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Macroeconomics 1 (ECO-CO-MACRO1)

ECO-CO-MACRO1

Purpose

This course covers several topics in advanced macroeconomics to provide the foundation for modern macroeconomic theory and applications. We will start with a simple finite horizon economy to learn how to define equilibria and to learn the concepts of Arrow-Debreu and sequential markets equilibria. Equipped with these fundamentals we will analyse one of the workhorse models in modern macroeconomics, the neoclassical growth model in discrete time. We will relate it 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, and we will also consider finite horizon models to learn the differences to the infinite horizon case when applying dynamic programming techniques. We close the lecture with two important extensions. First, we will study models with risk and learn how to extend our dynamic programming approaches to solve those models. Second, we will turn to welfare economics which provides us with the key framework to evaluate allocations.  

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.
 
Assessment    
Final exam (67%) and problem sets (33%)

Module structure

WEEK 1
Introduction. A Simple Dynamic Economy

WEEK 2
The Neoclassical Growth Model in Discrete Time

WEEK 3
Mathematical Preliminaries
Dynamic Programming: Theory

WEEK 4
Dynamic Programming: Praxis
Extension to Models with Risk

WEEK 5
Welfare
Aiyagari-Bewley-Hugett-Imrohoroglu Model

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
-    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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