Economics 6308

Macroeconomic Theory II
Spring 2006

Instructor: Chetan Dave

Contact Information: GR 3.412, (972) 883-2306, cdave@utdallas.edu.
Office Hours: TR, 11am-1pm and by appointment.
Lecture Times and Locations: TR, 2pm-3:15pm, CB 1.104.

Course Description

This course is the second in a sequence of core graduate macroeconomic theory courses. The
main aim is to introduce students to the methods of dynamic analyses in economics. The second aim
is to employ those methods in understanding aggregate empirical regularities with standard modern
macroeconomic theory. Therefore, primary course objectives include a thorough discussion of non-
stochastic and stochastic dynamics and optimization. Next, using these methods, applications
that illustrate the applied general equilibrium analyses that comprise modern theory are discussed.
The course presumes students have an undergraduate background in intermediate microeconomics,
differential calculus, integral calculus and matrix algebra.
The first part of the course introduces the basic tools in analyzing dynamical relations and
the optimization of functionals in continuos time. The course then proceeds to employ these
tools in introducing the basic models of modern macroeconomics: the neoclassical growth model
and the overlapping generations model. Having discussed non-stochastic dynamical systems and
applications, the course turns to the case of stochastic dynamics in discrete time. As before,
the tools for stochastic analyses, especially optimization, are discussed in depth first. With these
tools in hand the course proceeds to cover elements of the dynamic stochastic general equilibrium
paradigm that defines much of modern macroeconomic research.
The above tools and topics should require an entire semester, however, given fast progress,
additional topics that could be covered include: efficiency wages, search models of money and
adaptive learning of rational expectations equilibria in economic theory.

Course Requirements

Formal evaluation for the course will consist of a midterm examination and a final examination
with each counting towards one-half of the course grade. In addition, there will be homework
assignments at the approximate rate of one every two to three weeks. These assignments will
be voluntary with answers provided, students should take the initiative as the assignments are
designed to ensure digestion of the technical material covered in lectures. Finally, students are
strongly encouraged to answer any end-of-chapter questions in the recommended texts; answers,
where not provided, can be obtained from the instructor.

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 Course Materials

The course material will consist largely of lecture notes and readings from the texts. A course
outline is provided below, details and deviations will follow as a function of the progress in each
lecture. Finally, students are strongly encouraged to bring up for discussion in lecture additional
topics with respect to the tools employed in modern dynamic economic analyses. Such participation
can only enhance learning opportunities and will well serve our main goals.
The following are the reference texts for the course. The course material is drawn primarily
from these texts however none of the texts will be followed rigorously. The texts are organized
around the categories of primarily tools or primarily topics; one text from each category has been
ordered from the bookstore and has a star next to its reference. Finally, each of the texts has been
assigned a code in boldface after the reference, this code is used in specifying the readings in the
course outline.
Topical Texts:

• Azariadis, C. (1993), Intertemporal Macroeconomics, Blackwell. [A]

• Barro, R. & Sala-i-Martin, X. (1995), Economic Growth, . [BS]∗

• Blanchard, O. and Fischer, S. (1989), Lectures on Macroeconomics, MIT Press. [BF]

• Romer, D. (2001), Advanced Macroeconomics, McGraw-Hill. [R]

Technical Tools Texts:

• Chiang, A. (1992), Elements of Dynamic Optimization, McGraw Hill. [C]∗

• Hamilton, J. (1994), Time Series Analysis, Princeton. [H]

Topics and Tools Texts:

• Sargent, T. (1987), Macroeconomic Theory, Academic Press. [S]∗

• Whiteman, C. (1987), Problems in Macroeconomic Theory, Academic Press. [W]

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 Course Outline

1. Introduction

(a) Aims, Objectives and Stylized Facts

(b) Helicopter Tour: Topics [BF: Chapter 1, S: Chapters 1-2]
(c) Helicopter Tour: Tools [A: Chapter 1]
(d) Production, Utility and Elements of General Equilibrium
Additional Readings:
Blanchard, Olivier. 2000. “What Do We Know About Macroeconomics That
Fisher and Wicksell Did Not?”, Quarterly Journal of Economics, v. 115: 1375-
1409.
Woodford, Michael. 1999. “Revolution and Evolution in Twentieth-Century Macro-
economics”, Columbia University, mimeo. [http://www.columbia.edu/~mw2230/]

2. Dynamical Systems I: Deterministic Tools

(a) Basic Concepts and Scalar Dynamics [A: Chapters 1 & 2, S: Chapter 9, H: Chapters 1
& 2]
(b) Systems of Equations and Linearization Techniques [A: Chapters 4 & 6]
(c) Dynamic Optimization [BF: Chapter 2, C: Chapters 2, 7 & 8]

3. Application I: Neo-Classical Growth

(a) Solow Growth [R: Chapter 1]

(b) Optimal Growth [BF: Chapter 2, R: Chapter 2A]

4. Application II: Endogenous Growth

(a) AK Growth [BS: Chapter 4]

(b) R&D and Growth [R: Chapter 3]

5. Dynamical Systems II: Stochastic Tools

(a) Projections [S: Chapter 10]

(b) Stochastic Processes [S: Chapter 11, H: Chapter 3]
(c) Stochastic Optimization [S: Chapter 9]

6. Application III: Competitive Behavior

(a) Real Business Cycles [R: Chapter 4, BF: Chapter 7]

(b) Money and Output [R: Chapters 6A and 10, BF: Chapter 11]

7. Application IV: Non-Competitive Behavior and Additional Topics

(a) Nominal Rigidities [R: Chapters 6B & 6C, BF: Chapter 8]

(b) Consumption and Investment: [R: Chapters 7 & 8, BF: Chapter 6]