ECON4100 ADVANCED ECONOMIC ANALYSIS Session 1

Transcription

1 UNIVERSITY OF NEW SOUTH WALES SCHOOL OF ECONOMICS ECON4100 ADVANCED ECONOMIC ANALYSIS 2001 Session 1 Introduction This course is on advanced economic analysis. The first half will deal with macroeconomics, in other words, big-picture questions concerning such things as inflation, unemployment and exchange rates. Prior knowledge will be assumed about such things as IS-LM analysis and the AD-AS model. The second half will deal with one topical area of advanced microeconomics: the theory of the firm. The theory of the firm offers a unique opportunity for students to learn about important economic modeling issues like incomplete information and bounded rationality, while also developing a framework for thinking about real world management problems. A basic knowledge of optimization is assumed. The time and place for classes is Tuesday 2:00-5:00 p.m., EE221 The presenter of the first half of the course will be Geoffrey Kingston JG 138, X 3345, g.kingston@unsw.edu.au The presenter of the second half of the course and course coordinator will be Kieron Meagher JG 131, x 1145 k.meagher@unsw.edu.au Assessment Part-I Part-II Final exam 30% 30% Tutorial Presentation - 10% Review Essay 20% 10% Total 50% 50%

2 2 Part I Your review essay will consist of a summary and appraisal of any of the articles listed below with a dagger against it. Each student will be expected to review a different article, and these will be allocated on a first-come first-served basis. Before writing up your review article, you will be expected to present a 5-to-10-minute summary of it to your classmates (thereby gaining helpful feedback). Use two or three overheads in your presentation. In the event your presentation exceeds 15 minutes in length, excess minutes (over 15) will incur a penalty. Hand in your written review within three weeks of your oral presentation; please keep a copy. Your written review should not exceed 1600 words in length. The final exam will contain two essays (20%) and a question based on class exercise sets (10%). Part II Students will be grouped into pairs and assigned one or two journal articles and/or textbook chapters on a topic to review. Assignment of articles will depend upon student interests and will probably include articles not on the reference list, for this reason students must see Dr. Meagher to discuss choice of articles. Students will give a 1 hour tutorial presentation based on their readings and submit a review paper (not to exceed 1500 words) on the topic no later than 10 days after their tutorial presentation. Assessment will be on the group s performance unless special circumstances arise. There will be some choice of questions on the final exam. One question will be based on the student s tutorial presentation.

3 3 Lecture outline Part I: Macroeconomics Text and Reference Books There is no set text for the first half of the course. A useful reference is: David Romer, Advanced Macroeconomics, New York, 1996: McGraw-Hill. Week 1: 27 February Introduction to Macroeconomics International GDP Comparisons; Business Cycles; Expectations and Forecasting Limitations of GDP-based performance criteria; Hodrick-Prescott filter; leading indicators; evaluating forecasting performance. Dowrick, S. and J. Quiggin, Australia, Japan and the OECDL GDP Rankings and Revealed Preference, Australian Economic Review, 1 st Quarter 1993, O Sullivan, C., What Everyone Needs to Know About the Australian Business Cycle, UWA Economics Discussion Paper 93.21, de Roos, N. and B. Russell, Towards an Understanding of Australia s Co- Movement with Foreign Business Cycles, RBA Research Discussion Paper 9607, Fisher, L., G. Otto and G. Voss, Australian Business Cycle Facts, Australian Economic Papers 35(67) Dec. 1996, Australian Treasury, Macroeconomic Forecasts: Purpose, Methodology and Performance, Economic Roundup, Autumn Lowe, P., The Term Structure of Interest Rates, Real Activity and Inflation, RBA Research Discussion Paper 9204, Hamilton, J. and D. Kim (2000), A Re-Examination of the Predictability of Economic Activity Using the Yield Spread, NBER [@ Working Paper Romer Chs 4 and 5.

4 4 Week 2: 6 March Consumption and Saving Two-period Fisher diagram; economic income in conditions of inflation; Hall and Campbell versions of the life-cycle permanent-income hypotheses; influence of rates of return on consumption and saving. Hall, R.A., Stochastic Implications of the Life-Cycle Permanent Income Hypothesis: Theory and Evidence, Journal of Political Economy, December Campbell, J.Y., Does Saving Anticipate Declining Labour Income? An Alternative Test of the Permanent Income Hypothesis, Econometrica, Vol. 55, Carroll, C., Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis, Quarterly Journal of Economics, February 1997, Commonwealth Treasury of Australia, OECD Report on Taxation and Household Saving, Economic Roundup, Summer 1995, Hahn, J.-H., Consumption Adjustment to Real Interest Rates: Intertemporal Substitution Revisited, Journal of Economic Dynamics and Control, 22, 1998, Romer, Ch. 7. Week 3: 13 March Fiscal Policy Budget case study; taxation and the labour market; dynamic optimal taxation, esp. random walks in tax rates and the long-run functional incidence of alternative tax instruments. National Commission of Audit, Australian Government Printing Service, June Persson, T. and L. Svenson, Why a Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences, Quarterly Journal of Economics, 1989, Barro, R. On the Determination of the Public Debt, Journal of Political Economy, 87, 1979, Aschauer, D., The Equilibrium Approach to Fiscal Policy, Journal of Money Credit and Banking, 20, 1988, Section 4.

