Harvard University
John F. Kennedy School of Government
Syllabus, Spring 2008
API–119: Advanced Macroeconomics for the Open Economy II
Professor Maurice Kugler
Office Hours: Wednesday 2–4 at Rubenstein R–117
Assistant: Lauren Schiff (lauren_schiff@ksg.harvard.edu)
Teaching Fellow: Alexander Culiuc (alexander_culiuc@ksgphd.harvard.edu)
Overview
This course is for students with a good background in micro theory, macro theory,
econometrics, and mathematical techniques applied to economics. Our objective is to
develop expertise in the use of models for the analysis of macroeconomic policy questions in
open economies. The course relies on recent research with policy focus to build a
substantive understanding of current issues in macroeconomics, as well as capability in
applications of the core macroeconomic models. The rigor and discipline of mathematical
models will give robust foundations to our analysis. Most importantly, our modeling will be
oriented to have relevance, in that our analysis possesses potential impact upon policy change.
Prerequisites
Macroeconomic theory at the intermediate level; multivariate calculus and dynamic
optimization (rudiments of control theory) are necessary. The course freely uses the
techniques of dynamic optimization. As background reading I recommend “Dynamic
Optimization in Continuous Time Economic Models (A Guide for the Perplexed)” by
Maurice Obstfeld, (http://emlab.Berkeley.EDU/users/obstfeld/e202b/e202b.html). You
may also want to look at the math Appendix of R. Barro and X. Sala-i-Martin Economic
Growth, second edition, 2004. Yet, if you are really perplexed you better start with
Optimization in Economic Theory by Avinash Dixit. This course is open to non-MPA/ID
students by permission of the instructor only.
Readings
No single text covers all the material for the course. David Romer’s Advanced Macroeconomics,
third edition, 2006, (DR henceforth) is a book that has a nice coverage of recent research in
macroeconomics, very much in the style of what Olivier Blanchard and Stanley Fischer
Lectures on Macroeconomics, 1989, (BF henceforth) attempted a decade earlier. Because DR is
the more up to date, we have selected this for background reading. In fact, given the large
amount of material we expect you to read from this source, we have not included DR
chapters in the package. As professional economists, you would be well advised to own a
copy of both DR and the BF book. In lecture, we will be drawing mostly from these two
plus, of course, a number of mostly classical articles in the field. Because this is a course to
set up the stage for your understanding of macroeconomics, with a few exceptions I have
chosen to direct you to seminal or survey articles in each topic relying on DR for a
discussion of the developments thereafter. The reading list is short, under the assumption
that you will skim through most of the pieces. Yet, there are two types of readings, some
which you are required to read (flagged by *), and other pieces for background clarification.
For those interested in economic development at large, there are a couple of fairly recent
books that constitute very stimulating complementary reading, and which provide a good
link with material that is covered in lectures:
Helpman, Elhanan (2004), The Mystery of Economic Growth, Harvard University Press.
Rodrik, Dani (2007), One Economics, Many Recipes: Globalization, Institutions and Economic Growth,
Princeton University Press.
Grading
Grading will be based on:
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a midterm (30%)
problem sets (20%)
a final (50%)
The midterm will take place in class on March 11 and the final will be on May 21.
Why do we do theory?
This is a recurrent question in a course like this one, which attempts to address very practical
issues with relatively abstract models. In a 1994 piece, “The Rise and Fall of Development
Economics,” (http://web.mit.edu/krugman/www/dishpan.html) Paul Krugman argues that
the utility of modeling, like that of mapmaking, stems from useful simplification. With their
inimitable fiction, Argentinean writers A. Bioy Casares and J. L. Borges (under pseudonym
B. Lynch Davis) illustrate in a story on maps the importance of the principle of
parsimoniousness in Ockham’s Razor (http://en.wikipedia.org/wiki/Occam's_Razor ):
"... In that empire, the art of cartography reached such perfection that the map of
one province alone covered up the whole of a city, and the map of the empire, the
whole of a province. In time, those unconscionable maps did not satisfy, and the
colleges of cartographers set up a map of the empire which had the size of the
empire itself and coincided with it point by point. Less addicted to the study of
cartography, succeeding generations understood that this widespread map was
useless and not without impiety they abandoned it to the inclemency of the sun and
of the winters. In the deserts of the west some mangled ruins of the map lasted on,
inhabited by animals and beggars; in the whole country there are no other relics of
the disciplines of geography." Suarez Miranda, Viajes de varones prudentes, Book
IV, Chapter XLV, Urida, 1658.
