Carleton University Department of Economics Macroeconomic Theory : ECON 6002 (ECO 7923) Winter 2009 Professor F

Home , Karl Brunner (economist)

Carleton University Department of Economics Macroeconomic Theory : ECON 6002 (ECO 7923) Winter 2009 Professor F. Demers Loeb B-854 Phone: 520-2600 ext 3775 Email: [email protected] Office Hours: Monday 2:30-3:30, Wednesday 5:30PM to 6:30PM. ______Time: Monday 11:35PM-2:25 PM Place: Southam Hall, Room 506

Course Objectives

1. To survey the literature on some of the most important issues in macroeconomic theory. 2. To initiate students to learning how to build macroeconomic models 3. To learn about some new developments in macroeconomic theory

Reference texts:

Blanchard, O.J, and S. Fischer (1989) Lectures on Macroeconomics, Cambridge Mass: M.I.T. Press.

Ljungqvist, Lars and Thomas J. Sargent, (2004) Recursive Macroeconomic Theory, Second edition, MIT Press.

Acemoglu, Daron (2009) Introduction to Modern Economic Growth Princeton University Press.

Sargent, Thomas J. (1987) Macroeconomic Theory, Boston: Academic Press, 2nd ed.

Sargent, Thomas J. (1997), Dynamic Macroeconomic Theory Cambridge: Harvard University Press.

Stokey, N. L. and R. E. Lucas Jr. with E. C. Prescott (1989) Recursive Methods in Economic Dynamics, Cambridge Mass.: Harvard University Press.

Romer, David (2006) Advanced Macroeconomics, Third edition, Toronto: McGraw-Hill.

Altug, Sumru and Pamela Labadie (1994) Dynamic Choice and Asset Markets. Academic Press.

Altug, Sumru and Pamela Labadie (2008) Asset Pricing for Dynamic Economies. Cambridge University Press.

Obstfeld, Maurice and Kenneth Rogoff (1996) Foundations of International Macroeconomics, MIT Press.

Cochrane, John H. (2005) Asset Pricing, Princeton University Press, revised edition.

Cooley, Thomas F., ed., (1995) Frontiers of Business Cycle Research. Princeton: Princeton University Press.

Barro, Robert and Xavier Sala-i-Martin (2004) Economic Growth. The MIT Press. Second edition, 2004.

Taylor, J. B. and M. Woodford eds.(1999) Handbook of Macroeconomics, Elsevier Science.

Altug, S., J. Chadha, and C. Nolan eds., (2003) Dynamic Macroeconomic Analysis, Theory and Policy in General Equilibrium, Cambridge University Press. Professor F. Demers 2 Winter 2009 ECON 6002

Reference texts on computational methods

Judd, Kenneth (1998) Numerical Methods in Economics. Cambridge: MIT Press.

Miranda, Mario J. and Paul L. Fackler (2002), Applied Computational Economics and Finance, MIT Press.

Marimon, Ramon and Andrew Scott (1999), eds., Computational Methods for the Study of Dynamic Economies Oxford: Oxford University Press.

LIST OF TOPICS

1. Introduction and Optimal Growth 2. Introduction to Dynamic Programming 3. Real Business Cycle Models 4. Price-setting and rigidities 5. New Keynesian models of business cycles 6. Consumption 7 Asset pricing, the Equity Premium Puzzle and Stock Market Volatility 8. Investment 9. The Financial Accelerator (time permitting)

READING LIST

Time may not permit us to cover all the topics. Required readings are marked by a double asterisk (**), recommended readings with a single asterisk (*) and suggested readings with no asterisk. Additional readings may be given in class. Handouts will be given on each topic. These constitute required readings.

1. Optimal Growth

**Handouts 1, 2 and 3 **Blanchard and Fischer, Chapter 2. **Barro and Sala-i-Martin Chapter 2, Chapter 3, sec.3.1 and Chapter 4, sec. 4.1-4.3 **Romer, Chapter 2.

