Tufts University
Department of Economics
Masters Program in Economics
MACROECONOMIC THEORY II
Economics 206
Spring Semester
Professor M. Bianconi
111 Braker Hall
Ph: 617- 627 2677
E-mail: marcelo.bianconi@tufts.edu
URL: www.tufts.edu/~mbiancon
Office Hours: Tuesdays 11:30-1:45pm, or by appointment
Block K+ MW 4:30am-5:45PM – Braker 118
Course Materials Available @Trunk
General Objectives:
 This course is designed for you to think about economics from a macro perspective. The course is
mostly based on the microeconomic principles of rationality and optimization, but with several
deviations from them considered. We shall examine some basic aspects of an economic system such
as:
(i) time structure: static versus dynamic
(ii) equilibrium structure: partial versus general
(iii) trade structure: real versus nominal trade
(iv) information structure: symmetric, differential, asymmetric information;
(v) risk structure: certainty equivalents, expectations and risk;
(vi) asset market structure: complete versus incomplete markets.
 We shall study in some detail capital accumulation, labor markets, asset pricing and the structure of
asset markets, monetary policy, and fiscal policy, with attention to the relationship between
individual behavior and aggregate outcomes; and macroeconomics and finance interactions.
 As a technical note, this course uses discrete time models only.
Course Requirements:
Mid-Term Exam I: One Hour-15 Min Exam (15%) – Monday, March 3 (~ at part IV of the course)
Mid-Term Exam II: One Hour-15 Min Exam (15%) – Wednesday, April 9 (~ at part V of the
course, cumulative)
One Two-Hour Final Exam (40%) – Friday, May 9, 8:30-10:30AM
Short Problem Sets, Readings and Quizzes (10%)
One Term Paper (Topics to be discussed individually) (20%) – Due on Wednesday, April 30.
{Exam and Problem Sets Policy: There are no make-up exams. Problem set is due at a prearranged
date; after the deadline, the problem set looses 20% of its value for each late day; problem sets
handed in six or more days after the deadline have no value. All grades in this class are curved.}
 I encourage you to work with groups of your fellow colleagues to study and solve problem sets.
Group problem sets will be negotiated.
2
Main Texts:
Bianconi, Marcelo (2012) Financial Economics, Risk and Information. Second Edition. World
Scientific Publishing Co., River Edge, NJ. This is a monograph that presents several of
the methods and models examined in the course.
Ljungqvist, Lars and Thomas J. Sargent (2012, third edition; 2004, second edition; 2000 first
edition) Recursive Macroeconomic Theory. The MIT Press, Cambridge, MA. The
sequence to Sargent's Dynamic Macroeconomic Theory with up-to-date examples and
applications of recursive methods. (All editions are useful).
Sargent, Thomas J. (1987) Dynamic Macroeconomic Theory. Harvard University Press,
Cambridge, MA. A classic macro text that presents the basics of some of the workhorse
models in the dynamic general equilibrium area.
Williamson, Stephen (2014) Macroeconomics, Fifth (or any) Edition. Addison-Wesley,
Reading, MA. This is an intermediate textbook with some more advanced materials,
mainly in the appendixes, useful for this class. It will be used as general reading and
background.
Required Readings (more readings will be tentatively assigned):
Mankiw, N. Gregory (2006) "The Macroeconomist as Scientist and Engineer." Journal of Economic
Perspectives, 20 (4), Fall 2006, 29-46. To be posted.
(http://www.economics.harvard.edu/faculty/mankiw/papers/Macroeconomist_as_Scientist.pdf)
Other Books and References at the end of the syllabus.
3
COURSE OUTLINE (Tentative)
 I provide a brief and restricted set of references to articles in professional journals in the course
outline below. Many of the references to professional articles are available in the books referred. We
may examine some of those articles, and possibly others, more closely.
Note: Students should be familiar with the material in Bianconi (2012), Chapter 1 (1.1-1.5), and
read the Notes on the Literature at the end of each referred chapter.
I. GENERAL EQUILIBRIUM REAL MACROECONOMIC
THEORY WITH FULL INFORMATION:
DYNAMICS
Some fundamental papers (this list is not exhaustive) (~ 4 classes)
(i) Real Investment, Competitive Equilibrium and Pareto Optimality - The TwoPeriod Case:
Bianconi (2012, 2011); Notes;
Manuelli (2007), section 1.3;
Obstfeld and Rogoff (1996), Chapter 1.2;
Williamson (2014), Chapter 11 and Appendix;
Arrow (1972);
Debreu (1954, 1983).
