Intermediate Macro Texts Recommended for Background Review:
- Andrew Abel and Benjamin S. Bernanke, Macroeconomics, Addison-Wesley, latest available edition. [A good
all around intermediate-level introduction to macro.]
- Robert Barro, Macroeconomics, John Wiley and Sons,
latest available edition. [An intermediate-level macro text
that stresses the New Classical approach (flexible prices with continual market clearing and rational expectations) for a closed economy.]
- Robert Hall and John Taylor, Macroeconomics, W. W. Norton & Company, latest available edition. [An intermediate-level macro text that stresses the New Keynesian approach (sticky prices with possible labor market disequilibriuMB) for an open economy. A complete quantitative macroeconomic model is constructed, and a computer implementation (MacroSolve) of this model is provided.]
- M. Gregory Mankiw, Macroeconomics, Worth Publishers, latest available edition. [This best-selling intermediate macro text stresses a blend of New Keynesian and New Classical ideas. It uses simple verbal and graphical presentations, with most mathematics relegated to appendices (and exercises).]
- Wallace C. Peterson and Paul S. Estenson, Income, Employment, and Economic Growth, W. W. Norton & Co., New York, latest available edition [An intermediate-level macro text that is more discursive and less analytical than
Abel/Bernanke, Barro, or Hall/Taylor; strong on historical perspective and comparisons of competing schools of
thought.]
Topics, Discussion Questions, and Readings
Please Note: A double asterisk ** means that a reading
contains basic required material for answering exam questions and
exercises. A single asterisk * means that a reading contains
recommended material of a more general contextual nature that may be
useful for answering exam questions and exercises.
All readings with double and single asterisks are listed in a
suggested reading order. Each of these readings can be obtained
either in the required course packet, as a class hand-out, on-line, or in the Parks Library.
The form of availability for each reading is indicated after its
citation information. Suggested readings for more specialized study
are also given for each topic area.
Updated or new materials (required or recommended readings,
discussion questions, exercises, exam guides,...) may be added to
the on-line syllabus at a later time. Such materials will be marked
on the syllabus with an "updated" or "new" icon, respectively, for
at least one week, and their inclusion will also be announced in
class.
Finally, in the readings cited below, the expression
op. cit. is an abbreviation for the Latin expression
opere citato, which means "in the work cited (above)."
I. INTRODUCTION
- COURSE OVERVIEW
Key Questions for In-Class Discussion:
- What is "macroeconomics"?
- What lessons should be drawn from the current economic and financial crisis for the study of macroeconomics?
- What are some of the key approaches macroeconomists have been taking to the theoretical study of macroeconomic systems over the past forty years? Are these approaches now discredited? In need of major revision? Still viable?
- "Macroeconomic theorists don't make mistakes; they simply make peculiar assumptions." Is this accurate? fair?
- What issues will this course address?
Required Readings:
- [**] L. Tesfatsion, "What is Macroeconomics All About?".
PACKET
-
[**] Editorial and accompanying opinion pieces, "What Went Wrong with Economics?", "The Other Worldly Philosophers", and "Efficiency and Beyond"
(pdf,323KB),
The Economist, July 16th, 2009. ON-LINE
Recommended Readings:
-
[ *] "Symposium: Macroeconomics after the Financial Crisis", Journal of Economic Perspectives (JEP), Volume 24, No. 4, Fall 2010, pages 3-102. (Articles by Robert H. Hall, Michael Woodford, Lee E. Ohanian; Andreas Fuster et al., and Ricardo J. Caballero)
- Note: The JEP is freely available to all online. To access JEP articles, visit
here.
-
**Important Note:**
- The following five perspectives by well-known economists present five distinctly different views regarding the changing state of macroeconomic theorizing since the publication of Keynes' General Theory of Employment, Interest, and Money in 1936. These perspectives make particularly interesting reading because each was written in the years immediately preceding the 2007-2010 economic crisis. At this point I recommend that you simply skim through the articles to get a general sense of what is claimed. More careful readings of these articles could then profitably be done at a later time after we have covered more of the discussed topics in class.
- [ *] Michael Woodford, "Revolution and Evolution in Twentieth Century Macroeconomics
(pdf, 119KB),
presented at the conference Frontier of the Mind in the Twenty-First Century, Library of Congress,
Washington, D.C., June 1999. ON-LINE
-
[ *] N. Gregory Mankiw,
"The Macroeconomist as Scientist and Engineer"
(pdf,102KB),
Journal of Economic Perspectives, Vol. 20, No. 4, Fall 2006, 29-46. ON-LINE
- [ *] Edmund S. Phelps, "Macroeconomics for a Modern Economy"
(pdf,128KB),
Nobel prize lecture, Stockholm, Sweden, December 10, 2006. ON-LINE
- [ *] W. Brian Arthur, Steven Durlauf, and David Lane, "Introduction"
(pdf,53KB),
in W. B. Arthur, S. Durlauf, D. Lane (Eds.), The Economy as an Evolving Complex System II, Addison Wesley, Reading, MA, 1997.
