Macroeconomics Summer School : Program content

by Tobias Broer

This course will introduce students to the analysis of income and wealth heterogeneity in macroeconomic models, highlighting their role for the levels and dynamics of asset prices, aggregate demand, and the effects of policies. The focus will be on simple, tractable models.

Structure

• Introduction: Heterogeneity in macroeconomics, and in data
  • Why macroeconomics?
  • Why ’heterogeneity’?
  • Key facts about inequality
• A first look at heterogeneity in a two-period framework
  • Aggregation with complete markets
  • Incomplete markets and precautionary savings
  • Towards general equilibrium
• From two periods to infinite horizon
  • Aggregation
  • The permanent-income hypothesis
  • Precautionary savings
  • Concavity of the consumption function
• Equilibria with idiosyncratic risk and incomplete markets
  • Stationary equilibrium with idiosyncratic risk and incomplete markets
  • Key properties
  • Applications: Precautionary savings, optimal redistribution, and the optimal quantity of public debt
  • The complications with aggregate risk
• Heterogeneous-agent New Keynesian models

by Edouard Challe

The course aims to acquaint students with the basics of asset pricing and the interactions between asset prices and the macroeconomy from the perspective of dynamic general equilibrium theory. We will cover the foundations of the “consumption-based” asset pricing model under complete markets, the empirical/quantitative puzzles into which it runs – the equity premium puzzle, the risk-free rate puzzle and the equity volatility puzzle – and survey the leading proposed solutions: habit formation, recursive utility, long-run risk and disaster risk.

Structure

• The equity premium puzzle
• Habit formation models of asset pricing
• Rare disasters models of asset pricing
• Long-run risks and asset prices

Selected key references

• Bansal R. & Yaron A., 2004, “Risks for the long run: A potential resolution of asset pricing puzzles”, Journal of Finance, 59(4), pp 1481-1509.
• Barro R., 2009, “Rare disasters, asset prices, and welfare costs”, American Economic Review, 99(1), pp 243-264.
• Campbell J., 2017, Financial Decisions and Markets: A Course in Asset Pricing, Princeton University Press, Chapters 4-6.
• Campbell J. & Shiller R., 1988, “Stock prices, earnings, and expected dividends”, Journal of Finance, 43(3), pp 661-676.
• Campbell J. & Cochrane J., 1999, “By force of habit: A consumption-based explanation of aggregate stock market behavior”, Journal of Political Economy, 107(2), pp 205-251.
• Cochrane J., 2017, “Macro-finance”, Review of Finance, 21(3), pp 945-985.
• Ljungqvist L. & Sargent T., 2018, Recursive Macroeconomic Theory, MIT press, Chapters 8, 13 & 14.3-14.6.
• Mehra R. & Prescott E., 1985, “The equity premium: A puzzle”, Journal of Monetary Economics, 15(2), pp 145-161.

by Riccardo Cioffi

This course will introduce students to the main continuous-time models and methods used in modern macroeconomics. The lectures will feature a mix of tools and applications.

In terms of tools, we will cover continuous-time methods that are particularly useful for macroeconomists, especially to analyze models where the relevant state variable is a distribution. Such tools include Hamiltonians, Stochastic Calculus, Hamilton-Jacobi-Bellman equations, and Kolmogorov Forward Equations. However, rather than presenting an in-depth technical derivation of the methods, the course will aim to provide a hands-on approach for you to use these methods in your own research.

In terms of applications, you will likely already be familiar with the models we cover (such as the neoclassical growth model or the standard incomplete-markets models). These will serve both as a backbone and motivation for the above-mentioned tools, and to show how continuous-time methods also allow us to gain further intuition about the models’ behavior.

Structure

• Deterministic Optimal Control • Current-value Hamiltonian • The Neoclassical Growth Model • Phase Diagrams • Shooting Algorithm
• Deterministic HJB Equations • Hamilton-Jacobi-Bellman Equations • Finite-Difference Methods • Upwind Schemes • Explicit vs. Implicit Schemes • Non-convexities
• Stochastic Calculus and KF Equations • Preliminaries and Standard Stochastic Processes • Itô’s Lemma • Kolmogorov Forward Equations • Infinitesimal Generators 1
• Stochastic HJB Equations • Stochastic Optimal Control • The RBC Model • The Aiyagari Model • Boundary Conditions • Solving the Aiyagari Model in Continuous-Time

by Jean-Olivier Hairault

This class purports to review recent developments in labor macroeconomics. The course reviews the core intuition and mechanisms of the standard search and matching model. It uses this framework to study the unemployment volatility issue. It starts with an empirical investigation of the relative contribution of separations and hirings to the unemployment volatility and presents different extensions dealing with the Shimer puzzle (the inability of the standard model to explain the observed unemployment volatility). It reviews the standard explanations given to the observed high unemployment volatility, i.e., wage rigidity, search complementarities, aggregate demand and unemployment interactions.

