PART I. Textbook in this class is Olivier Blanchard, Macroeconomics, Prentice Hall 2003 (or 2006).

Transcription

1 Central European University, Budapest Department of Economics Macroeconomic Theory I - First Section 2007 Fall Instructor: Professor Julius Horvath, Ph.D. s: horvathj@ceu.hu PART I In this class we review basic intermediate macroeconomic topics in the period of three weeks. This class is a review class for those who majored in economics, and is a quick introduction to the macroeconomics for those with mathematics, computer science and other backgrounds. No previous exposure to macro-economics is assumed. We focus on the determination of macroeconomic variables such as output, employment, prices, and the interest rate in the short, medium, and long run, and we address number of policy issues. Also several examples of real world macro-phenomena are discussed. We begin with illustrative discussion of the history of the development of the macroeconomics. Then we present three basic macroeconomic models. First, we present the Keynesian model and the AS-AD model. This originates from the work of John Maynard Keynes, John Hicks, Paul Samuelson and others from the 1930 till the early Second, we present introduction to the theory of the growth. This originates from the work of Robert Solow from the middle 1950s. Finally, we introduce a basic open-economy model. This originates from the work of Robert Mundell and Marcus Flemming from the early 1960s. We use an easy, however, very well written and analytical textbook. For those, who would like to dig deeper syllabus provides additional readings including classical papers and more advanced, modern treatment papers. Also some additional papers with policy relevance are provided. This class provides 25% of your total grade in Macroeconomic Theory I. Five percent of the grade will be from homework and seminar, and twenty percent is due to final exam. Textbook in this class is Olivier Blanchard, Macroeconomics, Prentice Hall 2003 (or 2006). Introduction: Review of the Development of the Macroeconomic Theory Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 27, The Story of Macroeconomics Heijdra, Ben J. and Frederick van der Ploeg, The Foundations of Modern Macroeconomics, Oxford University Press, Chapter 1, Schools in Macroeconomics, pp Blinder, Alan S., Keynes, Lucas, and the Scientific Progress, American Economic Review, 1988, Vol 77, No.2, pp

2 Woodford, Michael, Revolution and Evolution in Twentieth-Century Macroeconomics, Princeton University, June 1999 Phelps, Edmund S., Seven Schools of Macroeconomic Thought, Clarendon Press, Oxford, Short-Run Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 3, The Goods Markets, pp Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 4, Financial Markets, pp Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 5, The IS-LM Model, pp Sellon, Gordon H., Jr. Monetary Policy and the Zero Bound: Policy Options when Short- Term Rates Reach Zero, Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter, pp Ludvigson, Sydney C. (2004): Consumer Confidence and Consumer Spending, Journal of Economic Perspectives 18(2): Classical Papers Hicks, John R., Mr. Keynes and the Classics ; a Suggested Interpretation, Econometrica 1937, vol. 5, No. 1, pp A More Advanced Treatment Heijdra, Ben J. and Frederick van der Ploeg, The Foundations of Modern Macroeconomics, Oxford University Press, Aggregate Supply and Aggregate Demand Model pp Romer, David, Advanced Macroeconomics, the McGraw-Hill Companies, 1996, Chapter 5.2, Review of the Textbook Keynesian Model of Aggregate Demand, pp Sargent, Thomas, Macroeconomics, Academic Press, 1987, Chapter II, The Keynesian Model 2. The Medium Run Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 6, The Labor Market, pp Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 7, Putting All Markets Together: The AS-AD Model, pp Lucas, Robert E., Jr. (1996): Nobel Lecture: Monetary Neutrality Journal of Political Economy 104(4): Ball, Laurence, and N. Gregory Mankiw (2002): The NAIRU in Theory and Practice, Journal of Economic Perspectives 16(4): Classical Papers Samuelson, Paul A., Foundations of Economic Analysis, Harvard University Press, 1963 (first published 1949) 3. The Long Run Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 10, The Facts of Growth, pp