* Acemoglu, Chapter 8

*Thomas F. Cooley and Lee E. Ohanian, “Postwar British Economic Growth and the Legacy of Keynes” Journal of Political Economy. 105, June 1997, 439-472.

*Carroll, Christopher D., Jody Overland and David Weil (2000). "Saving and Growth with Habit Formation" American Economic Review June, 341-55.

Stokey, Lucas and Prescott, chapters 2, 3, 4 and 5.

Sargent, chapter 1.

Altug and Labadie, Chapter 1.

Ljunquist and Sargent, Chapter 11. Professor F. Demers 3 Winter 2009 ECON 6002

2. Introduction to Dynamic Programming and Dynamic Methods

**Handout 4

*Ljunquist and Sargent, Chapters 1-4

*Stokey and Lucas with Prescott, Chapters 1-4

Marimon and Scott, Chapters 2, 3, 5, 6, 7

Judd, Chapter 12

3. Real Business Cycle Theory

** Handouts 5, 6 and 7

**King, Robert G. and Sergio Rebello (1999) "Resuscitating Real Business Cycles" in Handbook of Macroeconomics, J. B. Taylor and M. Woodford eds., Elsevier Science, Chapter 14.

*Rebelo, Sergio, (2005) "Real Business Cycles: Past, Present and Future," Scandinavian Journal of Economics

*Kydland, F. and Prescott, E. (1982): "Time to Build and Aggregate Fluctuations", Econometrica, vol. 50, Nov., 1345-70.

Long, J.B., and Plosser, C. (1983): "Real Business Cycles", Journal of Political Economy, February, 39-69.

*King, R., C. Plosser and S. Rebello (1988): "Production, Growth and Business Cycles: I. The Basic Neoclassical Model", Journal of Monetary Economics, vol.21, no.2/3, 195-232.

King, R., C. Plosser and S. Rebello (1988): "Production, Growth and Business Cycles: II. New Directions", Journal of Monetary Economics, vol. 21, no. 2/3, 309-41.

Hansen, Gary (1985): "Indivisible Labor and the Business Cycle," Journal of Monetary Economics, vol. 16, November, 309-27.

Cho, Jang-Ok and Richard Rogerson, (1988) "Family Labor Supply and Aggregate Fluctuations", Journal of Monetary Economics, vol.21, 233-245.

Cho, Jang-Ok and Richard Rogerson (1990): "Risk-Sharing, Indivisible Labour and Aggregate Fluctuations," Queen's University, Working Paper 787.

Greenwood, Jeremy, Gregory Huffman and Zvi Hercowitz (1988). "Investment, Capacity utilization and Real Business Cycles" American Economic Review 78, no 3, 402-17.

Bils, Mark and Jang-Ok Cho (1994): "Cyclical Factor Utilization," Journal of Monetary Economics, vol. 33, April, 319-54,

*Cooley, Thomas F. and Edward C. Prescott (1995) "Economic Growth and Business Cycles" in Cooley (1995), Chapter 1.

Professor F. Demers 4 Winter 2009 ECON 6002

Hansen, Gary D. and Edward C. Prescott (1995) "Recursive Methods for Computing Equilibria of Business Cycle Models" in Cooley (1995), Chapter 2.

Danthine, Jean-Pierre and John B. Donaldson (1995) "Computing Equilibria of Nonoptimal Economies" in Cooley (1995), Chapter 3.

Kydland, Finn (1995) "Business Cycles and Aggregate Labour Market Fluctuations" in Cooley (1995), Chapter 5.

Cooley, Thomas F. and Gary Hansen, "Money and Business Cycle" in Cooley (1995), Chapter 7.

Backus, David K.and Patrick J. Kehoe and Finn Kydland (1995) "International Business Cycles: Theory and Evidence" in Cooley (1995), Chapter 11.

Baxter, Marianne (1995) "International Trade and Business Cycles" in Handbook of International Economics, G. Grossman and K. Rogoff eds., Elsevier Science, Chapter 35.

