Advanced macroeconomics

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Preliminary, subject to change
School of Economics

Shanghai University of Finance & Economics

Spring Term 2006
Prof. Hongjun ZHONG


Class: 6:00pm-8:30pm Monday

Office Hour: 3:30pm-5:00pm Monday

TEXTBOOK (Required): David Romer, Advanced Macroeconomics, Third Edition. McGraw-Hill, 2005.

Other Useful books:

Blanchard, O. and Stanley Fischer, Lecture Notes on Macroeconomics, MIT, 1990.
Gregory Mankiw and David Romer, New Keynesian Economics, MIT, 1998

I. Introduction and Mathematic Review

A. Overview of Course

*George Akerlof, —Behavioral Macroeconomics and Macroeconomic Behavior,“ American Economic Review, June 2002, pp. 1-23.

B. Introduction

David Romer, Third Edition, Chapter 5, "Traditional Keynesian Theories of Fluctuations,“ Sections 5.1 and 5.3-5.6, pp. 222-231, and 242-270.

C. Mathematic Review

James Hamilton, Time Series Analysis, Ch2, “Lag Operators”, Section 2.1-2.3, pp

II. Equilibrium Concepts

*David Romer, Third Edition, Chapter 6, "Microeconomic Foundations of Incomplete Nominal Adjustment," Sections 6.1-6.3, and 6.9-6.10, pp. 271­285, pp. 316-326.

*Robert Lucas and Thomas Sargent, "After Keynesian Macroeconomics," from Federal Reserve Bank of Boston, After the Phillips Curve: Persistence of High Inflation and High Unemployment, Conference Series No. 19.

*Thomas Sargent, "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity 1973:2, pp. 429-472.

*John Taylor, "Staggered Wage Setting in a Macro Model," American Economic Review Papers and Proceedings, May 1979, pp. 108-113.

Calvo, Guillermo A., —Staggered Prices in a Utility-Maximizing Framework,“ Journal of Monetary Economics, 12 (September 1983), pp. 383-98.

Stanley Fischer, "Long-Term Contracts, Rational Expectations and the Optimal Money Supply Rate," Journal of Political Economy, February 1977, pp. 191-205.

Laurence Ball, "Credible Disinflation with Staggered Price Setting," American Economic Review, March, 1994, pp. 282-289.

Carlton, Dennis, "The Rigidity of Prices," The American Economic Review, September, 1986, pp. 637-658.

Steven Checchetti, "Staggered Contracts and the Frequency of Price Adjustment," The Quarterly Journal of Economics, Supplement, 1985, pp. 935-959.

*David Romer, Third Edition, Chapter 10, "The Dynamic Inconsistency of Low-Inflation Monetary Policy," Sections 10.4-10.7, pp. 506-538.

*Robert Barro and David Gordon, "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, August 1983, pp. 589­610.

John Taylor, "Discretion versus Policy Rules in Practice," Carnegie Rochester Series on Public Policy, December, 1993, pp. 195-214.

Alberto Alesina and Lawrence Summers, "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, May, 1993.

Adam Posen, "Central Bank Independence and Disinflationary Credibility: A Missing Link," Brookings Discussion Papers in International Activity, No. 109, August, 1994.

*Robert Shiller, "Why Do People Dislike Inflation?" in Reducing inflation : Motivation and Strategy, edited by Christina D. Romer and David H. Romer. Chicago : University of Chicago Press, 1997. Studies in Business Cycles : No. 30.

*Daniel Kahneman, Jack Knetsch and Richard Thaler, "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, September 1986, pp. 728-741.

*Eldar Shafir, Peter Diamond, and Amos Tversky, "On Money Illusion," Quarterly Journal of Economics, May 1997, pp. 341-374.

III. New Keynesian Theories

*David Romer, Third Edition, Chapter 9.1-9.4, 9.9 "Unemployment," pp. 437-460, 481-489.

*Janet Yellen, "Efficiency Wage Models of Unemployment," American Economic Review, May 1984, pp. 200-205.

*Carl Shapiro and Joseph E. Stiglitz, "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, June 1984, pp. 433-444.

George Akerlof and Janet Yellen, "The Fair-Wage Effort Hypothesis and Unemployment," Quarterly Journal of Economics, May 1990.

*David Romer, Third Edition, Chapter 6, Sections 6.4-6.6, —New Keynesian Economics,“ pp. 286-302.

