interest with or without the social contrivance of money, Journal of Political Economy, 66, (l) Diamond, Peter A National Debt in a Neoclassical Growth Model, American Economic Review, 55, Unemployment and Labor Market Dynamics (a) J. Gali, Unemployment Fluctuations and Stabilization Policies: A New Keynesian Perspective (b) Ljungquvist and Sargent (chapter 6 and 28) (c) Christopher A. Pissarides, Equilibrium Unemployment Theory. 6

7 (d) Robert Shimer, Labor Markets and Business Cycles. (e) Rogerson, Richard, Robert Shimer, and Randall Wright Search-Theoretic Models of the Labor Market: A Survey. Journal of Economic Literature, Vol. 43, pp (f) Rogerson, Richard and Robert Shimer Search in Macroeconomic Models of the Labor Market. NBER Working Paper (g) Shimer, Robert The Cyclical Behavior of Equilibrium Unemployment and Vacancies. American Economic Review, Vol. 95, pp (h) Hall, Robert E Equilibrium Wage Stickiness. American Economic Review, Vol. 95, pp (i) Andolfatto, David Business Cycles and Labor Market Search. American Economic Review, Vol. 86, pp (j) Pissarides, Christopher A The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer? Econometrica, Vol. 77, p (k) Gertler, Mark and Antonella Trigari Unemployment Fluctuations with Staggered Nash Bargaining. Journal of Political Economy, Vol. 117, p (l) Gali, Jordi Monetary Policy and Unemployment. NBER Working Paper (m) Blanchard, Olivier and Jordi Gali Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment. American Economic Journals: Macroeconomics, Vol. 2, p (n) Ravenna, Federico and Carl Walsh Welfare-Based Optimal Monetary Policy with Unemployment and Sticky Prices: A Linear-Quadratic Framework. 11. Investment and Financial Market Imperfections (if time permits) (a) Romer (Chapter 9) 7