Syllabus
EC 703 Advanced Macroeconomics
EJCH 240M: 4:00-5:15
Professor Mark Pingle
pingle@unr.edu, 784-6634
Office Hours (AB 319C) Monday and Wednesday 2:30-3:45 and by appointment
Fall 2010
Course Description: Introduction to modern theories of economic growth and fluctuations. Neoclassical
synthesis; descriptive, optimal, and endogenous growth; real business cycles; new classical and new
Keynesian theories.
Required Book: Pingle, Mark A., US Macroeconomic Statistics: A Set of Figures and Data Tables to
Supplement a Macroeconomic Course, 15th Edition, 2010. (To be distributed in class at cost of $10)
Required Book: Akerlof, George, A and Shiller, Robert J., 2009. Animal Spirits: How human psychology
drives the economy and why it matters for global capitalism, Princeton: Princeton University Press.
Required Book: Romer, David, 2006. Advanced Macroeconomics, Third Edition, New York: McGrawHill-Irwin.
Non-required books (Good for reference):
Barro, Robert J. and Sala-i-Martin, Xavier, 1995. Economic Growth. First Edition, New York:
McGraw-Hill-Irwin. (A more recent edition is available.)
Kamien, Morton I., and Schwartz, Nancy L., 1981. Dynamic Optimization: The Calculus of
Variations and Optimal Control in Economics and Management, New York: North Holland. (A more
recent edition is available.)
Grading: The graded items and grade weights are as follows:
20% Midterm 1
20% Midterm 2
30% Final: Monday December 13, 4:30-6:30 PM
10% Assignments
20 % Project
Assignments: Assigned problems or tasks will be given throughout the semester. In general, the student’s
grade for this work will be based upon (a) completeness, (b) content quality, and (c) presentation quality.
Project: While much macroeconomic analysis is done entirely theoretically, there is value in being able to
relate a mathematical model to data. Most highly trained economists never construct and estimate
macroeconomic models. However, employers often find value in people with economics training who can
work with data. Over the semester, you will complete a number of tasks that will culminate in the
completion of a written project involving the construction and estimation of a simple macroeconomic model.
This project will be something you can take with you to a job interview to demonstrate you have the ability to
extract information from data.
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Date
August 23
August 25
August 31
September 1
September 8
Syllabus
Topic
Lecture
 Introduction to the course
o Examine some Stats-book figures
 Project content
o Discuss task 5.1
o Project task content
To Do
 Modeling: Assignment 1 is to do problem set 1 (Math Review)
 Reading: Testimony of 5 well-known economists (See Web
Campus for the readings)
 Get Akerlof and Shiller Book
 Project: Assign tasks 1-5
Due
 Post project task 5.1 (by start of class or ask questions
Lecture
 Problem set 1
 Current state of macroeconomic analysis
o In class discussion of Testimony Reading
o Professor overview of papers posted on WebCampus
o Akerlof and Shiller Introduction
To Do
 Project: Task 5.2
 Assignment 2: Short paper (3-5 double spaced pages) on the current
state of macroeconomic analysis
Due
 Post problem set 1
 Post problem project task 5.1 and 5.2
Lecture
 Data Task 1
 Introduce static macroeconomic analysis
Due
 Post Assignment 2 short paper
Lecture
 Data Task 2, static macroeconomic analysis, creating a Stata Data
Set and creating Stata Do files
Due
 Data task 1, Data task 2
Lecture
 Relationship between exponential model in levels and polynomial
model in growth rates.
 Static macroeconomic analysis
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September 13
September 15
October 4
October 6
October 11
Future
Static Macroeconomic Analysis
 The LM Curve
 Finding the comparative static multipliers
 Applications
o Understanding crowding out
o Investment and macroeconomic volatility
o Impacts of monetary policy vs fiscal policy
o Aggregate demand (What is it? Why does it depend upon
the price level?)
To Due
 Problem set 2
 Problem set 3
Meet in Computer Lab AB 312
Complete Data task 3, Data task 4 in Lab
 Post IS-LM Problem Set 2
Lecture
 Ch 8 Classical View
 Romer: Taylor Rule
To Do
 Romer 5.3
Lecture
 Introduction to Differential Equations Modelingt
o The Pingle Malthus paper
Due
 Post Romer 5.3 answers to Webcampus
Lecture
 Introduction to growth theory
Due
 Post Malthus problem set to webcampus
This syllabus will be completed in detail, week by week, in covering the
topics below
Project Tasks
Data Task 1---Describing a Level Using a Point to Point Models
Data Task 2---Describing a Level Using an Exponential Model
Data Task 3—Detrending and Forecasting
Data Task 4—Modeling a Growth Rate
Data Task 5: Writing a Descriptive Analysis
Data Task 6--Explaining Economic Growth
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Disability Statement: If you have a disability and will be requiring assistance, please contact me or the
Disability Resource Center (Thompson Building Suite 101) as soon as possible to arrange for appropriate
accommodations.