(ii) Dynamic Programming and Blackwell's Contraction Mapping Theorem Optimal Economic Growth (Exogenous):
Bianconi (2012), Chapter 1 (1.7)
Obstfeld and Rogoff (1996), Chapter 7.1-7.2;
Sargent (1987), Chapter 1.1-1.3 and Chapter 1.4;
Benveniste & Scheinkman (1979);
Kreps (1990), Appendix II;
Ljungqvist and Sargent (2000), Chapter 11;
Williamson (2014), Chapters 7-8 and Appendix
[Solow(1956); Prescott (1988)].
(iii) Time Consistency of Preferences: Hyperbolic Discounting - Optimal Economic
Growth (Exogenous)
Laibson (1997); Harris
and Laibson (2001).
Arrow, Kenneth J. (1972) “General Economic Equilibrium: Purpose, Analytic Techniques,
Collective Choice.” The Sveriges Riksbank Prize in Economic Sciences in Memory of
Alfred Nobel: Prize Lecture, December 12.
Benveniste, L M & Scheinkman, J A, (1979). "On the Differentiability of the Value Function in
Dynamic Models of Economics," Econometrica, vol. 47(3), pages 727-32, May.
4
Bianconi, M. (2011) Transfer Programs under Alternative Insurance Schemes and Liquidity
Constraints," Journal of International Trade and Economic Development, available at
web page.
Debreu, Gerard. (1954) "Valuation Equilibrium and Pareto Optimum," Proceedings of the
National Academy of Science, 40: 588--92.
Debreu, Gerard (1983) “Economic Theory in the Mathematical Mode.” The Sveriges Riksbank
Prize in Economic Sciences in Memory of Alfred Nobel: Prize Lecture, December 8.
Harris, Christopher and David Laibson (2001) "Dynamic Choices of Hyperbolic Consumers."
Econometrica, 69, 935-957.
Laibson, David (1997) "Golden Eggs and Hyperbolic Discounting." Quarterly Journal of
Economics, 62, 443-478.
Prescott, Edward C. (1988) "Robert M. Solow's Neoclassical Growth Model: An Influential
Contribution to Economics". Scandinavian Journal of Economics 90, 7-12.
Solow, Robert M. (1956) “A Contribution to the Theory of Economic Growth.” Quarterly
Journal of Economics, 70, 65-94.
5
II. GENERAL EQUILIBRIUM REAL MACROECONOMIC THEORY:
LABOR MARKETS
Some fundamental papers (this list is not exhaustive) (~ 3 classes)
(i) Dynamic General Equilibrium Theory and Labor Supply
Campbell (1994)
Wallenius & Prescott (2011)
(ii) Indivisibilities and the Labor Market
Wallenius & Prescott (2011)
Mas-Colell, Whinston and Green (1995), pages 170-175;
Kreps (1990), Chapter 3;
[Hansen (1985), Rogerson (1988); Townsend (1987), Bianconi (2001), Ljungqvist and Sargent (2007)].
(iii) Frictions and the Labor Market
McCall (1970);
Sargent (1987), Chapter 1;
Diamond (1982);
Mortensen and Pissarides (1999);
Hall (2009).
Becker, Gary (1965) “A Theory of the Allocation of Time.” Economic Journal, 75, 493-517.
Bianconi, M. (2001) “Heterogeneity, Efficiency and Asset Allocation with Endogenous Labor Supply:
The Static Case," The Manchester School, 69(3), June, 253-268.
Bianconi, M. (2008) "Heterogeneity, Adverse Selection and Valuation with Endogenous Labor Supply."
International Review of Economics and Finance., 17, 113-126, 2008.
Campbell, John Y. (1994) “Inspecting the Mechanism: An Analytical Approach to the Stochastic
Growth Model.” Journal of Monetary Economics, 33, 463-506.
Diamond, Peter (1982) “Wage Determination and Inefficiency in Search Equilibrium,” Review
of Economic Studies, 49.
Hall, Robert E. (2009) Reconciling Cyclical Movements in the Marginal Value of Time and the
Marginal Product of Labor. Journal of Political Economy, Vol. 117, No. 2 (April), pp.
281-323
Hansen, Gary D. (1985) "Indivisible Labor and the Business Cycle". Journal of Monetary Economics,
16, 309-327.
Ljungqvist, Lars & Sargent, Thomas J, (2007) "Do Taxes Explain European Employment? Indivisible
Labour, Human Capital, Lotteries and Savings," CEPR Discussion Papers 6196, C.E.P.R.
Discussion Papers.
6
McCall, John J. (1970), 'Economics of information and job search'. Quarterly Journal of Economics 84,
pp. 113-126.
Mortensen, Dale and Pissarides, Christopher, (1999) “Job Reallocation, Employment
Fluctuations, and Unemployment,” in John B. Taylor and Michael Woodford eds.,
Handbook of Macroeconomics.
Phelps, Edmund S. (1990) Seven Schools of Macroeconomic Thought. The Arne Ryde Memorial
Lectures, Claredon Press. Oxford, UK.
