EC5102 Macroeconomic Theory
Instructor: Zhang Jie
Course Description:
This course is designed to provide modern macroeconomic models which are essential in
the study of economics at the graduate level. The course will develop the key models and
techniques in use in modern macroeconomics. The course materials will analyze the
general equilibrium foundations and the two welfare theorems, infinitely lived
representative agent models, the overlapping-generations model, and models with
incomplete markets and risk sharing. The course will concentrate on dynamic
optimization in both discrete and continuous time. The models will be used to study
growth theory, business cycles, certain components of aggregate demand, and monetary
and fiscal policies.
Readings: There is no good textbook that covers the material of the course
systematically. The books of Azariadis, Blanchard and Fischer, Dana and Le Van,
Romer, and Stokey and Lucas cover parts of the material and are to be used as
supplementary material. There are some lecture notes available on the web which better
cover the material. In particular, the lecture notes Krueger (2007) and Krusell (2007) will
be used as the primary references. As the course progresses, you will also be assigned
journal articles to read. There are several books on dynamic optimization that treat
dynamic programming and maximum principle in different levels of generality and may
be used for reference purposes.
The instructor will upload notes to the IVLE web site for each lecture a few days in
advance.
Lecture Notes:
1. Dirk Krueger (2007) “Macroeconomic Theory,” Mimeo. University of
Pennsylvania.
2. Per Krusell (2007) “Real Macroeconomic Theory,” Mimeo. Princeton University.
These and other lecture notes are available from: http://www.econphd.net/notes.htm
Textbooks:
1. C. Azariadis (1993) “Intertemporal Macroeconomics,” Blackwell.
2. R.J. Barro and X. Sala-i-Martin (1995) "Economic Growth," McGraw-Hill
3. O. Blanchard and S. Fischer (1989) “Lectures on Macroeconomics,” MIT Press.
4. R.A. Dana and C. Le Van (1992) “Dynamic Programming in Economics,”
Kluwer.
5. D. Romer (2005) “Advanced Macroeconomics, 3rd Ed.” McGraw Hill.
6. N. Stokey and R. Lucas (1989) “Recursive Methods in Economic Dynamics,”
Harvard University Press.
Dynamic Optimization References:
1. M.R. Caputo (2005) “Foundations of Dynamic Economic Analysis,” Cambridge
University Press.
2. A.C. Chiang (1992) “Elements of Dynamic Optimization,” McGraw-Hill.
3. A. Dixit (1990) “Optimization in Economic Theory,” Oxford University Press.
4. M. Intriligator (1971) “Mathematical Optimization and Economic Theory,”
Englewood Cliffs.
5. N. Stokey and R. Lucas (1989) “Recursive Methods in Economic Dynamics,”
Harvard University Press.
6. R. Sundaram (1996) “A First Course in Optimization Theory,” Cambridge
University Press.
Assessment
Assignments (30%); Final Examination (70%)
Syllabus
(1) Dynamic Programming and Other Techniques for Dynamic Optimization in
Discrete Time (Weeks 1 and 2)
Krusell, Ch. 3
Krueger, Ch. 5
Stokey and Lucas, Ch. 3, Ch. 4 (more advanced)
(2) General Equilibrium Foundations and the Two Welfare Theorems; Competitive
and Recursive Competitive Equilibrium in Dynamic Models; the Neoclassical
Growth Model (Weeks 3 and 4)
Krueger, Chs. 2, 3, 7
Krusell, Ch. 5
(3) The Overlapping Generations Model (Week 5)
Krueger, Ch. 8
Krusell, Ch. 7
Romer, Ch. 2, Part B
Balasko, Y., Shell, K., 1980. "The overlapping-generations model, I: The case of
pure exchange without money." Journal of Economic Theory 23, 281-306.
(4) Continuous-Time Dynamic Optimization: the Maximum Principle; the RamseyCass-Koopmans neoclassical growth models; Endogenous Growth Models
(Weeks 6 and 7)
Barro and Sala-i-Martin, Ch. 2, Appendix 1.3
Krueger, Ch. 9
Aghion, P., Howitt, P., 1992. "A model of growth through creative destruction."
Econometrica 60, 323-351.
Lucas, R.E., Jr., 1988. "On the mechanics of economic development." Journal of
Monetary Economics 22, 3-42.
Romer, P.M., 1986. "Increasing returns and long-run growth." Journal of Political
Economy 94, 1002-1037.
(5) Uncertainty: Models with Complete and Incomplete Markets and Risk Sharing
(Week 8)
Krueger, Ch. 6
Krusell, Ch. 6
(6) Real Business Cycles (Week 9)
Krueger, Ch. 6
Romer, Ch. 4
Greenwood, J., Hercowitz, Z., Huffman, G.W., 1988. "Investment, capacity
utilization, and the real business cycle." American Economic Review 78 (3), 402417.
Kydland, F.E., Prescott, E.C., 1982. "Time-to-build and aggregate fluctuations."
Econometrica 50, 1345-1370.
(7) Consumption (Week 10)
Romer, Ch. 7, and possibly other readings as well
(8) Investment (Week 11)
Romer, Ch. 8, and possibly other readings as well
(9) Inflation and Monetary Policy (Week 12)
Romer, Ch. 10
Ho, W., Zeng, J., Zhang, J., 2007. "Inflation taxation and welfare with
externalities and leisure." Journal of Money, Credit and Banking 39 (1), 105-131.
(10)
Budget Deficit and Fiscal Policy (Week 13)
Romer, Ch. 11
Chari, V.V., Christiano, L.J., Kehoe, P.J., 1994. "Optimal fiscal policy in a
business cycle model." Journal of Political Economy 102, 617-652.
Zhang, J., Davies, J., Zeng, J., McDonald, S., 2008. "Optimal taxation in a growth
model with public consumption and home production." Journal of Public
Economics 92, 885-896.