This class attempts to cover the most important topics in modern macroeconomics. The topics discussed include theories of consumption, investment, money and monetary policy and fiscal policy. Such wide coverage means each individual topic will be the object of roughly 4 to 8 hours of lectures, while the rest of the term will be dedicated to applications and exercises. This time allocation is however only tentative, and may change through the course of the semester.
There are two central concepts in modern macroeconomics, which will pervade all the topics we cover. First, we will construct theories where agent's expectations are determined endogenously and rationally. We will think about a representative agent who will react to her environment and formulate expectations about future developments, which in turn may affect today's behavior. For instance, the expectation that inflation will be high in the future partly conditions current salary demands. And inflation expectations are typically formed on the basis of what is rationally expected from the Central Bank. Second, we will develop methodologies to analyze dynamic decisions, whereby making a choice today has an effect on tomorrow, and is decided accordingly. For instance, the decision to save and invest today will augment tomorrow's productive capacities, and increase income then, at the cost of consumption today. Both concepts - rational expectations and dynamic programming - are absolutely central to modern macroeconomic analysis, and beyond. Its applications range far and wide, from financial economics to policy making. Thus, whether you plan a career in policy-making circles, international institutions, banking and finance or even the industry, these concepts will come in handy at one point or another.
There are no established exhaustive textbooks in macroeconomics. Nevertheless, I will often refer to Advanced Macroeconomics by David Romer, which is technically proficient, but not at the expense of intelligibility, and to Macroeconomic Theory by Michael Wickens.
Assistants: Ernest Dautovic and Oscar Martinez Cusicanqui
- Mid-term exam, 2 hours, closed book and no calculators allowed. (35% of total mark)
- Final exam, 3 hours. closed book and no calculators allowed. (55% of total mark
- Participation in practical classes. (10% of total mark)
Material and Schedule:
Content: This course provides an introduction to the literature on dispersed infromation in Macroeconomics. We will review the basic techniques of signal extraction in Gaussian environments. Then, we will apply them to Beauty Contest models to study how imperfect information can affect welfare. We will study a benchmark version of the Lucas' island model to demonstrate how dispersed signals can be microfounded as competitive prices. Finally we will use our framework of learning from prices to provide simple models of price rigidity, endogenous persistence and sentiments. (Slides available upon request).
- Rational Expectations and the Lucas' Critique
- Preliminaries on Conditional Expectations
1. Signal Extraction with Dispersed Information
- Beauty Contest and Welfare: Exogenous Information
- Beauty Contest and Welfare: Endogenous Information
2. Microfoundations of Information Structures
- Lucas' Island with Learning from Prices: Exogenous information
- Dynamic Extension
- Lucas' Island with Learning from Prices: Endogenous information
- Stability of Equilibria under Higher-Order-Belief Dynamics
3. Learning from Prices
- Endogenous Price Rigidity
- Amplification and Sentiments
- Dispersed Foresight and Endogenous Persistence