MACROECONOMICS VI

1st Module, 2002-2003

Professors: Ben Bental,  Kirill Sosunov

TAs:

General

This is the last module of the sequence. As such it enjoys the advantage and suffers from the disadvantages of approaching “capital T”. In particular, it must take as given whatever has been done before, but on the other hand it need not worry about subsequent modules.

I intend to present to you the dynamic general equilibrium approach to macroeconomics, and some of its implications. The cornerstone of this approach is the seminal asset-pricing model of Lucas (1978). We will discuss the empirical implications of this model, in particular as analyzed by the highly influential Mehra and Prsecott (1982) “equity premium puzzle” paper.

This basic framework has been extended during the last two decades in many directions. By explicitly modeling the production technology, the approach has been used to analyze questions related to economic growth, labor market phenomena, and many other aspects of the “real economy”.

The other direction into which this approach has evolved is the analysis of the role of money. This has been done mainly within the framework of a closed economy, although some work on international economics has also been done. We will discuss Lucas’ own extension to include money. Time permitting, we may extend the monetary aspects to discuss the real impact of money and price rigidities.

There will be a formal homework once a week. Students are required to turn in their answers in the following week. The grades on the homework will constitute 25% of this portion of the course in the final grade. The relevant questions in the final exam will supplement the remaining 75%.

There will be no opportunity to take make-up exams. In case of a failing grade, students may take another exam. In such a case, the final grade will not exceed 3+.

Books:

Topics and Readings

1. The Lucas “tree” model

Robert E. Lucas, Jr.: “Asset Prices in an Exchange Economy”, Econometrica 46(6), 1978, 1426-1445.

Rajnish Mehra and Edward C. Prescott: “The Equity Premium Puzzle”, Journal of Monetary Economics 15, 1985, 45-61.

S, chapter 3.

OR, chapter 5.

2. Money in the Lucas model

Robert E. Lucas, Jr.: “Interest Rates and Currency Prices in a Two-Country World”, Journal of Monetary Economics 10, 1982, 335-60.

Lucas, R. E. Jr.: “Money in a Theory of Finance”, in: K. Brunner and A. Meltzer, eds: Essays on the Macroeconomic Implications of Financial and Labor Markets and Political Processes, Carnegie-Rochester Series on Public Policy, vol 21, 1984.

3. Limited participation

Christiano, L. J., M. Eichenbaum and C. E. Evans: “Sticky Price and Limited Participation Models of Money: A Comparison”, European Economic Review 41(6), June 1997, 1201-49.

4. Uncertain and sequential trade

Eden, B.: “The Adjustment of Prices to Monetary Shocks When Trade Is Uncertain and Sequential”, Journal of Political Economy, 1994, 493 - 509.

Bental, B. and B. Eden: “Money and Inventories in an Economy with Uncertain and Sequential Trade”, Journal of Monetary Economics, 1996, 445 - 459.