Econ 808 - Fall 2006

Syllabus

- Course Description and Outline

Problem Sets and Exams

Problem Set 1  (due October 4)
Problem Set 2  (due October 18)
Problem Set 3  (due November 8)
Problem Set 4  (due November 29)
Problem Set 5  (due at final exam)
Midterm (Fall 2003)
Midterm (Fall 2005)
Final  (Fall 2003)
Final  (Fall 2005)

Programs

1.)  The program bigshow.m takes AR and MA coefficients as input, and then plots a simulated time path, an impluse
      response function, and the spectral density.  It calls the programs ss.m, tf.m, impulse.m, dimpulse.m, shownew.m. and
freq.m

2.)  The program ex2.m solves the simple job search model in question #6 in problem set 1. It calls the program valit.m.
       (These programs were written by Pierre Olivier-Weill, a Stanford graduate student at the time, now an NYU professor)

3.)  The file epdata.m contains Mehra and Prescott's (1985, JME) data.  The program hanjanbnd.m uses this
       data to compute and plot Hansen-Jagannathan bounds.  These are used to answer question 5 in problem set 3.
       Note, hanjanbnd.m calls the program PTIME.M to do some data manipulations, so you need to download this too.

Papers

Methodological  Issues

These 2 papers explain why macroeconomists worry so much about "microfoundations" (i.e., why it is so important to explain macroeconomic aggregates
in terms of the underlying preferences and technologies of individual agents).

Lucas (1976),  "Econometric Policy Evaluation: A Critique", Carnegie-Rochester Conference Series on Public Policy
Sargent (1980),  "Rational Expectations and the Reconstruction of Macroeconomics", Quarterly Review (Minneapolis Fed)

The next paper discusses the tension between positive and normative approaches to macroeconomics. It points to a potential logical inconsistency in the Lucas Critique.
It points out that the Lucas Critique may be unimportant from a purely positive perspective in which government policy is made endogenous.

Sargent (1984),  "Autoregressions, Expectations, and Advice"American Economic Review

The next paper is Prescott's Nobel Lecture.  It reviews the dramatic changes that have taken place during the past few decades in both the questions macroeconomists ask, and the way they
go about answering them.

Prescott (2006),  "The Transformation of Macroeconomic Policy and Research"Journal of Political Economy

Dynamic Optimization and Numerical Methods

The first paper provides a relatively intuitive exposition of continuous-time dynamic optimization.  Stokey's covers the same material but is somewhat more rigorous. The paper by Alvarex and
Stokey provides some existence and uniqueness results for a class of unbounded return functions, of the kind often encountered in economics.

Stokey (2003),  "Introduction to Optimal Control",  Unpublished notes
Alvarez & Stokey  (1998), "Dynamic Programming with Homogeneous Functions"Journal of Economic Theory

Uhlig's paper shows how to linearize nonlinear Euler equations, and applies a method of undetermined coefficients to solve them.  Sims et al. argue that first-order (ie, linear) approximation methods often produce misleading results, especially when computing welfare and asset prices.
The paper by Villaverde et al. contains a detailed comparison of several alternative solution strategies for a standard stochastic growth model.  It concludes that 2nd-order
perturbation methods clearly dominated first-order linear approximations. Projection methods are even better, but can be much more difficult to implement.

Uhlig (1999),  "A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily", book chapter
Sims et al. (2003),  "Calculating and Using Second-Order Accurate Solutions of Discrete Time Dynamic Equilibrium Models"
Villaverde et. al. (2003),  "Comparing Solution Methods for Dynamic Equilibrium Economies",  working paper

Unemployment

The next paper surverys the influential Mortensen-Pissarides search model of equilibrium unemployment. It points to several empirical shortcomings of the model, and argues that
the source of the problem lies in the Nash Bargaining wage setting assumption.

Shimer (2005),  "The Cyclical Behavior of Equilibrium Unemployment and Vacancies",   American Economic Review

Moen extends the Mortensen-Pissarides model by introducing competitive wage setting, and argues that the resulting equilibrium is efficient.  Mortensen & Wright discuss the generality
of this result.  Rogerson et al. provide a detailed overview of search-theoretic models of the labor market, with an emphasis on theory rather than empirical work.  Ljungqvist & Sargent
review alternative approaches to understanding unemployment, and question Prescott's recent contention that tax rates explain differences between North American and European labor supply.

