Macroeconomic Theory I ECON 705, Department of Economics University of Massachusetts Spring Thompson Hall (back-up classroom: 206 Dickinson)

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1 Macroeconomic Theory I ECON 705, Department of Economics University of Massachusetts Spring Thompson Hall (back-up classroom: 206 Dickinson) Monday/Wednesday 1:00-2:15 Office Hours: by appointment TA: Vuong Long (longumass@gmail.com) James Heintz 307 Gordon Hall, Tel: jheintz@peri.umass.edu Course website: courses.umass.edu/econ705 Description This course reviews the dominant theories, ideas, and policy debates reflected in the mainstream macroeconomics literature. The course introduces core theoretical arguments and commonly used modeling techniques. The class is designed to be a general foundation course for more advanced graduate study in macroeconomics. In the course of the semester, we will examine classical and Keynesian models, growth theory, models of consumption and investment, New Classical theory, New Keynesian approaches, and macroeconomic policy issues. A graduate-level course in mathematical methods for economics (for example, Econ 751 or Res Econ 701), or equivalent background, is a prerequisite for this course. Exams and Grades There will be one mid-term exam and one final exam. In addition, approximately five to six problem sets will be assigned. Grades will be determined by the following weighting scheme: mid-term exam (35%), final exam (40%), problem sets (15%), and class participation (10%). The primary textbook is: Romer, David (2006). Advanced Macroeconomic Theory, 3 rd edition. McGraw-Hill (ISBN: ). This textbook will be used during the first half of the course. Copies of the book are available at Food for Thought Bookstore in downtown Amherst. The course textbook will be supplemented by relevant journal articles. Many of the journal articles are available on-line. Information for downloading these articles will be provided when appropriate. When on-line access is limited, copies of the readings will be page 1 of 6

2 distributed in class. Only readings marked with an asterisk (*) are required. The other readings are listed for reference purposes only. Website The address for the course website is: courses.umass.edu/econ705. The website will be up-dated throughout the semester. On the site you can find information about the course, this syllabus, an on-going list of readings, details about exams, problem sets, and class notes. For convenience, every attempt will be made to post preliminary class notes before each class meeting. However, it should be noted that these preliminary notes represent drafts and should be treated as such changes and corrections will be made as necessary after the class has met when a final version of the class notes will be posted. Students should use the final version of the class notes as a record of what was actually covered. I. Introduction (1/2 week) Course Outline * Sachs. (2009). Rethinking Macroeconomics, Capitalism and Society 4(3). (Berkeley Electronic Press) II. IS-LM-MP/AD-AS Framework. Classical and Keynesian Arguments (1-1/2 weeks) * Romer Chapter 5 a. IS-LM-MP/AD-AS Model b. The Classical Model c. Keynesian variations d. Open economy dynamics: exchange rates and capital mobility Hillier (1986). Chapters 1 and 2, pp Macroeconomics: Models, Debates, and Developments, Oxford: Basil Blackwell. Sargent (1987). Macroeconomic Theory, Second Edition. Orlando, FL: Academic Press, Chapter 1. page 2 of 6

3 III. Growth Theory (2-1/2 weeks) a. Neoclassical theory: the Solow growth model b. Microfoundations of the neoclassical model c. Endogenous growth theory and technological change * Romer Chapter 1, Chapter 2 (pp , 70-74), Chapter 3 (pp , ). * Solow, Robert (1956). A contribution to the theory of economic growth, Quarterly Journal of Economics, 70: * Romer, P.M. (1990) Endogenous technological change, Journal of Political Economy, 98(5): * Mankiw, Romer, and Weil (1992). A contribution to the empirics of economic growth, Quarterly Journal of Economics 107(2): Barro and Sala-i-Martin (1999). Economic Growth. Cambridge, MA: MIT Press. IV. Consumption and Investment (2 weeks) a. Consumption i. The permanent income hypothesis ii. Neoclassical approaches to consumption under uncertainty iii. Liquidity constraints * Romer Chapter 7, pages , Ando and Modigliani (1963). The life-cycle hypothesis of saving: aggregate implications and tests. American Economic Review, 53(1): b. Investment i. Neoclassical theories of investment ii. Investment dynamics * Romer Chapter 8, pp Tobin, James (1969). A general equilibrium approach to monetary theory, Journal of Money, Credit, and Banking 1: page 3 of 6

