Advanced Macroeconomics Lecture and Tutorials Winter 2016/2017 Economics (Master) Prof. Dr. Thomas Beissinger Contact information Lehrstuhl für Dienstleistungs- und Arbeitsmarktökonmik (520G) Schloss, Museumsfluegel 70593 Stuttgart beissinger@uni-hohenheim.de seiffert@uni-hohenheim.de Destination group Compulsory module in MSc. Economics (1 st semester) Frequency One time per year (winter term) Time and Venue Lecture: Tuesday, 10-12; HS12. First meeting October 18. Tutorial: Thursday, 12-14; HS32. First meeting November 03. Slides The slides can be downloaded via ILIAS. The password is given in the first lecture. Exam Written exam (90 minutes) at the end of the semester with the possibility of retake near the beginning of the following semester. 1 I 6 UNIVERSITÄT HOHENHEIM Schloss Museumsflügel Raum 019 70599 Stuttgart www.uni-hohenheim.de BADEN-WÜRTTEMBERGISCHE BANK IBAN DE20 6005 0101 0002 5601 08 BIC-Code SOLADEST600 UST-ID DE 147 794 207 ANFAHRT Stadtbahn U3, Plieningen (Universität Hohenheim) Bus 65, 70, 73,74, 75, 76, 79
Aim of the course The aim of the course is to provide students with a solid understanding of important macroeconomic models explaining business cycle fluctuations and economic growth. The lecture also sheds some light on the ongoing debate between New Keynesian and (neo-) classical economists on the role of governments and central banks in stabilizing a market economy. An accompanying exercise course offers students the opportunity to get a deeper understanding of the topics dealt with in the lecture. Course requirements Solid understanding of intermediate macroeconomics as summarized, for example, in Blanchard, O., Macroeconomics, 5 th or 6 th edition, chapters 2-13. Introductory reading for the course: Mankiw, N. G. (2006), The Macroeconomist as Scientist and Engineer, Journal of Economic Perspectives 20(4), pp. 22-46. Literature Selected chapters from: Acemoglu, D. (2009), Introduction to Modern Economic Growth, Princeton University Press. Heijdra, B. J. (2009), Foundations of Modern Macroeconomics, 2 nd edition, Oxford University Press. Romer, D. (2006), Advanced Macroeconomics, 3 rd edition, McGraw-Hill. Additional literature is announced in the lectures. Contents 1. Trend and cycle 1.1 Introduction 1.1.1 Trend and cycle 1.1.2 Some research questions in macroeconomics 1.2 Classical business cycle 1.3 Growth cycle 1.3.1 A general decomposition 1.3.2 Linear trend 1.3.3 Stochastic trends and difference stationary processes 1.3.4 Filters 1.4 Comovements between economic time series 1.4.1 Graphical analysis 1.4.2 Cross-correlations 1.5 Appendix: Time Series in Stata 2 I 6
2. Keynesian Demand Management 2.1 The Keynesian Revolution 2.1.1 The General Theory 2.1.2 IS-LM model 2.1.3 Mundell-Fleming model 2.2 A simple open-economy model 2.2.1 Goods market 2.2.2 Trade balance 2.2.3 Production in the open economy 2.2.4 Example: an increase in government spending 2.2.5 Some conclusions for fiscal policy 2.3 Output, interest rate and the exchange rate 2.3.1 Money market 2.3.2 Uncovered interest parity 2.3.3 Mundell-Fleming model 2.3.4 Stabilization policy under fixed exchange rates 2.3.5 Stabilization policy under flexible exchange rates 3. Rational Expectations and Economic Policy 3.1 The Neoclassical Synthesis 3.1.1 Overview 3.1.2 AS-AD model with adaptive expecations 3.2 The rational expectations revolution 3.2.1 The critique of adaptive expectations 3.2.2 Weak-form rational expectations 3.2.3 Strong-form rational expectations 3.3 REH in a new-classical model 3.3.1 Assumptions of the model 3.3.2 Solution of the model 3.3.3 The policy ineffectiveness proposition 3.3.4 The Lucas critique 3.4 REH in a Keynesian model 3.4.1 Introduction 3.4.2 Single-period nominal wage contracts 3.4.3 Two-period overlapping nominal wage contracts 3.5 Conclusion: the REH in macroeconomics 3 I 6
4. The Government Budget Deficit 4.1 Introduction 4.1.1 Aims of the lecture 4.1.2 The Ricardian Equivalence Theorem 4.2 A Simple Example of Ricardian Equivalence 4.2.1 The representative household 4.2.2 The government budget constraint 4.2.3 Equilibrium in the capital market 4.2.3 A first demonstration of the Ricardian Equivalence Theorem 4.2.4 Taxes and household savings 4.2.5 A Ricardian experiment 4.3 Some Objections to Ricardian Equivalence 4.3.1 Distorting Taxes 4.3.2 Borrowing restrictions 4.3.3 Finite lives and overlapping generations 4.3.4 Informational problems 5. The Solow Growth Model 5.1. Introduction 5.1.1 Overview 5.1.2 Cross-country income differences 5.1.3 Income and welfare 5.1.4 Economic growth and income differences 5.2 The basic structure of the Solow model 5.2.1 Households and production 5.2.2. Market structure, endowments and market clearing 5.2.3 Firm optimization 5.3 The Solow model in discrete time 5.3.1 Fundamental law of motion of the Solow model 5.3.2 Definition of equilibrium 5.3.3 Equilibrium without population growth and technological progress 5.3.4 Transitional dynamics in the discrete time Solow model 5.4 The Solow model in continuous time 5.4.1 From difference to differential equations 5.4.2 Balanced growth and Kaldor facts 5.4.3 Types of technological prograss 5.4.4 Population growth and technological progress 5.4.5 The fundamental equation of the Solow model in continuous time 5.4.6 The impact of a change in the saving rate 4 I 6
6. The Ramsey Model 6.1. Introduction 6.2 Assumptions of the Ramsey model 6.2.1 Firms 6.2.2 Households 6.2.3 A reformulation of the model 6.3 The behavior of households and firms 6.3.1 The behavior of firms 6.3.2 The behaviour of households 6.4 The dynamics of the economy 6.4.1 The dynamics of consumption 6.4.2 The dynamics of the capital stock 6.4.3 The phase diagram 6.4.4 The saddle path 6.5 Welfare 6.6 The balanced growth path 6.6.1 Properties of the balanced growth path 6.6.2 The modified golden rule 6.7 A fall in the discount rate 6.8 The effects of government purchases 6.8.1 Adding government to the model 6.8.2 A permanent increase in government purchases 6.8.3 A temporary increase in government purchases 7. The Diamond Overlapping-Generations Model 7.1 Introduction 7.2 Assumptions of the Diamond model 7.2.1 Differences to the Ramsey model 7.2.2 Firms 7.2.3 Individuals 7.3 Household behaviour 7.3.1 The Euler equation 7.3.2 The saving function 7.4 The dynamics of the economy 7.4.1 The evolution of the capital stock 7.4.2 Logarithmic utility and Cobb-Douglas production 7.4.3 The general case 7.5 The possibility of dynamic inefficiency 5 I 6
8. Epilogue: Some Recent Developments in Macroeconomics 8.1 Real Business Cycle Theory 8.2 New Keynesian Economics 8.3 The current state of macroeconomics 8.3.1 The New Neoclassical Synthesis 8.3.2 A crisis of modern macroeconomics? 6 I 6