FINAL REVIEW AND HW3 ANSWERS ARE UP
Graduate Macroeconomic Theory (Eco 601, 621, and 603)
Course Description
Eco 601, 621, and 603 are a three semester sequence of courses on macroeconomics. The topics are divided into (I)
Economic Growth, including both long run growth (which determines the wealth of nations) and short run variation in
growth, which is known as the business cycle, (II) monetary economics and policy, and (III) fiscal policy including bonds
and deficits, distortionary taxation, and Social Security.
The first semester covers some mathematical preliminaries and economic growth. Economic growth is by far the most
important issue in macroeconomics, and perhaps in all science. Tiny differences in growth rates eventually determine
which countries are wealthy and which countries are poor. We will analyze three growth models: the optimal growth model,
an endogenous growth model, and the stochastic growth model (a model of business cycles).
For the second semester, we will continue to apply the tools learned in the first semester to several important areas of
macroeconomics. First, we will finish our discussion of business cycles. We then will move on to monetary economics and
money by examining various versions of the cash-in-advance model. Then we will explore the fiscal side of the economy,
looking at taxation, government spending, and deficits. Among the concepts we will examine are Ricardian equivalence and
Social Security.
The approach in these courses is the microfoundations approach. That is, we will use microeconomic models of individual
behavior, and then aggregate across individuals to determine the behavior of economic aggregates such as GDP. Our
analysis is necessarily dynamic. For example, growth is the result of dynamic decisions such savings, which represents
the trade-off between current and future consumption. Our class also uses general equilibrium analysis: we require
equilibrium in all markets. This approach was pioneered by authors such as Lucas and represents the dominant and most
sensible approach to macroeconomics.
General Information
Professor: David L. Kelly (Dave).
Course Meetings:
Tuesday and Thursday, 3:30-4:45 pm in room Aresty 435.
Office: Room 521-B, Jenkins School of Business.
Office hours: Wednesdays 10-12 and 3:30-5 (Dave is almost always around during business hours, but try to come
during office hours if you can).
Contacts: Dave can be contacted via phone (8x3725) or email (dkelly@miami.edu).
Web Site:
A website (http://moya.bus.miami.edu/~dkelly/teach/macro/index.html)
has been established for this course. At this site, you can download or view course material (homeworks, etc.).
Final Exam:
NOW DECEMBER 19 FROM 3:30-4:45 PM in
the same room, Aresty 435.
Prerequisites
Eco 601 is an introductory course and thus has no prerequisites. However, I assume a working knowledge of calculus and
basic optimization. Eco 621 requires Eco 601 and Eco 603 requires both 601 and Eco 621.
Textbooks
At the PhD level, there is rarely an ideal textbook. However, I recommend the Cooley book below which
summarizes many of the topics covered. Sargent covers some of the monetary topics and Lucas and Stokey covers the
mathematical underpinnings. Blanchard and Fisher review a few of the overlapping generations and growth topics. Cooley
is used primarily in the second and third semesters, whereas Lucas and Stokey is used heavily in the first semester.
Cooley. Frontiers of Business Cycle Research. Princeton Press, 1995.
Ljungqvist and Sargent. Recursive Macroeconomic Theory. MIT Press, 2000.
Blanchard and Fisher. Lectures on Macroeconomics. MIT Press, 1989.
Lucas and Stokey. Recursive Methods in Economic Dynamics. Harvard Press, 1989.
Grades
- Graded Homeworks 15%
- First Quiz NOW OCTOBER 5 25%
- Second Quiz NOW NOVEMBER 9 25%
- Final Quiz NOW DECEMBER 19 35%
Notes:
- Graded homeworks will be assigned as we go through the semester. Occasionally I will assign a problem that is
not graded. You are still responsible for these problems, which may be repeated on the quiz.
- All quiz material comes from class notes and assignments. However, I recommend reading all chapters and papers
given. It helps to see difficult material presented a second way.
- Students generally cannot follow everything in class. Get in the habit now of allocating time to reconstruct what
happened in class. One way to do this is to allocate a couple of hours after each class (when the material is still
fresh) to recopy the notes, redoing the derivations made in class.
Course Outline
Note that "C" is Cooley, "S" is Sargent, L&S is Lucas and Stokey, and "B&F" is Blanchard and Fisher. So "C:1" is Cooley,
chapter 1, etc.