ON-LINE
- [ *] Axel Leijonhufvud, "Agent-Based Macroeconomics"
(pdf,93KB),
Chapter 36 (pp. 1626-1637) in L. Tesfatsion and K. Judd (Eds.), Handbook of Computational Economics, Volume 2: Agent-Based Computational Economics, Handbooks in Economics Series, North-Holland/Elsevier, 2006. ON-LINE
Other Suggested Readings and Websites
- EMPIRICAL CHARACTERISTICS OF THE U.S. ECONOMY
Key Questions for In-Class Discussion:
- Historical facts about the U.S. economy
- How is the U.S. economy weathering the current crisis?
- Empirical comparisons with other economies
Required Readings:
- [**] L. Tesfatsion, "Key U.S. Historical Benchmarks".
PACKET
- [**] L. Tesfatsion, "Empirical Data Packet 1: Basic Concepts and Times Series". HAND-OUT
-
[**] L. Tesfatsion, "Empirical Data Packet 2: Financial Crises and the US Great Recession"
(pdf,2.5MB). ON-LINE
-
[**] Charles I. Jones, "The Global Financial Crisis: Overview"
(pdf,214),
a Supplement to Macroeconomics
(W.W.Norton), May 22, 2009. ON-LINE
-
[**] C. M. Reinhart and K. S. Rogoff, "The Aftermath of Financial Crisis"
(pdf,226KB),
American Economic Review: Papers and Proceedings 99(2), May 2009, 466-472.
Recommended Readings:
[ *]
P. Radford, "Whither Economics? What Do We Tell the Students?"
(pdf,32KB),
Real-World Economics Review, 52(10), March 20-10, 112-115.
[ *]
Building a Science of Economics for the Real World, Committee on Science and Technology, U.S. House of Representatives, July 20, 2010, Congressional Testimony given by
Brad Miller,
Robert Solow,
Sidney Winter,
Scott Page,
David Colander,
and
V.V. Chari
-
[ *] Kristopher Gerardi, Andreas Lehnert, Shane Sherlund, and Paul Willen, "Making Sense of the Subprime Crisis"
(pdf,494KB),
Brookings Papers on Economic Activity, Fall 2008. ON-LINE
- [ *] The
U.S. Congressional Budget Office (CBO)
provides current budget and economic information about the U.S. economy,
as well as its most current Budget and Current Outlook report projecting
the future state of the U.S. economy over the next several years. ON-LINE
- [ *] The
Economagic Economic Time Series Page
maintained by Economagic Inc. provides access to an extensive variety of
economic time series (primarily U.S. data) with customized graphing and printing facilities.
ON-LINE
- [ *] Abel and Bernanke, op. cit., introductory chapter titled
"Introduction to Macroeconomics", and Hall and Taylor, op. cit.,
introductory chapter titled "Economic Growth and Fluctuations".
Other Suggested Readings and Websites
-
MACRO MODELING: ALTERNATIVE APPROACHES
Key Questions for In-Class Discussion:
- What do macroeconomists mean by the "state" of an economy? By "social welfare"?
- Tailoring models to particular economic concerns
- What makes macro modeling so difficult to do well!!!
- Different strokes for different folks, or one universal way?
- What is the "Walrasian General Equilibrium (WGE)" model that underlies
so much of current macroeconomic theorizing?
- How is individual welfare measured in the WGE? How is social welfare measured?
Required Readings:
- [**] L. Tesfatsion, "In-Class Consulting Exercise".
HAND-OUT
- [**] L. Tesfatsion, "Universal Economic Principles?".
PACKET
-
[**] L. Tesfatsion, "Introduction to Walrasian General Equilibrium Modeling
(pdf notes,67KB),
(ppt slides,92KB).
PACKET/ONLINE
- Note: As will be seen throughout the remainder of the course, the WGE model is the principal paradigm underlying current mainstream macroeconomic theory.
Recommended Reading:
- Christopher D. Mackie, Canonizing Economic Theory: How Theories
and Ideas are Selected in Economics, M. E. Sharpe, Inc., 1998.
Other Suggested Readings and Websites
II. AGGREGATE MACROECONOMIC MODELING: A MICROFOUNDATIONS CRITIQUE
- THE BASIC IS-LM MODEL
Key Questions for In-Class Discussion:
- What are the strengths and weaknesses of the basic IS-LM model?
- Why does the basic IS-LM model continue to influence the language and practice of policymakers (e.g., the U.S. Economic Report of the President) despite its rejection by many mainstream macroeconomic theorists?
Required Readings:
- [**] L. Tesfatsion, "The Economy as a Circular Flow".
PACKET
- [**] L. Tesfatsion, "The Basic Short-Run IS-LM Model with Sticky
Prices". PACKET
- Note: The
basic sticky-price IS-LM model as presented and motivated in
Abel/Bernanke and Hall/Taylor, below. A careful review of the
indicated chapters from at least one of these texts is highly
recommended. Abel/Bernanke is recommended for more advanced students,
and Hall/Taylor is recommended for students with weaker
macro backgrounds.
