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Macroeconomics 1 (ECO-CO-MACRO-1)

ECO-CO-MACRO-1

Description

Module description

This course covers several topics in advanced macroeconomics to provide the foundation for modern macroeconomic theory and applications. 
We will start with a recap of the first and second welfare theorem in the standard Edgeworth box example. We will build on this with a simple finite horizon economy to learn how to define equilibria and to learn the concepts of Arrow-Debreu and sequential markets equilibria. When discussing the equilibrium properties of the model, we will again discuss the fundamental welfare theorems and thus again closely relate to microeconomics. Equipped with these fundamentals we will analyze one of the workhorse models in modern macroeconomics, the neoclassical growth model in discrete time. We will learn that this economy implements an efficient allocation in equilibrium and that we can thus directly solve the social planner’s problem. From this analysis we will learn one key savings motive of households, namely the inter-temporal allocation of resources. We will discuss how this savings motive affects the equilibrium capital accumulation in the economy and relate our findings to the classical Solow growth model in order to understand the key differences between equilibrium allocations in both models. In solving the neoclassical growth model, we will meet dynamic programming techniques, but restrict ourselves to special cases that permit a closed form solution. We will next take a more formal approach to dynamic programming, for which we also need to introduce the mathematical preliminaries. As a key element, we will learn different variants of numerical solution methods. We will also briefly discuss finite horizon models to learn the differences to the infinite horizon case when applying dynamic programming techniques. We next repeat the exercise in continuous time. This is to make you more familiar with continuous time techniques, which are often used to characterize solutions in closed form when it is not possible with discrete time methods. Finally, we close the lecture with an important extension: We will study models with risk and learn how additional precautionary savings motives arise in models with risk. We will only discuss precautionary savings out of prudence (preference-based explanation) and leave an explanation based on frictions (borrowing constraints, hence an institutional motivation) for macro II. We will turn to the neo-classical growth model with aggregate risk (the RBC model) and discuss how to solve it by extending the dynamic programming approaches to this class of models. We will close the lecture with an outlook on Aiyagari models with idiosyncratic risk and Krusell-Smith economies, which will be the content of macro II for the former and for second year courses for the latter.

Learning outcomes:
Knowledge: Foundations of macroeconomics theory: general equilibrium concepts and definitions, dynamic models, dynamic programming, choice under risk, welfare. 

Techniques: Analytical solution methods for simple models. Basic techniques for numerical dynamic programming in a deterministic and stochastic setting. 

Assessment:
Final exam (80%) and problem sets (20%)

Module structure:

WEEK 1

Introduction. A Simple Dynamic Economy

Krueger-Macro-Theory-Lecture Notes: Ch. 2

WEEK 2

The Neoclassical Growth Model in Discrete Time

Krueger-Macro-Theory-Lecture Notes: Ch. 3

WEEK 3

Mathematical Preliminaries

Dynamic Programming: Theory

Krueger-Macro-Theory-Lecture Notes: Ch. 4-5

WEEK 4

Dynamic Programming: Praxis

Slides, Problem Set

The neo-classical growth model in continuous 

EconPolicyNotes: Ch. 4

Krueger-Macro-Theory-Lecture Notes: Ch. 6

DynMacroNotes Ch. 5 (optional)

WEEK 5

Risk: Linear Expected Utility, Precautionary Savings and the Neoclassical Growth Model (the RBC Model)

DynMacroNotes Ch. 6.1, 6.2

DynMacroNotes Ch. 7.1

Bibliography and further readings:

-    Azzimonti, Marina, Krusell, Per, McKay, Alisdair, Mukoyama, Toshihiko: Macroeconomics, Chapters 1-7

-    Krueger, Dirk: Macroeconomic Theory (Lecture Notes) 

-    Ljungqvist, Lars and Tom. J Sargent. Recursive Macroeconomic Theory, MIT Press, 2004

-    Ludwig, Alexander: Heterogeneous Agent Models (Lecture Notes)

-    Ludwig, Alexander: Public Economics and Public Policy (Lecture Notes)

-    Romer, David. Advanced Macroeconomics, Mc Graw Hill, 2019

-    Stokey, N. and R. Lucas, with E. Prescott (1989): Recursive Methods in Economic Dynamics

-    Selected Research Papers

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