Lucas, R.E. (1976): "Understanding Business Cycles", in Stabilization of the Domestic and International Economy, Brunner, K. and Meltzer, A.H. eds. Vol.5, Carnegie-Rochester Series on Public Policy (1976). Reprinted in R. E. Lucas (1981): Studies in Business Cycle Theory, Cambridge: MIT Press, 215-39.

Danthine, Jean-Pierre and John. B. Donaldson (1990): "Efficiency Wages and the Business Cycle Puzzle," European Economic Review, vol. 34, 1275-1301.

Danthine, Jean-Pierre and John. B. Donaldson (1992): "Risk Sharing and the Business Cycle," European Economic Review, vol. 36, nos 2/3, April, 468-75.

Dow, J.P. (1995): "Real Businesss Cycles and Labor Markets with Imperfectly Flexible Wages," European Economic Review, vol. 39, December, 1683-96.

Altug, S., (1989): "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, vol. 30, 889-920.

Imrohoroglu, A., (1989): "Cost of Business Cycles with Indivisibilities and Liquidity Constraints", Journal of Political Economy, vol.97, 1364-1383.

Eichenbaum, M. (1991): "Real Business Cycles: Wisdom or Whimsy?" Journal of Economic Dynamics and Control, vol. 15, 607-26.

Sargent, T.J., Macroeconomic Theory, Chapter 18.

Thomas, J. (2002). "Is Lumpy Investment Relevant for the Business Cycle?" Journal of Political Economy, 110, 508-534.

Veracierto, Marcelo L. (2002) "Plant-Level Irreversible Investment and Equilibrium Business Cycles" American Economic Review 92, 181-97.

Demers Fanny S., Michel Demers and Sumru Altug, "Investment Dynamics" in S. Altug, J. Chadha and C. Nolan, eds, Dynamic Macroeconomic Analysis. Cambridge University Press, 2003.

Professor F. Demers 5 Winter 2009 ECON 6002

Aruoba, S.B., J. Fernández-Villaverde, and J. Rubio-Ramírez (2006). “Comparing Solution Methods for Dynamic Equilibrium Economies.” Journal of Economic Dynamics and Control, 30, 2477-2508

Fernández-Villaverde, J. and J. Rubio-Ramírez (2006). “Solving DSGE Models with Perturbation Methods and a Change of Variables.” Journal of Economic Dynamics and Control, 30, 2509-2531.

4. Price-setting and nominal rigities

*Handout 8

*Blanchard and Fischer, Chapter 8.

*Romer, Chapter 6

Rotemberg, Julio and Michael Woodford "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets" in Cooley (1995), Chapter 9.

Blanchard, Olivier, and Nobu Kiyotaki, "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, 77 September 1987.

Caplin, Andrew (1985), "The Variability of Aggregate Demand with (S,s) Inventory Policies," Econometrica, 53, 1395-1410. Caplin, Andrew, and Daniel Spulber (1987), "Menu Costs and the Neutrality of Money," Quarterly Journal of Economics.

Fisher, Stanley, "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, February 1977.

Taylor, John B., "Aggregate Dynamics and Staggered Contracts," Journal of political Economy, February 1980.

5. New Keynesian Business Cycles: The Debate on Technology shocks, and the RBC versus the New Keynesian Approach

**Handout 9

Gali, J. Monetary Policy, Inflation, and the Business Cycle An Introduction to the New Keynesian Framework. Princeton: Princeton University Press 2008.

*Galí, J. (1999) “Technology, employment and the business cycle: Do technology shocks explain aggregate fluctuations?,” American Economic Review 89, 249-271.

*Galí, J.and Rabanal, P. (2004), “Technology shocks and aggregate fluctuations: How well does the RBC model fit the postwar US data?,” NBER Working paper 10636 Also in the NBER Macroeconomics Annual-2004(2005).

*Ramey, Valery (2005) “Comment on Galí-Rabanal” NBER Macroeconomics Annual-2004

*McGrattan, Ellen (2005) “Comment on Galí-Rabanal” NBER Macroeconomics Annual-2004.