Recommended Readings:
- [ *] Review either Abel/Bernanke, op. cit. (Part 1:Introduction;
Part 2: Long-Run Economic Performance; and Part 3: Business Cycles and
Macroeconomic Policy), or Hall/Taylor, op. cit. (Part 1: Introduction;
Part 2: Long-Run Fundamentals; and Part 3: Economic Fluctuations).
- [ *] Keynes, op. cit., Chapters 1-3, 8-15, and 18.
- Supposed source of the IS-LM model -- see for yourselves.
Other Suggested Readings and Websites
-
AGGREGATE SUPPLY AND PRICE ADJUSTMENT
Key Questions for In-Class Discussion:
- How can the basic single-period IS-LM model be augmented with dynamic relationships (e.g., an expectations augmented Phillips curve) to permit the tracking of the state of the economy over time?
- How can the resulting dynamic IS-LM model be used to illustrate basic dynamic modeling concepts, such as state-space modeling, classification of variables, and dynamic parameter sensitivity analyses?
- How can the resulting dynamic IS-LM model be used to illustrate the important role played by price adjustments ("sticky" versus "flexible") and expectation formation ("adaptive" versus "rational") in the determination of macroeconomic policy effects?
Required Readings:
- [**] L. Tesfatsion, "Aggregate Supply and Price Adjustment: The
Dynamic Sticky-Price IS-LM Model". PACKET
- Note: The general idea of price adjustment
in response to excess supply or demand via a Phillips
Curve relation, as presented and motivated in Abel/Bernanke
and Hall/Taylor, below. A careful review of the
indicated chapters from these texts is highly recommended.
- [**] L. Tesfatsion, "A Dynamic Sticky-Price IS-LM Model".
PACKET
- [**] L. Tesfatsion, "The Dynamic Sticky-Price IS-LM Model: An
Illustrative Exercise". PACKET
- [**] L. Tesfatsion, "Adaptive versus Rational Expectations".
PACKET
- [**] L. Tesfatsion, "A Dynamic Flexible-Price IS-LM Model with
Rational Expectations". PACKET
- [**] L. Tesfatsion, "Policy Experiments with Two Versions of the Dynamic
IS-LM Model: Sticky-Price Vs. Flexible Price". PACKET
- [**] L. Tesfatsion, "Definitions of Various Conceptions of Money
Neutrality in Macro". PACKET
Recommended Readings:
- [ *] Hall and Taylor, op. cit., chapters titled "The Adjustment
Process" and "Macroeconomic Policy".
- Note:These Part-3 chapters discuss macro policy analysis using a
relatively simple form of an expectations-augmented Phillips curve.
These chapters are particularly recommended for study/review for students
with relatively weak macro backgrounds.
- [ *] Abel and Bernanke, op. cit., Part-4 chapter titled
"Unemployment and Inflation".
- Note: More advanced discussion than Hall and Taylor (above) of labor market
and price adjustment issues using an expectations-augmented Phillips curve.
This chapter is highly recommended to all students for study/review.
- [ *] Symposium on "Is There a Core of Practical Macroeconomics We Should All Believe In?", American Economic Review (Papers & Proceedings), May 1997, pp. 230-246.
- Note: Five short articles responding to the symposium question by five well-known economists of different persuasions circa 1997: R. Solow, J. Taylor, M. Eichenbaum, A. Blinder, and O. Blanchard. This should be interesting to (re)read from the vantage point of the 2007-2009 economic crisis!
Other Suggested Readings and Websites
-
CRITIQUES OF AGGREGATE MACROECONOMIC MODELING: SUMMARY OVERVIEW
Key Questions for In-Class Discussion:
- Microfoundations Issues
- Expectations Modeling Issues
- Coordination Issues
Required Reading:
- [**]
L. Tesfatsion, A Simple Dynamic IS-LM Model with Bond and Wealth Effects. PACKET
- Note: This packet reading develops a simple flexible-price IS-LM model that explicitly incorporates the possible effects of wealth on household saving and consumption decisions. It is seen that this incorporation of wealth effects requires at least five significant changes in the "microfoundations" underlying the standard IS-LM model in order to obtain a logically consistent stock-flow model satisfying basic accounting identities. The necessity of these changes highlights a number of substantial problems with the standard IS-LM model.
III. ECONOMIC GROWTH: A MICROFOUNDATIONS
APPROACH
-
GROWTH OVERVIEW
Key Questions for In-Class Discussion:
- Measured in terms of real per capita GDP, the poorest countries of the
world have an average growth rate of about 1%, whereas the average for
the richest countries is about 3.5%. Why so much concern about a 2.5%
difference?
- Why are many economists in agreement that a theoretical
framework is needed to think seriously about economic growth?
- What kinds of theoretical frameworks might be used?
- What should the scope of these theoretical frameworks be, e.g., can
economic growth be satisfactorily explained purely in terms of
economic factors?