Rogerson, Richard (1988) "Indivisible Labor, Lotteries and Equilibrium". Journal of Monetary
Economics, 21, 3-16.
Townsend, Robert M. (1987) "Arrow-Debreu Programs as Microfoundations of
Macroeconomics". Bewley, Truman F., Editor, Advances in Economic Theory; Fifth
World Congress. Cambridge University Press, Cambridge, UK.
Wallenius, Johanna & Edward C. Prescott, (2011) "Aggregate labor supply," Staff Report 457,
Federal Reserve Bank of Minneapolis.
7
III. DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM (DSGE)
REAL MACROECONOMIC THEORY WITH FULL INFORMATION
Some fundamental papers (this list is not exhaustive) (~1 ½ classes)
(i) Stochastic Growth (Exogenous) - Real Business Cycles, Calibration and Costs of
Economic Fluctuations:
Blanchard and Fischer (1989), Chapters 7.1-7.2;
McCallum (1989); Lucas (1987), Chapter 1-2;
Ljungqvist and Sargent (2000), Chapter 3, page 46;
Cooley and Prescott (1995), Chapter 1;
[Eichenbaum (1991); King et al (1988); Long and Plosser (1983); Kydland and Prescott
(1981); Stadler (1994); Summers (1986); Christiano (1988); Cochrane (1994); McGrattan
and Prescott. (2010)]
Campbell, John Y. (1994) “Inspecting the Mechanism: An Analytical Approach to the Stochastic
Growth Model.” Journal of Monetary Economics, 33, 463-506.
Christiano, Lawrence J. (1988) "Why Does Inventory Investment Fluctuate So Much? Journal of
Monetary Economics, 21, 247-280.
Cochrane, John (1994) “Shocks.” Carnegie-Rochester Conference Series on Public Policy, 41,
295-364.
Cooley, Thomas and Edward C. Prescott (1995) "Economic Growth and Business Cycles". In
Cooley, Thomas (Ed.) Frontiers of Business Cycle Research. Princeton University
Press, Princeton, NJ.
Eichenbaum, Martin (1991) "Real Business-Cycle Theory: Wisdom or Whimsy?" Journal of
Economic Dynamics and Control, 15, 4, 607-626.
King, Robert G., Charles I. Plosser, and Sergio T. Rebelo (1988) "Production, Growth, and
Business Cycles: I. The Basic Neoclassical Growth Model". Journal of Monetary
Economics, 21, 195-232.
King, Robert G., Charles I. Plosser, and Sergio T. Rebelo (1988) "Production, Growth, and
Business Cycles: II. New Directions". Journal of Monetary Economics, 21, 309-341.
Kydland, Finn E. and Edward C. Prescott (1982) "Time to Build and Aggregate Fluctuations".
Econometrica, 50, 6, 1345-1370.
Long, John B. and Charles I. Plosser (1983) "Real Business Cycles". Journal of Political
Economy, 91, 1, 39-69.
McCallum, Bennett T. (1989) "Real Business Cycle Models". Barro, Robert J., Editor, Modern
Business Cycle Theory. Harvard University Press, Cambridge, MA.
8
McGrattan, Ellen R., and Edward C. Prescott. (2010) "Unmeasured Investment and the Puzzling
US Boom in the 1990s." American Economic Journal: Macroeconomics, 2(4): 88–123.
Prescott, Edward C. (1986) "Theory Ahead of Business Cycle Measurement". Federal Reserve
Bank of Minneapolis Quarterly Review, 10, 9-22.
Stadler, George W. (1994) "Real Business Cycles". Journal of Economic Literature, 32, 17501783.
Summers, Lawrence (1986) "Some Skeptical Observations of Real Business Cycle Theory".
Federal Reserve Bank of Minneapolis Quarterly Review, 10, 23-27.
9
IV. GENERAL EQUILIBRIUM VALUATION AND INSURANCE
Some fundamental papers (this list is not exhaustive) (~ 7 classes)
(i) Valuation with Full Information: Complete versus Incomplete Markets
Bianconi (2012), Chapter 4 (e.g. Notes on the Literature);
(ii) Information Issues: Rational Expectations Equilibrium,
Risk Sharing and Revelation
Bianconi (2012), Chapter 4 (e.g. Notes on the Literature);
Grossman (1976);
Grossman and Stiglitz (1980);
Bolton, Santos and Scheinkman (2012).
(iii) Dynamic Valuation with Full Information: General Equilibrium and Asset
Pricing under Uncertainty with Complete Markets and Excess Returns
Bianconi (2012), Chapter 6 (6.4-6.10);
Sargent (1987), Chapters 1.6-1.7, Chapter 3;
Obstfeld and Rogoff (1996), Chapters 5.1-5.4;
Lucas (1987), Chapters 3-5;
Deaton (1992), Chapters 1-3;
Altug and Labadie (1994), Chapter 1;
Ljungqvist and Sargent (2004);
[Hansen and Singleton (1983); Svensson (1988); Campbell (1998)].
