Econ 8050/Macroeconomic Theory II
Course
Outline and Required
1. Expectations Formation and Macroeconomic
Dynamics
The Adaptive and Rational Expectations
Hypotheses, Forward and Backward-Looking Solutions, the Cagan Monetary Model.
Turnovsky, Chp. 3
2. Dynamic Optimization
Optimal Control
Theory, Dynamic Systems, Saddlepoint Behavior, and Phase Diagrams.
Turnovsky, Chp. 7
Lecture Notes (Click on links below to
download the pdf files):
(i) Introduction
to Continuous-Time Dynamic Optimization: Optimal Control Theory
(ii) Systems of Differential Equations
(iii) Saddlepoint Behavior and Phase Diagrams
Dorfman,
R. (1969), “An Economic Interpretation of Optimal Control Theory.” American
Economic Review, v. 59, iss. 5, pp.
817-31.
Obstfeld,
M. (1992), “Dynamic Optimization in Continuous-Time Economic Models: A Guide
for the Perplexed, Part-1” mimeo,
3. The Neoclassical
Representative Agent Model
The Basic Infinite Horizon Model, Ricardian Equivalence, Fiscal
Policy in Centralized and Decentralized Economies, Transitional Dynamics of
Fiscal Policy Shocks, Sidrauski’s Model of Monetary Growth.
Turnovsky,
Chp. 8, 9
4. Optimal Monetary and
Fiscal Policy
Optimal Monetary Growth, Optimal Monetary-Fiscal Policy Package,
Externalities and the Optimal Taxation of Capital.
Turnovsky,
Chp. 12
5. Extensions to the
Representative Agent Model
Habit formation and consumption externalities, Heterogeneous agents
and Distributional issues.
See
6.
Economic Growth Theory: Some Recent Developments
Externalities and Long-run Growth, The
Basic “AK” Model, Fiscal Policy and Growth, Transitional Dynamics,
Technological Diffusion, Non-Scale Models, and Two-Sector Growth Models,
Heterogeneous agents and Distributional issues.
Turnovsky, Chps. 13 and 14.
Barro and Sala-i-Martin, Chps. 4, 8, and
11.
Reading
List
1. Rational Expectations
Cagan,
P. (1956), “The Monetary Dynamics of Hyperinflation.” In M. Friedman, (ed.) Studies
in the Quantity Theory of Money.
Muth,
J.F. (1961), “Rational Expectations and the Theory of Price Movements.” Econometrica
29: 315-335.
Nerlove, M. (1958), “Adaptive Expectations and Cobweb Phenomena.” Quarterly
Journal of Economics 73:227-240.
Sargent, T.J., and N. Wallace (1973), “The
Stability of Models of Money and Growth with Perfect Foresight.” Econometrica
41: 1043-1048.
2. Dynamic Optimization
Barro, R.J. and X. Sala-i-Martin, Economic Growth, MIT Press, 1998.
Appendix on Mathematical Methods.
Chiang, A.C., Elements of Dynamic Optimization, McGraw Hill Inc., 1992. Chapters 7-9.
Dorfman, R. (1969), “An
Economic Interpretation of Optimal Control Theory.” American
Economic Review, v. 59, iss. 5, pp.
817-31.
Obstfeld, M. (1992), “Dynamic Optimization in Continuous-Time Economic Models: A
Guide for the Perplexed, Part-1” mimeo,
3. The Representative Agent Model
Abel,
A. and O. Blanchard (1983), "An Intertemporal Equilibrium Model of Saving
and Investment," Econometrica,
51.
Atolia,
M., S. Chatterjee, and S.J. Turnovsky (2008), “How Misleading is Linearization? Evaluating the Dynamics of
the Neoclassical Growth Model.” Mimeo.
Aschauer,
D.A. (1988), "The Equilibrium Approach to Fiscal Policy," Journal of Money, Credit, and Banking, 20.
Barro,
R.J. (1989), "The Neoclassical Approach to Fiscal Policy," in R.J.
Barro (ed.) Modern Business Cycle Theory,
Feenstra,
R., "Functional Equivalence between Liquidity Costs and the Utility of
Money," Journal of Monetary
Economics, 1986.
Fisher, W.H. and S.J. Turnovsky (1998),
“Public Investment, Congestion, and Private Capital Accumulation,” Economic
Journal 108.
Hayashi,
F. (1982), "Tobin's Marginal and Average q: A Neoclassical Interpretation," Econometrica, 50.
Judd, K., (1985) "Short-run Analysis
of Fiscal Policy in a Simple Perfect Foresight Model," Journal of
Political Economy, 1985.