4 V. New Classical Macroeconomics (1-1/2 weeks) a. Rational Expectations b. Real business cycle theory c. Dynamic Inconsistency of Monetary Policy * Romer Chapter 4 (pp ), Chapter 10 (pp ). * Friedman, M. (1968). The Role of Monetary Policy, American Economic Review, 58: Lucas, R (1976). Econometric policy evaluation: a critique Sargent and Wallace (1975). Rational expectations, the optimal monetary instrument, and the optimal money supply rule, Journal of Political Economy, 83(2). VI. New Keynesian Macroeconomics (2 weeks) a. Microfoundations and Keynesian Economics b. Menu cost models and incomplete nominal adjustment c. Credit rationing d. Efficiency wages and labor discipline * Romer Chapter 9, pp * Mankiw (1985). Small menu costs and large business cycles: a macroeconomic model of monopoly Quarterly Journal of Economics, 100: * Stiglitz. (1999). Interest rates, risk, and imperfect markets: puzzles and policies Oxford Review of Economic Policy. 15(2): Blinder, A. S. (1988). The fall and rise of Keynesian economics Economic Record (December): Stiglitz and Weiss (1981). Credit rationing in markets with imperfect information, American Economic Review 71(3): Shapiro, C. and Stiglitz, J. (1984). Equilibrium unemployment as a worker discipline device. American Economic Review 74(3): Bowles (1985). The production process in a competitive economy: Walrasian, Neo- Hobbesian, and Marxian models, American Economic Review, 75(1): page 4 of 6

5 VII. Topics in Macroeconomics (3 weeks) (1) Fiscal Policy and Economic Stimulus * Aschauer (1988). The equilibrium approach to fiscal policy Journal of Money, Credit, and Banking. 20(1): Romer. Chapter 11 (pp ) Aschauer, David A. 1989a. Is public expenditure productive? Journal of Monetary Economics 23(2): Barro, Robert (1981). Output effects of government purchases. Journal of Political Economy, 89: Baxter and King (1993). Fiscal policy in general equilibrium American Economic Review, 83(3): Blanchard and Perotti (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output Quarterly Journal of Economics, 117(4): (2) Financial Structure and Investment * Modigliani and Miller (1958) The cost of capital, corporation finance, and the theory of investment American Economic Review 48: Romer. Chapter 8 (pp ). Diamond, D. (1984) Financial intermediation and delegated monitoring Review of Economic Studies 51: Bernanke and Gertler (1989) Agency costs, net worth, and business fluctuations. American Economic Review 79: Crotty and Goldstein (1993). Do U.S. Financial Markets Allocate Credit Efficiently? The Case of Corporate Restructuring in the 1980s In Transforming the U.S. financial system: Equity and efficiency for the 21st century, New York: Sharpe. (3) Labor as a Produced Factor of Production * Barro and Becker (1989). Fertility choice in a model of economic growth Econometrica 57(2): Folbre. (1994). Children as Public Goods American Economic Review. 84(2): page 5 of 6

6 Folbre (1994). Who Pays for the Kids? London: Routledge. (4) Macroeconomics and the environment * Nordhaus (1992). Lethal Model II: the limits to growth revisited. Brookings Papers on Economic Activity, 2: Stavins (1992), Weitzman (1992). Comments on/discussion of Nordhaus (1992). Brookings Papers on Economic Activity, 2: Romer. Chapter 1. Section 1.8. page 6 of 6