Emory University
Department of Economics
ECONOMICS 777
TOPICS ON MACROECONOMICS
Fall 2014
Instructor: Vivian Z. Yue
Email: vyue@emory.edu
Office hours: 11am-12pm on Mondays and Wednesdays
Lecture Time: Mondays and Wednesdays 9:00-11:00am
Room: Callaway N116
Outline and Objective of the Course
The course begins with a workhorse representative-agent RBC framework with stochastic, noninsurable shocks to study international business cycles. The course explores then how this framework can be modified and enriched to study financial crises, sovereign default, and sudden reversals of capital inflows driven by capital market imperfections. We also study open-economy
DSGE models with heterogeneous agents and firms. The course finally discusses the industrial structure and growth for open economies.
Grading
The course is graded with problem sets (40%), a classroom presentation (20%), and final examination (40%).
Problem sets: There will be four problem sets. Students can work cooperatively but need to finish the problem sets individually. You will have between 7 to 14 days to work on these problem sets, depending on their difficulty. The details will be set in the first lecture of the semester. In addition to turning in a nicely-formatted description of your findings with all the necessary tables and figures (preparing documents that are neat and easy to read is a necessary condition to being a good researcher), you will need to upload all materials to the blackboard.
The suggested solutions will be discussed in class.
Presentation: The classroom presentation should be based on a paper from the reading list for this class. Each student has 45 minutes to present a paper of your own choice. Prepare to discuss the paper for 30 minutes and have 15 minutes for handling questions.
Final Exam: The final exam will be on Dec 10.
Textbooks and Other Reading Materials
The course is based largely on journal articles and working papers. The reading list is intentionally comprehensive with the aim of providing suggestions for further reading (required readings are identified explicitly).

Reference Texts:
Schmitt-Grohe, Stephanie and Uribe, Martin, “Open Economy Macroeconomics” Princeton
University Press, in preparation.
Obstfeld, Maurice & Kenneth Rogoff, Foundations of Intnl. Macroeconomics , MIT Press 1996.
Reinhart, Carmen M. & Kenneth Rogoff , This Time is Different: Eight Centuries of Financial
Folly, Princeton Univ. Press.
Ljungqvist, Lars & Sargent, Thomas J., Recursive Macroeconomic Theory, MIT Press, 2004.
Carlos A. Végh Open Economy Macroeconomics in Developing Countries, MIT Press, forthcoming.
Arellano, Cristina and Mendoza, Enrique G., “Credit Frictions and ‘Sudden Stops’ in Small
Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises,” in
Dynamic Macroeconomic Analysis: Theory and Policy in General Equilibrium , ed. by S. Altug,
J. Chadha and J. Nolan, Cambridge University Press, 2003.
Mendoza, Enrique G. and Vincenzo Quadrini, “Notes on Open-Economy Macroeconomics with
Incomplete Markets and Heterogeneous Agents”

1. Business Cycles Models for Small Open Economies
* Lecture notes written by Schmitt-Grohe and Martin Uribe
* Obstfeld and Rogoff, Chapter 1-3.
Obstfeld and Rogoff, “The Intertemporal Approach to the Balance of Payments,” in Handbook of International Economics, Vol 3.
* Mendoza, Enrique, 1991, “Real Business Cycles in a Small Open Economy,” American
Economic Review, 81, 797-818.
* Schmitt-Grohe, Stephanie and Martin Uribe, 2003, “Closing Small Open Economy Models,”
Journal of International Economics, 61, 163-185.
Schmitt-Grohe, Stephanie and Martin Uribe, “Solving Dynamic General Equilibrium Models
Using a Second-Order Approximation to the Policy Function,”
Uhlig, Harold, 1999, “A Toolkit for Analysing Nonlinear Dynamic Stochastic Models Easily,” in
Computational Methods for the Study of Dynamic Economies, Ramon Marimon and Andrew
Scott (editors), Oxford University Press.
Klein, Paul, 2004, “Using the Generalized Schur Form to Solve a Multivariate Linear Rational
Expectations Model,” Journal of Economic Dynamics and Control, vol. 28, pp 755-775.
2. International Real Business Cycles
* Aguiar, Mark and Gopinath, Gita, 2007, “Emerging Market Business Cycles: The Cycle is the
Trend,” Journal of Political Economy.
* Neumeyer, Pablo A. and Fabrizio Perri, 2005, “Business Cycles in Emerging Markets: The
Role of Interest Rates,” Journal of Monetary Economics, 52/2, 345-380.
* Uribe, M. and Z. V. Yue, “Country Spreads and Emerging Countries: Who Drives Whom?,”
JIE , 2006.
Gracio-Cicco, Javier, Roberto Pancrazi, and Martin Uribe, 2010, “Real Business Cycles in
Emerging Countries, “American Economic Review, 100, 2510-2531.
* Backus, David, Patrick Kehoe and Finn Kydland, 1992, “International Real Business Cycles,”
Journal of Political Economy, 745-775.
Backus, David and Finn Kydland, 1995, “International Real Business Cycles,” in Frontiers of
Business Cycle Research.
Obstfeld and Rogoff, Chapter 4.
Backus, David K., Patrick Kehoe and Finn Kydland, 1994, “Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?” American Economic Review, 84, 64-103.
Baxter, Marianne and Mario Crucini, 1995, “Business Cycles and the Asset Structure of Foreign
Trade,” International Economic Review, v36, 821-854.
3. Incomplete Markets
* Kehoe Patrick., Fabrizio. Perri, 2002, “International Business Cycles with Endogenous
Incomplete Markets,” Econometrica, v703, 907-928.