Professor F. Demers 6 Winter 2009 ECON 6002

*Greenwood, J., Hercowitz, Z. and Krusell, P. (2000), “The role of investment-specific technical change in the business cycle,” European Economic Review pp. 91-115.

*Fisher, J.: 2002, “Technology shocks matter,” Working paper 14, Federal Reserve Bank (Chicago).

*Fisher, J.: 2006, “The dynamic effects of neutral and investment-specific shocks,” Journal of Political Economy 114, 413-451.

Fisher, J. and M. Eichenbaum, (2007), “Estimating the Frequency of Price Re-Optimization in Calvo-Style Models.” Journal of Monetary Economics. Volume 54, Issue 7, October 2007, Pages 2032-2047.

Galí, J., D. López-Salido, and J. Vallés, (2003), “Technology shocks and monetary policy: assessing the Fed's performance,” Journal of Monetary Economics 50, 723-743.

Francis, N. and V. Ramey (2004), Is the technology-driven real business cycle hypothesis dead? shocks and aggregate fluctuations revisited, Journal of Monetary Economics .

Greenwood, J., Hercowitz, Z. and Krusell, P.: 1997, “Long run implications of investment-specific technological change,” American Economic Review 87, 342-362

Fisher, J.: 2005, “The dynamic effects of neutral and investment-specific shocks,” Manuscript, Federal Reserve Bank of Chicago.

6. Consumption

** Handouts 10, 11 ** Blanchard and Fischer, chapter 6, 275-90. ** Romer, chapter 7.

*Ljunquist and Sargent, Chapters 1, 13, 16, 17.

*Zeldes, (1989) "Consumption and Liquidity Constraints: an Empirical Investigation," Journal of Political Economy, vol. 97, 305-46.

*Carroll, C. (2001) “A Theory of the Consumption Function, With and Without Liquidity Constraints,” Symposium on Consumption Behavior, in The Journal of Economic Perspectives, Vol. 15, No.3. Expanded version: NBER Working Paper no. 8387.

*Carroll, C. (2000) "Precautionary Saving and the Marginal Propensity to Save out of Permanent Income" NBER Working Paper no. 8233.

*Carroll, C. (2000) "Risky Habits and the Marginal Propensity to Consume out of Permanent Income, Or, How Much Would A Permanent Tax Cut Boost Japanese Consumption?" NBER Working Paper no. 7839.

*Deaton, Angus (1991): "Saving and Liquidity Constraints," Econometrica, vol. 59, September, 1221-48.

Deaton, Angus (1991), Understanding Consumption. Oxford: Clarendon, 1992

Lucas, R.E. (1976): "Econometric Policy Evaluation: A Critique", in The Phillips Curve and Labour Markets, Karl Brunner and A. H. Meltzer, eds., Journal of Monetary Economics Supplement, 1976. Reprinted in Robert E., Jr.(1981): Studies in Business Cycle Theory. Cambridge: the M.I.T. Press, pp. 104-30. Professor F. Demers 7 Winter 2009 ECON 6002

Hall, R. (1978): "Stochastic Implications of the Life-Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, vol. 86, December, 971-87.

Flavin, Marjorie, (1981) "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, October 1981.

Caballero, Ricardo J. (1990), "Consumption Puzzles and Precautionary Savings," Journal of Monetary Economics, 25 (January), 113-136.

Carroll, Christopher D. (1992), "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, 2, 61-156.

Carroll, Christopher D.(1997) “Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis.” Quarterly Journal of Economics CXII(1):1–56.

Carroll, Christopher D. and Miles S. Kimball (1996), "On the Concavity of the Consumption Function," Econometrica, 64, 4, 981-992.

Carroll, C. and Miles Kimball, (2001) "Liquidity Constraints and Precautionary Saving" mimeo, The Johns Hopkins University.

Carroll, C. (2003) "The Time series Behavior of Aggregate Consumption in the CEQ PIH Model" mimeo, The Johns Hopkins University.