David Romer, Third Edition, Chapter 6, —Empirical Applications,“ and —Mankiw-Reis Model,“ Sections 6.12-6.13, pp. 328-339.

*George Akerlof and Janet Yellen, "A Near Rational Model of the Business Cycle, with Wage and Price Inertia,“ Quarterly Journal of Economics, September 1985, pp. 823-838.

*Gregory Mankiw, "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," Quarterly Journal of Economics, May 1985, pp. 529-537.

*Fehr, Ernst and Jean-Robert Tyran, —Does Money Illusion Matter?“ American Economic Review, December, 2001, pp. 1239-62.

N. Gregory Mankiw and Ricardo Reis, —Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve,“ Quarterly Journal of Economics, November 2002, pp. 1295-1328.

George Akerlof and Janet Yellen, "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?" American Economic Review, September 1985, pp. 708-720.

Olivier Blanchard and Nobihiro Kiyotaki, "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, September, 1987, pp. 647-666.

Romer, David and Laurence Ball, —Are Prices too Sticky?“ Quarterly Journal of Economics, August 1989, pp. 507-524.

Alan Blinder, "Why are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, May 1991, pp. 89­100.
IV. International Economics

*David Romer, Third Edition, Chapter 5, Section 5.2, —The Open Economy,“ pp. 231-241.

J. Marcus Fleming, "Domestic Financial Policies under Fixed and under Floating Exchange Rates," International Monetary Fund Staff Papers, November, 1962, pp. 369-379.

*Rudiger Dornbusch, "Expectations and Exchange Rate Dynamics," Journal of Political Economy, December, 1976, pp. 1161-1176.

V. Consumption

*David Romer, Third Edition, Chapter 7, "Consumption," Sections 7.1-7.4, and 7.6, pp. 346-365 and pp. 370-385.

*Milton Friedman, A Theory of The Consumption Function, Chapters I, II, and III, pp. 3-37.

*Robert Hall, "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, December 1978, pp. 971-987.

Chang-Tai Hsieh, —Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund,“ American Economic Review, March 2003, pp. 397-405.

Lars P. Hansen and Kenneth J. Singleton, "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, September 1982, pp. 1269-1286.

Henri Theil, "A Note on Certainty Equivalence in Dynamic Planning," Econometrica, April 1957, pp. 346-349.

Robert Hall and Frederick Mishkin, "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, March, 1982, pp. 461-482.

Christopher Carroll, "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, 1992:2, pp. 61-156.

Richard Thaler and H. M. Shefrin, "An Economic Theory of Self-Control," Journal of Political Economy, April 1981, pp. 392-406.

Gary Becker and Kevin Murphy, "A Theory of Rational Addiction," Journal of Political Economy, August, 1988, pp. 675-700.

*David Laibson, Andrea Repetto and Jeremy Tobacman, —Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, 1998:1, 91-196.

Richard Thaler and Shlomo Benartzi, —Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving.“ Journal of Political Economy, 112:1 Pt.2, Feb. 2004, pp. S164-S187.

Douglas Bernheim, Jonathan Skinner, and Steven Weinberg, —What Accounts for the Variation in Retirement Wealth Among U.S. Households?“ American Economic Review 91 (September, 2001), pp. 832-55.

VI. Investment and Capital Theory

*Franco Modigliani and Merton H. Miller, "The Cost of Capital, Corporation Finance and the Theory of Investment," American Economic Review, June 1958, pp. 261-297.

Jensen, Michael C., and William H. Meckling, —Theory of the firm: Managerial Behavior, Agency Costs and Ownership Structure,“ Journal of Financial Economics, 3:4 (October 1976), pp.305-360.

Owen Lamont, —Cash Flow and Investment: Evidence from Internal Capital Markets,“ Journal of Finance,. 52:1, (Mar., 1997), pp. 83-109.

*David Romer, Third Edition, Chapter 8, "Investment," pp. 386-436.

*Maurice Obstfeld and Kenneth Rogoff, Foundations of International Macroeconomics, Cambridge, MA: 1996, pp. 105-113.

Lawrence Summers, "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, 1981:1, pp. 67-127.

*Robert J. Shiller, "Do Stock Prices Move Too Much to be Justified by Subsequent

Changes in Dividends?" American Economic Review, June 1981, pp. 421­


*Lawrence H. Summers, "Does the Stock Market Rationally Reflect Fundamental Values?" Journal of Finance, July 1985, pp. 591-601.