Structure

• Basic concepts and Facts
• Unemployment fluctuations in the canonical matching model: solving the Shimer Puzzle
• Beyond the canonical matching model
• Aggregate demand and unemployment interactions

Selected key references

• Andolfatto D., 1996, “Business cycles and labor-market search”, The American Economic Review, 1 , pp 112-132.
• Blanchard O. & Diamond P., 1990, “The cyclical behavior of the gross flows of U.S. workers”, Brookings Papers on Economic Activity, 21(2), pp 85-156.
• Fujita S. & Ramey G., 2009, “The cyclicality of separation and job finding rates”, International Economic Review, 50(2), pp 415-430.
• Gomme P. & Lkhagvasuren D., 2015, “Worker search effort as an amplification mechanism”, Journal of Monetary Economics, 75, pp 106-122.
• Hagendorn M. & Manovskii I., 2008, “The cyclical behavior of equilibrium unemployment and vacancies revisited”, American Economic Review, 98(4), pp 1692-1706.
• Hairault J. O., Le Barbanchon T. & Sopraseuth T., 2015, “The cyclicality of the separation and job finding rates in France”, European Economic Review, 76, pp 60-84.
• Krusell P. & Smith A.A., 1998, “Income and wealth heterogeneity in the macroeconomy”, Journal of Political Economy, 106(5), pp 867-89.
• Pissarides C., 2000, Equilibrium Unemployment Theory, MIT Press.
• Ravn M. & Sterk V., 2013, Job uncertainty and deep recessions, University College London.
• Shimer R., 2005, “The Cyclical Behavior of Equilibrium and Vacancies Unemployment”, American Economic Review, 90(3), pp 482-498.

by Gilles Saint-Paul

A bubble is a deviation of an asset price from its fundamental value. We want to understand the conditions under which bubbles arise as well as their allocative consequences. The course will start with the analysis of rational bubbles in partial equilibrium. It will then examine the possibility of bubbles in general equilibrium models with overlapping generations, where they are similar to a Ponzi game; we show that their sustainability depends on whether or not the autarkic economy is dynamically inefficient, i.e., is such that there is capital overaccumulation. We will then move on to a more recent literature, studying the consequences of bubbles for long‐term growth, their role in models of financial accelerators, and the conditions for bubbles to arise in models with boundedly rational agents. We will conclude with recent papers on the effects of monetary policy on bubbles, if time permits.

Structure

• Rational bubbles in partial equilibrium
• Bubbles in Overlapping Generations models and dynamic inefficiency
• Bubbles in endogenous growth models
• Bubbles as collateral: financial accelerator
• Learning bubbles by boundedly rational agents
• Bubbles and monetary policy

Selected key references

• Adam K., Marcet A. & Nicolini J.-P., 2016, “Stock Market Volatility and Learning”, 71(1), pp 33-82.
• Blanchard O. J., & Watson M. W., 1982, “Bubbles, Rational Expectations, and Financial Markets” in Crisis in the Economic and Financial Structure, Lexington Books, pp 295-315.
• Franklin A. & Douglas G., 2001, Asset Price Bubbles and Monetary Policy, Center for Financial Institutions Working Papers N°01-26.
• Froot K. & Obstfeld M., 1991, “Intrinsic bubbles: the case of stock prices”, American Economic Review, 81(5), pp 1189-1124.
• Galí J., 2013, “Monetary policy and rational asset price bubbles”, NBER Working Paper N°18806.
• Martin A. & Ventura J., 2012, “Economic growth with bubbles”, American Economic Review, 102(6), pp 3033-3058.
• Olivier J., 2000, “Growth-enhancing bubbles”, International Economic Review, 41(1), pp 133-151.
• Tirole J., 1985, “Asset bubbles and overlapping generations”, Econometrica ,53(6), pp 1499-1528.