School of Economics and Finance Chi-Wa Yuen University of Hong Kong Spring 2002

ECON 6012 MACROECONOMICS

This course is concerned with the construction of theories to explain the determination of aggregative (economy-wide average) variables: per capita income, consumption, investment, the general level and rates of change of prices, rates of interest, and so on. It will cover deterministic and stochastic dynamic general equilibrium models of economic growth and fluctuations. There is no required text. Lectures will be based on my own notes and some chapters/papers listed below. The following books are recommended for general reference.

• Costas Azariadis, Intertemporal Macroeconomics, Blackwell Publishers, 1992. • Olivier J. Blanchard and Stanley Fischer, Lectures on Macroeconomics, MIT Press, 1989. • Lars Peter Hansen and Thomas J. Sargent, Recursive Linear Models of Dynamic Economies, unpublished manuscript, 1997. [See http://www.stanford.edu/~sargent/ hansen.html] • Lars Ljungqvist and Thomas J. Sargent, Recursive Macroeconomic Theory, MIT Press, 2000. • Edmond Malinvaud, Macroeconomic Theory: A Textbook on Macroeconomic Knowledge and Analysis, North-Holland, 1998. • George T. McCandless, Jr., with Neil Wallace, Introduction to Dynamic Macro-economic Theory: An Overlapping Generations Approach, Harvard University Press, 1991. • David Romer, Advanced Macroeconomics, 2/e, McGraw Hill, 2001. • Thomas J. Sargent, Macroeconomic Theory, 2/e, Academic Press, 1987a. • Thomas J. Sargent, Dynamic Macroeconomic Theory, Harvard University Press, 1987b. • Gregor Smith, Lecture Notes on Macroeconomics, unpublished manuscript, 2000. [http://qed.econ.queensu.ca/pub/faculty/smithgw/econ815A/index.html] • Brian Snowdon and Howard Vane, Conversations with Leading Economists: Interpreting Modern Macroeconomics, Edward Elgar, 1999. • Brian Snowdon, Howard Vane, and Peter Wynarczyk, A Modern Guide to Macroeconomics: An Introduction to Competing Schools of Thought, Edward Elgar, 1994. • Stephen J. Turnovsky, Methods of Macroeconomic Dynamics, MIT Press, 1995.

Those with little or no background in intermediate level macroeconomics should quickly review either one of the following undergraduate (= MBA level) texts/notes. • Andrew B. Abel and Ben S. Bernanke, Macroeconomics, 4/e, Addison Wesley, 2001. • Robert J. Barro, Macroeconomics, 5/e, MIT Press, 1998. • Nouriel Roubini and David Backus, MBA Lectures in Macroeconomics, New York University [http://www.stern.nyu.edu/~nroubini/LNOTES.HTM].

The following references are of somewhat more specialized (but still fairly general) interest. • Pierre-Richard Agénor and Peter J. Montiel, Development Macroeconomics, 2/e, Princeton University Press, 1999. • Allan Drazen, Political Economy in Macroeconomics, Princeton University Press, 2000. • George W. Evans and Seppo Honkapohja, Learning and Expectations in Macroeconomics, Princeton University Press, 2001. • Roger E.A. Farmer, The Macroeconomics of Self-Fulfilling Prophecies, 2/e, MIT Press, 1999. • Jacob A. Frenkel and Assaf Razin, with Chi-Wa Yuen, Fiscal Policy and Growth in the World Economy, 3/e, MIT Press, 1996. • Frank Hahn and Robert Solow, A Critical Essay on Modern Macroeconomic Theory, MIT Press, 1995. • Robert E. Lucas, Jr., Models of Business Cycles, Basil Blackwell, 1987. • Maurice Obstfeld and Kenneth Rogoff, Foundations of International Macroeconomics, MIT Press, 1996. • Torsten Persson and Guido Tabellini, Macroeconomic Policy, Credibility and Politics, Harwood Academic Publishers, 1990. • Thomas J. Sargent, Bounded Rationality in Macroeconomics, Oxford University Press, 1993. • James Tobin, with Stephen S. Golub, Money, Credit, and Capital, McGraw Hill, 1998. • Michael Woodford, Interest and Prices: Foundations of a Theory of Monetary Policy, unpublished manuscript, Princeton University, 2002.

