New Economics School
Macroeconomics Module 5, 2011
Dmitriy Stolyarov
Overview of the course
To understand macroeconomic phenomena, modern economists are using fully specified
equilibrium models that have “microeconomic foundations” and feature explicit dynamics. We
will cover the basic macroeconomic models that are used to understand fluctuations of economic
activity over the business cycle, the possible role of money in the economy and the functioning
of decentralized labor markets. The course will cover the relevant aspects of theory and will pay
particular attention to evaluating the empirical success of these models. In the process, the
students will be familiarized with a set of basic tools used in modern macroeconomic analysis.
Course requirement and grading
There will be a midterm exam (40% of the final grade) and a final exam (60% of the final grade).
Passing the course requires all students to take two exams (at their regularly scheduled times),
unless an exam is missed for a documented reason approved by NES administration. There is no
make up for the midterm exam; if the midterm exam is missed for an approved documented
reason, 100% of the final grade will be based on the final exam.
In addition, you will be given (at most) four problem sets to help you prepare for the exams.
Students are encouraged to form study groups to work on the problem sets. Subject to teaching
assistant availability, problem sets may be collected and loosely graded (check, check plus,
check minus, zero).
Reading
Books:
As with most graduate courses in macroeconomics, there is no single text that covers all of the
topics in this course in sufficient detail, but the book by
Romer, David, Advanced Macroeconomics, 3d edition, McGraw-Hill 2006
at least includes all of the course topics in some form.
In addition, students are encouraged to consult the relevant parts of several other excellent
graduate macroeconomics textbooks:
Handbook of Macroeconomics. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier,
1999. ISBN: 9780444501561.
Ljungqvist, Lars and Sargent, Thomas, Recursive Macroeconomic Theory, 2nd edition, MIT Press
2004.
Blanchard, Olivier and Fischer, Stanley, Lectures on Macroeconomics, MIT Press, 1989.
Pissarides, Christopher, Equilibrium Unemployment Theory, second edition, MIT Press, 2000.
Journal articles and notes:
Each topic in the course outline has links to relevant downloadable lecture notes authored by
well-known macroeconomists.
Some topics require you to read journal articles; required articles are listed in the course outline.
Course Outline1
Introduction
Brief history of macroeconomic thought on fluctuations; Questions that macroeconomists are
working on and would like to work on
Blanchard, O. "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?"
Quarterly Journal of Economics 115, no. 4 (November 2000): 1375-1410.
Mankiw, N. G. "The Macroeconomist as Scientist and Engineer." Journal of Economic
Perspectives 20, no. 4 (2006): 29-46.
Part I Real business cycle theory (5-6 lectures)
Business cycle facts
Romer 5.6
Stock, J., and M. Watson. "Business Cycle Fluctuations in U.S. Macroeconomic Time Series."
Chapter 1 in Handbook of Macroeconomics. Vol 1A. Edited by J. Taylor and M. Woodford. New
York, NY: Elsevier, 1999. ISBN: 9780444501561.
The basic business cycle model. Solution methods
Setting up the optimization problem. Intertemporal choice, shocks, uncertainty; The first order
conditions; Solving the model numerically; Value functions; Log linearization; Equivalence
between centralized and decentralized economies. The consumption problem in the decentralized
economy
Romer 4.2-4.7
Campbell, John, “Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth
Model,” Journal of Monetary Economics, 1994, 33, pp. 463-506.
Cochrane, John. “Solving real business cycle models by solving systems of first order
conditions”, class notes . (PDF)
Uhlig, H. "A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily." mimeo
University of Tilburg, 1997. (PDF)
Real business cycle model with labor and leisure choice. Evaluation and interpretation of the
model
1
Some parts of this course are based on Olivier Blanchard, course materials for 14.452 Macroeconomic Theory II,
Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology.
Movements in employment; Interpreting the first order conditions; Solving the model
numerically, and by log linearization; Evidence on labor supply elasticity; Evidence on high
frequency technological shocks; Solow residuals and their interpretation
Romer 4.2-4.7
King, R., and S. Rebelo. "Resuscitating Real Business Cycles." Chapter 14 in Handbook of
Macroeconomics. Vol. 1B. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier,
1999, pp. 927-1007. ISBN: 9780444501578.
Extensions and Propagation Mechanisms
Capital adjustment costs, indivisible labor supply, capacity utilization (time permitting). Costs of
adjustment for investment; Investment, consumption, and interest rates in the decentralized
economy; The role of the term structure of interest rates; The stock market and investment; The
effects of shocks on output, investment, the stock market, and the term structure.
Romer 8
Blanchard and Fischer, 6.3
King, R., and S. Rebelo. "Resuscitating Real Business Cycles." Chapter 14 in Handbook of
Macroeconomics. Vol. 1B. Edited by J. Taylor and M. Woodford. New York, NY: Elsevier,
1999, pp. 927-1007. ISBN: 9780444501578.
Part II Models of fluctuations based on incomplete nominal adjustment (4-5 lectures)
Monetary neutrality results (cash-in-advance model, money in utility function); The basic sticky
price model; The new Keynesian model.
Romer 5.6, 6
Blanchard and Fischer, 8.1-8.3
Gilchrist, Simon “A Dynamic New Keynesian model of the Business Cylce”, class notes, Boston
University (PDF)
Part III Search and matching theory of unemployment (2-3 lectures)
Romer 9.8
Pissarides, Chapter 1-2
Ljungqvist and Sargent, Chapter 6
Blanchard, Olivier, “Flows, Bargaining and Unemployment”, class notes, MIT (PDF)
Mortensen, Dale T.; Christopher A. Pissarides, “Job Creation and Job Destruction in the Theory
of Unemployment” The Review of Economic Studies, Vol. 61, No. 3. (Jul., 1994), pp. 397-415.
Andolfatto, David “Business Cycles and Labor Market Search”, The American Economic Review,
Vol. 86, No. 1 (Mar., 1996), pp. 112-132.