Moen (1997),  "Competitive Search Equilibrium", Journal of Political Economy
Mortensen & Wright (2002), "Competitive Pricing and Efficiency in Search Equilibrium", International Economic Review
Rogerson, Shimer & Wright (2005),  "Search-Theoretic Models of the Labor Market"Journal of Economic Literature
Ljungqvist & Sargent (2005), "Jobs and Unemployment in Macroeconomic Theory: A Turbulence Laboratory", mimeo
Ljungqvist & Sargent (2006), "Do Taxes Explain European Employment?",  mimeo

Growth Theory

Lucas provides some perspective on the importance of understanding business cycles.  He summarizes a research program that he initiated in 1987 which attempts to
calculate the welfare costs of business cycles.  His original estimate suggested that business cycles have very small wefare effects - orders of magnitude smaller than the welfare
effects of growth.  The following article argues that this original estimate is robust to a number of reasonable modifications.

Lucas (2003),  "Macroeconomic Priorities", American Economic Review

The first 2 papers ignited the endogenous growth revolution. Romer's model is based on learning-by-doing externalities. Lucas' model is based on human capital. The third
paper is a nice survey of endogenous growth theory.

Lucas (1988),  "The Mechanics of Economic Development", Journal of Monetary Economics
Romer (1994),  "The Origins of Endogenous Growth"Journal of Economic Perspectives

The next paper points out that if the Solow model is true (with identical technologies across countries) there should be HUGE incentives for capital to flow into poor countries

Lucas (1990),  "Why Doesn't Capital Flow from Rich to Poor Countries?", American Economic Review

The next two papers argue that it is impossible to explain the cross-sectional distribution of income levels unless you assume that technology levels differ.
Parente and Prescott offer political economy-based  models to explain why technology does not diffuse across countries.

Prescott (1998),  "Needed: A Theory of Total Factor Productivity", International Economic Review
Parente & Prescott (1999),  "Monopoly Rights: A Barrier to Riches"American Economic Review

Asset Pricing

Lucas shows that with complete markets the intertemporal marginal rate of subsitution in consumption can be used to price assets.  Kocherlakota reviews empirical work along
these lines.  He argues that asset prices are difficult to explain from this perspective.  Constantinides & Duffie show that incomplete markets with  persistent idiosyncratic labor income
risk can explain the equity premium puzzle.  McGrattan & Prescott argue that there is no equity premium puzzle if debt and equity returns are measured correctly.

Lucas (1978),  "Asset Prices in an Exchange Economy"Econometrica
Kocherlakota (1996),  "The Equity Premium: It's Still a Puzzle"Journal of Economic Literature
Constantinides & Duffie (1996),  "Asset Pricing with Heterogeneous Consumers"Journal of Political Economy
McGrattan & Prescott (2003),  "Average Debt and Equity Returns: Puzzling?"American Economic Review   
Barro (2006),  "Rare Disasters and Asset Markets in the Twentieth Century"Quarterly Journal of Economics

Dynamic Optimal Taxation

Atkeson et al review Chamley and Judd's result that the (asymptotic) optimal tax rate on capital income is zero.  They argue that this result is more general than commonly believed.
Aiyagari et al.  reconciles Barro's (1979) tax-smoothing model with Lucas and Stokey's (1983) model.  Based on Permanent-Income logic, Barro predicted that debt and taxes should
follow random walks.  Lucas and Stokey's model predicts that tax rates should reflect the serial correlation structure of government expenditures.  The key difference between these
models is that Barro assumes only state non-contingent debt, whereas Stokey and Lucas assume effectively complete markets. By ruling out state-contingent debt in Lucas and
Stokey's model, Aiyagari et al show that Ramsey taxes contain a near unit root, closely resembling the predictions of Barro's model. However, to obtain this result, exogenous
restrictions on government asset holdings must be imposed.  Kocherlakota studies optimal taxation with private information.  He develops a so-called "Mirrlees approach" to dynamic
optimal taxation, which relaxes the Ramsey taxation literature's (often implict) assumption that taxes are linear functions of income. He shows that wealth taxes are zero on average, but
are higher for poorer households.  Poorer households pay higher wealth taxes purely for incentive reasons, i.e., to discourage hidden saving.

Atkeson, Chari & Kehoe (1999),  "Taxing Capital Income: A Bad Idea"Minneapolis Fed Quarterly Review
Aiyagari, Marcet, Sargent & Seppala (2002), "Optimal Taxation without State-Contingent Debt", Journal of Polit. Economy
Kocherlakota  (2006),  "Advances in Dynamic Optimal Taxation",  mimeo
Golosov, Tsyvinski, & Werning  (2006),  "New Dynamic Public Finance: A User's Guide",  mimeo

Incomplete Markets

Aiyagari (1994),  "Uninsured Idiosyncratic Risk and Aggregate Saving", Quarterly Journal of Economics