Macroeconomics III, Part 1: Dynamic Programming and Real Business Cycles (Jesus Bueren)

This course covers infinite-horizon optimization via dynamic programming (deterministic and stochastic) and its application to some simple partial- and general-equilibrium models.

Macroeconomics III, Part 2: Incomplete and Incentive Constrained Markets (Alexander Monge-Naranjo)

This course covers the basic dynamic models of incomplete markets that must be familiar to all research economists, not just those doing macro. In the first lecture, we overview the different directions that we can take to incorporate contractual frictions and incompleteness in financial markets. In the following three lectures, develop the baseline dynamic incomplete markets model. We start by characterizing the individual’s optimization problems and then derive some key general equilibrium implications. We then sketch a few extensions, including models with aggregate fluctuations and models with equilibrium default. The ensuing three lectures and part of five are devoted to recursive contracts in the presence of limited commitment or private information problems. Again, we discuss the implications for individual dynamics and the cross-section of agents. Several leading examples and applications will be used. If time permits, we will also discuss the design of optimal government policy, with and without commitment.

Macroeconomics III, Part 1: Dynamic Programming and Real Business Cycles (Jesus Bueren)

Topics:

- Equilibrium with complete markets (static exchange economies, exchange economies with infinitely lived agents –without and with uncertainty)
- Dynamic programming (sequential versus recursive formulation, the principle of optimality, the contraction mapping theorem, discrete state-space methods, neoclassical growth, recursive competitive equilibrium)
- Stochastic dynamic programming (RBC and Lucas-Tree models, the Permanent-Income Hypothesis, precautionary savings)

Teaching material: [1], [8], [9], [12] and teaching notes

Grading: Problem sets (10%) and final exam (90%)

Macroeconomics III, Part 2: Incomplete and Incentive Constrained Markets (Alexander Monge-Naranjo)

Topics: