Objectives

Macro II is an advanced Macro course being taught in French, and offered to 3rd-year students in both Economics and in Management specializations. Other students (e.g. Mobility, qualifying year MSc, other faculties) are also admissible with professor's consent. Students are expected to have a solid grasp of Microeconomic and Mathematical Economics techniques, including optimization, partial and general equilibriums.

Macro II draws parallels between the Centralized (Social planner) and Decentralized (competitive equilibrium) Economies allocations. We insist on the diffrences between the two that are induced by various distortions (fiscal, price control and rigidities, ...), as well as on the various fiscal and monetary policy tolls that can be used to alleviate these differences.

The main analytical framework is the dynamic general equilibrium, and the main tool is dynamic optimization which will be introduced early on. We emphasize the Micro foundations underlying the Macro models, as well as the Econometric analysis of the various empirical regularities that these models must be able to reproduce.

Contents

1- Centralized economy (Wickens 2)

• Optimal growth (Ramsey)
• Golden Rule
• Optimal allocation
• Labor and leisure
• Adjustment costs

2- Economic growth (Wickens 3; Romer 1-3; Sørensen/W-J 5-9)

• Solow-Swan model
• Optimal growth
• Endogenous growth

3- Decentralized economy (Wickens 4; Romer 8, 9; Sørensen/W-J 14-15)

• Consumption and savings
• Labor supply
• Firms' allocations
• General equilibrium
• Comparisons with centralized economy
• Overlapping Generations Model (OLG)

4- Government expenditures and public finance (Wickens 5, 6; Romer 12)

• Government budget constraint
• Financing government expenditures
• Ricardian equivalence
• Fiscal sustainability
• Optimal public finance
• Fiscal smoothing

5- Open economy (Wickens 7; Romer 4)

• Sustainability and optimal alocation
• Traded and non-traded goods
• Terms of trade and the real exchange rate
• Twin deficits

6- Introduction monetary economy (Wickens 8)

• Historical perspectives and roles of money
• Nominal budget constraint
• Cash-in-Advance model (CIA)
• Money-in-the-utility model (MIU)
• Intermediate good and Shopping-time model (MIG)
• Empirical evidence
• Super-neutrality

7- Monetary policy (Romer 11; Wickens 14)

• Inflation, money growth, and interest rates
• Term structure of the interest rates
• Micro foundations for stabilization policies
• Backward-looking expectations
• Discussion monetary policy
• Dynamic inconsistency
• Inflation

8- Nominal rigidities* (Wickens 9; Romer 5-7; Sørensen/W-J 16-17)

• Empirical evidence prices, salaries
• Monopolistic competition
• Nominal rigidities, Taylor and Calvo models
• New-Keynesian Phillips curve

9- Unemployment* (Wickens 10; Romer 10; Sørensen/W-J 10-12)

• Empirical evidence
• Search and Matching model
• Efficiency wage model
• Sticky wages and unemployment

10- Nominal exchange rates* (Wickens 13)

• Historical perspectives
• Interest rate parities
• Keynesian IS-LM-BP mode
• Mundell-Fleming model
• Monetary model
• Dornbusch model

*: If time permits

References

• Michael Wickens, Macroeconomic Theory: A Dynamic General Equilibrium Approach, 2nd ed., Princeton University Press, Princeton and Oxford, 2012.
• David Romer, Advanced Macroeconomics, McGraw-Hill, 4th ed, 2011.
• Peter Birch Sørensen and Hans Jørgen Whitta-Jacobsen, Introducing advanced macroeconomics: Growth and business cycles, 2nd ed., McGraw-Hill, London, 2011.
• Chiang, A. C., Fundamental Methods of Mathematical Economics, Mc-Graw-Hill Book Company, 1984.
• Simon, C. P. and L. Blume, Mathematics for Economists, W.W. Norton & Company, 1994.

Evaluation

First attempt

Exam:

Written 2 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

1. Mid-term exam: 50%. This exam will be held in class and covers material from first half of course.
2. Final online exam: 50%. This exam will be held during formal exam period and covers material from second half of course.

Retake

Exam:

Written 2 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

In the event where a retake exam would be required, this exam will cover all the course material (i.e. from first and second half) and only the grade from this exam will be used to compute the final grade.