- What does empirical evidence suggest are the primary determinants of
economic growth?
- Why have some countries been able to sustain high
economic growth rates while other countries have not?
- Why are some countries wealthy and other countries poor?
Required Reading:
- [**] Jonathan Temple, "The New Growth Evidence"
(pdf,1.1MB),
Journal of Economic Literature, Vol. XXXVII (March 1999), 112-156, stress on Sections 6-10 (pp. 133-156). ON-LINE
- Note: The focus of this excellent detailed survey paper is predominantly on cross-country empirical growth research. Six issues are examined: the evolution of the world income distribution; the possible convergence to steady-state growth paths; diminishing returns to inputs; the determinants of wealth; divergencies in growth rates; and the prospects for growth in the longer run. Subtleties in measuring output levels and growth rates are also taken up.
Recommended Readings:
- [ *] P. Aghion and S. N. Durlauf (Eds.), Handbook of Economic Growth, Volume 1A, Elsevier B.V., 2005.
- The
Economic Growth Resources Website
maintained by Jonathan Temple (U of Bristol, UKB). Resources included at this site include surveys, references, researchers, papers, data sets, journals, events, networks, and related links. ON-LINE
- The
Growth Theory Website
maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York. ON-LINE
Other Suggested Readings and Websites
-
BASIC ECONOMIC GROWTH MODELING CONCEPTS
Key Questions for In-Class Discussion:
- Some essential facts about systems of ordinary differential/difference equations (ODEs)
- Macrodynamic models in state-space ODE form - general structural considerations
- Three-way classification of variables
- Definition of a model solution
- Definition and derivation of the "basic causal differential system"
Required Readings:
- [**] L. Tesfatsion, "Notes on Differential Equations".
PACKET
- [**] L. Tesfatsion, "Macrodynamic Models in Equation Form: General Structural Considerations". PACKET
Recommended Readings:
- [ *] Barro and Sala-i-Martin, Economic Growth, op. cit, Appendix on Mathematical Methods, pp. 462-517.
- Note: This appendix provides an excellent summary presentation of many of the main mathematical
methods currently used in economic growth theory: differential equations; static optimization; dynamic optimization in continuous time (Pontryagin's method making use of the Hamiltonian); matrix algebra; and useful results from the calculus (e.g, implicit function theory, integration by parts, and so forth). It is highly recommended for students planning to pursue a Ph.D. in economics.
- [ *] Russell Cooper,
"Dynamic Programming: An Overview" (pdf,19pp)
February 14, 2001. ON-LINE
- Note: This overview provides a clear basic introduction to dynamic programming, illustrated by economic examples. It is highly recommended for students planning to pursue a Ph.D. in economics.
- [ *] Gianluca Violante,
"Notes on Discrete Time Stochastic Dynamic Programming" (pdf,14pp), Spring 2000. ON-LINE
- Note: This overview provides a more advanced technical introduction to dynamic programming,
including careful presentations of the Banach fixed pointed theorem,
Blackwell's Sufficiency theorem, and so forth. The overview should be accessible to students with a good background in advanced calculus. It is highly recommended for students planning to pursue a Ph.D. in economics.
-
BASIC SOLOW-SWAN DESCRIPTIVE GROWTH MODEL
Key Questions for In-Class Discussion:
- What are the basic issues the one-sector Solow-Swan descriptive growth
model (SSMB) is meant to address?
- How does the SSM compare and contrast with the Walrasian general equilibrium model?
- How does the SSM compare and contrast with the (flexible/sticky-price) dynamic IS-LM Model?
- What are the basic predictions of the SSM
regarding short-run and long-run growth rates of economies?
- How has the SSM been extended to include technological change? factor
markets?
- Are the properties of the one-sector SSM robust to an
extension to two or more sectors (i.e., two or more
distinct produced goods)
Required Readings:
- [**] L. Tesfatsion, "The Basic Solow-Swan Descriptive Growth Model"
(pdf,141KB).
PACKET
- [**] L. Tesfatsion, "Summary: The Basic Solow-Swan Descriptive Growth Model" (Summary of Key Properties and Predictions).
PACKET
-
[**]
Robert M. Solow, Growth Theory and After
(html),
Prize Lecture on the occasion of the award of the Sveriges Riksbank Prize In Economic Sciences in Memory of Alfred Nobel, 1987, plus an Addendum added in 2001. ON-LINE
- [**] L. Tesfatsion, "An Illustrative Two-Sector Neoclassical Growth Model". PACKET
Recommended Readings:
- [ *] Andrew Abel and Ben Bernanke, op. cit., SECOND HALF of Part-2 chapter titled "Long-Run Economic Growth", which reviews the basic Solow-Swan Descriptive Growth Model.
- [ *] Barro and Sala-i-Martin, op. cit., chapter titled "Growth Models with an Exogenous Savings Rate" (advanced discussion of the Solow-Swan Descriptive Growth Model).
- [ *] Romer, op. cit., chapter titled "The Solow Growth Model" (advanced discussion).
