EC 742: Applied Macroeconomics Jianjun Miao Spring 2004 Schedule Tu 5:30-8:00pm, CAS 318 Office Hours WF 2:30-4:00 pm or by appointment Contact Office: Room 309, 270 Bay State Road E-mail: miaoj@bu.edu Phone: 353-6675. Homepage: http://people.bu.edu/miaoj Course Web Page The class material (syllabus, lecture notes, announcements, problem sets, additional readings) will be posted on Course Info. In order to access the course web page you can go to http://courseinfo.bu.edu/courses/04sprggrsec742 a1/. You will be asked to login. Use your BU username and Kerberos password. You can also access the web page directly through Student Link (simply click the course button). Course Overview This is a research seminar in aggregative economics with topics including dynamic general equilibrium theory; asset pricing and portfolio choice, dynamic contract theory and applications, and computational methods. 1
Textbooks Teaching will be based on lecture notes that will be made available on the course web site. The following textbook is recommended, which is available in the BU bookstore. Lundquist, Lars and Thomas J. Sargent, Recursive Macroeconomic Theory, MIT Press. Grades Registered students will be evaluated according to four dimensions, with weights given below. Class participation (10%): Students will be expected to come to class and actively participate in discussion. Paper presentations (15%): Registered Students will make a 30 minute presentation of a research paper (typically a recently published paper or a working paper), drawn from a list provided by the faculty and following presentation guidelines given by Professor King in EC741. These presentations will be distributed throughout the semester. Computation project (25%): There will be several computation projects during the course. Students are required to form several three person groups. Each group will select a computation project and work on it independently. The final output must be a report which details the problems and computational methods. The computation code must also be handed in. Final examination (50%): To be determined. 2
COURSE OUTLINE 1 Heterogeneous Agents Pure Exchange Economies Duffie, D., J. Geanakoplos, A. Mas-Colell, and A. McLennan, Stationary Markov Equilibria, Econometrica, 62 (1994) 745-781. Judd, K., F. Kubler, and K. Schmedders, Asset Trading Volume in Infinite- Horizon Economies with Dynamically Complete Markets and Heterogeneous Agents, Journal of Finance (forthcoming), (pdf) Judd, K., F. Kubler, and K. Schmedders, Computational Methods for Dynamic Equilibria with Heterogeneous Agents, Advances in Economic Theory and Econometrics, Volume III, Econometric Society, New York, 2003. Krebs, T., Non-Existence of Recursive Equilibria on Compact State Spaces When Markets Are Incomplete, forthcoming in The Journal of Economic Theory Kubler, F. and K. Schmedders, Stationary Equilibria in Asset-Pricing Models with Incomplete Markets and Collateral, (pdf), Econometrica (forthcoming). Kubler, F. and K. Schmedders, Recursive Equilibria in Economies with Incomplete Markets, Macroeconomic Dynamics, 6 (2002) 284-306 Levin, D. and W. Zame, Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets, Journal of Mathematical Economics 26 (1996), 103-131. Levin, D. and W. Zame, Does Market Incompleteness Matter [09/25/01] Magill, M. and M. Quinzii, Infinite Horizon Incomplete Markets, Econometrica 62 (1994), 853-880. Magill, M. and M. Quinzii, Incomplete Markets Over An Infinite Horizon: Long Lived Securities and Speculative Bubbles, Journal of Mathematical Economics, vol. 26, 1996, pp. 133-170. 3
2 Asset Pricing Stylized Facts and Standard Models Campbell, J., Consumption-Based Asset Pricing, forthcoming in Handbook of the Economics of Finance, George Constantinides, Milton Harris, and Rene Stulz eds., North-Holland, Amsterdam, 2003. Campbell, J., Asset Pricing at the Millennium, Journal of Finance, August 2000. Cochrane, J., New Facts in Finance, 2001. Downloadable from his home page. Lucas (1978), Asset Prices in an Exchange Economy, Econometrica 46, 1429-1446. Mehra, R. and E. Prescott (1985), The Equity Premium: A Puzzle, Journal of Monetary Economics 15: 145-161. L. Epstein and S. Zin (1991), Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework, Econometrica 57, 937-969. Heterogeneity and Incomplete Markets Aiyagari, R. and M. Gertler (1991). Asset Returns with Transactions Costs and Uninsured Individual Risk. Journal of Monetary Economics 27, 311-31. Constantinides, G. and D. Duffie (1996), Asset Pricing with Heterogeneous Consumers, Journal of Political Economy 104, 219-240. Heaton, J., and D. Lucas (1996). Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing. Journal of Political Economy 104, 443-87. Heaton, J. and D. Lucas (1995), The Importance of Investor Heterogeneity and Financial Market Imperfections for the Behavior of Asset Prices, Carnegie Rochester Conference Series on Public Policy 42, 1-32. 4