What You Should Seek to Learn: Concepts and Techniques
Macroeconomic understanding can be divided into two parts: concepts and techniques. Macroeconomic
concepts are ideas about the economy as a whole and how it operates. How is the economy structured?
What are its important components? How does the economy as a whole operate, or some sub-system within
it? All of these are conceptual questions. Techniques are tools used to express and analyze ideas in a
careful and systematic manner. How can we represent a consumer’s choice problem? How can we capture
the impacts of capital accumulation? These are technique questions. Modern macroeconomic analysis
involves using techniques to model ideas about how an economic system operates. Progress in
macroeconomic understanding comes as researchers demonstrate that the ideas embedded in their models
explain how real world economies seem to be operating.
Some Learning Tips
To enhance your training in macroeconomics, you must learn more ideas and more techniques. To learn new
ideas, you must first be exposed to them. The text for the course provides a systematic exposure to various
sets of ideas. Individual academic papers tend to focus on one idea or on a more limited set of ideas. When
you read the text or individual papers, make it your goal to identify key ideas. Do your best to incorporate
any new ideas into your existing macroeconomic understanding. This is how you make new ideas your own.
To learn new techniques, there is no substitute for “learning by doing.” It is good to not only do the assigned
problems, but it is also good to rework a technical procedure presented in class, in the text, or in a paper.
When you rework something you have already seen or something you have already done before, you
reinforce the technique in your mind, and what at first seems quite difficult can become quite easy. (Think
about how difficult driving a car was when you first did it, compared to how difficult you find driving now.)
While the student is responsible for his or her own learning, the professor is valuable resource. When you
don’t understand, it is often difficult to frame a question, and it is natural to not want to admit you do not
understand. However, no good teacher, who is challenging you, would expect you to understand everything
immediately. Good students are willing to humble themselves and ask questions. Seek to channel any
confusion into a question because intellectual growth happens when questions are asked and answered.
Some useful handouts
Handout: Some notes on functions and notation
Handout: Differentiation
Handout: Comparative static analysis
Handout: Cramer’s rule
Handout: Reviewing some tools using production as a context
Handout: Detrending
Notes: Point to Point Models
Notes: The Exponential Model
Notes: Using a Dummy Variable
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Notes: Estimating a Cobb Douglas Production Function
Project Data Set
U.S. Data Set
Detailed Presentation of Course Topics
Modeling Warm Up: (Assignment 1) Math Review
Topic 1---Current State of Macroeconomic Analysis: Macroeconomic analysis has evolved over time.
Mutations have led to new macroeconomic paradigms. As different paradigms have competed, selection
has favored some approaches over others. The readings below provide perspective on the development of
macroeconomic analysis to date.
Text Reading: None
Text Questions: None
To Do:
(1) Read the Akerlof and Shiller book and present in class the ideas from one Chapter
(2) Work with the group you are assigned to present the essentials of the article assigned to you.
(3) Assignment 1: Post to WebCT your own written summary of the current state of macroeconomic
analysis.
Other Selected Readings
Chari Testimony: The promise and the limits of modern macroeconomic theory
Solow Testimony: The promise and the limits of modern macroeconomic theory
Page Testimony: The promise and the limits of modern macroeconomic theory
Colander Testimony: The promise and the limits of modern macroeconomic theory
Winter Testimony: The promise and the limits of modern macroeconomic theory
Akerlof, George A., 2002. Behavioral economics and macroeconomic behavior, American Economic
Review 92(3), 411-433. In his Nobel prize address, Professor Akerlof discusses how macroeconomic
analysis has been and can be enhanced by considering microeconomic behavior, organized under the
"behavioral economics" umbrella.
Blanchard, Oliver, 2000. What do we know about macroeconomics that Fisher and Wicksell did not?,
De Economist 148(5), 571-601. Professor Blanchard gives a historical look at research in
macroeconomics, helping put recent research into perspective.
Phelps, Edmund S., 2006. Toward a model of innovation and performance along the lines of Knight,
Keynes, Hayek, and M. Polanyi, mimeo. This paper, and the associated Center on Capitalism and
Society, explores the idea that high economic performance depends upon having a dynamic, innovative
society, where new ideas are welcomed rather than hindered. The fundamental question is "What
societal institutions promote the creation and development of new ideas?" A more pointed question of
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interest is "How much does capitalism, based upon private property, generate new ideas relative to
socialism, based upon public ownership?"