3 Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 11, Saving, Capital Accumulation and Output, pp Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 12, Technological Progress and Growth, pp Oliner, Stephen D., and Daniel E. Sichel (2000): The Resurgence of Growth in the Late 1990s: Is Information Technology the Story? Journal of Economic Perspectives 14(4): 3-22 Classical Papers Solow, Robert M., A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, February 1956, pp A More Advanced Treatment Jones, Charles I., Introduction to Economic Growth, W.W. Norton, 2002, Chapter 1 Introduction to Facts, pp Barro, Robert J. and Xavier Sala-i-Martin, Economic Growth, McGraw-Hill, 1995, Chapter 1, pp Romer, David, Advanced Macroeconomics, McGraw-Hill, 1996, Chapter 1, The Solow Growth Model, pp The Open Economy Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 18, Openness in Goods and Financial Markets, pp Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 19, The Goods Market in an Open Economy, pp Blanchard, Olivier, Macroeconomics, International Edition, 2003, Chapter 20, Output, the Interest Rate, and the Exchange Rate, pp Classical Papers Fleming, Marcus J., Domestic Financial Policies under Fixed and under Floating Exchange Rates, International Monetary Fund Staff Papers 12, 1962, pp Mundell, Robert A., Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates, Canadian Journal of Economics and Political Science, 1963, 29 pp A More Advanced Treatment Mark, Nelson C. International Macroeconomics and Finance: Theory and Econometric Methods, Chapter 8 the Mundell-Fleming Model Dornbush, Rudiger, Open Economy Macroeconomics, New York Basic Books 1980 Dornbush, Rudiger, Expectations and Exchange Rate Dynamics, Journal of Political Economy, 84, December, 1976 pp

4 Macroeconomic Theory I - MA Economics - Fall 2007 Central European University Alessia Campolmi PART II and III Course Overview (weeks 4-9) This course is designed for first year master students and, therefore, it is aimed at providing a basic background in the field of graduate macroeconomics. While studying the basic models currently used in modern macro, you will learn the tools necessary to be able to take more advanced, topic-specific, macro courses. In order to help you in understanding which topics catch most your attention, we will try to cover a broad class of models. In the second year you will then have the possibility to elaborate on the arguments you find more interesting by taking topic-specific courses. In the first three weeks of the course (taught by Prof. J. Horváth) you review classical undergraduate macroeconomics i.e., Classical Keynesian Models, Mundell-Flemming and the basic growth model developed by Solow. In week 4 we will see some empirical evidence related to the Solow Model. In week 5 we will relax the assumption of an exogenous and fixed saving rate, under which the Solow Model has been derived, studying the Ramsey Model where savings decisions are derived from consumer optimization. The importance of understanding this model goes behind the study of growth models. This, indeed, will be our first step into the world of infinitely living optimizing agents so widely used nowadays in macroeconomics. The main difference between the classical macroeconomics taught at the undergraduate level and the one taught at graduate level is the presence, in the latter, of aggregate equilibrium conditions derived from the optimizing behaviour of representative agents (households and firms). Once we will have familiarized with the class of general equilibrium models used in modern macroeconomics, we will study some more recent growth models in order to give you some idea of the steps undertaken in order to reach a better understanding of the determinants of long run growth. The next step will be to study more in details how agents undertake their economic decisions. In particular, it is of crucial importance (both for long run growth and business cycle fluctuations) to study the determinants of consumption choices undertaken by consumers and of firms investment decisions. You will study investment decisions with Prof. A. Rátfai (weeks 10-12) while we will concentrate on consumption decisions, both in a deterministic setting and in a world where there is uncertainty about the future. In case we have some time left at the end of the course, we will have a look at simple macro models with frictions in the labour market. The textbooks for this part of the course are: Advanced Macroeconomics by David Romer. Economic Growth by Robert J. Barro and Xavier Sala-i-Martin. Understanding Consumption by Angus Deaton. 4

5 Administrative Issues Lectures: Monday and Wednesday: from week 4 to 9 Weeks 1-3 will be taught by Prof. Julius Horváth Weeks will be taught by Prof. Attila Rátfai Seminars: The T.A. for the course is Peter Harasztosi. Office Hours: Monday, Office: 409. My address is campolmia@ceu.hu. Grading Problem Sets: 20% Final Exam: 80% Program Updated versions of the program will be posted on my webpage during the course. Most of the articles are available on line at Week 4 (2 lectures) 1) Empirical and theoretical shortcomings of the Solow Model: Do we observe convergence? Barro and Sala-i-Martin, chapters 1, 11 and 12 Romer, chapter 1 Barro R. and Sala-i-Martin, X. (1992). Convergence. Journal of Political Economy, vol. 100, n.2. Mankiw N.G., Romer D. and Weil D.N. (1992). A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics, vol. 107, n.2. Quah D.T. (1996). Twin Peaks:Growth and Convergence in Models of Distribution Dynamics. The Economic Journal, vol. 106, n Week 5 (2 lectures) 2) Ramsey-Cass-Koopmans Model Barro and Sala-i-Martin, chapter 2 5

