John Bailey Jones
BA-113
442-4926
jbjones@albany.edu
http://www.albany.edu/~jbjones/
Office Hours:  Tuesday and Thursday, 10:30-12:00; and by appointment

The goal of this course is to extend the analytical approach that was begun in the fall semester course (Economics 601, taught by Professor Masters). In this class we will:

1. Review the (U.S.) “stylized business cycle facts.”
2. Develop and analyze dynamic partial and general equilibrium models in a stochastic setting.
3. Identify the models’ econometric implications and critically review their empirical performance.

 
A broader goal is to help you appreciate the importance of expectations, and the ways in which equilibrium behavior under uncertainty differs from equilibrium behavior under certainty.

There will be one in-class midterm and one final exam in this class, each worth 47.5 percent of your grade.  The date of the midterm will be announced in class. In addition, there will be several problem sets, cumulatively worth 5 percent of your grade. The final exam will not be explicitly cumulative, but the material covered in each part of the course will require a deep familiarity with the material covered in the preceding parts.

Students are encouraged to work in groups. Each group can hand in a single problem set on behalf of all its members. Please be sure to list all members of the group on such joint efforts. The size of such homework groups is limited to three people.

A reading list appears below. While the lectures are designed to be self-contained, you will almost surely find it essential to acquire the following texts:

• Hamilton, James D., 1994, Time Series Analysis, Princeton, New Jersey:  Princeton University Press.
• Romer, David, 2006, Advanced Macroeconomics, Third Edition, New York:  McGraw-Hill.

A second source of readings is a packet of technical notes, which I have installed on my web page at http://www.albany.edu/~jbjones/eco701/teknotes.pdf.  While I will not spend a lot of time reviewing these notes in class, the notes contain technical background that should be extremely helpful.

I also recommend that you spend time reviewing a good undergraduate textbook.  Three such books are:

• Abel, Andrew B., and Ben S. Bernanke, 2005, Macroeconomics, 5th Edition, Reading, Massachusetts: Addison-Wesley.
• Farmer, Roger E.A., 2002, Macroeconomics, 2nd Edition, Southwestern Press.
• Williamson, Stephen D., 2007, Macroeconomics, 3rd Edition, Reading, Massachusetts: Addison-Wesley.

There are many other texts that you might find useful. Professor Masters provides a list in his syllabus for the fall semester course.

1. Basic (U.S) Business Cycle Facts
• Review of statistics and introduction to stochastic processes
• The facts

 
2. The Keynesian View, Rational Expectations and Policy (In)effectiveness
• Helicopter tour of IS-LM and AD-AS models
• ARMA processes and conditional expectations
• AD-AS models with expectations
• Phillips curve
• Least squares projections
• Lucas’ signal extraction model

 
3. Optimal Consumption under Uncertainty
• Optimization under uncertainty
• Dynamic programming
• The basic consumption model
• Permanent income/life cycle hypothesis
• Random walk hypothesis
• Precautionary saving & liquidity constraints

 
4. Asset Pricing
• Introduction to rational expectations equilibria
• Linear expectational difference equations and lag operators
• The Lucas tree economy
• Extensions:  the equity premium, term structure, contingent claims

 
5. Real Business Cycles
• The basic stochastic growth model
• Linearization, calibration and simulation
• Criticisms and extensions

 
6. Multiple Equilibria and Sunspots
• Spillovers and strategic complementarities
• Sunspots in the overlapping generations model
• Sunspots in the stochastic growth model
• Evaluation

 
7. Additional Topics (Time Permitting)
• Non-stationary time series
• Vector autoregressions

Most of the items listed below can be found in the library.  In addition, students can copy my copies. To make this managable, I will request that one student borrow and copy the article for the entire class, and that the borrowed item be returned within 2 days.

Notation:  Items identified by the author are one of the texts listed above.  Items marked with a "box" are technical background readings. Items from the Abel-Bernanke or Williamson books are "intuition" background readings; in most cases, I would recommend these--or equivalent readings from the Farmer book--much more strongly than the technical readings (excluding the technical notes). Underlined readings are linked to electronic journal archives.