Ramsey,
F.P. (1928), "A Mathematical Theory of Saving," Economic Journal,
38. Reprinted in Stiglitz and Uzawa
(eds.)
Sidrauski,
M., "Rational Choice and Patterns of Growth in a Monetary Economy," American Economic Review, 1967
Stockman,
A., "Anticipated Inflation and the Capital Stock in a Cash-in-Advance
Economy," Journal of Monetary
Economics, 1981.
4. Optimal
Monetary and Fiscal Policy
Chamley, C. (1986) "Optimal Taxation
of Capital Income in General Equilibrium with Infinite Lives," Econometrica,
54.
Correia, I.H. (1996) “Should Capital
Income be Taxed in the Steady State?” Journal of Public Economics, 60.
Lucas, R.E. and N.L. Stokey (1983)
"Optimal Fiscal and Monetary Policy in an Economy without Capital," Journal
of Monetary Economics.
Lucas, R.E. (1990) "Supply-Side
Economics: An Analytical Review,
5. Extensions
to the Representative Agent Model
A.
Habit Formation and Consumption Externalities
Abel, A., 1990, “Asset prices under habit
formation and catching up with the Joneses,” American Economic Review (Papers
and Proceedings) 80, 38-42.
Gali, J., 1994, “Keeping up with the
Joneses: Consumption externalities, portfolio choice, and asset prices,” Journal
of Money, Credit, and Banking, 26, 1–8.
Liu, W.F. and S.J. Turnovsky, 2005,
“Consumption externalities, production externalities, and long-run
macroeconomic efficiency,” Journal of Public Economics 89,
1097-1029.
Ljungqvist, L. Uhlig, H., 2000, “Tax
policy and aggregate demand management under catching up with the Joneses,” American
Economic Review 90, 356-366.
B. Heterogeneous Agents and Distributional
Issues
Caselli, F. and J. Ventura, 2000, “A
representative consumer theory of distribution,” American Economic Review 90,
909-926.
Sorger, G. (2000), “Income and wealth
distribution in a simple model of growth.” Economic Theory 16, 23—42.
Garcia-Penalosa, C., and Turnovsky, S.J.
(2008) “Distributional Dynamics in a Neoclassical Growth Model: The Role of
Elastic Labor Supply.” Journal of Economic Dynamics and Control,
forthcoming.
6. Economic
Growth Theory: Some Recent Developments
A. Endogenous
Growth
Barro,
R.J. (1990), "Government Spending in a Simple Model of Endogenous
Growth," Journal of Political
Economy, 98.
Futagami, K., Y. Morita, and A. Shibata.
1993. "Dynamic Analysis of an Endogenous Growth Model with Public
Capital." Scandinavian Journal of Economics 95: 607-625.
Garcıa-Penalosa, C., Turnovsky,
S.J.: Growth and income inequality: a canonical model. Economic Theory
28, 25-49 (2006).
Lucas,
R.E. (1988), "On the Mechanics of Economic Development," Journal of Monetary Economics, 22.
Rebelo,
S. (1991), "Long-run Policy Analysis and Long-run Growth," Journal of Political Economy, 99.
Romer,
P.M. (1986), “Increasing Returns and Long-Run Growth.” Journal of Political Economy 94, p.
1002-37.
Romer, P.M. (1989),
"Capital Accumulation in the Theory of Long-run Growth," in R.J.
Barro (ed.) Modern Business Cycle Theory.
Turnovsky, S.J. 2000. “Fiscal Policy,
Elastic Labor Supply, and Endogenous Growth,” Journal of Monetary Economics 45:
185-210.
B. Non-Scale Growth
Barro, R.J., and X. Sala-i-Martin (1992),
“Convergence.” Journal of Political Economy,
100(2).
Eicher,
T., and S.J.Turnovsky (1999), “Nonscale Models of Economic Growth,” Economic
Journal, 109.
Jones,
C.I. (1995a), "R&D Based Models of Economic Growth," Journal of Political Economy, 103.
Jones,
C.I. (1995b), “Time-Series Tests of Endogenous Growth Models.” Quarterly
Journal of Economics, 110 (441).
Jones, C.I., 1999. “Growth: With or
Without Scale Effects,” American Economic Review, Papers and Proceedings,
89, 139-144.
Mankiw,
N.G., D. Romer, and D. Weil (1992), “A Contribution to the Empirics of Economic
Growth.” Quarterly Journal of Economics, 107 (2).
Segerstrom, P. 1998. "Endogenous
Growth without Scale Effects." American Economic Review 88:
1290-1310.
Young, A. 1998. "Growth without Scale
Effects." Journal of Political Economy 106: 41-63.