Economics serving society

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The PSE summer school macroeconomics program introduces participants to cutting-edge research on the topics listed below, and familiarizes them with the relevant methods needed to analyze them (econometric analysis, dynamic modelling). The objective of the course is to equip the participants with the background and tools that are needed to both contribute to these dynamic fields in terms of research, as well as to perform policy design and evaluation.


  • Heterogeneous agent models – Florin Bilbiie
  • Inequality and macroeconomics – Romain Rancière
  • Dynamic fiscal policy – Axelle Ferrière, Francesco Pappada
  • Unemployment in macroeconomics – Jean-Olivier Hairault
  • Bubbles – Gilles Saint-Paul

Heterogeneous agent models - Florin Bilbiie

In this class we will review the recent literature on dynamic stochastic general equilibrium models with heterogeneous agents. Heterogeneity in macroeconomics is important for several reasons. First, research has demonstrated the importance of credit as a driver of fluctuations, but credit only arises if people are heterogeneous enough for borrowers and lenders to coexist. Second, we know that fluctuations matter for welfare much more if agents are heterogeneous than if there is a representative agent. Third, heterogeneous agent models are the proper framework to analyze important issues such as credit constraints and the role of wealth distribution. The course will cover those issues.

Course structure

  • What is RANK not enough for? Aggregate Demand and Keynesian Cross
  • TANK (RANK-isomorphic): The New Keynesian Cross
  • THANK: Tractable HANK: idiosyncratic risk & precautionary saving; liquidity; cyclical risk
  • Optimal Monetary Policies in TANK & THANK
  • Liquidity Traps in THANK
  • Money-Liquidity
  • Capital
  • DSGE, estimation
  • Ways forward

Selected key references
- Woodford, M., 2011. Interest and prices: Foundations of a theory of monetary policy. Princeton University Press.
- Gali, J. 2010, “Monetary Policy, Inflation and the Business Cycle: An Introduction to the NK Framework”.
- Eggertsson, G. and M. Woodford. “The Zero Bound On Interest Rates and Optimal Monetary Policy,” Brookings Papers on Economic Activity 34, 2003-1 (2003): 139-235
- Christiano L., M. Eichenbaum and S. Rebelo (2011). “When Is the Government Spending Multiplier Large?” Journal of Political Economy, 119(1), pages 78 - 121
- Auerbach, Alan J. and Maurice Obstfeld (2005). “The Case for Open-Market Purchases In A Liquidity Trap,” American Economic Review
- Benhabib, J., S. Schmitt-Grohe, and M. Uribe (2002). “Avoiding Liquidity Traps,” Journal of Political Economy
- Bilbiie, F. (2016) “Optimal Forward Guidance”, American Economic Journal: Macroeconomics

Inequality and macroeconomics - Romain Rancière

In this part of the PSE summer school macroeconomics program we will cover various interactions between income distribution, wealth distribution and economic outcomes. It combines theoretical frameworks and model estimation.

Course structure

  • Trends in Income
  • Inequality Inequality and Growth
  • Inequality and Crises
  • Inequality, Aggregate Demand, and Monetary and Fiscal Policies
  • Inequality, Social Conflict, and Reforms

Selected key references
- Kumhof, M.; Rancière, R. and Winant, P. (2015) “Inequality, Leverage and Crises,” American Economic Review

Dynamic fiscal policies - Axelle Ferrière and Francesco Pappada

Fiscal policy is an important field of analysis in macroeconomics, which has recently evolved and advanced. In this part of the PSE summer school in macroeconomics we will analyze the optimal design of fiscal policy in closed and open economies, the role of the fiscal policy multiplier, and the determinants of sovereign debt and default. All these will be treated in reference to the frontier research on the topic.

Course structure

  • Optimal Fiscal Redistribution in Steady-State
  • Targeted Transfers and Aggregate Shocks
  • Fiscal Multipliers with Heterogeneous Agents: A Quantitative Approach
  • International Dimension of Fiscal Policy
  • Sovereign Debt and Default