1. Basic (U.S) Business Cycle Facts
• Williamson, Chapter 3; Abel & Bernanke Chapters 8.1-8.3.
• Hamilton, Chapter 3.1 and Appendix A.5.
• Kinal, Terrence, 1999, Statistics for Econometrics, manuscript, SUNY-Albany, Chapters 1-4.
• Romer, Chapters 4.1-4.2.
• King, Robert G., Charles I. Plosser, & Sergio T. Rebelo, 1988, "Production, Growth & Business Cycles I.  The Basic Neoclassical Model," Journal of Monetary Economics 21, pp. 195-232, especially pp. 225-231.
• Cooley, Thomas F., and Edward C. Prescott, 1995, "Economic Growth and Business Cycles," in Thomas F. Cooley (ed.), Frontiers of Business Cycle Research, Princeton, New Jersey:  Princeton University Press, pp. 1-38, especially pp. 26-33.
• King, Robert G., and Sergio T. Rebelo, 1999, "Resuscitating Real Business Cycles," in Michael Woodford and John B. Taylor (eds.), Handbook of Macroeconomics, Amsterdam:  North-Holland, Chapter 14, especially section 2.

 
2. The Keynesian View, Rational Expectations and Policy (In)effectiveness
• Romer, Chapters 5 and 6 (Part A).
• Abel & Bernanke, Chapters 9-12; Williamson, Chapters 9-12
• Hamilton, Chapters 3.1-3.5, 4.1-4.2, 4.8 and Appendix A.5.
• Lucas, Robert E. Jr., and Nancy L. Stokey, 1989, Recursive Methods in Economic Dynamics, Cambridge, Massachusetts:  Harvard University Press, Chapter 7.
• Kinal, Terrence, 1999, Statistics for Econometrics, manuscript, SUNY-Albany, Chapters 1-4.
• Lucas, Robert E. Jr., 1976, "Econometric Policy Evaluation:  A Critique," in Karl Brunner and Allan H. Meltzer (eds.), Carnegie-Rochester Series on Public Policy 1, pp. 19-46.

 
3. Optimal Consumption under Uncertainty
• Technical Note Packet:  "Optimization Under Uncertainty."
• One of:  (i) Sargent, Thomas J., 1987, Dynamic Macroeconomic Theory, Cambridge, Massachusetts: Harvard University Press, Chapter 1; or (ii) Ljungqvist, Lars, and Thomas Sargent, 2004, Recursive Macroeconomic Theory, 2nd Edition, Cambridge, Massachusetts: MIT Press, Chapter 3.
• Romer, Chapter 7.
• Williamson, Chapter 8; Abel & Bernanke, Appendix 4.A.
• Deaton, Angus, 1991, "Saving and Liquidity Constraints," Econometrica 59, pp. 1221-1248.
• Gourinchas, Pierre-Olivier, and Jonathan Parker, 2002, "Consumption Over the Life Cycle," Econometrica 70(1), pp. 47-89.

 
4. Asset Pricing
• One of:  (i) Sargent, Chapter 3; or (ii) Ljungqvist and Sargent, Chapter 13.
• Technical Notes:  "Lag Operators and Univariate Linear Expectational Difference Equations."
• Hamilton, Chapters 1 & 2.
• Romer, Chapter 7.

