be preliminary Econ 8185 Quantitative MacroEconomics Fall 2011

Econ 8185 Quantitative Macro, Fall of 2011

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 10:00-11:20 Hanson Hall 4-170. Some Mondays 10:00 - 11:20 in 4-170 Hanson will substitute for Wednesdays. Off Hours: Before and after class and by appointment. email:

  • Web page to sign up for presenting in class.

  • The new deadline for all homeworks is the last day of class. Please plan to come and talk to me individually to tell me which homework are you the proudest of.

    The eigth homework batch is corrected to talk about labor and households. I wish you do the new 14 instead of either 13 or 15.

    Please those that present put the slides in some location on the web and its addresses in the easywebcal page of the course so we can all have access to it.

    What are we doing? A class by class ex-post diary.

    1. Sept 7.

      We talked about the class, and what it is about, going over all the details. We started with a discussion of the first homework and 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.

    2. Sept 14

      We discussed the construction of the series for the Solow residual. This required the imputation of all series in NIPA on the factor side to either capital or labor and the addition of some components that are not in GDP but are in our measure of output (services from Government capital and from consumer durables). Look at Cooley and Prescott's chapter in the Cooley volume or the appendices here or here for details. We started to discuss how to use the stochastic properties of the time series and the basic growth model to answer the question about the role of productivity shocks in shaping output fluctuations.

    3. Sept 21

      Gustavo presented some of the homeworks (Thanks Gustavo). We continued the discussion of how to use the stochastic properties of the time series and the basic growth model to answer the question about the role of productivity shocks in shaping output fluctuations. In particular, 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.

    4. Sept 28

      Rishabh presented the 4th Hwk batch (Thanks Rishabh). We talked about various issues related to comparing model generated data and U.S. data and about how to use the model to say something about the U.S. Rishabh discussed the calibration. (More on that next week). We talked briefly about solving the growth model with log linear approximations (via dynare). We then started the discussion of global approximation methods using piecewise linear functions with exact solution in the grid points.

    5. Oct 3

      Zachary Mahone presented parts of Hwk batch 5 to get an answer to the question of how much do productivity shocks contribute to the volatility of hours worked. Thanks Zach. We still have to get an answer and to discuss in more depth how it compares with estimation. I would like another student to finish this homework. I interrupted often to discuss the nature of the homework. I dit a bit of talking on the global approximation methods including the inverse search method. I pointed to this paper to this paper for a description of how it is.

    6. Oct 12

      Zoe Xie presented a Business Cycle model with TFP shocks and shocks to the relative price of investment (from Violante and coauthor's series). Thanks Zoe. I then discussed the nature of the problems involving solving for the allocations in the Aiyagari economy, hwk batch 6. This involved the nature of the functional equation that determines the laws of motion and the way to approximate the stationary distribution of agents.

    7. Oct 19

      Gustavo made a presentation on global approximation. We discussed in some detail how to use endogenous grid to solve a problem that uses piecewise linear approximations with leisure. Thanks Gustavo. I then talked briefly about splines and about how to find a steady state in the Aiyagari economy. I pointed to some twist on ambiguity (Sargent?) using these or these slides.

    8. Oct 26

      David Wiczer described the class as.

      First we talked about general pitfalls and such with these micro data sources, i.e. (1) what are the weights, why do we need them, (2) what is top coding, (3) what sort of checks one can do for coding errors.


      We talked about the CPS and it's flavors, the displaced worker survey, outgoing rotation groups and March supplement. I talked about the DWS by looking at Farber's recent NBER WP 17040 about the experience of the unemployed in the Great Recession We went to: --IPUMS and downloaded some March Supplement --CEPR and got the ORG --went to the NBER page and talked about how to chain them.

      Then I covered the CEX, what's there and how to get it from the NBER or ICPSR. We talked about the survey and diary versions and how it matches up with macro data.

      Then I talked about the SCF and some of your "facts on distributions of wealth " papers and I showed them the awesome new panel they made for 2007 respondents.

      Panels: I talked about why to use panels in two contexts: What is the nature of earnings risk: isolating idiosyncratic, and persistent shocks and individual trends. We went through MaCurdy (1982) co-variance test for individual trends and how panel data gives it more power. What are individual fixed effects and why might they be economically meaningful? I talked about Abowd, Kramarz and Margolis (1999) which studies whether high wage firms are just collections of individuals with high wage fixed effects.

      What are cohort, time and age effects? I went through Storesletten, Telmer & Yaron (2004) and how to construct earnings variance profiles.

    9. Nov 2

      Actually, David Wiczer came back to finish the use of panel data and to discuss how to calibrate the Aiyagari model to certian statistics of the wealth and income distribution and of the persistence of wages using a model with leisure choice. He will talk more about how to get an approximation of a distribution in a computer and then use it, so he will get a bit into the nitty-gritty of the actual computation. In his actual words what he did was:

      Panel Data: We talked about the problem with short, dynamic panels and how the Arellano-Bond estimator addresses this.

      We went to the PSID and talked about the strengths and shortcomings of the data. For retrieving it, their search engine is useless but PSIDUSE is good.

      About the SIPP, we discussed the unique structure of its high-frequency data and how to get it from the census and the CEPR. Finally we discussed the NLSY and all its unique details about young people.

      Wealth & Income Distribution: We went through step-by-step how to approximate distributions by discretizing and by Monte Carlo.

      We reviewed some facts about the joint wealth income distribution, and how many models fail.

      We discussed some remedies, starting with heterogeneous discount rates. Then we touched on why entrepreneurs might be important and how Cagetti & Di Nardi (2006) incorporate them.

      Then we talked Castaneda, Diaz-Gimenez and Rios-Rull (2003). I highlighted the bequest/benevolence towards kids, retirement and consumption smoothing motives. Technically, we went through how to summarize tons of stuff as a single stochastic state variable and how we have some flexibility with the transition matrix to hit various objectives. And there was much rejoicing.

    10. Nov 9

      Filippo presented using this some stuff on Hwk Batch 5 (the three shock economy). We used his very nice presentation (thanks Filippo) to discuss how to think between model and data. Then I discussed the issues associated to solve for a transition. First, in the simple case of the growth model and then in the context of the Aiyagari economy.
    11. Nov 16

      Zach presentes using Endogenous Grid Methods how to solve the Aiyagari economy. Thanks Zach. Then, I presented Krusell-- Smith family of methods to solve for equilibria of economies with distributions as state variables when predetermined variables are sufficient statistics for current prices.
    12. Nov 23

      Rishabh presented the computation of the stationary distribution of wealth and productivity in the Aiyagari economy and how to find the steady staThe eigth homework batch is corrected to talk about labor and households. I wish you do the new 14 instead of either 13 or 15te. We made comments about the issue to improve the speed and accuracy of the calculations. Thanks Rishabh. Then, I presented the second generation Krusell-- Smith family of methods to solve for equilibria of economies with distributions as state variables when predetermined variables are NOT sufficient statistics for current prices.
    13. Dec 5

      Given the sparse attendance I talked about things that were interesting for the few in the class. This was about time consistent policies. What are the issues, and what is the charaterization. It is partly related to my paper with Klein and Krusell.
    14. Dec 7

      I went again over some issues in time consistent policy determination.
    15. Dec 14

      I will wrap up the course. I will ask about the homeworks. We will discuss some political economy issues and perhaps what are interesting topics of research.

    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 10:00 to 1 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 whenever I am out of town on Wednesdays. For the sake of paralellism, the main candidate as a substitute is Monday. See this homepage for details.

    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.