Macro Sequence

TI007 MACROECONOMICS I (Dynamic Stochastic General Equilibrium Models) Lecturer: Dr B. Brügemann (VU)

Short subject description: This course provides an introduction to stochastic neoclassical growth models. Mainstream macroeconomics builds on this class of models for many applications, including business cycles and growth.

Course contents:

This course introduces you to stochastic neoclassical growth models. These are basic models of the macroeconomy which build on general equilibrium theory. Standard consumer and producer theory is used to model the behavior of households and firms. Markets are perfectly competitive and complete in these models, and typically bring about an efficient allocation of resources. In this sense there are no frictions or market failures. This class of models has been used to study a large variety of issues in macroeconomics, including business cycles, growth, and asset pricing.

These models are useful for several reasons. First, they are useful in understanding the efficient allocation of resources. Second, if in the context of a particular application the relevant empirical evidence appears inconsistent with an efficient allocation of resources, then the precise nature of the discrepancy can indicate what type of frictions ought to be included in the model. Third, elements of the neoclassical growth model are important building blocks of macroeconomic models with frictions. For example, so-called Dynamic Stochastic General Equilibrium (DSGE) models are a class of models that is widely used to study monetary and fiscal policy, and they are constructed by introducing a variety of frictions into basic stochastic neoclassical growth models.

The course starts where Micro I left off. We continue the study of general equilibrium theory, with a focus on making it operational for analyzing macroeconomic issues. Specifically, we will consider aggregation, uncertainty, and dynamics. Having covered these basics, we will study different versions of the neoclassical growth model, specifically a version with infinitely-lived households and a version with overlapping generations of finitely-lived households. We will use these models to take a first pass at applications to business cycles, growth, and asset pricing. To study quantitative implications one needs to solve the models numerically. As a first step in this direction, you will practice solving the neoclassical growth model using dynamic programming.

Course Objective:

After the course students are:

• familiar with issues of aggregation, uncertainty, and dynamics in general equilibrium theory

• familiar with stochastic neoclassical growth models

• able to numerically solve basic neoclassical growth models using dynamic programming Literature:

• Acemoglu, D. (2008). Introduction to Modern Economic Growth, second edition, Princeton University Press

• Lecture notes, to be published on blackboard

TI008 MACROECONOMICS II (Macroeconomic Policy) Lecturer: Dr C.A. Stoltenberg (UvA)

Short course description:

In Macroeconomic Policy, we study the optimality of fiscal and monetary policies in a general equilibrium context.

Course contents:

The course builds on Macroeconomics I and applies dynamic stochastic general equilibrium models to the analysis of monetary and fiscal policy. It consists of four main parts. In the first part, a basic competitive equilibrium framework is developed which serves as the main building block for the course. The second part focuses on the role of fiscal policy. Here, effects of government spending, the role of public debt, and optimal taxation under commitment will be discussed. The third part introduces money into the framework and derives principles for optimal monetary policy under perfectly flexible prices. Further, the issues of monetary policy implementation and the determination of the price level will be addressed. The last part extends monetary policy analysis to the case where prices are imperfectly flexible. Within this framework optimal monetary policy under commitment and discretion will be examined, and interactions between monetary and fiscal policy will be discussed

Course objectives:

In this class, students learn how to:

• solve dynamic stochastic general equilibrium models

• show whether a long-run equilibrium exists and is unique

• derive conditions for a unique set of stable equilibriums sequences

• formally compute optimal tax and monetary policies in general equilibrium models

• understand the economic mechanism why a certain policy is optimal.

Literature:

• Ljungqvist, L. and T.J. Sargent (2004). Recursive Macroeconomic Theory, Second Edition, Cambridge Massachusetts: The MIT Press

• Walsh, C.E. (2010). Monetary Theory and Policy, Second Edition, Cambridge Massachusetts: The MIT Press

TI009 MACROECONOMICS III (Frictions and Resource Allocation) Lecturers: Prof. E.J. Bartelsman (VU) and Prof. P. Gautier (VU)

Short subject description:

This course extends macro models to analyze the effects of frictions in hiring and investment on firm dynamics and labor market outcomes.

Course contents:

Key macro indicators— unemployment, GDP, and productivity growth— may not follow the optimal paths determined in a frictionless economy. Recent models are much more careful in dealing with frictions agents face in reality, such as entry and exit fees, delays in finding transaction partners, information asymmetries, and limited contract enforcement. In this course, we explore the implications of heterogeneous agents facing various frictions that frustrate the allocation of resources in labor, capital and product markets.

By studying these models, students not only learn key aspects of three important topics in macroeconomics, namely labor market developments, business cycle analysis, and long-run growth, but also key building blocks that are useful by themselves.