 
5. Real Business Cycles
• Solow, Robert M., 1957, "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39, pp. 312-320.
• Williamson, Chapters 8-9; Abel and Bernanke, Chapters 6.1, 10.
• Technical Note Packet:  "Saddle-Path Stability in Vector Linear Expectational Difference Equations."
• Romer, Chapter 4.
• Low, Hamish, 2005, "Self-insurance in a life-cycle model of labour supply and savings," Review of Economic Dynamics 8, pp. 945–975.
• Stadler, George W., 1994, "Real Business Cycles," Journal of Economic Literature 33, pp. 1750-1783.
• King, Robert G., Charles I. Plosser, & Sergio T. Rebelo, 1988, "Production, Growth & Business Cycles I.  The Basic Neoclassical Model," Journal of Monetary Economics 21, pp. 195-232.
• Rebelo, Sergio T., 2005, "Real Business Cycle Models: Past, Present, and Future," Scandinavian Journal of Economics, 107(2), pp. 217–238.
• King, Robert G., and Sergio T. Rebelo, 1999, "Resuscitating Real Business Cycles," in Michael Woodford and John B. Taylor (eds.), Handbook of Macroeconomics, Amsterdam:  North-Holland, Chapter 14, especially section 2.
• King, Robert G., Charles I. Plosser, & Sergio T. Rebelo, 2002, "Production, Growth & Business Cycles I.  Technical Appendix," Computational Economics 20, pp. 87-116.
• Baxter, Marianne and Robert G. King, 1993, "Fiscal Policy in General Equilibrium," American Economic Review 83, pp. 315-334.
• Cogley, Timothy and James M. Nason, 1995, "Output Dynamics in Real-Business-Cycle Models," American Economic Review 85, pp. 492-511.
• Cooper, Russell, and Alok Johri, 2002, "Learning-by-doing and Aggregate Fluctuations," Journal of Monetary Economics 49(8), pp. 1539-1566.
• Boldrin, Michele, Lawrence J. Christiano, and Jonas D. M. Fisher, 2001, "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review 91, pp. 149-166.
• Burnside, Craig and Martin Eichenbaum, 1996, "Factor-Hoarding and the Propagation of Business Cycle Shocks," American Economic Review 86, pp. 1154-1174.
• Prescott, Edward C., 2002,"Prosperity and Depression," American Economic Review 92, pp. 1-15.

 
6. Multiple Equilibria and Sunspots
• Bryant, John, 1983, "A Simple Rational Expectations Keynes-Type Model," Quarterly Journal of Economics 98, pp. 525-528.
• Murphy, Kevin, Andrei Sheifer, and Robert Vishny, 1989, "Industrialization and the Big Push," Journal of Political Economy 97, pp. 1003-1026.
• Cooper, Russell and Andrew John, 1988, "Coordinating Coordination Failures in Keynesian Models," Quarterly Journal of Economics 103, pp. 441-463.
• Romer, Chapter 6.14.
• Farmer, Roger E.A., and Jang-Ting Guo, 1994, "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory 63, pp. 42-72.
• Harrison, Sharon, and Mark Weder, 2006, "Did sunspot forces cause the Great Depression?"Journal of Monetary Economics 53(7), pp. 1327–1339.
• Farmer, Roger E.A., 1999, Macroeconomics of Self-fulfilling Prophecies, 2nd Edition, Cambridge, Massachusetts: MIT press, Chapters 1, 2, 7, 8.1-8.2, 10.
• Schmitt-Grohe, Stephanie, 2000, "Endogenous Business Cycles and the Dynamics of Output, Hours and Consumption," American Economic Review 90(5), pp. 1136-1159.
• Wen, Yi and Pingfei Wang, 2006, "Imperfect Competition and Sunspots", Federal Reserve Bank of St. Louis Working Paper 2006-15A.
• Wen, Yi and Pingfei Wang, 2006, "Imperfect Competition and Indeterminacy of Aggregate Output", Federal Reserve Bank of St. Louis Working Paper 2006-17A.

 
7. Additional Topics (Time Permitting)
• Chari, V.V., Patrick Kehoe and Ellen McGrattan, 2007, "Business Cycle Accounting", Econometrica 75(3), pp. 781–836.
• Prescott, Edward C., 2002, "Prosperity and Depression," American Economic Review 92(2), pp. 1-15.
• Hamilton, Chapters 15, 17.5 (p. 504).
• Romer, Chapter 4.8.
• Hamilton, Chapters 10.1, 10.2, 11.2, 11.4-11.6.
• Sims, Christopher A., 1980, "Macroeconomics and Reality," Econometrica 48, pp. 1-48.