Econ 8185 Quantitative Macro, Fall of 2013

José-Víctor Ríos-Rull:,

  • Department of Economics University of Minnesota Phone-(612) 625-0941 4-101 Hanson Hall (off 4-179) Fed Phone (612) 204-5528 1925 Fourth Street South Fax: (612) 624-0209 Minneapolis, MN 55455. Homepage

  • Wed 3:45-6:45 Hanson Hall 4-170. This is a mini course that will last all semester so some classes will be shorter, others will be cancelled. The whole teaching time will be no less than a regular mini course. Off Hours: Before and after class and by appointment. email:

  • Web page to sign up for presenting in class.

  • What are we doing? A class by class diary.

    1. Sept 4.

      We talked about the class, and what it is about, going over all the details. We start with a discussion of what is the meaning of an approximation to a function and the criterias (family of approximating functions, criteria of distance, and method to find it) that are used to describe a particular approximation approach. We then go in detail over the first set of homeworks and its purpose. We finish with a discussion of the Solow residual. This includes the components of GDP on the income side. You should read the Cooley-Prescott chapter on the Cooley book or the - appendices here or here for details of the construction of the Solow residual needed to compute it. We discussed how to use a model to answer quantitative questions about the economy. In particular, we talked about how calibration and estimation operate, and what are their differences and similarities. We put special emphasis in saying that what matters is not the statistical techniques as much as the sources of identification. I refer to the first 5 sections of this paper, but in particular, Section 3. We discuss the next batch of homeworks if the computer works well (and I want volunteers to present some of them in the next class, Sept 18). Such discussion involves a minimal description of log linearization using dynare as well as comments on the use of software to take derivatives and on how to implement the notions of calibration discussed at the beginning of the class. While doing this, we talked about how to calibrate a model economy so that its steady state looks like the U.S. in the dimensions that we want. A place to find Jesus Fdez-Villaverde's examples of dynare code is this.

    2. Sept 11

      We went into the details of what to do in the homeworks and how does calibration answer the question of what is the contribution of TFP shocks to business cycles. We started the discussion of global approximation methods talking about piecewise linear functions (and their base represenation) with exact solution in the grid points. I want somebody to present Sept 18th the endogenous grid method. This paper is a great reference to a particularly efficient way to obtain a global approximation. Sign up to present it. I also talked about how shocks to wealth work in the growth model and what adjustments it needs to generate a recession. We started to develop an alternative to the TFP shocks: shocks that increase savings. These ideas will end up in a homework due October 2 that will require some thinking.

    3. Sept 18

      Tom and Chris presented the endogenous grid method. Thanks Tom and Chris. I started to talk about a model susceptible of having non TFP shocks yet perhaps capable of dealing with BC as we see them.

    4. October 2

      Sergio presented the main homework, and we discussed many relevant issues around it. Thanks Sergio. Then Annaliina presented the fundamentals of the Mortensen-Pissarides model using these slides. Thanks Annaliina. After that we commented both homeworks. The one for the global methods very briefly, the other one more thoroughly. Recall that I asked you to measure the contribution of preference shocks to the volatility of hours worked by using a version (and a closed economy version would be great) of the stuff in these slides and this paper. I also said that a similar task that what I ask in the homework was done in section 5.1 of this paper using a slightly different model. One that it essentially a neoclassical growth model. What I am asking is to use a close economy version of the model in the paper with Huo above to do the same exercise that is done in the paper with Bai and Storesletten. Contact me if you have any doubt.

    5. October 9

      Sebastian Dyrda taught how to read and use data sets. He used these notes from last year that he may update. He also used these slides. I will soon post some homeworks that require you to read some data sets.

    6. October 16

      We had a long class. Eugenia described global approximations and showed us how to solve the growht model using 3 different approaches. Thanks Eugenia. Sergio finished presenting HW batch 2. We discussed a few issues there but the bottom line that he found is that productvitiy shocks really do not move hours. I then described how to compute the household problem and the stationary distribution in the Aiyagari economy. We then talked about how to solve the transition and briefly about the GEE.

    7. October 23

      We talked about the problems of the Third HW Batch. We looked at two issues, first what is Nash Bargaining, how it works and what is what determines the surplus for each of the two sides. We also talked about how to determine the price of non tradables. This required us to look at monopolistic competition. We also talked about the concept of equilibrium and how a recession out of a financial crisis or impoverishment can happen. We will continue talking about this issue next week.

    8. October 30

      We talked a bit about the problems of the Third HW Batch. I used the discussion of the Nash bargaining problem (see these notes) to argue about models where everything is described in terms of fundamentals and models where we want to account for allocations and arrangements. We talked about the Krusell Smith methods and about the Bankruptcy problem including the issue of credit scores. We also discussed the problems with Non-Markov equilibria, and how to think of types.

    9. November 6

      Joaquin talked about the data homeworks. We discussed various issues.

    10. November 27

      I talked about a positive theory of Time Consistent economic policy. Mons talked about homework 7, the Aiyagari economy; Thanks Mons. I discussed a few things during his presentation including the simultanous posing of some targets of calibration.