We briefly discuss empirical regularities observed in the data regarding labor markets, firm demographics and productivity growth. After highlighting the difficulties of standard models to explain these regularities, we explore recent modifications. We start with growth models of heterogeneous firms and study the implications of frictions for static and dynamic efficiency.

Special attention will be paid to frictions in capital investment. Next, we turn to the labor market and discuss different ways to model how agents search, match, and bargain over prices. More specific examples are wage posting, Nash bargaining, and directed search.

Course objective:

• Understand and use the tools (game theory, dynamic programming) that are used in this literature.

• Learn how to formulate models that are rich in terms of the factors necessary to understand the key mechanisms for the questions at hand and abstract from irrelevant details.

Literature:

• Cooper, Russell W., and John C. Haltiwanger (2006). On the Nature of Capital Adjustment Costs, The Review of Economic Studies 73 (3) (July 1): 611–633, doi:10.1111/j.1467-937X.2006.00389.x

• Hopenhayn, Hugo A. (1992). Entry, Exit, and Firm Dynamics in Long Run Equilibrium, Econometrica 60 (5, pag. 1127-1150.): 1127–1150

• Mortensen, Dale T., and Christopher Pissarides (1994). Job Creation and Job Destruction in the Theory of Unemployment, Review of Economic Studies 61 (3(208)): 397–416

• Shimer, Robert (2005). The Assignment of Workers to Jobs in an Economy with Coordination Frictions, Journal of Political Economy 113 (5) (October 1): 996–1025,

doi:10.1086/444551

TI098 MACROECONOMICS IV (Financial Frictions in Macroeconomics) Lecturer: Prof. S.J.G. van Wijnbergen (UvA)

Short subject description:

This course focuses on why finance and financial structure matters for macroeconomics.

Course contents:

We draw on recent developments in microeconomic research on information asymmetries in financial markets and the consequences of market incompleteness to introduce financial frictions in macroeconomics. We pay special attention to the concepts of liquidity and financial fragility, to the consequences of limited risk sharing (market incompleteness), macroeconomic consequences of financial regulation and undercapitalized banks and to the macroeconomic causes and consequences of financial and Balance of Payment crises. Students will be introduced to many concepts from modern theories of financial intermediation and how they can shed light on the macroeconomic importance of financial structure.

Course objective:

The course intends to introduce students to currently ongoing research on financial frictions and macroeconomics; after this course students should be able to actively take part in this research agenda.

Literature:

• Brunnermeier, M., Th. Eisenbach and Y. Sannikov (2012), Macroeconomics with Financial Frictions: a Survey, NBER WP 18102

• Holstrom, B. and J. Tirole (1997). Financial Intermediation, Loanable Funds and the Real Sector, QJE

• Tirole, J. (2011). Illiquidity and all its Friends, JEL

• Krugman, P. (1979). A Model of Balance of Payments Crises, JMCB

• Chang and Velasco (2001). Financial Crises in Emerging Markets: a Canonical Model, QJE

• Philipon, Th. (2010). Debt overhang and Recapitalization in Closed and Open Economies, IMF ER

• Acharya, V., I. Drechsler, P. Schnabl (2012). A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk, NBER WP 17136

• Myers (1977). Determinants of Corporate Borrowing, JFE

• Homar, T. and S. van Wijnbergen (2013). On Zombiebanks and Recessions after Systemic banking Crises, TI WP 13-039

• Occhino, F. and A. Pescatori (2010). Debt Overhang in a business cycle model, WP 10/03R, Federal Reserve Bank of Cleveland

• Bernanke, B, M. Gertler and S.Gilchrist (1999). The Financial Accelerator in a Quantitative Business Cycle framework, in Taylor, J. and M. Woodford (eds), Handbook of Monetary Economics.

• Gertler, M. and P. Karadi (2011). A Model of Unconventional Monetary Policy, JME

• Kwaak, C. van der, S. van Wijnbergen (2013). Financial Fragility, Sovereign Debt Default Risk

• and the Limits to Commercial Bank Bailouts, Journal of Economic Dynamics and Control, 2014

• van Wijnbergen, S. and C. Van der Kwaak, (2014). Financial Fragility and the Fiscal multiplier, TI WP 14-14-004

• Cochrane, J. (2007). Financial Markets and the Real Economy, Ch.7 in Rajnish Mehra, (ed) Handbook of the Equity Premium Elsevier

• Benmelech, E. and N. Bergman (2012). Credit traps, AER

• Brunnermeier, M. and Y. Sannikov (2014). A Macromodel with a Financial Sector, AER

• Diamond, D. and R. Rajan (2012). Illiquid Banks, Financial Stability and Interest rate policy, JPE

• Woodford, M. (2012). Methods of Policy Accommodation at the Interest rate Lower Bound,

• Jackson Hole Conference Volume, Federal reserve Bank of Kansas

• Lecture Notes