A Universal History of Infamy, Penguin, London, 1975
The contribution of abstraction to analysis is the provision of tractable frameworks to
characterize systems we aim to understand, leaving out those details, which are realistic but
not essential to the subject being studied. Indeed, as Dani Rodrik remarks, in his highly
recommended web log (http://rodrik.typepad.com/dani_rodriks_weblog/2007/09/whywe-use-math.html), that abstract mathematical models possess the quality of aiding clear
analysis with explicit linkages between premises and conclusions. Metaphors and intuition
more often than not lack the precision needed in intellectual debate for policy formulation.
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Course Contents
The course will be focused on five main areas of the contemporary macroeconomics debate:
(i) growth theory, (ii) overlapping generations models and social security, (iii) consumption
and investment, (iv) business cycles (covering real business cycles and models of
unemployment), and (v) a discussion of fiscal and monetary policy.
I. Growth theory
January 31st and February 5 Introduction and the Solow model
DR, Chapter 1.
* Landes, D. (1990) “Why are we so Rich and They so Poor?”, American Economic Review, Vol.
80, May 1990.
* Easterly, W. (2001) The Elusive Quest for Growth: Economists Adventures and Misadventures in the
Tropics, Cambridge University Press, Chapter 2 and 3.
Feb. 7 and 12 The Ramsey model and optimal savings in the closed economy
DR. Chapter 2. Part A
BF, Chapter 2. Subsections 1 – 3
Feb 14 and February 21 Endogenous growth models
DR Chapter 3. Part A.
* Romer P. (1989), “Capital Accumulation in the Theory of Long-Run Growth”, in Robert
Barro, ed. Modern Business Cycle Theory, Harvard University Press.
* Lucas, R. (1990) “Why doesn’t Capital Flow from Rich to Poor Countries” American
Economic Review, Vol. 80, No. 2, May.
* Kremer, M. (1993) “Population Growth and Technological Change One Million BC to
1990”, Quarterly Journal of Economics, August.
Feb 26 Path dependence, policy and economic growth
* Krugman. P. (1987) “The Narrow Moving Band, the Dutch Disease, and the Competitive
Consequences of Mrs. Thatcher: Notes on Trade in the Presence of Dynamic Scale
Economies”, Journal of Development Economics, Vol. 27.
* Lucas, R. (1993) “Making a Miracle”, Econometrica, Vol. 61 (2), pp. 251-272.
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* Aghion, P. and P. Howitt (2005) “Appropriate Growth Policy: A Unifying Framework,”
Mimeo Harvard University.
Feb 28 Expectational indeterminacy, policy and economic growth
* Diamond, P. (1982) “Aggregate Demand Management in a Search Equilibrium,” Journal of
Political Economy, Vol. 90, No. 5.
* K. Murphy, A. Shleifer and R. Vishny (1989), "Income Distribution, Market Size and
Industrialization," Quarterly Journal of Economics, August.
* K. Murphy, A. Shleifer and R. Vishny (1989), "Industrialization and the Big Push," Journal
of Political Economy, October.
Easterly, W. (2005) “Reliving the ‘50s: the Big Push, Poverty Traps, and Takeoffs in
Economic Development”, No. 65.
March 4 Convergence: Theory, evidence and econometric issues
* Mankiw, G., D. Romer and D. Weil (1992) “A Contribution to the Empirics of Economic
Growth” The Quarterly Journal of Economics, Vol. 107, No 2.
* Sala-I-Martin X., (1997) “I Just Ran Two Million Regressions” The American Economic
Review, Vol. 87, No. 2.
* Caselli, F., G. Esquivel and F. Lefort (1996), “Reopening the convergence debate: A new
look at cross-country growth empirics,” Journal of Economic Growth, Vol. 1, No. 3.
March 6 Policies and Economic Growth
* Hall, R. and C. Jones (1999) “Why do Some Countries Produce so Much More Output per
Worker than Others?” The Quarterly Journal of Economics, February.