    11. December 4

      I talked about two important technical issues: one the Krusell-Smith type of approximations to solutions to business cycles in Aiyagari type economies (both with aggregate capital as sufficient statatistics for prices and when that is not the case); and algorithms to solve a large system of equations for calibration. Sergio presented the Fella paper. Thanks Sergio.
    12. December 11

      We will finish the discussion of HW 3. I will continue talking about the endogenous determination of policy and the GEE. This completes the course.

    Course Description

    The target of this course is for you to be able to go to a macro seminar and to realize after the layout of the model that you are able to solve it, and relate it to data, probably much better than the presenter.

    This course can be thought of as an addendum to the Macro sequence, it follows naturally after 8105-8108. Its purpose is to learn the map from models to data, i.e. to answer quantitative questions that we are interested in (in the process of doing so, some interesting theoretical questions arise). We will develop tools by stating general questions, and then discussing how to approach its answer. The tools that we will be developing beyond those already covered in the first year can be grouped into:

    This is a Ph.D. course not a Masters course. As such students are not expected to learn what other people have discovered, but the tools that are needed in order to discover things by themselves. Because of this reason the active work of the students is crucial to achieve the objective of mastering the tools that are described above. This is a course to learn to do things, and, therefore, it requires to do some things.

    Every class except the first one we will devote the first twenty minutes or so to students presentations of homeworks. I expect professional competence in this regard.

    Course Requirements

    There are various types of requirements that are a necessary part of the course, all of which are pertinent in order to achieve fulfillment of the course goals. This course believes drastically in Learning by Doing but, on the other hand, you are adults.
    • Regular Homeworks.The ones posted here. Full credit only if on time. Partial credit otherwise.

      Students will place the solution to the homeworks and to other requirements in electronic form. You have to send an email ASAP to stating your name and university email and username and that you are in my course to have access to a directory named /pkg/econ8185 and a subdirectory your user name.

    • Class Presentations Every student will make at least two class presentations with at least one being of a subset of a homework. The first presentation should take no more than 15 minutes and it will be absolutely professional. Every second wasted, every statement not planned, every bad thing will be highlighted. The second presentation (that will depend on class size and interests) maybe on a paper or on another homework.

    • Referee Report. I will assign a paper to each of you as we go along to write a referee report and perhaps also to present the paper in no more than 20 minutes. The refere report should be no longer than five pages and should contain a clear and concise exposition of the main points of the article as well as a critical evaluation of the article's contributions. In addition, you should write a letter to the editor with your personal recommendations. If very good, I will use them, anonymously.

    • Wikipedia Article. Optional, but excellent training. This is something that should be done by the end of the course. The moment you post it email me and place a copy in your directory. Think of a topic of the course no matter how silly.

    Class schedules.

    This class occurs mostly on Wed 3:45 to 6:45 in Hanson Hall 4-170 for the whole first semester. This is a mini length course yet, the need for long homeworks on your regard makes advisable to extend its duration. In addition, due to travels and other things we will teach on other times (Thursdays 2-4)whenever I am out of town on Wednesdays.

    What about knowledge of Computers?

    This is not a course in computer languages so students are responsible to learn to write computer programs. Students are also responsible for learning their way around McNeil computational facilities. I do not expect anybody to have a computer at home or anything like that. It is better to work in McNeill's computer room because you can talk to each other.

    There are various general classes of computer languages.

    Students should be able to write code in F90 in addition to matlab or gauss and to stata. Most students tell me in later years that I should have enforced harder the learning of F90, but I am willing to consider exceptions. If somebody has a serious reason not to use F90, please come and talk to me. At least one homework should be answered in f90.

    Grading Rules

    To satisfactorily complete the course, students have to do the requirements well.

    For those that do not register but take the course, I recommend that they do the homeworks. We learn to solve problems by facing them. Learning jointly with others greatly speeds the process.

    What about textbooks?

    In addition to the standard macro books (Stokey and Lucas, [1989], Harris, [1987], Ljungqvist and Sargent, [2000]) I find that there are a few books of interest.
    • Cooley and Prescott, [1995]. It is now dated but it contains some important lines of attack on business cycles. The computational techniques are a little bit obsolete, but the questions less so.
    • Judd, [1998]. is a general computational textbook with special attention to economists. While it is short on some details that we care about (complicated equilibrium considerations, multidimensional value functions, multidimensional interpolation) it is a very useful book for many topics.
    • Marimon and Scott, [1998]. It has a bunch of chapters that deal with specific problems. I find the continuous time chapter nice as well as some scattered other chapters.
    • Miranda and Fackler, [2002]. It is quite a nice book. Like others it is too irrelevant in some places and too easy in others. It is designed for matlab which is a pity, but it has a nice implementation (via a <a href="" > downloadable toolbox</a>) of function global approximations.
    • Heer and Maussner, [2004]. This is a nice book with a lot more economics than the others. Its consideration of the theory is closest to what we do. It has also many examples. The codes can be found here.
    • Press et al., [1992]. The classic book for numerical analysis. Very useful.

    Some interesting and useful links

    Tips for Doing Computational Work in Economics by Tony Smith for insights.

    Makoto Nakajima's course materials a great place for stuff.

    Allan Miller's Fortran Software A good list of recently updated F90 codes.

    Computer Codes from RED.

    Fortran repositories. A place to look for that routine that you need.