Bianconi (2012), Chapter 6 (6.11-6.12);
Sargent (1987), Chapters 1.6-1.7;
Altug and Labadie (1994), Chapter 1;
Ljungqvist and Sargent (2000), Chapter 10;
Cochrane (2000), Chapter 21
[Barro (2005, 2009), Mehra and Prescott (1985), Hansen and Jagannathan (1991), Weil
(1991)].
(iv) Dynamic Valuation: Bubbles, Frictions, Macrofinancial Risk
Bianconi (2012), Chapter 6
De Long et al (1990),
Basco (2009),
Kocherlakota (2009),
Brunnermeier et al (2012a), Brunnermeier and Oehmeke (2012b)
Gray, Merton and Bodie (2008)
Barro, Robert (2009) “Rare Disasters, Asset Prices and Welfare Costs.” American Economic Review,
99, 243-264.
10
Barro, Robert (2005) "Rare Disasters and Asset Prices in the 20th Century." Working Paper,
Harvard University: Cambridge: MA (published at QJE,
2006).(http://www.economics.harvard.edu/faculty/barro/papers/equity%20premium%201
2-1-05.pdf).
Basco, Sergi (2009) "Globalization and Financial Development: A Model of the Dot-Com and
the Housing Bubbles." MIT, Department of Economics working paper.
Bianconi, M. (2003) "Private Information, Growth and Asset Prices with Stochastic
Disturbances," International Review of Economics and Finance, 12, 1-24.
Bolton, P. T. Santos and J. A. Scheinkman (2012) Shadow Finance. Working paper, Princeton
University. In Rethinking the Financial Crisis, A. Blinder, A. Lo and R. Solow (eds.).
Brunnermeier, Markus K., Eisenbach Thomas, and Sannikov Yuliy (2012a) Macroeconomics
with Financial Frictions: A Survey. Department of Economics, Princeton University
working paper, March.
Brunnermeier, Markus K., and Oehmke Martin (2012b) Bubbles, Financial Crises, and Systemic
Risk, Brunnermeier, Markus K., and Oehmke Martin , Handbook of the Economics of
Finance, Amsterdam (forthcoming).
Campbell, John Y. (1998) “Asset Prices, Consumption and the Business Cycle.” NBER
Working Papers Series No. 6485, March. In Taylor, John and Michael Woodford (Eds.)
Handbook of Macroeconomics. Volumes 1, 2, and 3; North Holland: Amsterdam.
De Long, B. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J.
Waldmann, (1990) "Noise Trader Risk in Financial Markets," Journal of Political
Economy, vol. 98(4), pages 703-38, August.
Gray, Dale F. Robert C. Merton, Zvi Bodie (2008) New Framework for Measuring and
Managing Macrofinancial Risk and Financial Stability. Working paper, Harvard Busines
School (subsequently, book available from Wiley with the same title).
Grossman, S. J. (1976). "On the Efficiency of Competitive Stock Markets Where Traders Have
Diverse Information". The Journal of Finance, 31 (2): 573–584.
Grossman, S. J. and J. E. Stiglitz (1980) “On the Impossibility of Informationally Efficient
Markets.” American Economic Review 70(3), June 1980, pp. 123-136.
Hansen, Lars P. and Kenneth Singleton (1983) "Stochastic Consumption, Risk Aversion, and the
Temporal Behavior of Asset Returns". Journal of Political Economy, 91, 249-265.
Hansen, Lars P. and Ravi Jagannathan (1991) "Implications of Security Market Data for Models
of Dynamic Economies". Journal of Political Economy, 99, 225-262.
Kocherlakota, Narayana R. (2009) Bursting Bubbles: Consequences and Cures. FRBMinneapolis, University of Minnesota working paper.
11
Mehra, Rajnish and Edward C. Prescott (1985) "The Equity Premium: A Puzzle". Journal of
Monetary Economics, 15, 145-162.
Miller, Merton and Franco Modigliani (1958) The Cost of Capital, Corporate Finance and the
Theory of Investment. American Economic Review, 48, 261-97.
Svensson, Lars E. O. (1988) “Trade in Risky Assets.” American Economic Review, 78, 375-394.
Weil, Phillipe (1991) "The Equity Premium Puzzle and the Risk-Free Rate Puzzle." Journal of
Monetary Economics, 24, 401-421.
12
V. INTRODUCTION TO MONETARY AND FISCAL POLICY INTERACTIONS,
AND FINANCIAL ISSUES.