* Bai, Yan and Jing Zhang, 2010 “Can Financial Frictions Account for the Cross-Section
Feldstein-Horioka Puzzle?” Econometrica, v78, 603-632.
Alvarez, Fernando and Urban Jermann, 2000, “Efficiency, Equilibrium, and Asset Pricing with
Risk of Default,” Econometrica, v68, 775-797.
Heathcote, Jonathan and Fabrizio Perri, 2002, “Financial Autarky and International Business
Cycles,” Journal of Monetary Economics, v49, 601-627.
4. Sovereign Debt and Default
* Arellano, Cristina, 2008, “Default Risk, Income Fluctuations and Real Exchange Rates,”
American Economic Review, 98 (3), 690-712.
Atkeson, Andew, 1991, “International Lending with Moral Hazard and Risk of Repudiation,”
Econometrica, 59, 1069-89. (see also Chapter 15 of T. Sargent and L. Ljunquist, 2000, Recursive
Macroeconomic Theory, MIT Press.)
Bulow, Jeremy and Kenneth Rogoff, 1989, “Sovereign Debt: Is to Forgive or Forget?,”
American Economic Review, 79, 43-50.
Cole, Harold and Patrick J. Kehoe, 1998, “A General Reputation Model of Sovereign debt,”
International Economic Review,
Eaton, Jonathan and Mark Gersovitz, 1981, “Debt with Potential Repudiation: Theoretical and
Empirical Analysis,” Review of Economic Studies, 48, 289-309.
Fernandez, Raquel and Robert W. Rosenthal, 1990, "Strategic Models of Sovereign-Debt
Renegotiations," Review of Economic Studies, 57, 331-349.
Kletzer, Kenneth and Brian. D. Wright, 2000, “Sovereign Debt as Intertemporal Barter,”
American Economic Review, 90, 621-639.
* Mendoza, Enrique and Vivian Z. Yue, 2012, “A Solution to the Default Risk-Business Cycles
Disconnect,” Quarterly Journal of Economics, vol. 127, no. 2, pp. 889-946.
Wright, Mark and David Benjamin, 2009, “Recovery Before Redemption: A Theory of Delays in
Sovereign Debt Renegotiations”, Manuscript, UCLA.
* Yue, Vivian Z. 2010, “Sovereign Default and Debt Renegotiation,” Journal of International
Economics, vol 80 (2), 176-187.
Borri and Verdelhan, 2011, “Sovereign Risk Premia,” Working Paper.
Aguiar, Amador, Farhi, Gopinath, 2013, “Crisis and Commitment: Inflation Credibility and the
Vulnerability to Sovereign Debt Crises,” Working paper
Araujo, Leon, Santos, 2013, “Welfare Analysis of Currency Regimes with Defaultable Debts,”
Journal of International Economics, 89, 143-153.
Da-Rocha, Gimenez and Lores, 2012, “Self-fulfilling Crises with Default and Devaluation,”
Economic Theory.
Aguiar, Amador, Farhi, Gopinath, 2013, “Coordination and Crisis in Monetary Union,” Working
Paper.
Luigi Bocola, 2014, "The Pass-Through of Sovereign Risk." Northwestern.
* Cole, Harold and Tim Kehoe, 2000, “Self-Fulfilling Debt Crises,” Review of Economic
Studies, 67, 91-116.
* Lorenzori and Ivan Werning, 2014, “Slow Moving Debt Crises,” MIT and Northwestern.

