Problem Sets and Exams
Problem Set 1 (due September 23)
Problem Set 2 (due October 7)
Problem Set 3 (due October 21)
Problem Set 4 (due November 4)
Problem Set 5 (due November 18)
Problem Set 6 (due at final exam)
Midterm
Final
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
Review of Dynamic Optimization
The first paper provides a relatively intuitive exposition of continuous-time dynamic optimization. Stokey's covers the same material but is somewhat more rigorous.
Obstfeld (1992), "Dynamic Optimization in Continuous-Time:
A Guide for the Perplexed", Unpublished notes
Stokey (2003), "Introduction to Optimal
Control", Unpublished notes
Growth Theory
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.
Romer (1986), "Increasing Returns and Long-Run
Growth", Journal of Political Economy
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 argues that the original Solow model fits the data well if it is extended to include human capital as a third factor of production
Mankiw, Romer, and Weil (1992), "A Contribution to the Empirics of Economic Growth", Quarterly Journal of Economics
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 three 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 (1994), "Barriers
to Technology Adoption and Development", Journal of Political
Economy
Parente & Prescott (1999), "Monopoly
Rights: A Barrier to Riches", American Economic Review
Real Business Cycles
The first 3 papers provide general overviews of the RBC
approach. Prescott's Minneapolis Fed piece is probably the most influential
paper in the literature. It makes the
(in)famous claim that technology shocks account for 70%
of business cycles. Summers' critique anticipated much of the next decade's
refinements. Plosser provides a nice survey.
Prescott (1986), "Theory Ahead of Business
Cycle Measurement", Quarterly Review (Minneapolis Fed)
Summers (1986), "Some Skeptical Observations
on Real Business Cycle Theory", Quarterly Review (Minneapolis Fed)
Prescott (1986), "Response to a Skeptic",
Quarterly
Review (Minneapolis Fed)
Plosser (1989), "Understanding Real Business
Cycles", Journal of Economic Perspectives
The early RBC models did not fit labor market data. They
did not generate enough variability in labor hours and they predicted a
counterfactually high correlation between hours
and average productivity. The Hansen-Wright paper shows
that the volatility problem can be fixed if there is a fixed cost to going
to work. The Christiano-Eichenbaum paper
shows that the hours-productivity correlation problem
can be mitigated if government spending shocks are added to the model.
These produce a negative correlation between hours
and productivity. Finally, McGrattan extends the Christiano-Eichenbaum
paper by introducing distortionary taxation. With distortionary taxes government
spending shocks
(and their implied taxes) produce substitution
effects in labor supply. This substantially improves the performance
of the model.
Hansen & Wright (1992), "The Labor Market
in Real Business Cycle Theory", Quarterly Review (Minneapolis
Fed)
Christiano & Eichenbaum (1992), "Current
Real Business Cycle Theories and Aggregate Labor Market Fluctuations",
AER
McGrattan (1994), "A Progress Report on Business
Cycle Models", Quarterly Review (Minneapolis Fed)
The early RBC models focused on a closed economy. The
next paper is an influential two-country extension of the basic RBC model.
It shows that standard open economy RBC
models generate cross-country consumption correlations
that are too high and output correlations that are too lows. The model
also generates an excessively volatile trade balance.
Backus, Kehoe & Kydland (1992), "International Real Business Cycles", Journal of Political Economy
Recently, the RBC approach has come under attack on a
number of fronts. The following 2 papers are among the most influential.
The Burnside et al piece discusses various
potential biases in Solow residuals as measures of technology
shocks. The Cogley-Nason paper argues that RBC models contain virtually
no
endogenous propagation.
Burnside, Eichenbaum & Rebelo (1993), "Labor
Hoarding and the Business Cycle", Journal of Political Economy
Cogley & Nason (1995), "Output Dynamics
in Real Business Cycle Models", American Economic Review
Finally, 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
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 (2003), "The Cyclical Behavior of Equilibrium Unemployment and Vacancies: Evidence and Theory", working paper
Time Consistency
Like the Lucas Critique, the time consistency problem
is a recurring theme running through all of macroeconomics. Kydland and
Prescott (1977) is the seminal paper, and is still worth
reading. Barro and Gordon (1983) show how reputational
considerations may mitigate the time consistency problem. Stokey surveys
the literature. She notes that in models of
reputation building there may be a trade-off between
"observability" (ie, the accuracy with which the private sector can monitor
the government's actions) and "tightness" (ie, how
closely the policy instrument is linked to the ultimate
objectives of policy). Finally, Alvarez, Kehoe, and Neumeyer show that
optimal monetary and fiscal policies are time
consistent if and only if the Friedman Rule is optimal
under commitment.
Kydland & Prescott (1977), "Rules Rather
than Discretion: The Inconsistency of Optimal Plans", Journal of
Polit. Economy
Barro&Gordon (1983), "Rules, Discretion,
and Reputation in a Model of Monetary Policy", Journal of Monetary
Economics
Stokey (2002), " `Rules vs Discretion' After
Twenty-Five Years", NBER Macroeconomics Annual
Alvarez, Kehoe & Neumeyer (2003), "The
Time Consistency of Monetary and Fiscal Policies", working paper
Fiscal Policy
The last paper 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.
Aiyagari, Marcet, Sargent & Seppala (2002), "Optimal
Taxation without State-Contingent Debt", Journal of Polit. Economy