Jeremy Bulow and Kenneth Rogoff, "The Buyback Boondoggle," Brookings Papers on Economic Activity, 1988:2, pp. 675-704.

Olivier Blanchard, "Movements in the Equity Premium," Brookings Papers on Economic Activity, 1993:2, pp.75-138.

William Sharpe, "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk," Journal of Finance, September, 1964, pp. 425-442.

*David Romer, Third Edition, Chapter 7, Sections 7.5, "Consumption and Risky Assets," pp. 366-370.

Romer, David, "Rational Asset-Price Movements without News," American Economic Review, December, 1993, pp. 1112-1130.

VII. Nature of Unemployment and Other Theories of Unemployment

*David Romer, Third Edition, Chapter 6, Section 6.7, "Co-ordination Failure Models and Real Walrasian Theories,“ pp. 303-309 and Chapter 9, Sections 9.5-9.8, pp. 460-481.

Steven Davis and John Haltiwanger, "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Macroeconomics Annual, 1990, pp. 123-168.

*Richard Nelson and Charles Plosser, "Trends and Random Walks in Economic Time Series: Some Evidence and Implications", Journal of Monetary Economics, September 1982, pp. 139-162.

James Stock and Mark W. Watson, "Variable Trends in Economic Time Series," Journal of Economic Perspectives, Summer 1988, 147-174.

Avner Shaked and John Sutton, "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model", Econometrica, November 1984, pp. 1351-1364.

Assar Lindbeck and Dennis Snower, "Cooperation, Harassment and Involuntary Unemployment: An Insider-Outsider Approach", American Economic Review, March 1988, pp. 167-188.

*Olivier Blanchard and Lawrence Summers, "Hysteresis and the European Unemployment Problem", NBER Macroeconomic Annual, 1986, pp.15-78.

Olivier Blanchard and Justin Wolfers, —The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence,“ Economic Journal, March, 2000, pp. C1-33.

Lars Ljungqvist and Thomas Sargent, —The European Unemployment Dilemma,“ Journal of Political Economy, June 1998, pp. 514-550.

Charles Bean, "European Unemployment: A Survey," Journal of Economic Literature, June, 1994, pp. 573-619.

Olivier Blanchard and Lawrence Katz, —What We Know and Do Not Know about the Natural Rate of Unemployment,“ Journal of Economic Perspectives, Winter, 1997, pp. 51-72.

*Peter Diamond, "Aggregate Demand Management in Search Equilibrium", Journal of Political Economy, October 1982, pp. 881-894.

*Peter Howitt and Robert Clower, —The Emergence of Economic Organization,“ Journal of Economic Behavior and Organization, January 2000, pp. 55-84.

Joseph Stiglitz and Andrew Weiss, "Credit Rationing in Markets with Imperfect Information," American Economic Review, June 1981, pp. 393-410.

Ben Bernanke, "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, June 1983, pp. 257­276.

VIII. Economic Growth

A. The Solow Model

*Romer, David. Advanced Macroeconomics (second edition), Chapter 1.

Solow, Robert. 1956. "A Contribution to the Theory of Economic Growth" Quarterly Journal of Economics 70:65-94.

B. Cross-Country Income Differences

*Romer, David. Advanced Macroeconomics, Chapter 3, Part B.

*Hall, Robert E. and Charles I. Jones. 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?" Quarterly Journal of Economics 114:83-116.

*Hsieh, Chang-Tai, and Peter J. Klenow. 2004. "Relative Prices and Relative Prosperity" Unpublished paper, Stanford University (August).

*Parente, Stephen L., and Edward C. Prescott. 1999. "Monopoly Rights: A Barrier to Riches" American Economic Review 89 (December): 1216-1233.

*Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation." American Economic Review 91 (December): 1369-1401.

*Albouy, David. 2004. "The Colonial Origins of Comparative Development: A Reexamination Based on Improved Settler Mortality Data" Unpublished paper, University of California, Berkeley (December).

*Acemoglu, Daron. 2003. "Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics." Unpublished paper, M.I.T. (August). Journal of Comparative Economics, forthcoming.

Klenow, Peter J., and Andres Rodriguez-Clare. 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?" NBER Macroeconomics Annual 12: 73-103.