Some fundamental papers (this list is not exhaustive) (~ 11 classes)
(i) The Intertemporal Government Budget Constraint:
Sargent and Wallace (1981)
Hall, George J., and Thomas J. Sargent. (2011)
Cochrane (2011a, b; 2005)
Bianconi (2012), Chapter 6 (6.13-6.15);
Barro (1997), Chapters 7 and 8;
Sargent (1997), Chapters 4 and 5;
Blanchard and Fischer (1989), Chapter 4;
Ljungqvist and Sargent (2000), Chapter 17;
Williamson (2014), Chapter 9 and Appendix.
[Abel (1985); Stockman (1981); Woodford (1990); Bianconi (1992)].
Woodford (2011, 2012)
(ii) Short Discussion of The New Keynesian
Dynamic Stochastic General Equilibrium (DSGE) Model
Smets and Wouters (2007)
Calvo (1983)
Clarida, Gali and Gertler (1999): most influential article
Romer (1995, newest editions) Ch. 7
(iii) Time Consistency of Fiscal Policy:
Fisher (1980);
Barro (1997), Chapters 12-14;
Sargent (1987), Chapter 6;
Ljungqvist and Sargent (2000), Chapter 9;
Williamson (2014), Chapter 8 and Appendix
[Barro (1974, 1989); Baxter and King (1993); Chamley (1986); Cogan, John F. & Cwik,
Tobias & Taylor & Wieland(2009)].
(iv) Banking and Risk Sharing:
Diamond and Dybvig (1983)
Mehra & Piguillem & Prescott (2011)
Lucas and Stokey (2011)
Lucas (2013)
(v) Debt, Leverage and Collateral:
Geanakoplos (2009)
Fostel and Geanakoplos (2008)
Bardsley (1995)
Brunnermeier and Sannikov (2011)
Brunnermeier, Eisenbach and Sannikov (2011)
Shleifer and Vishny (2011)
13
Luttmer (1996)
(vi) The Term Structure of Interest Rates:
Brunnermeier, M. and M. Oehmke (2010)
Cogley, Sargent and Surico (2011)
Sargent (1987)
Ljungqvist and Sargent (2012)
Abel, Andrew (1985) "Dynamic Behavior of Capital Accumulation in a Cash-in Advance
Economy". Journal of Monetary Economics, 16, 55-71.
Barro, Robert J. (1974) "Are Government Bonds Net Wealth?". Journal of Political Economy,
82, 1095-1117.
Barro, Robert J. (1989) “The Neoclassical Approach to Fiscal Policy.” In Barro, R. J. (Ed.)
Modern Business Cycle Theory, Harvard University Press, Cambridge, MA.
Bardsley, P. (1995) “Optimal leverage for the utility maximizing firm.” Journal of Economic
Behavior & Organization, Volume 26, Issue 2, Pages 237-251
Baxter, Marianne and Robert King (1993) "Fiscal Policy in General Equilibrium". American
Economic Review, 83, 315-334.
Bianconi, M. (1992) "Monetary Growth Innovations in a Simple Cash-in-Advance Asset-Pricing
Model". European Economic Review, 36, 1501-1521.
Brunnermeier, M. and M. Oehmke (2010) “The Maturity Rat Race.” Princeton University
working paper. Jounal of Finance, 2012.
Brunnermeier, M. and Y. Sannikov (2011) “A Macroeconomic Model with a Financial Sector.”
Princeton University working paper.
Brunnermeier, Markus K., Thomas Eisenbach, and Yuliy Sannikov. (2011) Macroeconomics
with Financial Frictions: A Survey. Princeton University, working paper.
Calvo, Guillermo A., (1983) "Staggered prices in a utility-maximizing framework." Journal of
Monetary Economics. Elsevier, vol. 12(3), pages 383-398, September.
Chamley, Christophe (1986) "Optimal Taxation of Capital Income in General Equilibrium with
Infinite Lives". Econometrica, 54, 607-622.
Cochrane, John H. (2011a) Determinacy and Identification with Taylor Rules. Journal of
Political Economy, Vol. 119, No. 3 (June), pp. 565-615
Cochrane, John H. (2011b) Understanding fiscal and monetary policy in the great recession:
Some unpleasant fiscal arithmetic. January, European Economic Review 55 2-30.
14
Cochrane, John H. (2005) Money as Stock. Journal of Monetary Economics 52:3, 501-528.
Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker (2009)"New Keynesian
versus old Keynesian government spending multipliers," CEPR Discussion Papers 7236,
C.E.P.R. Discussion Papers.
Cogley, T., T. Sargent and P. Surico (2011) The Return of the Gibson Paradox. NYU working
paper.
Diamond D.W, and Dybvig PH (1983). "Bank runs, deposit insurance, and liquidity". Journal of
Political Economy 91 (3): 401–419.
Fischer, Stanley (1980) "Dynamic Inconsistency, Cooperation and the Benevolent Dissembling
Government". Journal of Economic Dynamics and Control, 2, 93-107.
Fostel, A. and John Geanakoplos (2008) “Levarage Cycles and the Anxious Economy.”
