Graduate Macro 2


Lectures are on Tuesdays, 10:15-12:15, in room 11 (27, rue Saint-Guillaume).

This is the second  sequence of graduate macroeconomics, for EPP students. The course largely focuses on models of the business cycle, and search-and-matching models of the labor market. The course does not follow any single textbook, but uses a mix of textbook chapters and research papers.


Tutorials are held in three groups on Monday afternoons. Attendance is compulsory. Two of the tutorials (the 1st and the 4th) will be in a computer lab. There will be a problem set for almost every tutorial. Two of these problem sets will be handed in, graded, and will count towards the final assessment. With questions regarding the problem sets and the tutorials please contact Pierrick Clerc ( or Aseem Patel (, who will be running the tutorials.

NEW MATERIAL *** exam 2012; exam 2013 ***


Topic 1: Dynamic Stochastic General Equilibrium Models

Topic 1.1: Business cycle facts, basic model, equivalence of centralized and decentralized economy, solution methods: special cases, log-linearizing, stochastic dynamic programming

Lecture 1

Tutorial 1; Tutorial 1 code; Tutorial 1 data links; hp_filter; Tutorial 1 data; t1_data

Tutorial 2: Problem set 1; solutions


Plosser (1989): Understanding Real Business Cycles, Journal of Economic Perspectives, 3, 51-77

Mankiw (1989): Real Business Cycles: A New Keynesian Perspective, Journal of Economic Perspectives, 3, 79-90

Campbell (1994): Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model, Journal of Monetary Economics, 33, 463-506

Stock and Watson (1999): Business Cycle Fluctutations in US Macroeconomics Time Series, in Taylor and Woodford, Handbook of Macroeconomics, Vol 1A, Ch1, Section 3.

Mankiw (2006): The Macroeconomist as Scientist and Engineer, Journal of Economic Perspectives, 20, 29-46

*Ljungqvist and Sargent (2000): Recursive Macroeconomic Theory, MIT Press, Chapter 2 and 3

*Stokey, Lucas and Prescott (1989): Recursive Methods in Economic Dynamics, Harvard University Press, parts of Chapter 5 and 10

*Blanchard and Fisher (1989): Lectures on Macroeconomics, MIT Press, Chapter 2

Topic 1.2: The RBC model, the labor-leisure choice in perfect markets 

Lecture 2

Lecture 3

Tutorial 3: Problem set 2 - 4.4, 4.6, 4.7, 4.13 from the Romer book, *4.9 optional

Tutorial 4: Tutorial 4 code

Problem set 3 - ***HAND-IN February 23 midnight*** To generate the impulse response functions start from Tutorial 4 code, download, and change file type to '.mod'. You need to use Dynare, try to install version 4.2.4 or older, the newest one is not compatible with Octave (nor with Matlab). solutions; q1_code; q2_code


Romer (2001): Advanced Macroeconomics, second edition, Chapter 4.

King and Rebelo (1999): Resuscitating Real Business Cycles, in Taylor and Woodford, Handbook of Macroeconomics, Vol 1B, Ch14

*Uhlig (1999): A Toolkit for Analyzing Nonlinear Stochastic Models Easily, in Marimon and Scott, Computational Methods for the Study of Dynamic Economies, Oxford

*Prescott (1986): Theory Ahead of Business Cycle Measurement, Quarterly Review, Federal Reserve Bank of Minneapolis, Fall 1986, 9-22

*Basu and Fernald (2000): Why is Productivity Procyclical? Why Do We Care?, NBER W7940, October 2000

Topic 1.3: New-Keynesian model 1, imperfect competition and markups

Lecture 4

Tutorial 5: Problem set 4; solutions; q1_code; q2_code; q3_code; q4_code


Rotemberg and Woodford (1995): Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets, in Cooley, Fronties of Business Cycle research, Chapter 9

Topic 1.4: Introducing money, cash in advance model, money in utility model

Lecture 5

***no tutorial this week***


Walsh (2010): Monetary Policy and Theory, Chapter 2 and 3, book website

Blanchard and Fisher (1989): Lectures on Macroeconomics, MIT Press, section 4.3-4.7 and 10.2

Topic 1.5: New Keynesian model 2, sticky prices, Calvo pricing

Lecture 6

Tutorial 6: Problem set 5; solutions; q3_code; q4_code


Dotsey and King (2006): Pricing, Production, and Persistence, Journal of the European Economic Association, MIT Press, vol. 4(5), pages 893-928, 09

Christiano, Eichenbaum and Evans (2005): Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, vol 113, no 1

Clarida, Gali, and Gertler (1999): The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature, vol. 37, pp. 1661-1707.

*Chari, Kehoe, and McGrattan (2000), Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem, Econometrica, vol. 68, pp. 1151-79

*Calvo (1983): Staggered Prices in a Utility-Maximizing Framework, Journal of Monetary Economics, vol. 12, pp. 383-98.

Topic 2: Labor markets, unemployment, search and matching: one-sided search, two-sided search, endogenous job destruction, Diamond and Rotschild paradox, the Shimer critique, the Hosios condition, labor market policies

Lecture 7

Lecture 8

Lecture 9

Lecture 10

Tutorial 7: Problem set 6; solutions

Tutorial 8: Problem set 7; solutions

Tutorial 9: Problem set 8; solutions

Tutorial 10: Problem set 9 ***HAND-IN a hard copy by April 7 12:00 am in H.404, Cecile Markarian's office*** no late submissions will be accepted, as the solutions will be discussed on the 7th during the tutorial; solutions


Hall (2005): Wage Determination and Employment Fluctuations, American Economic Review

Mortensen and Pissarides (1994): Job Creation and Job Destruction in the Theory of Unemployment, Review of Economic Studies, vol 61, pp397-415

Shimer (2005): Reassessing the Ins and Outs of Unemployment, NBER WP13421

Shimer (2005): The Cyclical Behavior of Equilibrium Unemployment and Vacancies, American Economic Review

Rogerson, Shimer, and Wright (2005): Search-Theoretic Models of the Labor Market: A Survey, Journal of Economic Literature, Vol. 43, pp. 959–988

Pissarides (2000): Equilibrium Unemployment Theory, MIT Press, Chapter 1, 2 & 9.

*Ljungqvist and Sargent (2000): Recursive Macroeconomic Theory, MIT Press, Chapter 5

Topic 3: Consumption

Topic 3.1: Consumption, aggregation, idiosyncratic shocks, autarky, complete markets, permanent income hypothesis, certainty equivalence, precautionary savings, prudence, borrowing constraints, natural debt limit

Lecture 11

Tutorial 11: Problem set 10; solutions


Mace (1991): Full Insurance in the Presence of Aggregate Uncertainty, Journal of Political Economy

Cochrane (1991): A Simple Test of Consumption Insurance, Journal of Political Economy

Hall (1978): Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence, Journal of Political Economy

Deaton (1991): Saving and Liquidity Constraints, Econometrica

Carroll (1997): Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis, Quarterly Journal of Economics

*Blundell and Preston (1998): Consumption Inequality and Income Uncertainty, Quarterly Journal of Economics

Topic 3.2: Equilibrium with agents facing heterogeneous labor income risk in incomplete markets, magnitude of precautionary savings, wealth inequality, efficiency and constrained efficiency, aggregate uncertainty

Lecture 12

Tutorial 12: Problem set 11; solutions


Aiyigari (1994): Uninsured Idiosyncratic Risk and Aggregate Saving, Quarterly Journal of Economics

Huggett (1993): The Risk-free Rate in Heterogeneous-agent Incomplete-insurance Economies, Journal of Economic Dynamics and Control