Macro Theory I

Cem Karayalcin

Office Hours: TuTh: 2pm-3pm

Office Phone: 305-348-3285



Tentative Syllabus Spring 2017


The purpose of this course is to provide an introduction to the methods and topics of modern intertemporal macroeconomics. Students are expected to have mastered the material normally taught in an advanced undergraduate macroeconomics course. Since that material will not be reviewed, those who are uncertain about their preparation should review any of the several available undergraduate texts.


The course does not require a high level of mathematical sophistication. Only basic knowledge of calculus and linear algebra is assumed. Part of the material to be covered in the course will make use of difference equations. Though this material will be discussed in class, students are advised to review these techniques using, for instance, Fundamental Methods of Mathematical Economics by Chiang or Mathematics for Economists by Simon and Blume.


We will be using material from several recent graduate macroeconomics textbooks. These include (in alphabetical order)


Dynamic Economics Adda and Cooper (A&C in what follows)

Dynamic Macroeconomic Theory by Sargent (DMT in what follows)

Foundations of International Macroeconomics by Obstfeld and Rogoff (O&R in what follows)

Intertemporal Macroeconomics by Azariadis (IM in what follows)

Lectures on Macroeconomics by Blanchard and Fischer (B&F in what follows)

Macroeconomics of Self-fulfilling Prophecies by Farmer (MSP in what follows)

Monetary Policy, Inflation, and the Business Cycle by Gali (MPIB in what follows)

Recursive Macroeconomic Theory by Ljunqvist and Sargent (L&S in what follows)

Recursive Methods in Economic Dynamics by Stokey and Lucas (S&L in what follows)


A suggested supplemental reading list is attached. Students will receive the Lecture Notes in pdf format.


There will be two midterms and one final exam. These have the weights of 25%, 25%, and 35%. Homeworks, which will be assigned in class, carry a weight of 15%.


1 Remembrance of the Models Past


Blanchard, Olivier, 2000. “What do we Know about Macroeconomics that Fisher and Wicksell did not?” NBER Working Paper 7550.

Woodford, Michael, 1999. “Revolution and Evolution in Twentieth-Century Macroeconomics,” manuscript.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest, and Money London: Macmillan.

B&F, Chapter 10, pp. 529-536.

Abel, Andrew B., and Bernanke, Ben S. 1992. Macroeconomics. Reading, Mass.: Addison-Wesley.

Hall, Robert E., and Taylor, John B. 1991. Macroeconomics. Third edition. New York: W. W. Norton.

Mankiw, N. Gregory. 1994. Macroeconomics. Second edition. New York: Worth.

Tobin, James, and Brainard, William. 1963. "Financial Intermediaries and the Effectiveness of Monetary Control." American Economic Review 53 (May): 383-400.

Kashyap, Anil K, and Stein, Jeremy C. 1994. "Monetary Policy and Bank Lending." In N. Gregory Mankiw, ed., Monetary Policy, 221-256. Chicago: University of Chicago Press.

Dunlop, John T. 1938. "The Movement in Real and Money Wage Rates." Economic Journal 48 (September): 413-434.

Beaudry, Paul, and DiNardo, John. 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data." Journal of Political Economy 99 (August): 665-688

Solon, Gary, Barsky, Robert, and Parker, Jonathan A, 1994. "Measuring the Cyclicailty of Real Wages: How Important Is Composition Bias?" Quarterly Journal of Economics 109 (February): 1-25.

Bils, Mark 1.1985. "Real Wages over the Business Cycle: Evidence from Panel Data." Journal of Political Economy 93 (August): 666-689.

Chevalier, Judith A., and Scharfstein, David S. 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence." National Bureau of Economic Research Working Paper No.4614 (January).

Friedman, Milton. 1968. "The Role of Monetary Policy." American Economic Review 58 (March): 1-17.

Phelps, Edmund S. 1968. "Money-Wage Dynamics and Labor Market Equilibrium." Journal of Political Economy 76 July/August, Part 2): 678-711.

Azariadis, Costas. 1993. Intertemporal Macroeconomics, Cambridge, Blackwell. Chapters 1-4.

McCafferty, Stephen. 1990. Macroeconomic Theory, Harper and Row, New York.