Sims, Christopher A. 1996. Macroeconomics and Methodology, Journal of Economic Perspectives
10(1), 105-120. While discussing the methods used in macroeconomic analysis in general, Professor
Sims discusses the role of econometrics and empirical analysis in macroeconomics, especially relative
to the real business cycle theory research paradigm.
Topic 2---Static Macroeconomic Analysis (IS-LM Model and the NeoClassical Synthesis): The 1936
publication of Keynes' General Theory of Employment, Interest, and Money is regarded by many as start of
macroeconomic analysis. The 1937 IS-LM formulation of Hicks is a modeling framework that provided a
way to using mathematics to characterize the macroeconomic interactions Keynes used in his general theory.
This framework was the workhorse of macroeconomic theory for the next 4 decades. The IS-LM
framework lacks a microfoundation, in that the objectives of consumers, producers, and governments are not
explicitly recognized, and the static nature of the model means we must "fudge" matters in order to look at
dynamic issues, like the effects of capital accumulation. For these reasons and others, the IS-LM static
framework is no longer used much by macroeconomic researchers. However, this framework still tends to be
a primary reference point for macroeconomic policy discussions; it offers insight into how various markets
(i.e., goods market, money market, and labor market) interact; and it provides a context for learning
comparative static analysis, a type of analysis that can fruitfully be applied to steady states in more complex
dynamic models. Thus, it is good to have an understanding of how to construct and analyze a static
macroeconomic model.
Text Reading: Romer, Chapter 5
Text Questions: 5.3, 5.7, 5.8
To Do:
(1) Assignment: Questions using the IS-LM model presented in class
(2) Assignment: Do Romer questions 5.3, 5.7, and 5.8
Readings
Keynes, John Maynard, 1936. The General Theory of Employment, Interest and Money. Seek to
under the “essence of the General Theory” in Keynes own words by reading Chapter 3.
Hicks, John R., 1937. Mr. Keynes and the Classics, Econometrica 5, 74-86. See Hicks comment on
what Keynes accomplished, and see Hicks introduce the IS-LM apparatus, which he called IS-LL.
Pingle Classnotes Chapter 7 Development of the IS-LM apparatus, and comparative static analysis
within the IS-LM framework
Pingle Classnotes Chapter 8 Using IS-LM framework to characterize the Essence of Keynes’ General
Theory. Keynes original notation translated into modern notation, with further discussion of what
Keynes accomplished. Extension of Keynes model so as to relate Keynes work to the Classical
canonical model.
Bordo, Michael D. and Schwartz, Anna J. IS-LM and Monetarism, History of Political Economy 36
(Supplement 1): 217-239 (2004) Examine the relationship between the development of Keynesian
theory in the IS-LM framework and the development of monetarism.
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Things to Learn
Keynes
 Contrast Keynesian and Classical perspectives of how the economy works. In particular, if we think
of a complete macroeconomic model as including capital market, money market, labor market, and
product market, how did Keynes differ from the classical perspective he described with regard to how
these markets worked. What variable adjustments put these various markets into equilibrium
according to Keynes, and how does this differ from the classical view?
 Keynes says the idea that “supply creates its own demand” underlies all orthodox economic theory.
But, he disputes this idea. Can you explain Keynes’ perspective?
 What does Keynes perceive as the driving force of the economy? In particular, what fundamentally
determines the employment and output levels for the economy.
 What is “effective” demand, as opposed to just demand?
 What is the essence of Keynes’ General Theory as he describes it in his Chapter 3? (You should see
that, in terms of modeling, the essence of the General Theory is and IS equation and a production
function.)
Hicks
 Hicks indicated that, when Keynes added the interest rate to the money demand function, it was a
significant innovation. Why was it significant?
 Why does Hicks indicate that the LM curve (or what he calls the LL curve) is vertical when the real
income level (i.e., output level) is high but horizontal when income level is low?
Keynesianism versus Monetarism (Examining the old debate provides an opportunity to practice
model building, practice comparative static analysis and practice interpreting
comparative static multipliers)
 Stereotypical Keynesian Perspective: What assumptions about economic behavior will make the IS
curve closer to vertical and the LM curve closer to horizontal? When will aggregate demand be
more sensitive to changes is fiscal policy than changes in monetary policy? Why might the simple
quantity theory of money, where the velocity of money is constant, fail to hold.