5 5 Bordo, M. and E. White, A Tale of Two Currencies: British and French Finance During the Napoleonic Wars, Journal of Economic History, June 1991, Judd, K., The Welfare Cost of Factor Taxation in a Perfect-Foresight Model, Journal of Political Economy, 1987, Lucas, R., Supply-Side Economics: An Analytical Review, Oxford Economic Papers, April Barro, R., Notes on Optimal Debt Management, May [From his Harvard webpage] Cooley, T. and L. Ohanian, Postwar British Economic Growth and the Legacy of Keynes, Journal of Political Economy, 1997, Fisher, L. and G. Kingston, Permanent Income, Tax Smoothing and Forecasts of Government Expenditure in the United States: , Manuscript, February Romer, Ch. 2. Week 4: 20 March Monetary Policy Recent Australian experience; time consistency; understanding extreme inflations; inflation, taxation and the current account. MacFarlane, I., Australian Monetary Policy in the Last Quarter of the Twentieth Century, Economic Record 75, September 1999, Mankiw, N., Recent Developments in Macroeconomics: A Very Quick Refresher Course, Journal of Money Credit and Banking 20, Kingston, G., The Foreign Currency Loans Affair: An Economist s Perspective, Australian Economic Papers, 1995, Dornbusch, R. and Fischer, S., Stopping Hyperinflations Past and Present, Welwirtschaftliches Archiv., Bayoumi, T. and J. Gagnon, Taxation and Inflation: A New Explanation for Capital Flows, Journal of Monetary Economics 38, 1996, Romer, Ch. 9.

6 6 Week 5: 27 March Asset Prices Macro perspectives on stock returns, including failure of the CCAPM; expectations theory of the term structure of interest rates; empirical regularities and the monetary model of exchange rates (including the currency - substitution hypothesis). Cochrane, J., Where is the Market Going? Uncertain Facts and Novel Theories, NBER Working Paper Campbell, J. and R. Shiller, Valuation Ratios and the Long-Run Stock Market Outlook, Journal of Portfolio Management, Winter 1998, McGrattan, E. and E. Prescott, (2001), Is the Stock Market Overvalued?, NBER [@ Working Paper Bekaert, G., R. Hodrick and D. Marshall, Peso Problem Explanations for Term Structure Anomalies, NBER Mussa, M., Empirical Regularities in the Behaviour of Exchange Rates and Theories of the Foreign Exchange Market, in K. Brunner and A. Meltzer (eds), Carnegie-Rochester Conference Series on Public Policy, Vol.11, 1979, Boyer, R. and G. Kingston, Currency Substitution Under Finance Constraints, Journal of International Money and Finance, 1987, Obstfeld, M. and K. Rogoff (2000), The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?, NBER [ Working Paper Week 6: 3 April Employment and Welfare Policy Recent Australian experience; capture model of labour market regulation; universal vs targeted welfare; lessons from Sweden. Valentine, T., The Sources of Unemployment: A Simple Econometric Analysis, Economic Papers, December 1993, Mitchell, D., A. Harding and F. Gruen, Targeting Welfare, Economic Record, 70, September 1994 issue, Lindbeck, A., The Swedish Experiment, Journal of Economic Literature, Romer, Ch. 10.

7 7 Week 7: 10 April Investment Tobin s Q ; embedded options in investment projects. Pindyck, R.S., Irreversibility, Uncertainty and Investment, Journal of Economic Literature, September Dixit, A., Investment and Hysteresis, Journal of Economic Perspectives, 6, 1992, Abel, A.B. and J.C. Eberly, The Effects of Irreversibility and Uncertainty on Capital Accumulation, Journal of Monetary Economics, 44, December 1999, Romer, Ch. 8.

8 8 Part 2: Contemporary Theories of the Firm Lecture Topics Several modern theories about the structure of firms will be considered. The models covered fall into two broad categories: contracting theory and hierarchy theory. Lectures 1-2: Incomplete contracts and the boundary of the firm Reading: Chapters 2-3 in Hart, O., Firms, Contracts and Financial Structure, Clarendon Lectures in Economics (Oxford, 1995: Oxford University Press). References Grossman, S and O. Hart (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94, Hart, O., and J. Moore (1990). Property rights and the nature of the firm. Journal of Political Economy, 98, Lecture 3-4: Incentive Contracts Holmstrom, B. (1982). Moral hazard in teams. Bell Journal of Economics, 13, Salanie, B. (1999). The Economics of Contracts, MIT Press, Cambridge, Massachusetts. Spence, M. (1973). Job market signaling. Quarterly Journal of Economics, 87, Stole, L. (1997). Lectures on the Theory of Contracts and Organizations, unpublished manuscript, University of Chicago. Lectures 4-7: Management Decision-Making, Communication and Hierarchies Meagher, K. (1996). Managing Change and the Success of Niche Products. Santa Fe Institute Working Paper Prat, A. (1997). Hierarchies of Processors with Endogenous Capacity. Journal of Economic Theory, 77, Rosen, S. (1982). Authority, control and the distribution of earnings. Bell Journal of Economics, 13, Van Zandt, T. Organizations with an Endogenous Number of Information Processing Agents, Chapter 7 in Organizations with Incomplete Information, Ed. Mukul Majumdar, forthcoming (Cambridge, 1999?: Cambridge University Press).