Aguiar, Mark and Manuel Amador, “Take the Short Route: How to Repay and Restructure
Sovereign Debt with Multiple Maturities,” 2014.
Aguiar, Mark and Manuel Amador, “Sovereign Debt,” Handbook of International Economics,
Vol 4, Elsevier, 2014.
* Dovis, Alessandro, 2014, “Efficient Sovereign Default,” Penn State University.
* Na, Seunghoon, Stephanie Schmitt-Grohe, Martin Uribe and Vivian Yue, “A Model of the
Twin Ds: Optimal Default and Devaluation,” NBER Working Paper 20314.
* Gilchrist, Simon, Vivian Yue and Egon Zakrajsek, 2014, “Sovereign Risk and Financial Risk,”
Working Paper.
5. Financial Crises and Sudden Stops
Bianchi, J. and E. Mendoza, 2010, “Overborrowing, Financial Crises and Macro-Prudential
Policy,” mimeo, University of Maryland.
Calvo, G.A., “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden
Stops,” Journal of Applied Economics , v. 1, pp. 35-54, 1998
Mendoza, E. and Uribe, M. "Devaluation Risk and the Business Cycle Implications of Exchange
Rate Management," Carnegie-Rochester Conference Series in Public Policy, 2001. Available at http://www.econ.umd.edu/~mendoza/pp/CRCS00.pdf
Bernanke, B., M. Gertler, and S. Gilchrist (1999):, “The financial accelerator in a quantitative business cycle model," in Handbook of Macroeconomics , ed. by J. Taylor, and M. Woodford.
Bianchi, J. “Overborrowing and Systemic Externalities in the Business Cycle” American
Economic Review .
Caballero, R. and A. Krishnamurthy, “International and Domestic Collateral Constraints in a
Model of Emerging Market Crises,” Journal of Monetary Economics , 2001.
* Mendoza, E., “Sudden Stops, Financial Crises and Leverage” American Economic
Review, 2010.
* Gertler, M., S. Gilchrist, and F. Natalucci (2007), “External constraints on monetary policy and the financial accelerator," Journal of Money Credit and Banking .
6. Global Imbalances, Financial Development & Heterogeneous Agents
* Mendoza, E., V. Quadrini, and J. V. Rios-Rull, “Financial Integration, Financial Deepness and
Global Imbalances,” Journal of Pol. Econ.,
Mendoza, E., V. Quadrini, and J. V. Rios-Rull, “On the Welfare Implications of Financial
Globalization without Financial Development,” International Seminar on Macroeconomics
Annual , R. Clarida & F. G Giavazzi, eds.
Mendoza, E. and V. Quadrini, “Financial Globalization, Financial Crises and Contagion,”
Journal of Monetary Economics , 2010.
Benigno, P, “Are Valuation Effects Desirable from a Global Perspective?,” NBER WP 12219,
2006.
Bernanke, B. (2005). The global saving glut and the U.S. current account deficit. Speech at the
Sandridge Lecture, Virginia Association of Economists, March 10, 2005.
Blanchard, O., Giavazzi, F., and Sa, F. (2005). The U.S. current account deficit and the dollar.
NBER Working Paper No. 11137.

Caballero, R. J., Farhi, E., & Gourinchas, P. O., “An Equilibrium Model of “Global Imbalances” and Low Interest Rates,” AER 2008.
Devereux, M. and A. Sutherland, “Solving for Country Portfolios in Open Economy Macro
Models,” mimeo, Dept. of Economics, Univ. of British Columbia
Engel, C. and Rogers, J. H. (2006). The U.S. current account deficit and the expected share of world output. Board of Governors of the Federal Reserve System, International Finance Disc.
Papers No. 856. IMF, “Global Imbalances: A Saving, Investment Perspective” World Econ.
Outlook, Ch. 2, Sept. 2005.
Martin, P. and H. Rey, “Financial Globalization and Emerging Markets: With or Without
Crash?,” AER 2007.
McGrattan, E. R. and Prescott, E. C. (2007). Technology capital and the U.S. current account.
Federal Reserve Bank of Minneapolis, Staff Report 406.
Van Wincoop, E. and C. Tille, “International Capital Flows,” mimeo, University of Virginia.
Willen, P. S. (2004). “Incomplete Markets and Trade”. WP No. 04-8, Federal Reserve Bank of
Boston.
Jeanne, Olivier, “Macroprudential Policies in a Global Perspective”
7. International Business Cycles and Heterogeneous Firms
* Alessandria, George, Sangeeta Pratap, Vivian Yue, 2013, “Export Dynamics in Large
Devaluations” Working paper.
Alessandria, George and Horag Choi, 2007, “Do Sunk Costs of Exporting Matter for Net Export
Dynamics,” Quarterly Journal of Economics, 122, 289-336.
* Ghironi, Fabio and Marc Melitz, 2005, “International Business Cycles and Heterogeneous
Firms” Quarterly Journal of Economics.
* Alessandria, George and Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net
Export Dynamics?" The Quarterly Journal of Economics.
Ruhl, Kim, 2008, “The International Elasticity Puzzle”, mimeo, NYU Stern.
Atkeson, Andrew, and Ariel Burstein, 2009 “Innovation, firm dynamics, and international trade”, mimeo UCLA.
Alessandria, Midrigan and Joe Kaboski, 2008 "Inventories, Lumpy Trade and Large
Devaluations" American Economic Review, 2011.
8. Industrial Structure, Growth, and International Capital Flows
* Jin, Keyu, 2012, Industrial Structure and Financial Capital Flows American Economic Review
2012, 102(5): 2111-2146.
* Tim Uy and Kei-Mu Yi, Jing Zhang, 2012, Structural Change in an Open Economy , 2012,
Journal of Monetary Economics .
Ventura Jaume, 1997, Growth and Interdependence Quarterly Journal of Economics , 112 (1),
57-84.
Tim Kehoe and Claustra Bajona, Trade, growth, and convergence in a dynamic Heckscher–Ohlin model Review of Economic Dynamics, 2010
Alejandro Cuñat and Marco Maffezzoli, 2004, Neoclassical growth and commodity trade,
Review of Economic Dynamics 7 (2004) 707–736.