Econ 8185 Quantitative Macro, Fall of 2010

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 11:20-1:00 Hanson Hall 4-170. Some Mondays 1:45 - 3:45 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 course is over, but I will check on the homeworks.

    Alessandra Fogli has organized a session on how to analyze geographical data (things happen somewhere and we may want to know how it propagates). Anyone interested is welcome to attend. The session (GIS workshop) will be in 90 Blegen Hall from 8 a.m. until noon on Thursday of next week (12/16). More info in Geographic Information System's Page.

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

    1. Sept 8.

      We talked about the class, and what it is about. We went 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 od distance, and method to find it) that are used to describe an approximation approach.

    2. Sept 15

      John Seliski discussed the problems with real data that has been chain indexed (it is no longer additive) and the use of Tornquist aggregators to transform then into additive series. We discussed the construction of the series for the Solow residual. This requires 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 will be 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.

    3. Sept 22

      We discussed 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 29

      David Wiczer lectured on how to read data sets both cross section and panel. These are his notes for using data sets The notes come from a long tradition. The stuff David teaches is the crucial input for homework batch 4. This is perhaps the most useful class of all.

    5. Oct 6

      We discussed how to use data generated by the model for comparisons with the U.S. data. We talked about how, when and what to filter and compare. We also looked at the alternative way of operationally answering the question that we are addressing with formal econometrics. Finally, we started the discussion of global approximation methods with emphasis on the piecewise approximation and exact solution in the grid points.

    6. Oct 13

      David used these slides to describe Chebyshev approximations. Thanks David. He also outlined Indirect indifference and also talked about how to approximate a continuous AR(1) with a Markov chain.

    7. Oct 20

      Andrea presented stuff on global methods. There we learned a few tricks of how to think of functions to approximate. Thanks Andrea. We also discussed some of the problems involved in estimation the variance decomposition to the three shocks (two to preferences and one to technology). Hopefully, we will sort it out next wednesday in the global presentation. I then talked a bit about splines and their properties; about the global approximation when there are both leisure and Markovian shocks; and about the problem with storing, saving and updating measures. The corresponding homework is a version of Aiyagari's economy with leisure. In it we do not care yet about either calibration or equilibrium. Just obtaining a stationary distribution of households giving that the parameters of the problem and constant prices and interest rates.

    8. Oct 27

      We talked more about how to solve the decision rules with labor in the Aiyagari economy. We then discussed how it is the equilibrium of a small open economy or how to solve for that of a closed economy. We also discuss how to calibrate the economy at least for some moments. This is the core of the homework batch 7 that was slightly changed. Finally, we also talked about how to do once and for all unexpected changes in the environment such as the doubling of productivity. This has a small homework (batch 8).

    9. Nov 3

      Marcelo talked about obtaining the piecewise approximation by iterating not on the decision rule but on its inverse. He discussed how easy it is to solve for today's assets and also how to construct the inverse checking that the bounds are fine. Among the questions asked, there is one about transition in the Aiyagari world that I still need to answer. I then talked about the Krusell Smith with no leisure and the extent that there is limited rationality.

    10. Nov 15

      There were two presentations. Sebastian presented the details of the implementation of the simple Krusell-Smith environment. He also discussed some of its properties and the accuracy of the approximation. Zhen then gave as a very nice discussion of how the endogenous grid method with search and the use of consumption functions even with endogenous labor can be very useful. I learned a lot from the two presentations. I then turned to discuss how to solve equilibria with uncertainty when we do not know which moments are sufficient statistics for prices. These include economies like that in Krusell-Smith but where there is labor choice, or the possibility of savings in stocks and in bonds, or even where there are housing prices. The key here is to do a two step procedure. In it, we have a value function for tomorrow, over which we use forecasted prices. However, to solve it for today we use current prices which require the solution to a market clearing equation every time we iterate on the solution.

    11. Nov 17

      We looked at a problem with discrete choice. The problem of bankruptcy. We did many things while talking about it. Discussing the problem of non concavity. The issue of the default set. The interplay between continuous and discrete variables. The iterative process to solve the model. All this is a condensed review of the 2007 Econometrica paper joint with Chatterjee, Corbae, and Nakajima.

    12. Nov 24

      We talked about families. First, we look at various demographic details (early death, what about their assets), then about how to model preferences when there are two people (Pareto weights, bargaining, limited commitment a la Marcet/Marimon), then how to think about marital status as shocks. Throughout this class all problems can be solved with standard methods that use the FOC of the problem.

    13. Dec 1

      We talked about the last homeworks and we discussed a couple. The one about tax policy in the Aiyagari world, and one about the second order approximation and its possible impact in the computation of welfare. We then discused a variety of issues that apper in family economics and in discrete choice models. We went over a few techniques to solve those models. Some involve discrete choices and discrete states. Others involve continues choices and discrete states. Some other times we use shocks to smooth the solutions. Finally I talked about issues that arise when two parties have to agree. I talked about seduction games and the issue that both parties of the transaction need to agree.

    14. Dec 8

      This was the last day of class. I did derive the GEE of a the recursive problem that yields the time consistent Markovian optimal provision of public expenditures with income taxes and a period by period balanced budget constraint. Two functional equations are involved, that of the government FOC (the GEE) that involves not only functions but also the derivatives of those functions and the FOC of the household. We talked about how to use global methods to solve it, or to use successive derivatives (assuming the policy functions are polynomials of increasing order).

    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.

    Class schedules.

    This class occurs mostly on Wed 11:20 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 11:20 to 1. 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.

    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.