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 http://www.econ.umn.edu/~vr0j/index.html

http://www.caerp.com

Department of Economics, University of Minnesota,

Tue and Thursday 14:30-15:45 Hanson Hall 4-170. Off Hours: Before and after class and by appointment. http://www.econ.umn.edu/~vr0j/ec8501-14/, email: vr0j@umn.edu, Fax: (612) 624-0209 Fed Phone (612) 204-5528

TA, Eslami, Keyvan eslam010@umn.edu The recitation is on Mondays, 5:30-6:45pm (HMH 1-108), and office hours are right after that, 7:00-9:00pm on Mondays (HMH 3-125). 612.626.9248.

The 8108 final is Wednesday, May 13 at 8 AM in Hanson 4-170.

What are we doing? Brief description of previous classes and next one.

Course Description

Homeworks and Grades

Textbooks

Preliminary List of Material to Cover

References

Problem Sets Problems and solutions with due dates. Do not wait for the posting to answer them.

Class notes taken in class and posted by Keyvan

1. March 24.

   I described the course and discussed some context of what are the main facts over which macro has to be organized around:
   1. output per capita has grown at a roughly constant rate
   2. the capital-output ratio (where capital is measured using the perpetual inventory method based on past consumption foregone) has remained roughly constant
   3. the capital-labor ratio has grown at a roughly constant rate equal to the growth rate of output
   4. the wage rate has grown at a roughly constant rate equal to the growth rate of output
   5. the real interest rate has been stationary and, during long periods, roughly constant
   6. labor income as a share of output has remained roughly constant
   7. hours worked per capita have been roughly constant.
   I discussed what restrictions do these facts pose on the models that we use.
   I also discussed what is the meaning of an equilibrium (a mapping from environment to allocations) and then talked about why the social planner problem may be a problem whose solution is interesting (it is because it is the unique equilibrium of the economy once we use the welfare and other theorems). We talked of how an Arrow Debreu Equilibrium for the growth model, supports the social planners solution using the welfare theorems. I referred to how to build a sequence of markets equilibrium out of an Arrow-Debreu equilibrium (and viceversa) and argued that we can then solve for Social Planner problem sometimes, but that we do so using recursive methods (dynamic programming). Why not then always recursive methods? This is to define equilibria recursively.

2. March 26.

   We defined Recursive Competitive Equilibrium. We started with that of arbitrary expectations and moved on to a rational expectations equilibria. I went over equilibria with valued leisure emphasizing always what are the state variables. We started talking about a government that finances a public good.

3. March 31

   I defined a Markovian stochastic process with finite support. I defined recursive compet. eq. for a stochastic economy emphasizing market completenes, and state contingent markets to deliver capital. I continued to describe equilibrium of economies where the welfare theorems are of no use. A government financing a public good with with capital income taxes and debt and how to deal with the no Ponzi scheme condition in recursive environments.

4. April 2

   We continued looking at environments where the welfare theorems do not work. We looked at economies with agents differing in wealth in a model without leisure, and discussed how to write the model if agents differ in wealth and in efficient units of labor. Then we looked at an economy with two countries and what does this mean. We looked at the necessary state variables in a deterministic economy, and somebody point out that total capital and the share of wealth was sufficient. I asked as a homework to include aggregate shocks and to compare complete and incomplete markets (for Arrow securities). In this case we need to keep track of 3 state variables.

5. April 7

   We finished standard RCE by looking at habit formation and externalities (keeping-up, catching-up) and by discussing the economy when there is a stock market and the firms own land and install capital. I talked about the Lucas tree posing special emphasis in how to price securities and in how to get pricing formulae.

6. April 9

   We discussed the Lucas tree with demand contributing to productivity with competitive search. We arrived at the equilibrium of this economy by constructing the two functional equations that determine price and market tightness.

7. April 14

   We saw the optimality of Competitive search equilibrium. I talked about Nash bargaining and what equilibrium condition it implies. This rapped up the first part of the course. We started measure theory.

8. April 16

   We started industry equilibria. We defined equilibria with exit decisions.

9. April 21

   We finished industry equilibria looking at adjustment costs. We started looking at incomplete markets by looking at the farmer's problem. We saw how the problem (when agents are impatient enough) generates a unique stationary distribution of wealth and income.

10. April 23

    Midterm.

11. April 29

    We looked at how this isolated economy can be made a part of an incomplete market economy with multiple agents embodied in a growth model.

12. April 30

    We started looking at growth. I went summarily over the AK model, the externality model, and the human capital model. I posed the Romer three sector growth model.

13. May 5

    We finished the Romer three sector growth model. We talked about how to think of OLG models recursively as a tool to incorporate age in macroeconomics.

14. May 7

    We finished the OLG model, we talked about entrepreneurial choice in a version of the Aiyagari model. We then talked about aggregate uncertainty in the Aiyagari model. I said a few things about monetary economics. I finished the course talking about the program and the profession.