Cross-Sectional Returns Berk,J.R.C.GreenandV.Naik,1999,OptimalInvestment,GrowthOptions, and Security Returns, Journal of Finance 54, 1553-1607. R. Bansal, Bob Dittmar and Chris Lundblad, 2002, Consumption, Dividends, andthecross-sectionofequityreturns Lettau, Martin and Syney Ludvigson, 2001, Resurrecting the (C)CAPM. Journal of Political Economy 109: 1238-1287 Gomes, Joao, Leonid Kogan and Lu Zhang, Equilibrium Cross Section of Returns Forthcoming, Journal of Political Economy Corporate Finance and Agency Costs Gorton, G., J. Dow, and A. Krishnamurthy, Equilibrium Asset Prices under Imperfect Corporate Control, 2003 Gomes, J., A. Yaron, and L. Zhang, Asset Prices and Business Cycles with Costly External Finance, Review of Economic Dynamics. Gomes, J., A. Yaron, and L. Zhang, Asset Pricing Implications of Firms Financing Constraints, March 2003. Holmstrom, B. and J. Tirole, LAPM: A Liquidity-Based Asset Pricing Model, Journal of Finance 56, 2001,1837-1867. Kiyotaki, N. and J. Moore, Credit Cycles, Journal of Political Economy, 105 (2), 1997, 211-248. Arvind Krishnamurthy, Collateral Constraints and the Amplification Mechanism, forthcoming in Journal of Economic Theory 5
3 Financial Market Imperfection, Development and Growth Aghion, P., A. Banerjee and T. Piketty, 1999, Dualism and Macroeconomic Volatility, Quarterly Journal of Economics, 114 1359-1397. Aghion, P. and P. Bolton (1997), A Theory of Trickle-Down Growth and Devlopment, Review of Economic Studies 64, 151-172. Aghion, P., M. Dewatripont and P. Rey, 1999, Competition, Financial Discipline and Growth, Review of Economic Studies 66, 825-852. Bernanke, B., and M. Gertler (1989). Agency Costs, Net Worth, and Business Fluctuations, American Economic Review 79(1), 14-31. C.T. Carlstrom, and T.S. Fuerst (1997), Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis, American Economic Review 87, 893-910. Matsuyama, K. (2000), Endogenous Inequality, Review of Economic Studies, 67, 743-759. T. Piketty (1997) The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing, Review of Economic Studies, 64, 173-189. 4 Dynamic Contract Theory and Applications Theory Abreu, D., D. Pearce, and E. Stacchetti, Optimal Cartel Equilibria with Imperfect Monitoring, Journal of Economic Theory, (1986) 39, 251-269. D. Abreu, D. Pearce, and E. Stacchetti, Toward a theory of discounted repeated games with imperfect monitoring, Econometrica, 58 (1990) 1041-1063. S.E. Spear and S. Srivastava, On repeated moral hazard with discounting, Rev. Econ. Studies 54 (1987) 599-617. 6
A. Marcet and R. Marimon, Recursive contracts, 1999, working paper. W. Rogerson, Repeated Moral Hazard, Econometrica 53 (1985), 69-76. OptimalSocialInsurance A. Atkeson and R. Lucas, On efficient distribution with private information, Review of Economic Studies, 59 (1992), 427-453. J. Thomas and T. Worrall, Income fluctuation and assymmetric information: An example of a repeated principal-agent problem, Journal of Economic Theory, 51 (1990) 367-390. N. Kocherlakota, Implications of efficient risk sharing without commitment, Review of Economic Studies, 1996. C. Wang, Dynamic Insurance with Private Information and Balanced Budgets, Review of Economic Studies 62 (1995), 577-595. Computation Judd, K., S. Yeltekin, and J. Conklin, Computing Supergame Equilibria, 2003. Phelan, C. and R. Townsend, Computing Multi-period Information Constrained Optima, Review of Economic Studies 1991, 58, 853-881. Fiscal and Monetary Policy S. Athey, A. Atkeson, and P. Kehoe, The optimal degree of discrection in monetary policy, FRBM, Staff repart #326, 2003. R. Chang, Credible monetary policy in an infinite horizon model: recursive approaches, Journal of Economic Theory 81 (1998), 431-461. C. Phelan and E. Stacchetti, Sequential Equilibria in a Ramsey Tax Model, Econometrica, 1999. 7
Sleet, C. and S. Yeltekin, Optimal Taxation with Endogenously Incomplete Debt Markets, 2003. Sleet, C. and S. Yeltekin, Credible Monetary Policy with Private Government Preferences, 2003. Stefania Albanesi and C. Sleet, Dynamic Optimal Taxation with Private Information, June 2003 Corporate Finance Rui Albuquerque and Hugo Hopenhayn, Optimal Lending Contracts and Firm Dynamics, September 2002. Forthcoming Review of Economic Studies. Gian Luca Clementi and Hugo A. Hopenhayn, A Theory of Financing Constraints and Firm Dynamics, 2002. Rui, Castro, Gian Luca Clementi and Glenn MacDonald, Investor Protection, Optimal Incentives, and Economic Growth, 2003 C. Wang, Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model, Journal of Economic Theory, 75, 1997. Unemployment Insurance H. Hopenhayn and J. Nicolini, Optimal unemployment insurance, Journal of Political Economy, 105 (1997) 412-438. Sleet, C. and S. Yeltekin, Dynamic Labor Contracts with Temporary Layoff and Permanent Separations, Economic Theory 18, 2001, 207-235. Kocherlakota,N.R.(2003): Simplifying Optimal Unemployment Insurance: The Impact of Hidden Savings, Federal Reserve Bank of Minneapolis Research Department Staff Report. 8
Asset Pricing Alvarez, F., and U. Jermann (2000). Efficiency, Equilibrium, and Asset Pricing with Risk of Default, Econometrica 68, 775-97. Alvarez, F., and U. Jermann (2001). Quantitative Asset Pricing Implications of Endogenous Solvency Constraints, Review of Financial Studies 14, 1117-51. Hanno Lustig, The Market Price of Aggregate Risk and the Wealth Distribution, 2003. Business Cycles P. Kehoe and F. Perri, International business cycles with endogenous incomplete markets, Econometrica, 2002. Patrick J. Kehoe and Fabrizio Perri, 2003, Competitive Equilibria With Limited Enforcement, FRBM, Staff Repart 307. Cooley, T., M. Marimon, and V. Quadrini, Aggregate Consequences of Limited Contract Enforceability, 2003. Urban Jermann and V. Quadrini, Stock Market Boom and The Productivity Gains of The 1990s, 2003. 9