Economics EconG207 UCL Winter 2015

José-Víctor Ríos-Rull:,

  • Department of Economics University College London, 113.Drayton House.


  • Thursday 18:00-21:00 Room 321 Drayton House. Until March 19th. These are 9 days. There will be some cancellation. Additional possible dates are Fridays 11:00-12:00 in Drayton Edgeworth B16 on the following dates: 30th Jan, 13th Feb, 27th Feb or 13th Mar. Any other change will be posted in this page.

  • Off Hours: Before and after class and by appointment., email:

  • The class of March 12 is moved to Monday 16th March from 18:00. We will anounce when. Krisztina will be out of town on Th and Fr and we could not find a suitable room/time on Wednesday. I will email the room. Contact me if there is a problem.

    From 5th Feb, to March 12th on Drayton G26. 19th Mar, in Drayton Jevons.

    Chapters 5 and 6 of these notes have the Lucas tree with shopping.

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

  • Course Description

  • Homeworks and Grades

  • Example of possible List of Material to Cover

  • References

  • Course Description.

    This is a course in how to do modern macroeconomics. As such we will not review what the profession knows about a particular issue. Instead we will look at how to answer particular questions, with especial emphasis on tools. The first part of the course will have some engagement in the notion of recursive equilibrium.

    The main content of this class is to learn how to do work in macroeconomics. This requires T
    1. Theoretical tools: The lens through which we look at the data:Economic models.
    2. Computational tools: What is needed to complete characterize outcomes in those economic models.
    3. Empirical tools. The ability to compute statistics in models and data, and to compare outcomes of the economic model with those of data.
    4. Hopefully good sense.
    The content of this course will ultimately depend on the interests of its students. So it will take a week or two to get determined. My main interests are in macroeconomics, labor, health and family economics, and public finance.

    This page is work in progress you should look in here to see what is going on.

    I want to start reviewing what equilibrium is. We will emphasize the recursive nature of equilibrium by looking at it in some detail. We will go over the part of the material below that has not been seen by the students and/or it attract some of your interest.

    Homeworks and Grades

    In the context of the course, I will assign some homeworks: usually 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 exam.

    I want the students to make presentations. Very short ones. To answer a homework. To make a point. To present a paper or a question. If all goes well, all students will present.

    The grade will be based on the presentations and the final exam.

    Possible 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

    1.1  Equilibrium. What is its meaning.

    Competitive equilibrium in the growth model. Taking advantage of the welfare theorems.
    Stokey and Lucas, [1989], Chapters 15 and 16; Harris, [1987], Chapters 3 and 4; Cooley and Prescott, [1995].
    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.

    1.1.1  Arrow Debreu

    1.1.2  Sequence of Markets

    1.1.3  Recursive Competitive Equilibrium

    2  Recursive Competitive Equilibrium

    2.1  The Basic Setup

    The logic of recursivity. Its principles. How it works when all is easy.

    2.2  A Model with Public Goods

    The first reason that makes life difficult. Non-optimality.

    2.2.1  Financed with Lump Sum Taxation

    2.2.2  Financed with Capital Income Taxation

    2.2.3  Adding Government Debt

    2.3  A Model with Heterogeneous Agents

    The second reason that makes life difficult. Multiple agents. Negishi works but so what?

    2.4  A Model with Uncertainty

    Expanding the model to have shocks.

    2.4.1  Markov Chains

    2.4.2  AD and SM Household Problem

    2.4.3  Recursive Formulation

    2.4.4  Lucas Trees and Asset Pricing

    2.5  A Model with Firms making Investment Decisions

    Separating decision makers.

    2.6  A Model of International Economics

    In multicountry settings people are not country. So what are they?

    3  Measure Theory

    Just counting properly. Any reference is fine.

    4  Industry Equilibrium

    A first notion of production. The sometimes useful of firms as technologies.

    4.1  A static description

    Many firms producing the same.

    4.2  A Simple Dynamic Environment

    They are long lived and still mechanical.

    4.3  Introducing Exit Decision

    Now there is some pruning by choice.

    4.4  Stationary Equilibrium

    What happens in the aggregate. An important theoretical object.

    4.5  Adjustment Costs

    Making firm less silly.

    4.6  What is a firm?

    Let' not fetichize things.

    4.6.1  An entrepreneur

    4.6.2  With some limited liability

    4.6.3  A partnership

    4.6.4  A coalition

    4.6.5  Limits to securitization of corporations

    4.6.6  What about the modern publicly traded corporation

    5  The Aiyagari Economy

    A model with many households using measures to describe them.

    5.1   The household problem

    Bounds when households are impatient.

    5.2   The steady state conditions

    An important notion.

    5.3   Aggregate Shocks

    All things are moving.

    6  Monopolistic Competition

    A detour to get market power.

    7  A Growth Model

    A detour to get economies growing.

    7.1  Exogenous growth

    7.2  Endogenous Growth

    7.2.1  A-K models

    7.2.2  Externalities

    Romer, [1986]

    7.2.3  Two sector growth models

    Lucas, [1988]

    7.2.4  R and D models with monopolistic Competition

    Romer, [1990]

    8  Life Cycle Models

    People do live and die.

    8.1  The Classic trouble making OLG Model

    8.2  A Recursive Formulation for important issues

    9  Search Models

    You can't always get what you want.
    Rogerson, Shimer, and Wright, [2005]

    9.1  The Search Problem

    Should I stay or should I go?

    9.2  A Continuous Time Formulation

    9.3  Generating Transitions

    9.4  Equilibrium

    10  Time Consistent Policy

    Government's commitment is an oxymoron. Then what?

    10.1  A primer. Going against my future self.

    10.2  Sequences of governments.


    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.
    HARRIS, M. (1987): Dynamic Economic Analysis. Oxford University Press.
    LUCAS, R. E. (1988): "On the Mechanics of Economic Development," 22, 3-42.
    ROGERSON, R., R. SHIMER, AND R. WRIGHT (2005): "Search-Theoretic Models of the Labor Market: A Survey," Journal of Economic Literature, 43, 959-988.
    ROMER, P. M. (1986): "Increasing Return and Long-run Growth," 94, 1002-36.
      (1990): "Endogenous Technological Change," 98, S71-S102.
    STOKEY, N. L., AND E. C. LUCAS, R. E. WITH PRESCOTT (1989): Recursive Methods in Economic Dynamics. Harvard University Press.