Barro, Robert and Xavier Sala-i-Martin. 2003. Economic Growth. Chapters 10 - 12.

C. The Ramsey-Cass-Koopmans Model

*Romer, David. Advanced Macroeconomics, Chapter 2, Part A.

*Barro, Robert and Xavier Sala-i-Martin. Economic Growth. Chapter 2 and Appendix A.3 (at end of book)

Weitzman, Martin. 2003. Income, Wealth, and the Maximum Principle (Harvard University Press).

Obstfeld, Maurice. 1992. "Dynamic Optimization in Continuous-Time Economic Models (A Guide for the Perplexed)" Part 1.

D. The Diamond OLG Model

*Romer, David. Advanced Macroeconomics, Chapter 2, Part B.

Diamond, Peter. 1965. "National Debt in a Neoclassical Growth Model" American Economic Review 55:1126-1150.

E. Endogenizing Growth

*Romer, David. Advanced Macroeconomics, Chapter 3, Part A.

Rebelo, Sergio. 1991. "Long-Run Policy Analysis and Long-Run Growth" Journal of Political Economy 99:500-521.

*Lucas, Robert E. 1988. "On the Mechanics of Economic Development" Journal of Monetary Economics 22:3-42.

*Romer, Paul M. 1990. "Endogenous Technological Change" Journal of Political Economy 98:S71-S102.

Jones, Charles I. 1995. "R&D-Based Models of Economic Growth" Journal of Political Economy 103:759-784.

Kremer, Michael. 1993. "Population Growth and Technological Change: One Million B.C. to 1990" Quarterly Journal of Economics 108:681-716.

*Jones, Charles I. 2004. "Growth and Ideas" Unpublished paper, U.C. Berkeley (September). Handbook of Economic Growth, forthcoming.

IX. Real Business Cycle Theory
A. Business Cycles in the Neoclassical Growth Model

*Romer, David. Advanced Macroeconomics, Chapter 4.

Lucas, Robert E. "Macroeconomic Priorities" American Economic Review, March 2003, pp. 1-14.

*Cooley, Thomas F. and Edward C. Prescott. 1995. "Economic Growth and Business Cycles." Chapter 1 of Cooley (ed.) Frontiers of Business Cycle Research

*Campbell, John Y. 1994. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model" Journal of Monetary Economics 33:463-506.

Prescott, Edward. 1986. "Theory Ahead of Business Cycle Measurement" Federal Reserve Bank of Minneapolis Quarterly Review 10(4):1-22.

Summers, Lawrence. 1986. "Some Skeptical Observations on Real Business Cycle Theory" Federal Reserve Bank of Minneapolis Quarterly Review 10(4):23-27.

*Hansen, Gary and Randall Wright. 1992. "The Labor Market in Real Business Cycle Theory" Federal Reserve Bank of Minneapolis Quarterly Review 16(2).

Chari, V.V., Kehoe, Patrick J. and Ellen R. McGrattan. 2002. "Business Cycle Accounting" Federal Reserve Bank of Minneapolis Working Paper No. 625.
X. Fiscal Policy and Budget Deficits

*Romer, David. Advanced Macroeconomics, Chapter 11.

*Auerbach, Alan J., William G. Gale, and Peter R. Orszag. 2004. "Sources of the Long-Term Fiscal Gap." Tax Notes 103 (May 24): 1049-1059.

Barro, Robert J. 1979. "On the Determination of the Public Debt." Journal of Political Economy 87 (October): 940-971.

Tabellini, Guido, and Alberto Alesina. 1990. "Voting on the Budget Deficit." American Economic Review 80 (March): 37-49.

Alesina, Alberto, and Allan Drazen. 1991. "Why Are Stabilizations Delayed?" American Economic Review 81 (December): 1170-1188.

*Roubini, Nouriel, and Jeffrey D. Sachs. 1989. "Political and Economic Determinants of Budget Deficits in the Industrial Democracies." European Economic Review 33 (May): 903-933.

Grilli, Vittorio, Donato Masciandaro, and Guido Tabellini. 1991. "Political and Monetary Institutions and Public Financial Policies in the Industrial Countries." Economic Policy 13 (October): 341-392.

*Pettersson-Lidbom, Per. 2001. "An Empirical Investigation of the Strategic Use of Debt." Journal of Political Economy 109 (June): 570-583.


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