Selected key references
- Floden, M. & J. Lindé (2001), “Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?,” Review of Economic Dynamics, Volume 4, Issue 2.
- Ferriere, Axelle, Gruebener, Philipp, Navarro, Gaston & Oliko Vardishvili (2020), “Larger Transfers Financed with More Progressive Taxes? On the Optimal Design of Taxes and Transfers”.
- Kaplan, Greg and Giovanni Violante (2014), “A Model of the Consumption Response to Fiscal Stimulus Payments”m Econometrica, 82(4), 1199-1239.
- McKay, Alisdar & Ricardo Reis (2016), “The Role of Automatic Stabilizers in the U.S. Business Cycle,” Econometrica, vol. 84, pages 141-194,
- Hagedorn, Marcus & Iourii Manovski & Kurt Mitman (2019), “The Fiscal Multiplier”, NBER Working paper 25571.
- Müller, Gernot J. (2008), “Understanding the dynamic effects of government spending on foreign trade”, Journal of International Money and Finance, Volume 27
- Corsetti, Giancarlo & Gernot Müller and André Meier (2012), “Fiscal stimulus with spending reversals”, Review of Economics and Statistics 94(4), 878-895
- Arellano, Cristina (2008). “Default Risk and Income Fluctuations in Emerging Economies.” American Economic Review, 98 (3): 690-712.
- Pappadà, Francesco and Yanos Zylberberg (2017), “Austerity and tax compliance”, European Economic Review, 100 (C), 506-524

Bubbles - Gilles Saint-Paul

This course will introduce participants to the literature on asset bubbles. A bubble is a deviation of an asset price from its fundamental value. We wish to understand the conditions under which bubbles arise as well as their allocative consequences. We 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 and their sustainability depends on whether or not the autarkic economy is dynamically inefficient, i.e., involves excess savings. We will then move on to a more recent literature that studyies 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.

Course 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
- Barlevy, Gadi (2007), “Economic theory and asset bubbles”, Federal Reserve Bank of Chicago Economic Perspectives
- Froot, Kenneth and Maurice Obstfeld (1991): “Intrinsic bubbles: the case of stock prices” American Economic Review 81(5) 1189-1124
- Tirole, Jean, 1985 “Asset bubbles and overlapping generations”, Econometrica
- Olivier, Jacques, “Growth-enhancing bubbles”, International Economic Review, 41, 1, 133-151
- Kocherlakota, Narayana (2009), “Bursting bubbles: Consequences and Cures” Federal Reserve Board of Minneapolis Working Paper
- Martin, A. and J. Ventura (2012), “Economic growth with bubbles”, American Economic Review, 102 (6), 2012, 3033-3058
- Adam, Marcet and Nicolini, “Stock Market Volatility and Learning”, 2008
- Timmermann, A. (1993): “How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices,” Quarterly Journal of Economics, 108, 1135—1145.
- Gertler, Mark, and Ben Bernanke. 1999. “Monetary Policy and Asset Price Volatility” in New Challenges for Monetary Policy, Kansas City: Federal Reserve Bank of Kansas City.

Unemployment and macroeconomics - Jean-Olivier Hairault

This class reviews recent developments in labor macroeconomics. We will review the core ideas and mechanisms of the standard search and matching model and then uses this framework to study the unemployment volatility issue. We will start with an empirical investigation of the relative contribution of separation and hiring to unemployment volatility and then present different extensions dealing with the Shimer’s puzzle (the inability of the standard model to explain the observed unemployment volatility). We will discuss the standard explanations given to the observed high unemployment volatility, i.e., wage rigidity, search complementarities, aggregate demand and unemployment interactions.

Course structure

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

Selected key references
- Blanchard, O. & Diamond, P. (1990). “The cyclical behovior of the gross flows of U.S. workers”, Brookings Papers on Economic Activity, 21(2), 85–156.
- Fujita, S. & Ramey, G. (2009). “The cyclicality of separation and job finding rates”, International Economic Review, 50(2), 415–430.
- Hairault, J. O., Le Barbanchon, T., & Sopraseuth, T. (2015). “The cyclicality of the separation and job finding rates in France”, European Economic Review.
- Gomme, P. & Lkhagvasuren, D. (2015), ’Worker search effort as an amplification mechanism’, Journal of Monetary Econmics.
- Hagendorn, M. & Manovskii, I. (2008), “The cyclical behavior of equilibrium unemployment and vacancies revisited”, American Economic Review 98(4), 1692–1706.
- Pissarides, C. (2000). Equilibrium Unemployment Theory. MIT Press.
- Shimer, R. (2005). “The Cyclical Behavior of Equilibrium and Vacancies Unemployment”, American Economic Review, 90(3), 482–498.
- Andolfatto, D. (1996), “Business cycles and labor-market search”, American Economic Review (1), 112–132.
- Krusell, P. and Smith, A. A. (1998), “Income and wealth heterogeneity in the macroeconomy”, Journal of Political Economy, vol. 106(5), pp. 867-89
- Ravn, M.O. and Sterk, V. (2017), “Job uncertainty and deep recessions”, Journal of Monetary Economics, 90, pp.125-141.

Contents - Macroeconomics