Econ 8108 Macroeconomics First Year Session IV Spring 2008

José-Víctor Ríos-Rull:,

Last modified: Thursday, 24 April 2008 at 21:43 UTC.

  • Department of Economics, University of Minnesota, 1130 Heller Hall, 271 19th Avenue South, Minneapolis, MN 55455
  • Tue and 14:30-15:45 BlegH 415. Off Hours: Before and after class and by appointment., email:, Phone-(612) 625-0941 Fax: (612) 624-0209 Fed Phone (612) 204-5528
  • TA, Ali Shourideh, Office Hours: Mondays 10am-12pm. Recitation time is Tuesdays 4-5:15.

  • 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 by Ali.

  • What we are doing each day.
    1. May 8.

      The final.
    2. May 6.

      We will rap up the search and will talk about the Romer growth model with innovations.
    3. May 1.

      We talked more about search and the problem of the worker with on the job offers. We talked about bargaining and matching.
    4. April 29.

      We talked about labor search. We discussed its discrete and continuous. We also looked at the case when searcg effort rewards with more offers, and discussed the differences between the distribution of offers and that of wages.
    5. April 24.

      We finished the characterization of Industry Equilibria by looking at an economy with labor adjustment costs. We talked about growth and the Romer externality in Physical capital model.
    6. April 22.

      We continued the characterization of Industry Equilibria with some tweaks to provide for interesting economics. We had the test.
    7. April 17.

      We talked about measure theory briefly and started the discussion of Industry equilibria.
    8. April 15.

      We did finance and the pricing of assets using Lucas trees.
    9. April 10.

      We finished the two country economy, with complete and incomplete markets and looked at the RCE of economies with a government that issues debt. We discussed the meaning of the present valu budget contraint.
    10. April 8.

      We looked at the recursive implementation of economies with shocks with Arrow securities that pay in capital goods. We then moved to a two country world. We saw that to understand the problem of where to invest we should pose a dynamic problem for firms. We looked at a version of the growth model where L stands for land owned by firms who install capital.
    11. April 3.

      We looked at the recursive implementation of economies with shocks and complete markets with Arrow securities that yield consumption goods.
    12. April 1.

      We started looking at particular non optimal or multiple agent economies. The first one was an economy with fixed government spending and lump sum taxes, then we switched to capital income taxes. The third economy we looked at had rich and poor (but otherwise identical) agents.
    13. March 27.

      We solidified concepts and went go over Recursive Comp Eq (RCE) with and without Rational Expectation and justified its components. We saw how this notion can be used to find equilibra dyirectly with tools similar to dynamic programming.
    14. March 25.

      We went over the homepage contents (although you could never see it). We talked about the differences between equilibrium and Pareto Optima and what role does the latter play in Macro. We argue that an equilibrium concept is a tool to pick outocomes (allocations). We went over the logic that allows to look at Social Planner allocations to see what sequence of markets equilibria predict.

    Course Description.

    This course complements 8105-8107. 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 a variety of economic questions by producing allocations in the form of model generated data 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 will be on economic rigor, i.e. the target is to learn tools that will be useful later in a variety of contexts. 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.

    Homeworks and Grades

    In the context of the course some homework will be assigned. Sometimes 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 30% on a midterm, 60% on a final that will take place the last day of class and 10% on class participation Ali will give you feedback regarding the homeworks.

    Textbooks and papers

    Besides those used and recommended by my colleagues, there is a good little book (out of print actually) that is useful, Harris, [1987]. 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. First year is to learn tools, not to read papers.

    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.
    1. Introduction
      1. Equilibrium. What is its meaning.
      2. Competitive equilibrium in the growth model. Taking advantage of the welfare theorems.
        1. Arrow Debreu.
        2. Sequence of Markets.
        3. Recursive Competitive Equilibrium.
        Stokey and Lucas, [1989], Chapters 15 and 16; Harris, [1987], Chapters 3 and 4; Cooley and Prescott, [1995].
      3. A stochastic version of the growth model. What are complete markets? What are one period ahead Arrow-securities? How to define Competitive equilibrium in stochastic growth model.
        1. Arrow Debreu.
        2. Sequence of Markets.
        3. Recursive Competitive Equilibrium.
    2. Attacking recursive equilibria directly.
      1. Non-optimal Economies.
        1. An economy with an externality in production.
        2. An economy with public expenditures, income taxes and a period by period balanced budget constraint.
        3. An economy with public expenditures, income taxes and a present value balanced budget constraint.
        4. An economy with money some form of cash in advance.
        5. Normative versus Positive thinking: Optimal policy. Optimal Time-consistent policy. Markov equilibria with sequences of governments.
        6. An Economy with decentralized bargaining in labor markets.
      2. Multiple Agents Complete Markets Economies.
        1. An economy with two types of agents differing in skills and/or wealth.
        2. A two country economy.
    3. Finance and Asset pricing
      1. The Lucas tree non-recursive.
      2. Recursive. Some formulas.
    4. Another excursion into Growth:
      1. Exogenous growth
      2. Transforming the economy
      3. Externalities.
      4. Research and development (Romer 86).
      5. Non balanced growth paths.
    5. Industry Equilibria.
      1. Exogenous entry and exit. A measure of firms.
      2. Endogenous entry and exit.
    6. Search and bargaining over the job.
    7. Monopolistic Competition Environment.
    8. Recursive Preferences. Epstein-Zin recursive utility. Epstein and Zin, [1989].
      Ljungqvist and Sargent, [2000]
    9. Recursive Models with demographic detail.
      1. Overlapping Generations with many periods.
      2. Overlapping Generations with variable demographics.
      3. A hybrid. The exponential population, exponential aging, model.
    10. Fertility in the utility.
    11. Multiplicity of Equilibria.


    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.
    EPSTEIN, L. G., AND S. ZIN (1989): "Substitution, Risk Aversion and the Temporal Behavior of Asset Returns: a Theoretical Framework," Econometrica, 57, 937-969.
    HARRIS, M. (1987): Dynamic Economic Analysis. Oxford University Press.
    LJUNGQVIST, L., AND T. SARGENT (2000): Recursive Macroeconomic Theory. MIT Press.
    LUCAS, R. E. (1978): "Asset Prices in an Exchange Economy," Econometrica, 46(6), 1429-1445.
    STOKEY, N. L., AND E. C. LUCAS, R. E. WITH PRESCOTT (1989): Recursive Methods in Economic Dynamics. Harvard University Press.

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