American Economic Review, 98:4, 1211–1244.
Geanakoplos, John (2009) “The Leverage Cycle.” Cowles Foundation Discussion Paper No.
1715.
Gertler, Mark & Jordi Gali & Richard Clarida, (1999). "The Science of Monetary Policy: A New
Keynesian Perspective," Journal of Economic Literature, American Economic
Association, vol. 37(4), pages 1661-1707, December.
Hall, George J., and Thomas J. Sargent. 2011. "Interest Rate Risk and Other Determinants of
Post-WWII US Government Debt/GDP Dynamics." American Economic Journal:
Macroeconomics, 3(3): 192–214.
Lucas, Jr. R. and Nancy L. Stokey (2011) Liquidity Crisis. University of Chicago working paper.
Lucas, Robert E. (2013). "Glass-Steagall: A Requiem." American Economic Review, 103(3):4347.
Luttmer, E. G (1996) Asset Pricing in Economies with Frictions Econometrica , Vol. 64, No. 6
(Nov.), pp. 1439-1467
Mehra, R. & Facundo Piguillem & Edward C. Prescott (2011). "Costly financial intermediation
in neoclassical growth theory," Quantitative Economics, Econometric Society, vol. 2(1),
pages 1-36, 03.
Sargent, T. and N. Wallace (1981) Some Unpleasant Monetarist Arithmetic. Federal Reserve
Bank of Minneapolis Quarterly Review. v. 5, p. 1-17.
Shleifer, A. and Robert Vishny (2011) Fire Sales in Finance and Macroeconomics. Journal of
Economic Perspectives—Volume 25, Number 1—Winter 2011—Pages 29–48.
15
Smets, Frank, and Rafael Wouters. 2007. "Shocks and Frictions in US Business Cycles: A
Bayesian DSGE Approach." American Economic Review, 97(3): 586-606.
Stockman, Alan C. (1981) "Anticipated Inflation and the Capital Stock in a Cash-in-advance
Economy". Journal of Monetary Economics, 8, 387-394.
Woodford, Michael (1990) "The Optimum Quantity of Money". Friedman, Benjamin M. and
Frank H. Hahn (Eds.) Handbook of Monetary Economics, Volume 2, Chapter 20. North
Holland: Amsterdam.
Woodford, Micheal (2011) “Simple Analytics of the Government Expenditure Multiplier,” AEJ
Macroeconomics, January 2011.
Woodford, Michael (2012)“Methods of Policy Accommodation at the Interest-Rate Lower
Bound,” presented at the Jackson Hole symposium, August.
TERM PAPER due, Friday, April 25
FINAL EXAM – Friday May 9 – Covers all course material
16
Book References:
There will be other texts that I may (or may not) refer in my lectures, but are good references for your
study in the masters program (this list is not exhaustive):
Adda, Jerome and Russell Cooper (2003) Dynamic Programming: Theory and Applications. The
MIT Press, Cambridge: MA. This is an up-to-date graduate book on the dynamic
programming methodology that is vastly used in modern macroeconomics.
Aghion, Philippe and Peter Howitt (1998) Endogenous Growth Theory. The MIT Press,
Cambridge, MA. A recent textbook that analyzes the new endogenous growth theory
with attention to research and development issues.
Aghion, Philippe and Steven Durlauf (Eds.) (2005) Handbook of Economic Growth. Volumes 1,
2, and 3; North Holland: Amsterdam. Solid, useful and most recent collection of surveys
in the field.
Altug, Sumru and Pamela Labadie (1994) Dynamic Choice and Asset Prices. Academic Press,
San Diego, CA. Basic dynamic macroeconomic theory.
Altug, Sumru, Jagjit S. Chandra and Charles Nolan, Eds. (2003) Dynamic Macroeconomic
Analysis: Theory and Policy in General Equilibrium. Cambridge University Press,
Cambridge, UK. A collection of recent articles and surveys focusing on dynamic
stochastic general equilibrium (DSGE) models.
Arrow, Kenneth J. and M. Kurz (1970) Public Investment, and Rate of Return, and Optimal
Fiscal Policy. Johns Hopkins University Press for Resources for the Future, Inc. The
classic on continuous time optimal control applications to macroeconomics, with
attention to fiscal policy.
Auerbach, Alan J. and Laurence J. Kotlikoff (1987) Dynamic Fiscal Policy. Cambridge
University Press, Cambridge. The life-cycle model examined theoretically and
quantitatively in great detail, with attention to fiscal policy.
Azariadis, Costas (1993) Intertemporal Macroeconomics. Basil Blackwell, Cambridge, MA. A
solid survey of modern macroeconomic theory, with a useful presentation of the technical
tools.
Bagliano, Fabio-Cesare and Guiseppe Bertola (2007) Models for Dynamic Macroeconomics.