Carroll, C. (2001) "Theoretical Foundations of Buffer Stock Saving" mimeo, The Johns Hopkins University.

Ludvingson Sydney C. and Alexander Michaelides (2001) "Does Buffer Stock Saving Explain the Smoothness and Excess Sensitivty of Consumption?" American Economic Review 631-47

Carroll, C. (2003) "Cointegration and the Dynamics of Consumption, Income and Wealth" mimeo, The Johns Hopkins University.

Carroll, C. (2001) "Death to the Log-Linearized Consumption Euler Equation" mimeo, The Johns Hopkins University.

Carroll, C. (2000) "Requiem for the Representative Consumer? Aggregate implications of Microeconomic Consumption Behavior." American Economic Review 110-5.

Attanasio, Orazio and Guglielmo Weber (1995). "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey." Journal of Political Economy 103, no 6, 1121-57.

7. Asset Pricing, the Equity Premium Puzzle and Stock Market Volatility

**Handouts 12 and 13

**Blanchard and Fischer, Chapter 10, 506-512.

*Ljunquist and Sargent (2004), Chapter 10. Professor F. Demers 8 Winter 2009 ECON 6002

* Mehra, R. and E. Prescott (2003) “The Equity Premium in Retrospect.” In Handbook of the Economics of Finance. Edited by G.M. Constantinides, M. Harris, and R. Stulz. Amsterdam, Netherlands: North- Holland.

* Mehra, R. (2003) “The Equity Premium: Why Is It a Puzzle?” Financial Analysts Journal Jan-Feb. (Summarizes the findings in Mehra and Prescott (2003) in the Handbook).

* Abel, Andrew B. (2005) “Equity Premia with Benchmark Levels of Consumption, Leverage, Imperfect Correlation of Consumption and Dividends, and Distorted Beliefs: Closed-Form Results” Wharton School Working paper.

*Mehra, R. and E. Prescott (1985): "The Equity Premium: a Puzzle", Journal of Monetary Economics, vol. 15, no. 2, 145-62.

Weil, Philippe, (1989): "The Equity Premium Puzzle and the Risk-Free Rate Puzzle", Journal of Monetary Economics, vol.24, 1989, 401-421.

Epstein, Larry G. and Stanley E. Zin, "Substitution, Risk Aversion, and the Temporary Behavior of Consumption and Asset Returns: An Empirical Analysis", Journal of Political Economy, vol.99, 1991, 263-286.

Aiyagari, Rao S. and Mark Gertler, "Asset Returns with Transactions Costs and Uninsured Individual Risk", Journal of Monetary Economics, vol.27, 1991, 311-331.

Lucas, Deborah J., "Asset Pricing with Undiversifiable Income Risk and Short Sales Constraints, Deepening the Equity Premium Puzzle", Journal of Monetary Economics, vol.34, 1994, 325-341.

Kocherlakota, N.R., "Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrevelance Result", Journal of Finance, vol.45, 1990, 175-190.

Kocherlakota, N.R., (1996) "The Equity Premium, It's Still A Puzzle," Journal of Economic Literature, vol. 34, No. 1, March.

Constantinides, G. (1990): "Habit Formation: A Resolution of the Equity Premium Puzzle" Journal of Political Economy, vol 98, 519-43.

Abel, A. (1990): "Asset Prices under Habit Formation and Keeping up with the Joneses," American Economic Review.

John Campbell and Albert Kyle, Smart Money Noise Trading and Stock Price Behavior” Review of Economic Studies, 1993, 1-34.

Cambell, J.Y, (1999) "Asset Prices, Consumption and the Business Cycle," in Handbook of Macroeconomics, J. B. Taylor and M. Woodford eds., Elsevier Science, Chapter 19.

Campbell, John and John Cochrane (1999) "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behaviour" Journal of Political Economy.

Cambell, J.Y, A. W. Lo, and A. C. MacKinley, (1997), The Econometrics of Financial Markets, Princeton University Press, Princeton New Jersey, (Chapters 7 and 8). Professor F. Demers 9 Winter 2009 ECON 6002

Campbell J.Y, (2000), "Asset Pricing in the Millennium," The Journal of Finance, Vol.LV, August.

