Syllabus of EC6102 Advanced Macroeconomic Theory We discuss some basic skills of constructing and solving macroeconomic models, including theoretical results and computational methods. We emphasize some basic intuition of macroeconomics such as mechanisms amplifying the economic fluctuations and precautionary savings. We also discuss frictions that prevent economy from efficient allocations of resources and the interactions between inequality and economic growth. In the end we will reach the research frontier in a broad field of macroeconomics: heterogeneous agents models. Instructor: Shenghao Zhu Office: AS2/4 27 Tel: 65166831 Class time: Friday 2pm 5pm Classroom: AS1 0203 Office hour: Monday 4 6pm Score: Homework 20%, Midterm exam 40%, Final exam 40%. Midterm exam: 14 March 2014 (Fri.), 2pm Final exam: 5 May 2014 (Mon.), 1pm Textbook: Ljungqvist and Sargent, Recursive Macroeconomic Theory (3rd edition) Reference books: Stokey and Lucas, Recursive Methods in Economic Dynamics 1
Dixit and Pindyck, Investment under Uncertainty Kamien and Schwartz, Dynamic Optimization: The Calculus of Variations and Optimal Control in Economics and Management (2 nd edition) Grossman and Helpman, Innovation and Growth in the Global Economy 1. Continuous time stochastic dynamic programming and investment (2 weeks) Dynamic optimization under uncertainty, Stochastic calculus, Brownian motion, formula, diffusion process, Hamilton Jacobi Bellman equation, Merton s portfolio problem, Richard model, Poisson process, jump diffusion models, smooth pasting, real option method of investment Kamien and Schwartz Sections 21 and 22 Dixit and Pindyck Chapters 4 and 5 Merton, R. (1971), Optimum Consumption and Portfolio Rules in a Continuous time Model, JET, Vol. 3, 373 413. Richard, S. (1975), Optimal Consumption, Portfolio and Life Insurance Rules for an Uncertain Lived Individual in a Continuous Time Model, Journal of Financial Economics, Vol. 2, 187 203. Benhabib, J. and S. Zhu (2008), Age, Luck, and Inheritance, NBER working paper 14128. 2
Miao, J. and N. Wang (2007), Investment, Consumption, and Hedging under Incomplete Markets, Journal of Financial Economics, Vol. 86, 608 642. Wang, N. (2007), An Equilibrium Model of Wealth Distribution, Journal of Monetary Economics, Vol. 54, 1882 1904. Obstefeld, M. (1994), Risk Taking, Global Diversification, and Growth, AER, Vol. 84, 1310 1329. 2. Topics in growth (3 weeks) Rising product quality, inequality, economic growth, incomplete credit markets, political mechanisms, estate taxes Grossman and Helpman Chapter 4 Galor, O., and J. Zeira (1993), Income distribution and Macroeconomics, Review of Economic Studies, 60, 35 52. Bossmann, M., C. Kleiber, and K. Walde (2007), Bequests, taxation and the distribution of wealth in a general equilibrium model, Journal of Public Economics, 91, 1247 1271. 3. Imperfect enforcement and imperfect information (2 weeks) Kiyotaki Moore model, Credit rationing, The financial accelerator Kiyotaki, N. and J. Moore (1997), Credit Cycles, JPE, Vol. 105, 211 248. 3
Stiglitz, J. and A. Weiss (1981), Credit Rationing in Markets with Imperfect Information, AER, Vol. 71, 393 410. Bernanke, B. and M. Gertler (1989), Agency Costs, Net Worth, and Business Fluctuations, AER, Vol. 79, 14 31. 4. Asset pricing (2 weeks) Equilibrium asset pricing, the term structure of interest rates, state contingent prices, the Modigliani Miller theorem, the equity premium puzzle RMT Chapters 13 and 14 5. Self insurance and the income fluctuation problem (2 weeks) Borrowing constraint, precautionary saving, stationary distribution of asset, solving Bellman equation with computers, piecewise linear interpolation of value function RMT Chapter 17 Stokey and Lucas Chapter 12.4 and 12.5 4
6. Incomplete markets models (1 week) Idiosyncratic shocks, Aiyagari model, aggregate shocks, Krusell Smith model RMT Chapter 18 Chatterjee, S. (1994), Transitional Dynamics and the Distribution of Wealth in a Neoclassical Growth Model, Journal of Public Economics, Vol. 54, 97 119. Huggett, M. (1993), "The Risk Free Rate in Heterogeneous Agent Incomplete Insurance Economies", Journal of Economic Dynamics and Control, Vol. 17, 953 969. Aiyagari, S. R. (1994), "Uninsured Idiosyncratic Risk and Aggregate Saving", Quarterly Journal of Economics, Vol. 109, 659 684. Aiyagari, S. R. (1993), "Uninsured Idiosyncratic Risk and Aggregate Saving", Working paper 502, Federal Reserve Bank of Minneapolis. http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb _autonum_id=589 Tauchen, G. (1986), Finite State Markov chain approximations to Univariate and Vector Autoregressions, Economics Letters, Vol. 20, 177 181. Aiyagari, S. R. and E. McGrattan (1998), The Optimum Quantity of Debt, JME, Vol. 42, 447 469. Krusell, P. and A. Smith (1998), Income and Wealth Heterogeneity in the Macroeconomy, JPE, Vol. 106, 867 896. 5
Castaneda, A.; J. Diaz Gimenez and J.V. Rios Rull (2003), "Accounting for the U.S. Earnings and Wealth Inequality", Journal of Political Economy, Vol. 111, 818 857. Nie, J. (2008), Training or Search? Evidence and an Equilibrium Model, mimeo, NYU. Palazzo, B. (2009), Firms' Cash Holdings and the Cross Section of Equity Returns, mimeo, NYU. Yang, F. (2009), Consumption over the life cycle: How different is housing?, Review of Economic Dynamics, Vol. 12, 423 443. Chen, K. (2010), A life cycle analysis of social security with housing, Review of Economic Dynamics, Vol. 13, 597 615. Jeske, K. and S. Kitao (2009), U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?, Journal of Monetary Economics, Vol. 56, 210 221. Sandri, D. (2008), Growth and Capital Flows with Risky Entrepreneurship, mimeo, Johns Hopkins University. Quadrini, V. (2000), Entrepreneurship, Saving, and Social Mobility, Review of Economic Dynamics, Vol. 3, 1 40. Kitao, S. (2008), Entrepreneurship, taxation and capital investment, Review of Economic Dynamics, Vol. 11, 44 69. Cagetti, M. and M. De Nardi (2009), Estate Taxation, Entrepreneurship, and Wealth, American Economic Review, Vol. 99, 85 111. 6