* Rodrik, D. (2005) “Why We Learn Nothing from Regressing Economic Growth on
Policies”, Mimeo, Kennedy School, March.
Easterly, W. (2003), “National Policies and Economic Growth: A Reappraisal,” Center for
Global Development, Working paper, Handbook of Economic Growth.
End of Topics covered in Midterm
Midterm date: March 11
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II. Overlapping generation models
March 13 The basic setup
DR, Chapter 2. Part B.
Diamond, P. (1965) “National Debt in a Neoclassical Growth Model”, American Economic
Review, Vol. 55, 5, December, pp. 1126-1150.
March 18 Social security and transitions
BF, Chapter 3, subsection 1-2.
* Feldstein, M. (1996) "The Missing Piece in Policy Analysis: Social Security Reform," The
Richard T. Ely Lecture, in American Economic Review, Vol. 86, No. 2, May, pp 1-14.
* Feldstein, M (1997) “Transition to a Fully Funded Pension System: Five Economic Issues”
NBER Working Paper, No. 6149.
III. Consumption and investment
March 20 and April 1 Consumption
DR. Chapter 7.
April 3 Ramsey in open economy with investment
DR Chapter 8
BF, Chapter 2.4
Sachs, J. (1981) “The Current Account and Macroeconomic Adjustment in the 1970s”,
Brookings Papers on Economic Activity.
Summers L. (1981) “Taxation and Corporate Investment: A Q-Theory Approach” Brookings
Papers on Economic Activity.
IV. Business cycles
April 8 Real business cycles
DR. Chapter 4.
* Prescott, E. (1986) “Theory Ahead of Business Cycle Measurement”, Federal Reserve Bank of
Minneapolis FED Quarterly.
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April 10 and 15 Microeconomic foundations of rigidities: A primer
DR Chapters 5 and 6
Friedman, M. (1968), “On the role of Monetary Policy”, American Economic Review, Vol. 58,
No. 1.
Lucas, R. (1976), “Some International Evidence on Output-Inflation Tradeoffs”
The American Economic Review, Vol. 66, No. 5
Mankiw, G. and D. Romer (1991) “Introduction” in Mankiw G. and D. Romer (eds) New
Keynesian Economics, Cambridge MIT Press. (this is just a long list of recent contributions that
you can use as reference)
Akerlof, G. (2002) “Behavioral Macroeconomics and Macroeconomic Behavior,” The
American Economic Review, Vol. 92, No. 3, pp. 411-433.
IV. Fiscal and Monetary Policy
April 17 Ricardian equivalence
DR. Chapter 11.1-11.3
* Barro, R. (1974) “Are Government Bonds New Wealth?,” Journal of Political Economy, Vo.
82, No. 6.
April 22 Tax smoothing and fiscal policy
DR Chapter 11.4-11.9
* Barro, R. (1979) “On the determination of Public Debt”, Journal of Political Economy, Vol.
87.
* Alesina, A. and R. Perotti (1994) “The Political Economy of Budget Deficits,” IMF Staff
Papers, Vol. 42.
* Rodrik, D. "Why Do More Open Economies Have Bigger Governments?" Journal of
Political Economy, 106(5), October 1998.
April 24 and 29 Monetary policy: inflation and deficits
DR, Ch. 10.1-10.2-10.8-10.9
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Cagan P. (1956) “Monetary Dynamics of Hyperinflation” in M. Friedman (ed.) Studies in the
Quantity Theory of Money.
Dornbusch, R., F. Sturzenegger, H. Wolf (1990) “Extreme Inflation: Dynamics and
Stabilization,” Brookings Papers on Economic Activity, Vol. 2
BF Chapter 4. Sections 4.1, 4.2, 4.5 and 4.6
BF Chapter 8, Section 8.2 and Chapter 10, Section 10.5.
May 1 A discussion on monetary policy
DR Chapter 10.6-10.7.
* Svensson, L. (1997) "Inflation Forecast Targeting: Implementing and Monitoring Inflation
Targets," European Economic Review, Vol. 41: 1111-1146.
* Mishkin, F. (2006) “Monetary Policy Strategy: How did we get here?” NBER Working
Paper No. 12515, September.
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