# Syllabus of Econ 704, Spring 20

## Table of Contents

- 1. Course Description.
- 2. Homeworks and Grades
- 3. Textbooks and papers
- 4. Preliminary List of Material to Cover
- 4.1. Introduction: Why the Growth Model
- 4.2. Review: Neoclassical Growth Model
- 4.3. Recursive Competitive Equilibrium
- 4.4. Asset Pricing: Lucas Tree Model
- 4.5. Endogenous Productivity in a Product Search Model
- 4.6. Measure Theory
- 4.7. Industry Equilibrium
- 4.8. Incomplete Market Models
- 4.9. Time Consistency Problems
- 4.10. Wage Distribution
- 4.11. Extreme Value Shocks and the elimination of decision rules as functions
- 4.12. Monopolistic Competition
- 4.13. Endogenous Growth and R&D
- 4.14. References

## 1 Course Description.

This course complements the rest of 702-704. In my view, the
ultimate goal of this course is to learn to use a variety of models
that can be used to give *quantitative* answers to economic
questions. The models can generate artificial data of both
allocations and prices that can be meaningfully related to actual
data. In this course most (if not all) of the material will be
studied from the strict point of view of the theory, so we will not
look at data in any serious manner nor at solving the models with
the computer. The emphasis is on *economic rigor*, i.e. the target
is to learn tools that will be useful later. The course, then, is
not a survey of topics in macroeconomics. When some specific topic
is addressed the objective is not to give a review of known results
but rather to give an example of how an issue is addressed and of
how tools are used.

There will be recitations once a week. These will be used either to introduce some mathematical apparatus that we need, to solve homeworks, or to explore issues related to those presented in class. The material covered in recitations constitutes part of the required curriculum.

## 2 Homeworks and Grades

In the context of the course, I will assign some homeworks: usually I will ask you to prove something during a lecture, sometimes they will be posted in the homepage. These problems are not required but will give you an idea of what is expected for the exams, and especially for the prelim. The grades will be based 33% on some form of midterm, date and format to be determined, and 67% on a final date and format to be , date and format to be determined. Ricardo will give you feedback regarding the homeworks. He may post them on the web as well as post answers to it at a later day. Or he may not. We will see about it.

## 3 Textbooks and papers

No special textbooks. There are notes from previous years and Ricardo post class notes of this year’s class. It never hurts to have the usual suspects, but I do not dwell on them. Besides those used and recommended by my colleagues, there is a good little book (out of print actually) that is useful, Harris-87. The papers that I cite (in a very incomplete form below) are not to be read in general, although some students may find them useful. A fantastic book is being written now by Per Krusell. We will occasionally use bits of it. First year is to learn tools, not to read papers.

## 4 Preliminary List of Material to Cover

This list is of material that I want to go over. The first few items you have seen in a very similar way, so I will go very fast over it, but I find it very useful to go over them again.

### 4.1 Introduction: Why the Growth Model

### 4.2 Review: Neoclassical Growth Model

- The Neoclassical Growth Model Without Uncertainty
- A Comment on the Welfare Theorems

### 4.3 Recursive Competitive Equilibrium

- Economy with Government Expenditures
- Lump Sum Tax
- Labor Income Tax
- Capital Income Tax
- Taxes and Debt
- An Economy with Capital and Land
- Adding Heterogeneity (Wealth, Skills, Countries)
- Shocks, Markov Processes, Complete and Incomplete Markets

### 4.4 Asset Pricing: Lucas Tree Model

- The Lucas Tree with Random Endowments
- Asset Pricing
- Taste Shocks

### 4.5 Endogenous Productivity in a Product Search Model

- Competitive Search
- Business Cycles in this Model

### 4.6 Measure Theory

### 4.7 Industry Equilibrium

- Preliminaries
- A Simple Dynamic Environment
- Introducing Exit Decisions
- Stationary Equilibrium
- Adjustment Costs

### 4.8 Incomplete Market Models

- A Farmer’s Problem
- Huggett’s Economy
- Aiyagari’s Economy
- Policy
- Aggregate Shocks

### 4.9 Time Consistency Problems

### 4.10 Wage Distribution

### 4.11 Extreme Value Shocks and the elimination of decision rules as functions

### 4.12 Monopolistic Competition

### 4.13 Endogenous Growth and R&D

The notes are the evolution of class notes by many students over the years, both from Penn and Minnesota including Makoto Nakajima (2002), Vivian Zhanwei Yue (2002-3), Ahu Gemici (2003-4), Kagan (Omer Parmaksiz) (2004-5), Thanasis Geromichalos (2005-6), Se Kyu Choi (2006-7), Serdar Ozkan (2007), Ali Shourideh (2008), Manuel Macera (2009), Tayyar Buyukbasaran (2010), Bernabe Lopez-Martin (2011), Rishabh Kirpalani (2012), Zhifeng Cai (2013), Alexandra (Sasha) Solovyeva (2014), Keyvan Eslami (2015), Sumedh Ambokar (2016), Omer Faruk Koru (2017) and Jinfeng Luo (2018).

### 4.14 References

COOLEY, T. F., AND E. C. PRESCOTT (1995): “Economic Growth and Business
Cycles,” in *Frontiers of Business Cycle Research*, ed. by T. F. Cooley,
chap. 1. Princeton University Press, Princeton.

HARRIS, M. (1987): *Dynamic Economic Analysis*. Oxford University Press.

LUCAS, R. E. (1988): “On the Mechanics of Economic Development,” 22, 3-42.

ROGERSON, R., R. SHIMER, AND R. WRIGHT (2005): “Search-Theoretic Models
of the Labor Market: A Survey,” *Journal of Economic Literature*, 43,
959-988.

ROMER, P. M. (1986): “Increasing Return and Long-run Growth,” 94, 1002-36.

ROMER, P. M. (1990): “Endogenous Technological Change,” 98, S71-S102.

STOKEY, N. L., AND E. C. LUCAS, R. E. WITH PRESCOTT (1989): *Recursive
Methods in Economic Dynamics*. Harvard University Press.