Oxford University Press, NY, NY. A review of dynamic macroeconomic models.
Barro, Robert J. and Xavier Sala-i-Martin (1995) Economic Growth. McGraw Hill Book Co.,
New York, NY. A classic survey on the revival of growth theory in the last 15 years.
Barro, Robert J., (Ed.) (1989) Modern Business Cycle Theory. Harvard University Press,
Cambridge, MA. Series of articles discussing the important macroeconomic theories of
the time.
17
Blanchard, Olivier J. and Stanley Fischer (1989) Lectures on Macroeconomics. The MIT Press,
Cambridge, MA. A classic textbook at its time.
Brunnermeier, M. (2001) Asset Pricing under Asymmetric Information - Bubbles, Crashes,
Technical Analysis and Herding. Oxford University Press. Classic on deviations from
market efficiency in asset markets.
Canova, Fabio (2007). Methods for Applied Macroeconomic Research (Princeton, NJ: Princeton
University Press). Applied macroeconomics and econometric methods.
Chow, Gregory (1997) Dynamic Economics: Optimization by the Lagrangean Method. Oxford
University Press, Oxford, UK. This is a solid advanced text that examines several
existing applications in dynamic economics and finance using the Lagrangean technique
as opposed to Dynamic Programming.
Cochrane, John H. (2001). Asset Pricing (Princeton, NJ: Princeton University Press, 2nd Edition
available in 2005). The up-to-date review of finance, both in theory and econometric
practice.
Cooley, Thomas (Ed.) (1995) Frontiers of Business Cycle Research. Princeton University Press,
Princeton, NJ. Series of articles discussing the important contributions and advances of
the real business cycle research program.
Deaton, Angus (1992) Understanding Consumption. Claredon Lectures in Economics, Claredon
Press, Oxford. A primer on consumption theory.
Debreu, Gerard (1959) Theory of Value: An Axiomatic Analysis of Economic Equilibrium.
Cowles Foundation Monograph 17, Yale University Press, New Haven, CT. The classic
on general equilibrium analysis.
DeJong, David N. with Chetan Dave (2007). Structural Macroeconometrics Princeton, NJ:
Princeton University Press). Econometric methods and macroeconomics.
Dixit, Avinash K. (1990) Optimization in Economics, Second Edition. Oxford University Press,
New York, NY. A very well written monograph which gives a useful introduction to
some basic economic theories and problems.
Dixit, Avinash K. and Robert Pyndyck (1994) Investment Under Uncertainty. Princeton
University Press, Princeton, NJ. The classic on the subject.
Duffie, Darrell (1988) Security Markets: Stochastic Models. Academic Press, New York, NY.
An advanced text in finance theory and asset pricing.
Duffie, Darrell (1992) Dynamic Asset Pricing Theory. Princeton University Press, Princeton,
NJ. A follow up to Duffie (1988), it is an advanced text in finance theory and asset
pricing.
18
Evans, George and Seppo Honkapohja (2001) Learning and Expectations in Macroeconomics.
Princeton University Press, Princeton, NJ. This advanced book presents the research
agenda of the modern approach to expectation formation and learning activity by
economic agents.
Farmer, Roger E. A. (1993) The Macroeconomics of Self-Fulfilling Prophecies. The MIT Press,
Cambridge, MA. An useful survey of some of the main modern macroeconomic theories
and applications.
Friedman, Benjamin M. and Frank H. Hahn (Eds.) (1990) Handbook of Monetary Economics,
Volumes 1 and 2, North Holland: Amsterdam. Collection of surveys in the area of
monetary economics.
Gong, Gang and Willi Semmler (2006). Stochastic Dynamic Macroeconomics: Theory and
Empirical Evidence. (Oxford: Oxford University Press).
Gray, Dale F. and S. Malone (2007) Macrofinancial Risk Analysis. Wiley Finance, NY.
Harris, Milton (1987) Dynamic Economic Analysis. Oxford University Press, New York, NY.
More advanced, this is a monograph that gives a rigorous treatment of topics in capital
theory and the dynamics of capital accumulation.
Heijdra, Ben J. and Frederick Van Der Ploeg (2002) Foundations of Modern Macroeconomics.
Oxford University Press. Oxford UK. A recent and useful treatise in modern
macroeconomics covering a wide range of topics and models.
Huang, Chi-Fu and Robert H. Litzenberger (1988) Foundations for Financial Economics. North
Holland: Amsterdam. Classic on modern finance theory and asset pricing.
Judd, Kenneth L. (1999) Numerical Methods in Economics. The MIT Press, Cambridge, MA.
A classic on simulation methods in economic analysis.
Lucas, Jr., Robert E. (1987) Models of Business Cycles. Basil Blackwell, Cambridge, MA. An
in depth discussion of basic growth theory under uncertainty with special attention to the
role of money.