- [ *] Robert Solow, Reflections on Growth Theory
(pdf,44KB),
pp. 3-10 in P. Aghion and S. N. Durlauf (Eds.), Handbook of Economic Growth, Volume 1A, Elsevier B.V., 2005. ON-LINE
- Abstract:
"This note contains some general and idiosyncratic reflections on the current state of neoclassical growth theory. It expresses some surprise at the lack of attention both to multi-sector growth models and to multi-country models with trade and capital flows. It also suggests that there might be value in further analysis of some old topics like
capital–labor substitution with an expanded definition of capital, and the interaction of growth and medium-run phenomena (or, to put it differently, the interaction of demand-side and supply-side variations)."
- [ *] Jonathan Temple, "Aggregate Production Functions and Growth Economics"
(pdf,267KB),
International Review of Applied Economics 20(1), July 2006, 301-317. ON-LINE
- Note: Rigorous approaches to aggregation indicate that aggregate production functions do not exist except in unlikely special cases. This paper considers the awkward implications
for growth economics. It provides a conventional defence of growth theory in terms of `parables' and then considers how empirical growth research might avoid the need for aggregate production functions.
- [ *] Leigh Tesfatsion, "Notes on the Existence of Aggregate Production Functions"
(pdf,61KB). ON-LINE
- Abstract: These notes summarize the stringent necessary conditions determined by Franklin Fisher for the existence of an aggregate production function of the form Y = F(K,L) as standardly used in growth models based on the Solow-Swan growth model, the Ramsey optimal growth model, or the overlapping generations model.
- The
Neoclassical Growth Website
maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York. ON-LINE
- The
Multi-Sector Growth Website
maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York. ON-LINE
-
BASIC OPTIMAL GROWTH MODEL
Key Questions for In-Class Discussion:
- Basic Issue: What happens when the simple Keynesian savings function
in the Solow-Swan descriptive growth model is replaced by
a "representative" optimizing consumer who chooses a consumption/savings
path over time to maximize his lifetime utility?
- How can the resulting "optimal growth model" be expressed
in analytically tractable form?
- What is the economic interpretation of this optimal growth model?
- What are the advantages and limitations of optimal growth models
(descriptive and optimal) from a theoretical viewpoint? from an
empirical viewpoint?
Required Readings:
- [**] L. Tesfatsion, "A Simple Illustrative Optimal Growth Model"
(pdf,1.4MB). PACKET/ON-LINE
- [**] L. Tesfatsion, "Notes on Hyperbolic Discounting".
PACKET
Recommended Readings:
- [ *] Barro and Sala-i-Martin, op. cit., chapter titled "Growth Models with Consumer Optimization -- the Ramsey Model" (advanced discussion).
- [ *] Romer, op. cit., "optimal growth" sections of Chapter titled "Infinite Horizon and Overlapping Generations Models" (advanced discussion).
- [ *] Shane Frederick, George Loewenstein, and Ted O'Donoghue, "Time Discounting and Time Preference: A critical Review", Journal of Economic Literature, Volume XL, Number 2, June 2002, pp. 351-401(Stress on First Four Sections).
- The
Optimal Growth Website
maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York. ON-LINE
-
BASIC OVERLAPPING GENERATIONS MODEL
Key Questions for In-Class Discussion:
- What are the key defining properties of the n-period lived
overlapping generations (OG) model of an economy?
- What important classes of economic problems can be addressed using this
type of model?
- Why is it that the trading activities of private agents in
the basic OG economy do not necessarily result in Pareto efficient or even productively efficient outcomes?
Required Readings:
- [**] L. Tesfatsion, "Game Theory: Basic Concepts and
Terminology"
(pdf,35KB). PACKET
- [**] L. Tesfatsion, "The Basic Pure-Exchange Overlapping
Generations Economy". PACKET
Recommended Readings:
- [ *] G. Becker, "Family Economics and Macro Behavior"
American Economic Review 78 (March 1988), 1-13 (Presidential Address).
- [ *] Romer, op. cit., "overlapping generations" sections of chapter titled "Infinite Horizon and Overlapping Generations Models" (advanced discussion).
IV. TREATMENT OF EXPECTATIONS IN MACROECONOMIC MODELS
-
RATIONAL VS. ADAPTIVE EXPECTATIONS
Key Questions for In-Class Discussion:
- What are the essential distinctions between rational and adaptive expectations?
- What is meant by "weak form" versus "strong form (Muthian)" rational expectations?
- What are the implications of rational vs. adaptive expectations assumptions regarding the types of uncertainty that can be considered and addressed in macro models?
- Why is it often difficult to solve explicitly for a "rational
expectations" solution?
- Why kinds of logical and practical difficulties are posed by the
fact rational expectations solutions can fail to exist or can fail to be unique?
Required Reading:
-
[**] L. Tesfatsion, "Introduction to Rational Expectations"
(pdf,138KB).