Three good technical references using respectively dynamic programming, Lagrange multiplier, and numerical techniques include: • Nancy L. Stokey and Robert E. Lucas, Jr., with Edward C. Prescott, Recursive Methods in Economic Dynamics, Harvard University Press, 1989. • Gregory C. Chow, Dynamic Economics, Oxford University Press, 1997. • Kenneth L. Judd, Numerical Methods in Economics, MIT Press, 1998.

Some useful survey papers can be found in: • Robert J. Barro (ed.), Modern Business Cycle Theory, Harvard University Press, 1989. • Thomas J. Cooley (ed.), Frontiers of Business Cycle Research, Princeton University Press, 1995. • Benjamin M. Friedman and Frank H. Hahn (eds.), Handbook of Monetary Economics, Volumes 1 and 2, North-Holland, 1990. • Kevin D. Hoover (ed.), Macroeconometrics: Developments, Tensions, and Prospects, Kluwer Academic Publishers, 1995. • John B. Taylor and Michael Woodford (eds.), Handbook of Macroeconomics, Volumes 1A)1C, North-Holland, 1999.

Course Requirements

Problem sets will be circulated in class. They will not be graded and thus need not be handed in. Your grade in the course will be determined by two mid-terms (40%) and a final (60%). Exams will be open books, open notes.

Topics and Readings

I have tried to include survey-type papers and textbook chapters rather than the original articles so as to better synthesize the analysis. You should not therefore assume that the unassigned (original) works are unimportant, or take the list as discouraging further reading. More references will be added as we go along.

(0) Microfoundations of Macroeconomics • Barro (1998), chapters 2-6.

(1) Economic Growth • Robert E. Lucas, Jr., “Some Macroeconomics for the 21st Century,” Journal of Economic Perspectives 14 (2000), 159-168. • Ellen R. McGrattan and James A. Schmitz, Jr., “Explaining Cross-Country Income Differences,” in Taylor and Woodford (1999), chapter 10. (2) Business Cycles • Robert G. King and Sergio T. Rebelo, “Resuscitating Real Business Cycles,” in Taylor and Woodford (1999), chapter 14.

(3) Money, Inflation, and Output • Bennett T. McCallum, “Inflation: Theory and Evidence,” in Friedman and Hahn (1990), chapter 18. • Carl Walsh, “Empirical Evidence on Money and Output,” in Walsh (1998), chapter 1. • Olivier J. Blanchard, “Why does Money Affect Output? A Survey,” in Friedman and Hahn (1990), chapter 15.

(4) Macroeconomic Policy • Robert J. Barro, “The Neoclassical Approach to Fiscal Policy,” in Barro (1989). • Robert Clarida, Jordi Galí, and Mark Gertler, “The Science of Monetary Policy: A New Keynesian Perspective,” Journal of Economic Literature XXXVII (1999), 1661-1707. • Torsten Persson and Guido Tabellini, “Political Economics and Macroeconomic Policy,” in Taylor and Woodford (1999), chapter 22.

(5) Quantitative Macro • Carlo A. Favero, Applied Macroeconometrics, Oxford University Press, 2001. • Symposium on “Computational Experiments in Macroeconomics,” in Journal of Economic Perspectives 10 (Winter 1996), 69-120.

General Information

Office hours: Saturdays, 12-1 pm (or by appointment) Address: Rm 927, K.K. Leung Building Phone: 2859-1051 Fax: 2548-1152 E-mail: [email protected] Website: http://www.econ.hku.hk/~cwyuen

Midterm I: April 6 23, 2001 (after class)

Midterm II: May 4, 2001 (in class)