Syllabus

Economics 526
Macroeconomic Theory II
Spring 2002

Course Description: Macroeconomics, as a separate field was founded to explain the

business cycle fluctuations in output that were observed in all industrialized countries.
After the war, the gap in incomes between developed and developing countries became
more central as macroeconomists began to focus more on the determinants of long-term
growth. In this course, we will study the basic elements of some of the key modern
models of business cycles and economic growth. A commonality of both of these subjects
is the centrality of capital investment to both business cycle fluctuations and long-term
economic growth. Thus, we will spend time learning the theory of investment. We will
concentrate both on the rigorous use of optimization methods to construct rigorous
models of economic behavior as well as the application of these models to explain
economic phenomena.
Course Requirements. The course grade will be based on the final exam. During the
course, several homework assignments will be required. The chief textbook used in the
course will be Advanced Macroeconomics by David Romer.
Textbook References
Romer, David [R] Advanced Macroeconomics Second Edition . McGraw-Hill.
Azariadias, Costas, [A] Intertemporal Macroeconomics, Blackwell.
Barro, Robert & Sala-i-Martin, Xavier [B&SiM]Economic Growth, McGraw
Blanchard, Olivier and Stanley Fischer [B&F] Lectures on Macroeconomics, MIT
Press.
Cooley, Thomas ed. [C] Frontiers of Business Cycle Theory, Princeton University Press
Farmer, R [F] The Macroeconomics of Self-Fulfilling Prophecies, MIT Press.
Ljungqvist, Lars and Sargent, Thomas D. [L&S] Recursive Macroeconomic Theory,
Reading List
I.
Background and Data
A. Chapter 5, [R]
B. Woodford, Michael D. "Revolution and Evolution in Twentieth-Century
Macroeconomics," June 1999. (pdf format) [Forthcoming, P. Gifford, ed.,
Frontiers of the Mind in the Twenty-First Century, Harvard University
Press.]
C. Chapter 1. [B&F]
D. Hodrick & Prescott, Postwar U.S. Business Cycles : An Empirical
Investigation, JMCB, 1997
E. Nelson and Plosser Trends and Random Walks in Macroeconomic Time
Series: Some Evidence and Implications, JME, 1982.

II.

Real Business Cycles

A. Chapter 4. [R]
B. Kydland & Prescott Time to Build and Aggregate Fluctuations,
Econometrica, 1982
C. Chapter 1: [C], Economic Growth and Business Cycles,
D. Greenwood, Hercowitz, and Huffman, Investment, Capacity Utilization
and Business Cycles, AER, 1988.
E. Brock and Mirman, Optimal Economic Growth and Uncertainty: The
Discounted Case, JET 1973.
F. Lucas and Rapping Real Wages: Employment and Inflation, JPE, 1969.
G. Chapter 1-3. [F]

III.

Sticky Prices
A. [R] Chapter 6
B. Blanchard and Kiyotaki, Monopolistic Competition and the Effects of
Aggregate Demand, AER 1987.
C. Taylor Aggregate Dynamics and Staggered Contracts, JPE 1980.

IV.

Endogenous Growth Theory

A. [R] Chapter 3.
B. [B&S] Chapter 2.
C. Romer, P.M. Endogenous Technical Change, JPE, 1990.
D. Romer, P.M Increasing Returns and Long Run Growth, JPE, 1994.
E. Murphy, Shleifer, and Vishny Industrialization and the Big Push, JPE,
1988.

V.

Investment
A. [R] Chapter 8
B. Hayashi, Tobins Marginal q and Average q: An Interpretation,
Econometrica, 1982.
C. Townsend, Robert Optimal Contracts and Competitive Markets with
Costly State Verification, JET 1979.
D. Gale and Helwig, 1985, Incentive Compatible Debt ContractsI: The One
Period Problem, RESTUD 1985.
E. Bernanke and Gertler, Agency Costs, Net Worth, and Business Cycles,
AER 1989.