PACKET
Recommended Readings:
- [ *] Axel Leijonhufvud, "Towards a Not-Too-Rational Macroeconomics", Chapter 3 (pp. 39-55) in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge, UK, 1996.
- Note: Leijonhufvud contrasts current macroeconomic theory -- the study of "incredibly smart people in unbelievably simple situations" -- with what he believes ought to be the subject of macroeconomic theory, the study of "believably simple people (coping) with incredibly complex situations."
- [ *] A. Blinder, "Keynes, Lucas, and Scientific Progress",
American Economic Review
(pdf, 969KB),
77 (May 1987), pp. 130-136. ON-LINE
- [ *] R. Lucas, Jr., and T. Sargent, "After Keynesian
Macroeconomics", Chapter 7 (pp. 166-180) in T. M.
Havrilesky, Modern Concepts in Macroeconomics, Harlan-Davidson, Illinois, 1985.
- Note: This famous article, an intentionally provocative assertion that "rational expectations is the only game in town," dramatically heated up the rational expectations debate in the 1980s.
- [ *] Alan P. Kirman, "Whom or What Does the Representative Individual
Represent?" Journal of Economic Perspectives 6 (Spring 1992),
117-136.
- Note: The Kirman article has been a highly influential critique of the use of "representative agents" in macroeconomic theorizing in general and rational expectations theorizing in particular.
Other Suggested Readings and Websites
-
IMPLICATIONS FOR POLICY CHOICE OVER TIME
Key Questions for In-Class Discussion:
- What is meant by a "government policy rule"?
- What is the Lucas Critique?
- Why might it be advantageous for a government to act in accordance with
policy rules rather than engage in discretionary policy choice?
- Why are credible commitment and time inconsistency problems of concern to
government macroeconomic policy makers?
Required Readings:
- [**] L. Tesfatsion, "Notes on the Lucas Critique, Time Inconsistency and Related Issues"
(pdf,122KB).
PACKET
Recommended Readings:
- [ *] F. S. Mishkin,"The Rational Expectations Revolution", A review article of Preston J. Miller, ed., The Rational Expectations
Revolution: Readings from the Front Line," Journal of
International and Comparative Economics, Volume 5, 1996
(pdf,1026KB). ON-LINE
- [ *] Peter Howitt, "Monetary Policy and the Limitations of Economic Knowledge", pp. 347-367 in David Colander (Ed.), Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge University Press, Cambridge, UK, 2006.
- [ *] K. Hoover, The New Classical Macroeconomics..., op.
cit., Chapter 8: "Econometrics and the Analysis of Policy" (pp. 185-202).
- Note: This interesting chapter examines the Lucas Critique and provides an assessment of contrasting attempts to apply new classical macro principles to the econometric analysis of policy.
Other Suggested Readings and Websites
V. DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODELS AND TAYLOR RULES
-
RECENT DEVELOPMENTS IN DSGE MODELING
Key Questions for In-Class Discussion:
- General structural features of DSGE models?
- Connections to other types of macro models?
- Taking DSGE models to the data: Output Validation? Input Validation?
- Re-evaluation needed in view of recent econ/financial crisis?
Required Reading:
-
[**] Argia M. Sbordone, Andrea Tambalotti, Krishna Rao, and Kieran Walsh, Policy Analysis Using DSGE Models: An Introduction
(pdf,618KB),
FRBNY Economic Policy Review, Federal Reserve Bank of New York, October 2010. ON-LINE/IN-CLASS PRESENTATION
Recommended Readings:
- [ *] Frank Smets and Raf Wouters, "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area"
(pdf,570KB),
National Bank of Belgium Working Paper, 2003, Stress on Sections 1, 2, and 6. ON-LINE
- Remark: The Smets-Wouters DSGE model has been used by the European Central Bank over the past several years to analyze macroeconomic policy for the Euro area, i.e., the particular set of European countries that have commonly adopted the Euro as their currency.
- [ *] Leigh Tesfatsion, "The Household Sector in the Smets-Wouters DSGE Model: Comparisons with the Standard Optimal Growth Model"
(pdf,41KB). ON-LINE and PACKET
- [ *] Jana Kremer, Giovanni Lombardoy, Leopold von Thaddenz, and
Thomas Werner, "Dynamic Stochastic General Equilibrium Models
as a Tool for Policy Analysis"
(pdf,161KB),
CESifo Economic Studies, November 28, 2006, 26pp. ON-LINE
- Abstract: This article surveys the state-of-the-art in mainstream macroeconomic policy modeling right before the
2007-2009 global economic crisis. In particular, it favorably reviews
the use of dynamic stochastic general equilibrium (DSGE) models as a tool for policy analysis.
-
[ *] Frank Smets and Raf Wouters, "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach"
(pdf,443KB),
American Economic Review, Vol. 97, No. 3, June 2007, 586-606. ON-LINE
- [ *] C. E. Tovar, "DSGE Models and Central Banks"
(pdf,270KB),
BIS Working Paper No. 258, Bank for International Settlements, September 2008, 29pp. ON-LINE
- Remark: The BIS is now famous for being one of the few agencies to issue strong warnings about excessive risk taking in financial markets in advance of the economic and financial crisis of 2007-2009.
