DEPARTMENT OF ECONOMICS CARLETON UNIVERSITY ECON 5002 X Macroeconomic Theory

Professor Hashmat Khan Winter 2011

COURSE INFORMATION Lectures: Monday, 8h35-11h25 Location: Patterson Hall 111 Office: LOEB-D891 Office Hours: Monday and Wednesday, 15h30-16h30 or by appointment Contact: WebCT email, Tel 613 520 2600 (Ext 1561)

WebCT Check WebCT: for course material and email communication

COURSE DESCRIPTION This course introduces advanced techniques and topics in macroeconomic theory at a Masters level. We will cover a range of theoretical models of economic growth, business cycles, consumption, inflation and monetary policy. The main objectives of the course are:

• To develop analytical skills for studying a range of dynamic equilibrium models. By the end of the course, you should be able to solve standard models using methods of constrained optimization in discrete and continuous time.

• To understand interactions between macroeconomic theory and data. By the end of the course, you should know what insights macroeconomic models give in better understanding growth, business cycles, consumption, inflation, and monetary policy.

• To highlight new macroeconomic research areas since the 2007-2008 Financial Crisis

REQUIRED TEXT

David Romer (DR) Advanced Macroeconomics Third Edition (McGraw-Hill)

TOPICS

1. Economic Growth

• The Solow Growth Model

• The Ramsey-Cass-Koopmans Model

• New Growth Theory

1 Lecture notes

DR: Chapter 1, 2 (Part A), 3 (selected parts)

Robert Solow (1999) “Neoclassical growth theory, in Handbook of Macroeconomics, Volume 1A, Edited by John Taylor and Michael Woodford, Amsterdam: Elsevier.

Charles Jones (2005) “Growth and Ideas”, in Handbook of Economic Growth, Volume 1B. Edited by Philippe Aghion and Steven N. Durlauf, Amsterdam: Elsevier. (Sections 1 to 3).

2. Consumption

• The Permanent-Income Hypothesis (PIH) • The Random Walk (RW) Hypothesis • The Interest rate and Saving • Consumption and Risky Assets • The Equity Premium Puzzle • Precautionary Savings • Liquidity Constraints

Lecture notes

DR: Chapter 7

Robert Hall (1978), “Stochastic Implications of the Life Cycle-Permanent Income Hypothe- sis: Theory and evidence”, Journal of Political Economy 86 (December), 971-987.

Narayan Kocherlakota (1996). “The Equity Premium: It’s Still a Puzzle. Journal of Eco- nomic Literature 34 (March): 42-71.

3. Real Business Cycles

Class notes

DR Chapter 4

Prescott, E (1986) “Theory Ahead of Business Cycle Measurement”, Federal Reserve Bank of Minneapolis Quarterly Review, Fall, 9-22.

John Campbell (1994) “Inspecting the Mechanism: An Analytical Approach to the Stochas- tic Growth Model, Journal of Monetary Economics 33 (3), 463-506.

Tim Cogley and James Nason (1995) “Output Dynamics in Real Business Cycle Model” American Economic Review 85 (June), 492-511.

2 4. Business Cycles under Real and Nominal Frictions

• Imperfect Information • Incomplete Nominal Adjustment • Imperfect Credit Markets

Lecture Notes

DR Chapters 5, 6 (selected parts)

Ben Bernanke and Mark Gertler (1989) “Agency Costs, Net Worth, and Business Fluctua- tions” American Economic Review 79 (March), 14-13

Joseph Stiglitz and Bruce Greenwald “Financial Market Imperfections and Business Cycles Quarterly Journal of Economics, 108(1), February 1993, 77-114.

Ben Bernanke, Mark Gertler, and Simon Gilchrist (1999) “The Financial Accelerator in a Quantitative Business Cycle Framework, in John Taylor and Michael Woodford, eds., Handbook of Macroeconomics Vol. 1C, 1341-1393. Amsterdam: Elsevier.

Mark Gertler, and Nobuhiro Kiyotaki (2010) “Financial Intermediation and Credit Policy in Business Cycle Analysis” NYU manuscript.

5. Inflation and Monetary Policy

• Inflation, Money Growth, and Interest Rates • The Dynamic Inconsistency of Low-Inflation Monetary Policy • Interest Rate Rules • Inflation Targeting • The Zero Lower Bound on the Nominal Interest Rate

Lecture notes

DR: Chapter 10

Bernanke. B., and M. Gertler, (1994), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission, Journal of Economic Perspectives 9(4), pp. 27-48.

Ben Bernanke and F. Mishkin, (1997), “Inflation Targeting: A New Framework for Monetary Policy?, Journal of Economic Perspectives 11(2), pp. 97-116.

Richard Clarida, Jord´ıGali and Mark Gertler (1999),“The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature 37(4), pp. 1661- 1707.

3 COURSE EVALUATION

Problem Sets 20% Midterm Exam (March 7) 30% Final Exam 50% 100%

Academic accommodations

1. For students with disabilities: Students with disabilities requiring academic accom- modations in the course are encouraged to contact a coordinator at the Paul Menton Centre to complete the necessary letters of accommodation. After registering with the PMC, make an appointment to meet and discuss your needs with the instructor at least two weeks prior to the midterm exam. This is necessary in order to ensure sufficient time to make the nec- essary arrangements. Please note the following deadline for submitting completed forms to the PMC for formally scheduled exam accommodations is March 11, 2011

2. For religious obligations: To be worked out on individual basis with the instructor at least two weeks prior to the particular day. Consult Equity Services or an Equity Advisor (ext. 5622) for the current policy and a list of days.

3. Pregnancy: Requests for academic accommodation to be made during the first two weeks of class, or as soon as possible after the need for accommodation is known to exist. For more details consult Equity Services

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