Campbell, J.Y, and Cochrane, J. H., (2000), "Explaining the Poor Performance of the Consumption-based Asset Pricing Model," Journal of Finance, Vol. LV, December.

Cochrane, J. H., (2001) Asset Pricing, Princeton University Press, Princeton New Jersey.

Danthine, J.P. and John Donaldson (1999) "Non-Falsified Expectations and General Equilibrium Asset Pricing: The Power of the Peso," The Economic Journal, 109, October, 607-35.

Nicholas Barberis, Andrea Shleifer and Robert Vishny (1998) “A Model of Investor Sentiment” Journal of Financial Economics. 49, 1998, 307-343.

Eugene Fama, “Market Efficiency, (1998) Long-term Returns and Behavioral Finance”, Journal of Financial Economics, 283-306.

Barberis, Nicholas, Ming Huang and Tano Santos (2001). “Prospect Theory and Asset Prices.” Quarterly Journal of Economics. 116(1), pp.1-53.

James Poterba, "Demographic Structure and Asset Returns", The Review of Economic and Statistics, LXXXIII, November 2001, 565-84.

John Campbell, "A Comment on James M. Poterba's "Demographic Structure and Asset Returns", The Review of Economic and Statistics, LXXXIII, November 2001, 585-88.

Andrew B. Abel "Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire?" The Review of Economic and Statistics, LXXXIII, November 2001, 589-95.

Harris, Trevor, S., Glenn Hubbard and Deen Kemsley (2001) "The Share Price Effects of Dividend Taxes and Tax Imputation Credits" Journal of Public Economics, 569-96.

Brav, Alon, George Constantinides and Christopher C. Geczy (2002). "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence" NBER Working Paper no. 8822.

Constantinides, George M, John B. Donaldson and Rajnish Mehra (2002). “Junior Can’t Borrow: a New Perspective on the Equity Premium Puzzle” Quarterly Journal of Economics, 117(1), pp. 269-96.

Constantinides, George M, and Darrel Duffy (1996) “Asset Pricing with Heterogeneous Consumers,” Journal of Political Economy, Vol.104, 219-240.

Abel, Andrew (2001). "An exploration of the Effects of Pessimism and Doubt on Asset Prices" NBER Working Paper, no. 8132.

Routlege, Bryan R. and Stanley Zin (2001). "Model Uncertainty and Liquidity" NBER Working Paper no. 8683.

Ludvigson, Sydney, and Martin Lettau (2001a): “Consumption, Aggregate Wealth, and Expected Stock Returns,” Journal of Finance, 56(3), 815–49.

Ludvigson, Sydney, and Martin Lettau (2001b): “Understanding Trend and Cycle in Asset Values: Bulls, Bears, and the Wealth Effect on Consumption,” Manuscript, New York University. Professor F. Demers 10 Winter 2009 ECON 6002

John H. Cochrane, Francis A. Longsta, Pedro Santa-Clara (2003) Two Trees: Asset Price Dynamics Induced By Market Clearing

8. Investment

** Handout 14

**Blanchard and Fischer, Chapter 6, pp. 291-301.

** Demers Fanny S., Michel Demers and Sumru Altug, "Investment Dynamics" in S. Altug, J. Chadha and C. Nolan, eds, Dynamic Macroeconomic Analysis. Cambridge University Press, 2003.

*Demers, M. (1991): "Investment, Irreversibility and the Arrival of Information Over Time", Review of Economic Studies Vol. 58, No. 2, April 91, 333-350.

Altug, Sumru, Fanny S. Demers and Michel Demers, (1999) "Cost Uncertainty, Taxation and Irreversible Investment," in Current Trends in Economics: Theory and Applications, Proceedings of the III International Conference of the Society for the Advancement of Economic Theory, Studies in Economic Theory 8, edited by A. Alkan, C. D. Aliprantis and N. Yannelis. Springer-Verlag.

Altug, Sumru, Fanny S. Demers and Michel Demers, (2005) "Tax Policy and Irreversible Investment," Mimeo.

Altug, Sumru, Fanny S. Demers and Michel Demers, (2007) "Political Risk and Irreversible Investment," CESifo Economic Studies 53(3),pp.430-465

Altug, Sumru, Fanny S. Demers and Michel Demers, (forthcoming 2009) “The Investment Tax Credit and Irreversible Investment," Journal of Macroeconomics.

Demers F. S., M. Demers and H. Schaller, (forthcoming 2009) "Irreversible Investment and Costs of Adjustment," in C. Hagen, ed., International Finance and Financial Services.

Dixit, A. and R. Pindyck, (1994) Investment Under Uncertainty, Princeton University Press.

*Caballero, Ricardo and Eduardo Engel, (1999) "Explaining Investment Dynamics in US Manufacturing: A Generalized (S,s) Approach" Econometrica, July, 783-826.

Fazzari, S., R. G. Hubbard and B. Petersen (1988) "Financing constraints and Corporate Investment," Brookings Papers on Economic Activity Vol. 1, 141-206.

Whited, Toni (1992), "Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, 47, 1425-1460.

Hubbard, R. G., A. K. Kashyap, and T. Whited (1995) "Internal Finance and Firm Investment," Journal of Money, Credit and Banking vol. 27, pp. 683-701.

Hubbard, R. Glenn (1998). "Capital-Market Imperfections and Investment". Journal of Economic Literature. Vol. 36, pp.193-225.

Clementi, Gian Luca and Hugo A. Hopenhayn. (2006). “A Theory of Financing Constraints and Firm Dynamics”. Quarterly Journal of Economics 121 (1):229–265.

Professor F. Demers 11 Winter 2009 ECON 6002

Thomas, J. (2002). "Is Lumpy Investment Relevant for the Business Cycle?" Journal of Political Economy, 110, 508-534.

Veracierto, Marcelo L. (2002) "Plant-Level Irreversible Investment and Equilibrium Business Cycles" American Economic Review 92, 181-97.

9. The Financial Accelerator

Kiyotaki N. and K. D. West (1996) "Business Fixed Investment and the Recent Business Cycle in Japan" in Ben Bernanke and Julio Rotemberg, eds, NBER Macroeconomics Annual 1996. Cambridge University Press, 11-74.

Jaffee, Dwight and Joseph Stiglitz, (1990) "Credit rationing" in Handbook of Macroeconomics B. M. Friedman and F.H. Hahn, eds, Elsevier Science, Chapter 16.

*Bernanke, B., M. Gertler and S. Gilchrist, (1999) "The Financial Accelerator in a Quantitative Business Cycle Framework," in Handbook of Macroeconomics, J. B. Taylor and M. Woodford eds., Elsevier Science, Chapter 21.

Gilchrist, Simon and Egon Zakrajszek (2007)“Investment and the Cost of Capital: New Evidence from the Corporate Bond Market” Boston University Working Paper, May 2007.

Evaluation:

The basis for determining your final grade in this course is as follows:

Mid term exam 40% Problem sets At least two; These are voluntary, but highly recommended. Final exam 60% (during the exam period)

Accommodations

For Students with Disabilities: Students with disabilities needing academic accommodations are required to contact a co-ordinator at the Paul Menton Centre to complete the necessary letters of accommodation. The student must then make an appointment to discuss their needs with the instructor at least two weeks prior to the first in-class test. This is to ensure sufficient time is available to make the necessary accommodation arrangements.

For Religious Obligations: To be worked out on individual basis with instructor. Consult Equity Services Website or an equity Advisor (ext. 5622) for Policy and list of Holy Days (www.carleton.ca/equity)

For Pregnancy: Contact Equity Services (ext. 5622) to obtain letters of accommodation.

Plagiarism

Please be aware that plagiarism is a serious offence and one that should be recognized and avoided. For further information regarding this subject, please see the Department of Economics Web site.