 Stereotypical Monetarist Perspective: What assumptions about economic behavior will make the IS
curve closer to horizontal and the LM curve closer to vertical? When will aggregate demand be more
sensitive to changes is monetary policy than changes in fiscal policy? What assumptions about
money demand will generate a simple quantity theory of money, where the velocity of money is
constant.
Crowding out
 One type of crowding out occurs entirely on the demand-side of the economy, because the economy’s
money supply is constrained. Be able to use and IS-LM framework to identify when this type of
crowding out is minimal and when it is substantial. Be able to explain how this type of crowding out
relates to the Keynesian-Monetarist debate. Understand why this type of crowding out can be
mitigated by the economy’s central bank.
 A second type of crowding out occurs when aggregate supply and aggregate demand interact, because
the economy’s resources are constrained. Show how what is going on in the money market can
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
“crowd out” the impact of an initial increase in spending. Explain why this type of crowding out is
more serious that the other, and why it makes the Monetarist-Keynesian debate less important.
How does the “Neoclassical Synthesis,” which claims to reconcile the Monetarist-Keynesian debate,
relate to crowding out.
The Sticky Wage Neoclassical Synthesis model
 Be able to write down a sticky wage static macroeconomic model.
 Be able to use this model to explain why fluctuations in aggregate demand will tend to affect
employment, unemployment, and output.
 Be able to use this model to explain why monetary policy and fiscal policy may have a role to play in
mitigating short term economic fluctuations caused by changes in aggregate demand.
 Be able to use this model to show that changes in the real wage are counter-cyclical
 Understand that this model is discounted in the profession because changes in the real wage have
tended to be procyclical
From Romer Text
 Traditional IS-LM approach versus Taylor’s IS-MP approach
o IS-MP approach makes money supply endogenous, assuming central bank adjusts the money
supply to achieve an interest rate target
o Interest rate target is assumed to depend upon output level and inflation rate
o AS-AD diagram in output-inflation space
o Effect of fluctuations in aggregate demand depend upon responsiveness of output to inflation
rate
 Open Economy
o Perfect capital mobility versus imperfect capital mobility
o Fixed versus flexible exchange rates
 Wage and Price Rigidities
o What assumptions will yield procyclical real wage movements?
 Phillips Curve (Output-inflation tradeoffs)
o Why might there be an output-inflation tradeoff?
o What can disrupt this tradeoff?
 Supply shocks rather than demand shocks
 Expectations augmented Phillips curve
Topic 3---Descriptive Growth Theory (Solow-Swan Model): Because wealth comes from production, it is
important to understand why an economy grows. The Solow-Swan growth model offers an explanation for
growth that recognizes the dynamic impact of capital accumulation. Saving at one point in time finds its way
into investment, which enhances the ability to produce at later points in time. The savings rate, population
growth rate, capital depreciation rate, and rate of technical progress are key factors recognized as explaining
growth. If these factors are the same for two economies, then any observed differences must be because one
economy is further along than the other on the capital accumulation path. If the two economies are headed
toward the same ultimate state, then we should observe “convergence,” meaning the two economies become
more alike. This model is the most important model in modern macroeconomics because it is often the
foundation, or starting point, for many other related inquiries. For example, “new growth theory” seeks to
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endogenize, or explain, the rate of technical change in the Solow-Swan model. Differential equations or
difference equations can be used to capture the capital accumulation dynamics in the Solow-Swan model.
These are the basic tools for modeling dynamic economic systems, where an action at one point in time, or in
one period, affects an outcome at another point in time, or in another time period.
Text Reading: Romer, Chapter 1
Text Questions: 1.1, 1.3
To Do:
(1) Assignment: Analyzing Malthus Model problem set
(2) Assignment: Analyzing the Solow-Swan Model
(3) Assignment: Romer questions 1.1, 1.3
Introducing Dynamic Analysis Using Malthus’s Principle of Population (Pingle: Journal of Economic
Education, Winter 2003.)
 Most simple Cobb Douglas production function, diminishing returns, and Malthus
 Finding an elasticity
 Modeling Malthusian dynamics using a first order differential equation
 Steady state of a single state variable differential equation system
 Comparative statics
 Solving the most simple linear differential equation using the separation of variables technique
 How must technology improve in the face of diminishing returns to maintain a given living standard?
 Phase diagram analysis of single state variable differential equation system
 Stability of steady state
Some useful notes: Growth Theory Notes
 Modeling production in aggregate and per capita form in the neoclassical way, where technological
improvement is labor augmenting.
 Modeling the capital market using a differential equation to model capital accumulation.