-
TAYLOR RULES AND CENTRAL BANK MONETARY POLICY
Key Questions for In-Class Discussion:
- What is meant by a "Taylor Rule"?
- How have Taylor Rules been incorporated into DSGE models to date?
- Post-crisis analysis: Are Taylor Rules enough for monetary policy makers?
Required Readings:
- [**] Athanasios Orphanides, "Taylor Rules"
(pdf,105KB),
Finance and Economics Discussion Series 2007-18, Federal Reserve Board, January 2007.
ON-LINE
Recommended Readings:
- [*] Committee on the Global Financial System (CGFS), "Macroprudential Instruments and Frameworks: A Stocktaking of Issues and Experiences"
(pdf, 183KB),
CGFS Papers No. 38, Bank for International Settlements, May 2010. ON-LINE
- Remark: Traditionally, macroeconomic fiscal and monetary policies (e.g., Taylor monetary policy rules) have focused on maintaining high employment and keeping inflation in check. The goal of macroprudential policy, recently advocated by the Bank for International Settlements (BIS) and other financial institutions, is the mitigation of systemic risk, defined to be disruptions to financial services entailing serious negative consequences for the real economy. Researchers at the BIS were among the first to warn about the pending financial crisis back in 2007.
- [ *] John B. Taylor, "Discretion Versus Policy Rules in Practice"
(pdf,1.7MB),
Carnegie-Rochester Conference Series on Public Policy 39, 1993, pp. 195-214. ON-LINE
VI. MACROECONOMIC MODELING OF ENDOGENOUS COORDINATION
-
COORDINATION ISSUES FOR MACROECONOMIES
Key Questions for In-Class Discussion:
- Must economic equilibrium necessarily entail Walrasian market
clearing?
- What does "coordination failure" mean for a macroeconomy? How
is it distinct from disequilibrium?
- Can economies become stuck
in situations with persistently positive "involuntary" unemployment?
- Can unemployment arise in macroeconomies for reasons other
than sticky prices?
- Why might credible signalling of purchasing intentions be important in
circular flow economies?
- How might coordination failure arise in the presence of behavioral
uncertainty?
- What kinds of institutions (private or public) might help to
induce coordination on socially desirable outcomes?
Required Readings:
- [**] L. Tesfatsion,
"Walrasian General Equilibrium: Benchmark of Coordination Success?"
(pdf,72KB). PACKET
-
[**] Giorgio Fagiolo and Andrea Roventini, "Macroeconomic Policy in DSGE and Agent-Based Models"
(pdf,345KB),
University of Paris Working Paper 2012-17, March 2012.
Recommended Readings:
-
[ *] L. Tesfatsion, "NonWalrasian Equilibrium: Illustrative
Examples"
(pdf,187KB).
PACKET
- [ *] George A. Akerlof, "Behavioral Macroeconomics and Macroeconomic Behavior", The American Economic Review, Volume 92, No. 3, June 2002, pages 411-433.
- Note: This is a revised version of the Nobel Lecture Akerlof delivered in Sweden on December 8, 2001.
- [ *] Robert Clower and Peter Howitt, "Taking Markets Seriously: Groundwork for a Post Walrasian Macroeconomics", Chapter 2 (pp. 21-37) in David Colander (ed.), Beyond Microfoundations: Post Walrasian
Macroeconomics, Cambridge University Press, Cambridge, UK, 1996.
- [ *] Samuel Bowles and Herbert Gintis, "Walrasian Economics in
Retrospect"
(pdf,205KB),
Quarterly Journal of Economics, November 2000, 1411-1439. ON-LINE
Other Suggested Readings and Websites
-
CONSTRUCTIVE MODELING OF ENDOGENOUS COORDINATION:
AGENT-BASED MACROECONOMICS
Key Questions for In-Class Discussion:
- What is agent-based computational modeling and how might it facilitate the study
of macroeconomic systems?
- Key coordination issues that are being experimentally studied using agent-based computational tools:
- Learning effects (under what conditions will expectations come to be
coordinated?)
- Interaction effects (under what conditions will buyers and sellers
efficiently match and trade? Under what conditions will social norms and conventions
emerge as shared perceptions?)
- Effects of institutional constraints (hindrance or help for achieving
macroeconomic coordination?)
Required Readings:
-
[**] L. Tesfatsion, "Agent-Based Macroeconomics: Constructive Modeling of Decentralized Market Economies"
(ppt slides,3.6MB). ON-LINE, IN-CLASS PRESENTATION
- Note: This presentation discusses the potential of ACE modeling tools for the study of macroeconomic systems. Points are illustrated using an ACE model of a two-sector decentralized market economy. The presentation is based on the packet reading "Agent-Based Computational Modeling and Macroeconomics" listed below as a recommended reading.