Mas-Colell, Andreu, Michael Whinston and Jerry Green (1995) Microeconomic Theory.
Oxford University Press, Cambridge, MA. The most modern synthesis of basic
economic theory from a rigorous perspective, it has some of the main microeconomic
applications. Highly recommended.
McCandless, George T. with Neil Wallace (1992) An Introduction to Dynamic Macroeconomic
Theory: An Overlapping Generations Approach. Harvard University Press, Cambridge,
MA. A low-level textbook the introduces the overlapping generations approach to
macroeconomic theory.
19
Obstfeld, Maurice and Kenneth Rogoff (1996) Foundations of International Macroeconomics.
The MIT Press, Cambridge, MA. The graduate textbook in macroeconomics with focus
on the international trade and international finance aspects of the field. The book is a
treatise on the subject and may be used as background.
Romer, David (1995) Advanced Macroeconomics. McGraw Hill Book Co., New York, NY. A
well-written and popular textbook of modern macroeconomics with a variety of topics
surveyed. (up to the fourth edition now).
Sargent, Thomas J. (1987) Macroeconomic Theory, Second Edition. Academic Press, San
Diego, CA. The first Sargent textbook, has impressive presentations of technical tools
and several discussions of classic useful topics.
Starr, Ross M. (1997) General Equilibrium Theory: An Introduction. Cambridge University
Press, Cambridge, UK. A valuable and accessible introduction to abstract general
equilibrium theory. Low to medium level.
Stokey, Nancy L., Robert E. Lucas, with Edward C. Prescott (1989) Recursive Methods in
Economic Dynamics. Harvard University Press, Cambridge, MA. Advanced book on
mathematical methods for economics. This is a book with an in depth presentation of the
recursive approach to economics, I recommend it highly. Note: the Harris (1987) book is
a “baby” version of some of the chapters in this book.
Sundaram, Rangarajam K. (1996) A First Course in Optimization Theory. Cambridge
University Press, Cambridge, UK. This is a very good introduction to the mathematics of
(mostly static) optimization used in economics.
Taylor, John and Michael Woodford (Eds.) (2000) Handbooks of Macroeconomics. Volumes 1,
2, and 3; North Holland: Amsterdam. Solid, useful and most recent collection of surveys
in the field.
Turnovsky, Stephen J. (1997) International Macroeconomic Dynamics. The MIT Press,
Cambridge, MA. A solid book presenting the research program of Turnovsky and many
of his co-authors in the areas of monetary and fiscal policy with attention to the
international aspects. Several analytical technical tools are presented in great detail.
Covers mostly continuous time macroeconomic theory.
Turnovsky, Stephen J. (2000) Methods of Macroeconomic Dynamics, Second Edition The MIT
Press, Cambridge, MA. A solid book presenting the research program of Turnovsky and
many of his co-authors in the areas of monetary and fiscal policy. Several analytical
technical tools are presented in great detail. Covers mostly continuous time
macroeconomic theory.
Walsh, Carl E. (2003). Monetary Theory and Policy (Cambridge, MA: IT Press). Basic coverage
of monetary theory and policy, useful discussion of time consistency issues.
20
Wickens, Michael (2008) Macroeconomic Theory: A Dynamic General Equilibrium Approach.
Princeton University Press. A simple and modern survey of dynamic macroeconomic
theory.
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy.
Princeton University Press, Princeton, NJ. This is an important recent book. It presents a
synthesis of one school of macroeconomic thought, the New-Keynesian approach (AKA
the New Keneysian bible), and expands into new approaches of price level determination
and interaction between monetary and fiscal policy.
 General References:
Durlauf, Stephen et al (2002) The New Palgrave Dictionary of Economics. This is a new edition. The
older edition is also available. Eatwell, John, M. Milgate and P. Newman (1987) The New
Palgrave Dictionary of Economics. The Macmillan Press, New York, NY. A good reference for
some topics you where may want to learn the basics. Available at the Tisch Library.
Newman, Peter, M. Milgate, and J. Eatwell, Eds. (1992) The New Palgrave Dictionary of Money and
Finance. Stockton Press, New York, NY. A good reference for some topics here you may want
to learn the basics. Available at the Tisch Library.

An important annual publication is the NBER(National Bureau of Economic Research)
Macroeconomics Annual; various editors, 1986-present. Available at the library.

Another important publication is the NBER Working Papers Series; various authors, 1981present. Available at the library and on the web: www.nber.org
Software Reference: Available at the Tisch Library:
Hamilton, Lawrence H. (2012) Statistics with STATA.Thomson, Belmont, CA.
Wolfram, Stephen (1996) The Mathematica Book. Cambridge University Press, Cambridge, UK.
21
Spring 2014 Term Schedule: EC206: Macro Theory II
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Final Exam: 8:30-10:30AM
All Material included