Home » Departments and Centres » Academic catalogue » Course detail

Open sidebar menu

Macroeconomics 3 (ECO-CO-MACRO3)

ECO-CO-MACRO3

Description

This course covers the foundational dynamic models that every research economist should be familiar with—not only those specializing in macroeconomics. The objective of this course is to equip students with a solid understanding of dynamic macroeconomic models and to train them to use these models to analyse complex empirical questions, while providing rigorous exposure to the foundational models and core macroeconomic literature.
In the first lectures, we introduce the basics of asset pricing in macroeconomic models under both complete and incomplete markets. We then study the New Keynesian framework and the design of optimal monetary policy. The final lectures of the course focus on models that examine the interaction between monetary and fiscal policy. 

Learning outcomes:    
By the end of this module, students should be able to:
•    Understand and work with dynamic macroeconomic models featuring incomplete markets and nominal rigidities.
•    Analyze asset pricing implications in models with complete and incomplete markets.
•    Explain the structure and implications of the New Keynesian framework.
•    Characterize optimal monetary policy design under various frictions.
•    Analyze the interaction between monetary and fiscal policy using formal models.

Assessment    
The grade will be based on a final exam (90%) and two problem sets (10%)

Module structure

Week 1-2
    Asset Pricing Theory
Topics:
•    Complete markets
o    Arrow-Debreu economy
o    The Lucas asset pricing model
o    Stock prices and bond prices
o    Risk premium
•    Incomplete markets
o    Endowment economy a la Huggett
o    Production Economy a la Aiyagari
Readings: 
•    Lucas, Robert E., Jr. (1978). "Asset Prices in an Exchange Economy," Econometrica, 46(6), 1429–1445.
•    Stokey, Nancy L., Robert E. Lucas Jr., and Edward C. Prescott. (1989). Recursive Methods in Economic Dynamics. Harvard University Press.
•    Ljungqvist, Lars, and Thomas J. Sargent. Recursive Macroeconomic Theory. 4th ed. Cambridge, MA: MIT Press, 2018.

Week 3-4
    The New Keynesian model  and monetary policy design
Topics: 
•    The classical monetary model and the basic New Keynesian model
•    Monetary policy design
•    Monetary policy tradeoffs: discretion vs. commitment
•    Sticky wages
•    The open economy New Keynesian model
Readings:
•    Gali, Jordi. (2015). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. 2nd edition, Princeton University Press.
•    Woodford, Michael. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press

Week 5
    Fiscal and monetary policy interactions
Topics:
•    “Some unpleasant monetarist arithmetic.”
•    The fiscal theory of the price level
Readings:
•    Sargent, Thomas J., and Neil Wallace. (1981). "Some Unpleasant Monetarist Arithmetic," Federal Reserve Bank of Minneapolis Quarterly Review, 5(3), 1–17.
•    Leeper, Eric M. (1991). "Equilibria Under ‘Active’ and ‘Passive’ Monetary and Fiscal Policies," Journal of Monetary Economics, 27(1), 129–147.
•    Cochrane, John H. (2023). The Fiscal Theory of the Price Level. Princeton University Press.


Bibliography and further readings

Main references:
•    Gali, Jordi. (2015). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. 2nd edition, Princeton University Press.
•    Ljungqvist, Lars, and Thomas J. Sargent. Recursive Macroeconomic Theory. 4th ed. Cambridge, MA: MIT Press, 2018.
•    Stokey, Nancy L., Robert E. Lucas Jr., and Edward C. Prescott. (1989). Recursive Methods in Economic Dynamics. Harvard University Press.
•    Woodford, Michael. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press. 
•    Sargent, Thomas J., and Neil Wallace. (1981). "Some Unpleasant Monetarist Arithmetic," Federal Reserve Bank of Minneapolis Quarterly Review, 5(3), 1–17.
Supplementary readings:
•    Adda, Jérôme, and Russell Cooper. Dynamic Economics: Quantitative Methods and Applications. Cambridge, MA: MIT Press, 2003.
•    Aiyagari, S. Rao. “Uninsured Idiosyncratic Risk and Aggregate Saving.” Quarterly Journal of Economics 109, no. 3 (1994): 659–84.
•    Azzimonti, Marina, Marco Bassetto, and Fernando Martin. Macroeconomics. 2025. https://phdmacrobook.org/.
•    Bansal, Ravi, and Amir Yaron. “Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles.” Journal of Finance 59, no. 4 (2004): 1481–1509.
•    Barro, Robert J., and David B. Gordon. “Rules, Discretion and Reputation in a Model of Monetary Policy.” Journal of Monetary Economics 12, no. 1 (1983): 101–121.
•    Bianchi, Francesco, Renato Faccini, and Leonardo Melosi. “A Fiscal Theory of Persistent Inflation.” Quarterly Journal of Economics 138, no. 4 (November 2023): 2127–2179.
•    Campbell, John Y., and John H. Cochrane. “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior.” Journal of Political Economy 107, no. 2 (1999): 205–251.
•    Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans. “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy.” Journal of Political Economy 113, no. 1 (2005): 1–45.
•    Clarida, Richard, Jordi Galí, and Mark Gertler. “The Science of Monetary Policy: A New Keynesian Perspective.” Journal of Economic Literature 37, no. 4 (1999): 1661–1707.
•    Cochrane, John H. Asset Pricing. Rev. ed. Princeton, NJ: Princeton University Press, 2005.
•    Cochrane, John H. “Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level.” Econometrica 69, no. 1 (2001): 69–116.
•    Cochrane, John H. The Fiscal Theory of the Price Level. Princeton, NJ: Princeton University Press, 2023.
•    Galí, Jordi. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications. 2nd ed. Princeton, NJ: Princeton University Press, 2015.
•    Hall, Robert E. “Stochastic Implications of the Life Cycl-Permanent Income Hypothesis: Theory and Evidence.” Journal of Political Economy 86, no. 6 (1978): 971–87.
•    Hansen, Lars Peter, and Kenneth J. Singleton. “Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns.” Journal of Political Economy 91, no. 2 (1983): 249–265.
•    Leeper, Eric M. “Equilibria under ‘Active’ and ‘Passive’ Monetary and Fiscal Policies.” Journal of Monetary Economics 27, no. 1 (1991): 129–147.
•    Lucas, Robert E., Jr. “Asset Prices in an Exchange Economy.” Econometrica 46, no. 6 (1978): 1429–1445.
•    Lucas, Robert E., Jr. “Expectations and the Neutrality of Money.” Journal of Economic Theory 4, no. 2 (1972): 103–124.
•    Mehra, Rajnish, and Edward C. Prescott. “The Equity Premium: A Puzzle.” Journal of Monetary Economics 15, no. 2 (1985): 145–161.
•    QuantEcon. “Quantitative Economics.” Accessed July 9, 2025. https://quantecon.org/. Developed by Thomas J. Sargent and John Stachurski.
•    Sargent, Thomas J., and Neil Wallace. “Some Unpleasant Monetarist Arithmetic.” Federal Reserve Bank of Minneapolis Quarterly Review 5 (Fall 1981): 1–17.
•    Smets, Frank, and Raf Wouters. “Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach.” American Economic Review 97, no. 3 (2007): 586–606.
•    Stachurski, John. Economic Dynamics: Theory and Computation. Cambridge, MA: MIT Press, 2009.
•    Taylor, John B. “Discretion versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39 (1993): 195–214.
•    Woodford, Michael. “Fiscal Requirements for Price Stability.” Journal of Money, Credit and Banking 33, no. 3 (2001): 669–728.
 

Register for this course