- [**] B. LeBaron and L. Tesfatsion, "Modeling Macroeconomies as Open-Ended Dynamic Systems of Interacting Agents"
(pdf,45KB)
American Economic Review (Papers & Proceedings), Volume 98, No. 2, 2008, 246-250. ON-LINE
- Abstract: This article discusses the potential applicability of Agent-based Computational Economics (ACE) for macroeconomic modeling, with a particular stress on the following three issues: (1) taxonomy - what types of agents for macroeconomic models?; (2) scale robustness - how many agents for macroeconomic models?; and (3) empirical validation - connecting to data.
Recommended Readings:
- [ *] R. Axtell, Very Large-Scale Multi-Agent Systems and Emergent Macroeconomics
(pdf,559KB),
Lecture Notes, The Brookings Institution, Washington, D.C., 2005. ON-LINE
- [ *] Paul L. Borill and L. Tesfatsion, "Agent-Based Modeling: The Right Mathematics for the Social Sciences?"
(pdf,3.6MB),
to appear in J. B. Davis and D. W. Hands, eds., Elgar Recent Economic Methodology Companion, Edward Elgar Publishers.
ON-LINE
-
[ *] G. Fagiolo and A. Roventini, "On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms"
(pdf,437KB),
Laboratory of Economics and Management (LEMB) Working Paper, Sant'Anna School of Advanced Studies, Pisa, Italy, February 2008. ON-LINE
- Abstract:
The authors compare and contrast the strengths and weaknesses of DSGE and agent-based macroeconomic modeling, using monetary policy issues for concrete illustration.
-
[ *] Peter Howitt, "Macroeconomics with Intelligent Autonomous Agents"
(pdf,181KB),
Brown University Working Paper, June 1, 2007. ON-LINE
-
[ *] Marc Oeffner, "Agent-Based Keynesian Macroeconomics"
(Thesis Intro/Refs Only, pdf, 455KB),
(Entire Thesis, pdf, 3.4MKB),
Dissertation, Julius-Maximilians-Universität Würzburg, Germany, September 2008. ON-LINE
- Abstract: The 61-page introduction to this thesis provides the most comprehensive survey to date of the existing and potential uses of ACE modeling tools for the development and study of macroeconomic systems. The final chapters of this thesis develop, implement, validate, and study a proof-of-concept monetary macroeconomic model using the
SeSAm multi-agent simulation environment.
Complete code for this SeSAm implementation can be obtained in a zip file named Dokument1.zip (39MB) available
here.
The thesis and thesis code are also available at
Wikipedia: Agent-Based Computational Macroeconomics.
- [ *] L. Tesfatsion, "Agent-Based Computational Modeling and Macroeconomics"
(pdf,148KB),
pp. 175-202 in David Colander (ed.), Post-Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge University Press, Cambridge, UK, 2006. PACKET, ON-LINE
On-Line Resources for Agent-Based Macroeconomics
-
ILLUSTRATIVE APPLICATION
Key Questions for In-Class Discussion:
- Construction of an ACE labor market model
with preferential job search and evolution of
work-site behaviors
- What might "equilibrium" mean in such a model?
- What other types of issues can be addressed?
Recommended Readings:
-
[*] L. Tesfatsion, "Labor Institutions and Macroeconomic Performance"
(ppt slides,182KB). ON-LINE
- Note: This presentation summarizes some of the key findings in the Pingle/Tesfatsion article posted below as a recommended reading. It also discusses the implementation of this study using the
Trade Network Game (TNG) Laboratory.
- [ *] M. Pingle and L. Tesfatsion,
"Evolution of Worker-Employer Networks and Behaviors Under Alternative Non-Employment Benefits: An Agent-Based Computational Study"
(pdf,269KB),
pp. 256-285 in A. Nagurney (ed.), Innovations in Financial and Economic Networks, Edward Elgar, 2003. ON-LINE
-
[ *] G. Fagiolo, D. Dosi, and R. Gabriele,
"Towards an evolutionary interpretation of aggregate labor market regularities"
(pdf,387KB),
in: Cantner, U., Dinopoulos, E. and Lanzillotti, R.F. (Eds.), Entrepreneurship, the New Economy and Public Policy: Schumpeterian Perspectives, Berlin - Heidelberg, Springer Verlag, 2004.
ON-LINE
Other Suggested Readings and Websites
MIDTERM AND FINAL EXAM REVIEW MATERIALS
- Important Caution: Please keep in mind that the readings,
exercises, and course packet materials for this year's Econ 502 may differ in various ways from the materials assigned for Econ 502 in previous years, and these differences may be reflected in differences in the form and content of the exams. The exam study guides and practice exams provided below from past years are for general guidance only.
- Indeed, the Econ 502 course topics presented in the second half of the course substantially changed in Fall 2008 relative to previous years. Consequently, to avoid confusion, no practice final exams are presented from years prior to 2008.
- Midterm Exam:
- Final Exam:
Copyright © 2012 Leigh Tesfatsion. All Rights Reserved.
