Macroeconomic Theory (First half) Econ 504, Spring 2017

Instructor: Nobuhiro Kiyotaki, O¢ce hour Monday 4:15-5:45pm 189 JR.Rabinowitz Preceptor: Adrien G. Bilal, [email protected], A74 JRR Christian Wolf, [email protected], A74 JRR

In this course, we will use dynamic general equilibrium models to ad- dress questions in . We will study asset pricing, investment, business cycles, unemployment and monetary policy, by considering Önancial frictions, labor market frictions and nominal price stickiness.

The recommended textbook is Lars Ljungqvist and Thomas Sargent. Re- cursive Macroeconomic Theory,thirdedition,MITPress(2012)(thesecond edition is Öne too).

Course outline: Students are expected to read the articles with (*) in the list.

0. Quick Overview of National Income

1. Consumption and Asset Pricing Models

Milton Friedman. ATheoryofConsumptionFunction. Chapters 2 and 3. (1957) Princeton: Press. (*) Rajnish Mehra and Edward Prescott. "The Equity Premium: A Puzzle." Journal of (1985): 145-162. Ljungqvist-Sargent. Chapters 13 and 14.

2. Investment

Stephen Bond and Jason Cummins. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions." Brook- ings Papers on Economic Activity (2000:1):61-124. (*) Guido Lorenzoni and Karl Walentin. "Financial Frictions, Investment and Tobinís q." Mimeo, (2007). Northwestern University. Andrea Caggese. "Financing constraints, irreversibility, and investment dynamics." Journal of Monetary Economics (2007): 2102-30.

1 3. Business Cycles and Credit

(*) Edward Prescott. "Theory Ahead of Business Cycle Measurement." Federal Reserve Bank of Minneapolis Quarterly Review (Fall 1986): Together with the exchange with Laurence Summers. http://www.mpls.frb/research/qr/. Ljungqvist-Sargent. Chapter 12. Takashi Kamihigashi. "Real business cycles and sunspot áuctuations are observationally equivalent." Journal of Monetary Economics (1996):105-117. (*) Nobuhiro Kiyotaki. "Credit and Business Cycles." Japanese Eco- nomic Review (1998): 18-35. Available at my Princeton homepage. Nobuhiro Kiyotaki and . "Liquidity, Business Cycles and Monetary Policy." (2012). Available in my homepage.

4. Unemployment

Ljungqvist-Sargent. Chapter 28. (*) Dale Mortensen and Christopher Pissarides. "Job Creation and Job Destruction in the Theory of Unemployment." Review of Economic Studies (1994): 397-415. Robert Shimer. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies." (2005): 25-49.

5. Sticky Prices and Monetary Policy

Jordi Gali. "The Basic New Keynesian Model. " Chapter 3 in Mone- tary Policy, Ináation, and the Business Cycle (2008) Princeton: Princeton University Press. . "Sticky Prices in the United States." Journal of Polit- ical Economy, (1982): 1187-1211. Eric Leeper, Christopher Sims and Tao Zha. "What Does Monetary Policy Do?" Brookings Papers on Economic Activity (2:1996): 1-63. (*) and . "Inside the Black Box: the Credit Channel of the Monetary Policy." Journal of Economic Perspectives (Fall 1995): 27-48. (*) Mark Gertler and Peter Karadi. "Monetary Policy Surprises, Credit Costs, and Economic Activity." American Economic Review (2015): 44-76.

2 ECO 504 Macroeconomic Theory II Ezra Oberfield Spring 2017 Princeton University Weeks 10-12 [email protected]

Course Information

Instructor: Ezra Oberfield Lectures: Monday, Wednesday, 1:00-2:30, JRRB A87 Office Hours: By appointment, JRRB 292A

TA: Adrien Bilal ([email protected]) Christian Wolf ([email protected])

Precepts: Thursday 2:15-3:15, A97 Fisher

Topics

1. Self Insurance 2. Exogenously Incomplete Markets

Materials

(i) Required Text Books • Ljungvist and Sargent (2012), Recursive Macroeconomic Theory, 3rd Edition. If you have an earlier edition you can use it but some of the material has changed and the chapter numbers and question numbers are different. All of the questions in the homework assignments refer to the 3rd edition. (ii) Useful Background Readings: • Guvenen, F. “Macroeconomics with Heterogeneity: A Practical Guide”, Federal Reserve Bank of Richmond Quarterly, 2012 • Heathcote, J., K. Storesletten and G. Violante “Quantitative Macroeconomics with Heterogeneous Households”, Annual Review of Economics, 2009 • Journal of Economic Dynamics and Control, Issue 34 (2010), Special Issue on Solving the Incomplete Markets Model with Aggregate Uncertainty

Requirements

1. Homework assignments (2) (40%). See schedule below. 2. Final exam (60%)

Computation

The homework assignments will include a computational aspect. You can use any programming language that you feel comfortable with. For those who are new to programming I recommend using Matlab. The TA will give a precept in Week 1 on computation. At that precept he will go over Homework 0, which is an optional homework assignment designed to get you familiar with solving economic models in Matlab.

Detailed Course Outline

1. Self Insurance 1.1. Environment (LS 17.1-17.2) 1.2. Non-stochastic Savings Problems (WILL NOT COVER IN CLASS) 1.2.1. �� > 1 1.2.2. �� = 1 (LS 17.3) 1.3. Permanent Income Hypothesis (LS 17.4) 1.4. Precautionary Savings 1.4.1. Precautionary Savings through Prudence (LS 18.14) 1.4.2. Precautionary Savings through Borrowing Constraints 1.4.3. Natural Borrowing Limits (LS 18.4-18.5) 1.5. General Stochastic Savings Problems 1.5.1. Supermartingale Convergence Theorem (LS 17 App) 1.5.2. �� > 1 1.5.3. �� = 1 (LS 17.5-17.7) 1.5.4. �� < 1 (LS 18.4-18.5)

2. Exogenously Incomplete Markets (Bewley Models) 2.1. Neoclassical Growth Model with Incomplete Markets without Aggregate Uncertainty 2.1.1. Environment (LS18.2) 2.1.2. Equilibrium (LS18.2) 2.1.3. Existence and Uniqueness (LS 18.6) 2.1.4. Computation (LS 18.2, 18.7) 2.1.5. Transitional Dynamics 2.2. Neoclassical Growth Model with Incomplete Markets with Aggregate Uncertainty (LS 18.15) 2.2.1. Environment 2.2.2. Equilibrium 2.2.3. Computation 2.2.4. Near Aggregation 2.2.5. Alternative Algorithms (RED Special Issue)