Macroeconomic Theory II
Dr. Philip Shaw
Dealy Hall, East 522
Office Hours: Monday, 2pm-3:30pm & Thursday 2pm-3:30pm.
II is focused on the dynamic behavior of households, firms and the
aggregate economy. The course consists of three parts. The first part
will focus on the theory of consumption behavior and savings at the
individual and aggregate level. The second part of the course will
investigate overlapping-generations models (OLG) focusing on both
endowment and production economies. Finally we will review real
business cycle theory and conclude by exploring some relatively recent
developments in the formulation and computation of heterogeneous
The grading for the class breaks down as follows:
Final Exam (45%)
Problem Sets (10%)
Deaton, A. Understanding Consumption. Oxford Press, 1992.
Romer, D. Advanced Macroeconomics. 3rd or 4th edition, McGraw-Hill, 2005.
Wickens, Michael. Macroeconomic Theory. 1st Edition, Princeton University Press,
McCandless and Wallace. Introduction to Dynamic Macroeconomic Theory: An Overlapping Generations Approach. 1st ed., Harvard University Press, 1992.
Practice Problems Posted Below
I. Review of Dynamic Programming
Wickens, 2008. Appendix 15.5
Bellman, R. 1954. "The Theory of Dynamic Programming". RAND Working Paper P-550. Download Here!
II. Theory of Consumption Behavior
A. The Basics
Deaton, 1992. Preface, Chapter 1.
Romer chapter 7.
Modigliani, F. 1986. "Life Cycle, Individual Thrift and the Wealth of Nations". American Economic Review 76, 297-313. Download Here!
Deaton, 1992. Chapter 3.
Hall, R.. 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence". Journal of Political Economy 86, 971-987. Download Here!
Flavin, M.. 1981. "The Adjustment of Consumption to Changing Expectations About Future Income". Journal of Political Economy 89, 974-1009. Download Here!
C. Consumption Under Uncertainty
Deaton, 1992. Chapter 6.
Carroll, C. 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints". NBER Working paper W9397. Download Here!
D. Consumption Based Asset Pricing
Deaton, 1992. Chapter 2.2.
Parker, J. 2003. "Consumption Risk and Expected Stock Returns". American Economic Review Papers and Proceedings, 93(2). Download Here!
Mehra, R. and E. Prescott 1985. "The Equity Premium: A Puzzle". Journal of Monetary Economics, 15, 145-161. Download Here!
III. Overlapping Generations Models
A. Endowment Economies
McCandless and Wallace Chapters 1-3.
Balasko, Y. and Shell, K. 1980 "The Overlapping-Generations Model, I: The Case of Pure Exchange without Money". Journal of Economic Theory, 23, 281-306. Download Here!
Weil, P. 2008. "Overlapping Generations: The First Jubilee". Journal of Economic Perspectives, 22, 115-134. Download Here!
B. Production Economies
McCandless and Wallace Chapters 9.
Romer Chapter 2 part B.
IV. Real Business Cycle Theory and Beyond
A. RBC Models
Wickens Chapter 14
Kydland, Finn and Prescott, Edward, 1982. "Time to Build and Aggregate Fluctuations". Econometrica, 50(6), 1345-70. Download Here!
King, R. and Rebelo, S. 2000. "Resuscitating Real Business Cycles". NBER Working Papers 7534. Download Here!
Prescott, E. 1986. "Theory Ahead of Business Cycle Measurement". Federal Reserve Bank of Minneapolis, Quarterly Review, 10 (Fall). Download Here!
Summers, L. 1986. "Some Skeptical Observations on Real Business Cycle Theory". Federal Reserve Bank of Minneapolis, Quarterly Review (Fall). Download Here!
B. Heterogeneous Agent Models
Aiyagari, S. Rao 1994 "Uninsured Idiosycratic Risk and Aggregate Saving". The Quarterly Journal of Economics, 109(3), 659-684. Download Here!
Hansen, G. and Imrohoroglu, A. 1992 "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard". Journal of Political Economy, 100(1), 118-42. Download Here!
Krusell, P. and Smith, A. 1998. "Income and Wealth Heterogeneity in the Macroeconomy". Journal of Political Economy, 106, 867-96. Download Here!
Huggett, M. 1996 "Wealth Distribution in Life-Cycle Economies". Journal of Monetary Economics, 38, 469-94. Download Here!