2. Intertemporal Macroeconomic Models


A. Difference Equations





B. Dynamic Programming






C. Consumption and Saving

A&C, ch. 6

Obstfeld & Rogoff Ch.1, 2 and 3, Supplements to ch. 2 (A and C)

B&F Ch. 6.1-6.2

Modigliani, F. and R. Brumberg. 1954. “Utility analysis and the consumption function: An interpretation of cross-section data,” in K. Kurihara, ed., Post-Keynesian Economics, 388-436. New Brunswick, NJ: Rutgers University Press.

Friedman, M. 1957. A Theory of the Consumption Function. Princeton, NJ: Princeton University Press. Hall, R. 1978. “Stochastic implications of the life cycle-permanent income hypothesis: Theory and evidence.” Journal of Political Economy 86: 971-987.

Campbell,J. and G. Mankiw. 1989. “Consumption, income, and interest rates: reinterpreting the time series evidence.” NBER Macroeconomics Annual 4: 185-216.

Shea, J. 1995. “Union contracts and the life-cycle/permanent income hypothesis.” American Economic Review 85: 186-200.

Parker, J. 1999. “The response of household consumption to predictable changes in social security taxes.” American Economic Review 89: 959-973.

Souleless, N. 1999. “The response of household consumption to income tax refunds.” American Economic Review 89: 947-958.

Hubbard, G., J. Skinner, and S. Zeldes. 1995. “Precautionary saving and social insurance.” Journal of Political Economy 103: 360-399.


D. Investment

A&C, ch. 8

Obstfeld & Rogoff Ch. 1 and 2

B&F Sections 2.4 and 6.3-6.4

Hall, R. and D. Jorgensen. 1967. “Tax policy and investment behavior.” American Economic Review 57: 391-414.

Lucas, R. 1967. “Adjustment costs and the theory of supply.” Journal of Political Economy 75: 321-334.

Foley, D. and M. Sidrauski. 1970. “Portfolio choice, investment and growth.” American Economic Review 60: 44-63.

Mussa, M. 1977. “External and internal adjustment costs and the theory of aggregate and firm investment.” Economica 44: 163-178.

Hayashi, F. 1982. “Tobin’s marginal q and average q: A neoclassical interpretation.” Econometrica 50: 213-224.

Cooper, R. , J. Haltiwanger, and L. Power. 1999. “Machine replacement and the business cycle: Lumps and bumps.” American Economic Review 89: 921-946.

Caballero, R. 1999. “Aggregate investment,” in J. Taylor and M. Woodford, eds., Handbook of Macroeconomics, 813-862. Amsterdam, Elsevier.

Goolsbee, A. 1998. “Investment tax incentives, prices, and the supply of capital goods.” Quarterly Journal of Economics 113: 121-148.


E. General Equilibrium


Ramsey, F. 1928. “A mathematical theory of saving.” Economic Journal 38: 543-559.

Obstfeld & Rogoff Ch. 7

A&C ch.5

Campbell, J. Y. 1994. “Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model,” Journal of Monetary Economics 33: 463-506.

MPIB ch. 3

Uhlig, Harald, 1997. “A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily,” at

Epstein, L. and A. Hynes. 1983. “The rate of time preference and dynamic economic analysis.” Journal of Political Economy 91: 611-635.

Becker, R. 1980. “On the long-run steady state in a simple dynamic model of equilibrium with heterogeneous households.” Quarterly Journal of Economics 95: 375-382.

Michel, P. “On the transversality condition in infinite horizon optimal problems.” Econometrica 50: 975-986.

Krugman, P., Kathryn Dominquez, and Kenneth Rogoff. 1998. “It’s Baaaack: Japan’s Slump and the Return of the Liquidity Trap.” Brookings Papers on Economic Activity 1998: 137-205.

Calvo, Guillermo. 1983. “Staggered Prices in a Utility Maximizing Framework,” Journal of Monetary Economics 12, no. 3, 383–398. 

Taylor, John B. 1999. “A Historical Analysis of Monetary Policy Rules,” in J. B. Taylor (ed.), Monetary Policy Rules, University of Chicago Press, Chicago, IL. 

Woodford, Michael. 1996. “Control of the Public Debt: A Requirement for Price Stability,” NBER WP 5684. 

Galí, Jordi, and Pau Rabanal. 2004. “Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data?” NBER Macroeconomics Annual 2004, 225–288.

Golosov, Mikhail, and Robert E. Lucas. 2007. “Menu Costs and Phillips Curves,” Journal of Political Economy 115, no. 2, 171–199.

Eggertson, Gauti, and Neil Mehrotra. 2014. “A Model of Secular Stagnation,” NBER WP 20574.