6 Romer, chapter 2 Week 6&7 (4 lectures) 3) Some Extensions of the Ramsey-Cass-Koopmans Model Barro and Sala-i-Martin, chapter 3 4) Endogenous Growth Model. The AK model Barro and Sala-i-Martin, chapter 4 Romer, chapter 3 Romer P.M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, vol. 94, n.5. Romer P.M. (1990). Endogenous Technological Change. Journal of Political Economy, vol. 98, n.5 part II. Week 8 (2 lectures) 5) Consumption - Consumption Under Certainty: Permanent-Income Hypothesis - Consumption Under Uncertainty: Random-Walk Hypothesis Romer, chapter 7 Deaton, chapters 3 and 4 Friedman M. (1957). A Theory of the Consumption Function. Modigliani F. (1986). Life Cycle, Individual Thrift and the Wealth of Nations. American Economic Review, vol. 76, n. 3. Hall R.E (1978). Stochastic Implication of the Life Cycle-Permanent Income Hypothesis: Theory and evidence. Journal of Political Economy, vol. 86, n.6. Week 9 (2 lectures) 6) Asset Pricing and Consumption CAPM Romer, chapter 7 Mehra R. and Prescott E.C. (1985). The Equity Premium. A Puzzle. Journal of Monetary Economics, vol. 15, n. 2. Lucas R.E. (1978). Asset Prices in an Exchange Economy. Econometrica, vol. 46, n. 6. 6

7 MACROECONOMICS I CENTRAL EUROPEAN UNIVERSITY, FALL 2007 PART IV Instructor: Attila Rátfai Office: Nador 11 Bldg, #405, ratfaia@ceu.hu Office Hours: By appointment This part of the course gives a graduate level introduction to fundamental issues in a particular area in modern macroeconomics, investment in physical capital and inventories. The material we cover should provide the foundation for going on to study more advanced specific issues in macroeconomics. The interplay between economic theory and data analysis will be emphasized throughout. Organization. A total of five lectures will be given in five weeks, each of them lasting for 120 minutes. The lectures are designed to provide background to the main themes and to overview the motivation, the assumptions, the mechanics, and the logical and empirical consequences of important models. You are expected to come to class prepared to discuss the day s topic and encouraged to participate in class discussions. Besides regular class attendance, you are also assumed to carry out a fair amount of work on your own, including completing readings and homework assignments. One extensive problem set will also be assigned. You may discuss these problems among yourselves, as long making a serious individual effort of solving them beforehand. Writing up the solutions must be done individually. Solutions will be discussed in a seminar session, and graded by the Teaching Assistant. Assessment. The final grade for the course is based on performance on the final exam (80%) and the homework assignments (20%). The final exam is comprehensive, covering all material in class meetings, required readings and homework exercises. Class participation counts on the margin. Readings. Core readings denoted by asterisk in the syllabus are mandatory. Collected in the reader, they include textbook chapters and a few important articles. Extra readings include more advanced background material. If you have a strong interest in macroeconomics in general or in a particular topic, you are encouraged to get acquainted with these readings as well. To maximize the benefit from doing so, it is best to read the core readings prior to coming to class. The readings are available in the library, via the Internet or if none of these options work, they can be borrowed from me. In the absence of adequate background in macroeconomics at the intermediate level, you are strongly encouraged to consult intermediate level texts such as Mankiw or Abel&Bernanke. Note. If you are experiencing any problem with this class, please come to talk to me as early as possible, in order to address your problem before it becomes too late. LIST OF READINGS Investment in Physical Capital and Inventories (5 lectures) 7

8 Cost of Capital, Investment Tax Credit, Q Theory, Irreversible Investment, Lumpiness and Uncertainty, Financial Imperfections, Inventory Accumulation *Handout on Investment *Blanchard and Fischer (1994): Lectures on Macroeconomics, Ch 6.4 *Hubbard (1994): Investment under Uncertainty: Keeping One s Option Open, Sections 1-3, JEL *Romer (2001): Advanced Macroeconomics, Ch 8 (except 8.2 and 8.6) Adda and Cooper (2003): Dynamic Economics, Ch.8 Caballero (1999): Aggregate Investment, Handbook of Macroeconomics, Ch 12 Chirinko (1993): Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications, JEL Dixit and Pindyck (1994): Investment under Uncertainty, Princeton UP Hall (2000): The Stock Market and Capital Accumulation, AER Ramey and West (1999): Inventories, Handbook of Macroeconomics, Ch 13 8