- Introduction and math review. C:1.1, C:1.6
- Optimal Growth Models.
- Optimal Growth Model and Tools for analysis of deterministic growth models.
- Euler Equations. C:1.5, S:1, Romer article.
- Competitive equilibria, social planning problems, and welfare. C:1.2, L&S 15.
- Steady states.
- The value function and policy function. S:1.
- Properties of the value function (fixed points, recursive representations, envelope equations, first order
conditions, concavity, differentiability, speed of convergence, super-modularity, and the properties of the
policy function). C:1.5, L&S:4, articles by Prescott, Milgrom and Shannon, and Santos.
- Results of Optimal Growth Model. King and Rebelo article.
- Competitive Economy (C:1.3, 2.4)
- Endogenous Growth. Romer articles, Jones article, JEL articles, Lucas article, Segerstrom article.
- AK Model
- Quality ladder model of endogenous growth, Planning problem. Segerstrom article.
- Quality ladder model, competitive equilibrium. Segerstrom article.
- ECO 603 BEGINS.
- Stochastic Growth (RBC) and tools for analysis of stochastic growth models. C:1.3, C:2.2, Kydland and
Prescott article.
- Value function
- Properties of the Value Function
- Invariant distributions.
- Convergence of discrete Markov processes.
- Calibration C:1.4, C:1.6, C:1.7.
- Results.
- Stochastic Growth and Labor Markets (Household Production, Indivisibilities, etc). C:5, C:6, Hansen
article.
- Monetary Economics.
- Asset pricing and the value of money (Lucas type models). S:7.
- Money in utility function. S:17, McCallum article, Fenstra article, Danthine, Donaldson and Smith
article.
- FIRST QUIZ, NOW OCTOBER 5
- Cash in advance. C:2.4, C:7, S:17, Lucas and Stokey article, Svensson article, Cho article.
- Cash in advance required for consumption and/or investment goods.
- Cash good/Credit good model.
- End of period Transfers.
- Price Contracting model.
- Welfare and Inflationary Finance
- Overlapping Generations Model with Money.
- Tools.
- Existence of equilibria.
- Steady states. B&F 5.
- Stability of steady states. B&F 5.
- Pareto efficiency of equilibria. B&F 5.
- The OG model with money. B&F:4, Grandmont article, Samuelson article.
- Sunspot equilibria. B&F 5.
- OG Model with Learning.
- Learning and the stability of equilibria.
- Learning and monetary policy.
- SECOND QUIZ NOW NOVEMBER 9
- Fiscal Policy.
- Bonds.
- Ricardian Equivalence: C:7.4.
- Bond Interest Rates.
- Deficits: McCallum article.
- Unpleasant Monetarist Arithmetic: S:17.
- Distortionary Taxation: Cooley and Hansen article, McGrattan Article, Lucas articles, Greenwood
and Huffman article.
- Distortionary Taxation and the Business Cycle.
- Second Best Distortionary Taxes.
- THIRD QUIZ: NOW DECEMBER 19
- THIRD SEMESTER ENDS .
- Government Consumption and Investment.
- Social Security and Redistribution (OG Model)
- Converting an OG model to a growth model.
- Two period to n period lived OG models.
- Finite agent to continuum of agents
- Welfare theorems and discounting issues.
- Miscellaneous Topics.
- Supermodularity: article by Milgrom and Shannon, Topkis, and Hopenhayn and Prescott
- Continuous Time models (Barro chapter 1, B&F Chapter 2)
- Solution Methods: C:2.3, C:3.3, C:3.6, C:3.8, Journal of Business and Economic Statistics
survey articles.
- Discrete State Space Methods.
- Linear-Quadratic Method.
- Parameterized Expectations.
- Topics of interest to the class
Some Macro Links
Class Handouts
Bibliography (pdf)
Graphs from the first day (pdf)
A few articles are available by clicking on the links here. For the rest, click
here to search by journal title.
Dave's notes on growth. I will not teach growth in this class. However, I may
need to refer back to these notes while teaching material from this semester. The notes are here just if necessary.
Notes: Real Business Cycles
Notes: Money
Notes: Bonds and Distortionary Taxes
Homeworks, Quizzes and Solutions
homework 1.
homework 1 solutions.
homework 2.
homework 2 solutions.
First Quiz Review.
First Quiz.
First Quiz Solutions.
homework 3.
homework 3 solutions.
Final Quiz, review