: Information, Beliefs and Coordination in Macroeconomics 2017-2018 Academic Year Master of Research in Economics, Finance and Management 1. Description of the subject Topics in Macroeconomics I Code: 32080 Total credits: 3 ECTS Workload: 75 hours Term: 1st Type of subject: Elective Department of Economics and Business Teaching team: Edouard Schaal 2. Teaching guide Objective: The purpose of this course is to study informational frictions and the formation of beliefs in macroeconomics. The topics covered include news shocks, uncertainty-driven business cycles, sentiments, coordination games with heterogeneous beliefs (global games), bayesian learning, dispersed information in DSGE models, forecasting the forecast of others, etc. A first objective is to learn the tools that are used in this literature. A second objective is to provide exposure to the main economic questions related to information frictions in macroeconomics with a particular focus on business cycles. I. News shocks Theory - Beaudry, P., & Portier, F. (2004). An exploration into Pigou's theory of cycles. Journal of monetary Economics, 51(6), 1183-1216. - Beaudry, P., & Portier, F. (2007). When can changes in expectations cause business cycle fluctuations in neo-classical settings?. Journal of Economic Theory, 135(1), 458-477. - Jaimovich, N., & Rebelo, S. (2009). Can News about the Future Drive the Business Cycle?. American Economic Review, 99(4), 1097-1118. - Lorenzoni, G. (2009). A theory of demand shocks. The American economic review, 99(5), 2050-2084.
- Krusell, P., & McKay, A. (2010). News shocks and business cycles. Economic Quarterly, (4Q), 373-397. Empirical evaluation - Barsky, R. B., & Sims, E. R. (2011). News shocks and business cycles. Journal of monetary Economics, 58(3), 273-289. - Forni, M., Gambetti, L., & Sala, L. (2014). No news in business cycles. The Economic Journal, 124(581), 1168-1191. II. Uncertainty-driven cycles Theory - Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77(3), 623-685. - Bloom, N., Floetotto, M., Jaimovich, N., Saporta-Eksten, I., & Terry, S. J. (2016). Really Uncertain Business Cycles. - Gilchrist, S., Sim, J. W., & Zakrajšek, E. (2014). Uncertainty, financial frictions, and investment dynamics (No. w20038). National Bureau of Economic Research. - Arellano, C., Bai, Y., & Kehoe, P. (2016). Financial Markets and Fluctuations in Uncertainty. Working paper. - Fajgelbaum, P., Schaal, E., & Taschereau-Dumouchel, M. (2017). Uncertainty traps. The Quarterly Journal of Economics, qjx021. - Benhabib, J., Liu, X., & Wang, P. (2016). Endogenous information acquisition and countercyclical uncertainty. Journal of Economic Theory, 165, 601-642. - Senga, T. (2014). A new look at uncertainty shocks: Imperfect information and misallocation. Working paper. Empirical evaluation - Bachmann, R., Elstner, S., & Sims, E. R. (2013). Uncertainty and economic activity: Evidence from business survey data. American Economic Journal: Macroeconomics, 5(2), 217-249. - Bachmann, R., & Bayer, C. (2013). Wait-and-See business cycles?. Journal of Monetary Economics, 60(6), 704-719. Measurement - Bloom, N. (2014). Fluctuations in uncertainty. The Journal of Economic Perspectives, 28(2), 153-175. - Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. The American Economic Review, 105(3), 1177-1216. - Rossi, B., & Sekhposyan, T. (2015). Macroeconomic uncertainty indices based on nowcast and forecast error distributions. The American Economic Review, 105(5), 650-655. - Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636. 2
III. Sentiments and sunspots - Azariadis, C. (1981). Self-fulfilling prophecies. Journal of Economic theory, 25(3), 380-396. - Cass, D., & Shell, K. (1983). Do sunspots matter?. Journal of political economy, 91(2), 193-227. - Benhabib, J., & Farmer, R. E. (1994). Indeterminacy and increasing returns. Journal of Economic Theory, 63(1), 19-41. - Wen, Y. (1998). Capacity utilization under increasing returns to scale. Journal of Economic theory, 81(1), 7-36. - Benhabib, J., & Farmer, R. E. (1999). Indeterminacy and sunspots in macroeconomics. Handbook of macroeconomics, 1, 387-448. - Diamond, P. A. (1982). Aggregate demand management in search equilibrium. Journal of political Economy, 90(5), 881-894. - Howitt, P., & McAfee, R. P. (1992). Animal spirits. The American Economic Review, 493-507. - Angeletos, G. M., & La'O, J. (2013). Sentiments. Econometrica, 81(2), 739-779. - Benhabib, J., Wang, P., & Wen, Y. (2015). Sentiments and aggregate demand fluctuations. Econometrica, 83(2), 549-585. IV. Global games - Carlsson, H., & Van Damme, E. (1993). Global games and equilibrium selection. Econometrica: Journal of the Econometric Society, 989-1018. - Morris, S., & Shin, H. S. (1998). Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review, 587-597. - Morris, S., & Shin, H. S. (2001). Global games: Theory and applications. - Frankel, D., & Pauzner, A. (2000). Resolving indeterminacy in dynamic settings: the role of shocks. The Quarterly Journal of Economics, 115(1), 285-304. - Angeletos, G. M., & Werning, I. (2006). Crises and Prices: Information Aggregation, Multiplicity, and Volatility. American Economic Review, 96(5), 1720-1736. - Angeletos, G. M., Hellwig, C., & Pavan, A. (2007). Dynamic global games of regime change: Learning, multiplicity, and the timing of attacks. Econometrica, 75(3), 711-756. - Weinstein, J., & Yildiz, M. (2007). A structure theorem for rationalizability with application to robust predictions of refinements. Econometrica, 75(2), 365-400. - Angeletos, G. M., & Lian, C. (2016). Incomplete information in macroeconomics: Accommodating frictions in coordination. Handbook of Macroeconomics, 2, 1065-1240. - Goldstein, I., & Pauzner, A. (2005). Demand deposit contracts and the probability of bank runs. the Journal of Finance, 60(3), 1293-1327. - Schaal, E., & Taschereau-Dumouchel, M. (2015). Coordinating business cycles. V. Applications of heterogeneous beliefs - Amador, M., & Weill, P. O. (2010). Learning from prices: Public communication and welfare. Journal of Political Economy, 118(5), 866-907. - Morris, S., & Shin, H. S. (2002). Social Value of Public Information. American Economic Review, 92(5), 1521-1534. 3
- Woodford, M. (2003). Imperfect Common Knowledge and the Effects of Monetary Policy. Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, 25. - Angeletos, G. M., & Jennifer, L. O. (2009). Incomplete information, higher-order beliefs and price inertia. Journal of Monetary Economics, 56, S19-S37. - Angeletos, G. M., & La o, J. (2010). Noisy business cycles. NBER Macroeconomics Annual, 24(1), 319-378. - Angeletos, G. M., & Lian, C. (2016). Forward guidance without common knowledge (No. w22785). National Bureau of Economic Research. - Albagli, E., Hellwig, C., & Tsyvinski, A. (2011). A theory of asset pricing based on heterogeneous information (No. w17548). National Bureau of Economic Research. - David, J. M., Hopenhayn, H. A., & Venkateswaran, V. (2016). Information, misallocation, and aggregate productivity. The Quarterly Journal of Economics, 131(2), 943-1005. VI. Forecasting the forecast of others - Townsend, R. M. (1983). Forecasting the forecasts of others. Journal of Political Economy, 91(4), 546-588. - Futia, C. A. (1981). Rational expectations in stationary linear models. Econometrica: Journal of the Econometric Society, 171-192. - Hansen, L. P., & Sargent, T. J. (1981). Linear rational expectations models for dynamically interrelated variables. Rational expectations and econometric practice, 1, 127-156. - Whiteman, C. H. (1983). Linear rational expectations models: a user's guide. U of Minnesota Press. - Sargent, T. J. (1991). Equilibrium with signal extraction from endogenous variables. Journal of Economic Dynamics and Control, 15(2), 245-273. - Kasa, K. (2000). Forecasting the forecasts of others in the frequency domain. Review of Economic Dynamics, 3(4), 726-756. - Rondina, G., & Walker, T. B. (2012). Information equilibria in dynamic economies with dispersed information. Working paper, UC San Diego. - Huo, Z., & Takayama, N. (2015). Rational expectations models with higher order beliefs. Yale mimeo. - Acharya, S. (2013). Dispersed beliefs and aggregate demand management. University of Maryland mimeo. VII. Information acquisition and rational inattention - Grossman, S. J., & Stiglitz, J. E. (1980). On the impossibility of informationally efficient markets. The American economic review, 70(3), 393-408. - Hellwig, C., & Veldkamp, L. (2009). Knowing what others know: Coordination motives in information acquisition. The Review of Economic Studies, 76(1), 223-251. - Van Nieuwerburgh, S., & Veldkamp, L. (2009). Information immobility and the home bias puzzle. The Journal of Finance, 64(3), 1187-1215. - Reis, R. (2006). Inattentive producers. The Review of Economic Studies, 73(3), 793-821. 4
- Sims, C. A. (2003). Implications of rational inattention. Journal of monetary Economics, 50(3), 665-690. - Sims, C. A. (2006). Rational inattention: Beyond the linear-quadratic case. The American economic review, 96(2), 158-163. - Sims, C. A. (2005). Rational inattention: a research agenda (No. 2005, 34). Discussion paper Series 1/Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank. - Maćkowiak, B., & Wiederholt, M. (2009). Optimal sticky prices under rational inattention. The American Economic Review, 99(3), 769-803. - Matejka, F., & McKay, A. (2014). Rational inattention to discrete choices: A new foundation for the multinomial logit model. The American Economic Review, 105(1), 272-298. VIII. Social learning, herding and delays - Banerjee, A. V. (1992). A simple model of herd behavior. The Quarterly Journal of Economics, 107(3), 797-817. - Bikhchandani, S., Hirshleifer, D., & Welch, I. (1992). A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of political Economy, 100(5), 992-1026. - Chamley, C., & Gale, D. (1994). Information revelation and strategic delay in a model of investment. Econometrica: Journal of the Econometric Society, 1065-1085. - Caplin, A., & Leahy, J. (1993). Sectoral shocks, learning, and aggregate fluctuations. The Review of Economic Studies, 60(4), 777-794. - Zeira, J. (1994). Informational cycles. The Review of Economic Studies, 61(1), 31-44. 3. Assessment and Grading System Grading: Final grade = Problem sets + presentation Plan for the course: In each lecture, I will usually introduce the topic myself and the seminal papers on the question. I will then ask students to present a more recent paper related to the subject and applying/extending the tools seen in class or criticizing the approach. Problem sets/assignments I will try to assign 2-3 problem sets that apply methods seen in class. 5