 Auxiliary conditions: Predicting real wage and real interest rate levels by assuming producer profit
maximization. Consumption level is the residual of savings
 Summary presentations of the neoclassical growth model in aggregate and per capita forms
 Steady state comparative static analysis
 Stability of the steady state
 Using a phase diagram to describe dynamics outside the steady state
 Golden rule consumption and possible dynamic inefficiency
 Using a Taylor series expansion to examine growth rate near steady state
 How well does the neoclassical growth model explain the growth observed in real world economies?
Topic 4---Endogenous Growth Theory (AK Model, Learning by Doing and Knowledge Spillovers): In
the standard Solow-Swan growth model, the rate of technical change is exogenous, and this exogenous rate
of technical change is the primary determinant of the improvement in the average standard of living. Thus,
we learn from the Solow-Swan model improved living standards are not explained by capital accumulation
or population growth. The improvements come from something else, which we label technical change. But,
the Solow-Swan model does not tell us what causes the technical change. This is the objective of New
Growth Theory.
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Text Reading: Romer, Chapter 3
Text Questions:
Some useful notes: Endogenous Growth Theory Notes
 The AK model
o The intensive form of the AK model
 Analyzing the intensive form of the AK model
o A generalized AK model
 The intensive form of the generalized AK model
 Analyzing the intensive form of the generalized AK model
 Research and development model
o Special case of the research and development model
o General case of the research and development model
 Learning by doing model
o Analyzing the learning by doing model
o Deriving an AK model from the learning by doing model
 Econometric estimation of growth models
Topic 5---Optimal Growth Theory (Ramsey-Kass-Koopmans Model): In the standard Solow-Swan
growth model, the savings rate is exogenous. It turns out that a given savings rate can be inefficient in the
sense that there are other savings rates that, if they were chosen, would lead to enhanced welfare. “Optimal
growth theory” addresses this issue by assuming the consumer chooses a savings rate that is best over some
time horizon. This problem can be modeled using “calculus of variations” techniques or “optimal control”
techniques. Optimal saving by consumers can rescue the economy from dynamic inefficiency, though it can
also be shown that optimal saving will not always ensure dynamic efficiency. Optimal saving has interest
rate implications that are of interest. The techniques used in this type of analysis are good to have in your
toolkit, for they can be used to characterize the implications of the assumption that people do the best they
can (or at least seek to do so) as they make decisions over time.
Text Reading: Romer, Chapter 2 (pages 48-76)
Text Questions:
Some useful notes: A Neoclassical (Ramsey-Kass-Koopmans) Optimal Growth Model
 Learn how to take a standard aggregated circular flow model and convert it into an “intenstive form”
or “per capita form” optimal growth model
 Learn how to formulate an optimal growth model
 Learn how to solve an optimal growth problem using Optimal Control Theory or the Calculus of
Variations
 Learn how to characterize the optimal growth path described by two differential equations using a
two dimension phase diagram
 Learn of the implications of this optimal growth model for the path followed by the economy’s real
interest rate level
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Topic 6---Real Business Cycle Theory: Real business cycle theory seeks to explain the observed
fluctuations in aggregate economic measures, like output. The Real Business Cycle method is to see how
much of the observe fluctuations can be accounted for with a model that assumes agents optimize (or do the
best they can in their circumstances) and markets remain in equilibrium. This approach is popular, at least in
part, because the macroeconomic model has a microeconomic foundation, meaning we see the problems that
individual decision makers solve as they interact in the economy. While many would the assumption that
markets remain in equilibrium (A Walrasian approach) is questionable, there is no unanswered question as to
why the market is not in equilibrium, or how fast it is adjusting. Real business cycle models show that we
need not have disequilibrium or agent sub-optimization to have economic fluctuations. The economic
flucturations in a real business cycle economy are optimal responses channeled through markets in
equilibrium. The source of any fluctuations is clearly identified, usually some type of assumed shock to
technology
Text Reading: Romer, Chapter 4
Text Questions:
Topic 7---New Classical and New Keynesian Theories: The New Classical and New Keynesian
approaches seek macroeconomic understanding in models that have a microeconomic foundation. As with
real business cycle theory, there is a commitment to assuming decision makers optimize. Typically, it is
assumed that agents form their expectations rationally, which implies the expectations are consistent with
how the economy actually works so that the agents are not consistently fooled. A primary topic of interest is
why changes in a nominal variable, like the money supply, might have real economic effects. The New
Classical approach tends to impose market clearing, while the New Keynesian approach is often aimed at
understanding why a market may not clear. Either approach can offer explanations for economic
fluctuations, and explain why nominal shocks may have real consequences.
Text Reading: Romer, Chapter 6
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