CEU, Economics Department

Lecturer: Prof. Attila Rátfai
Office: October 6 Bldg / 811, Email:
Office Hours: By appointment
Course: 4 credits

This course covers a set of fundamental issues in modern macroeconomics at the graduate level. The interplay between
economic theory and data analysis will be emphasized throughout.
Organization. A total of sixteen lectures will be given in eight weeks, each of them lasting for 120 minutes. The lectures are
designed to provide background to the main themes and to overview the motivation, the assumptions, the mechanics, and
the logical and empirical consequences of important models. You are assumed to come to class prepared to discuss the
day's topic and encouraged to participate in class discussions. Besides regular class attendance, you are expected to
carry out a fair amount of work on your own, including completing all core readings and homework assignments. Four
problem sets will be assigned. You may discuss the problems among yourselves, as long making a serious individual
effort of solving them beforehand. Writing up the solutions must be done individually. Solutions will be discussed in seminars,
and then graded by the Teaching Assistant.
Assessment. The final grade is determined by performance on the final exam (80%, 180 minutes, comprehensive) and the
homework assignments (20%). Class participation does count on the margin. The exam covers all material in class meetings,
required readings and homework problems.
Readings. The main textbook for the course is Advanced Macroeconomics by David Romer, second edition, 2001. Core
readings denoted by asterisk in the syllabus and collected in the reader include textbook chapters and a few important
articles. To maximize the benefit from attendance, it is best to do the readings prior to coming to class. The extra readings
on the syllabus include more advanced background material. If you have a strong interest in macroeconomics in general or
got curious about a particular topic, you are encouraged to get acquainted with these readings as well. These readings are
available in the library, via the Internet or if none of these options work, they can be borrowed from me. In the absence of
adequate background in macroeconomics at the intermediate level, you are encouraged to consult texts such as Mankiw
or Abel&Bernanke.
Note. If you are experiencing any problem with this class, please come to talk to me as early as possible, in order to address
your problem before it becomes too late.


0. Preliminaries
Blanchard (2000): What Do We Know about Macroeconomics that Fisher and Wicksell Did Not?, QJE
Romer (2000): Advanced Macroeconomic, Ch 5.1
Woodford (1999): Revolution and Evolution in Twentieth-Century Macroeconomics, manuscript
Wyplosz (1998): The Culture of Economic Policy Advice: An International Comparison with Special Emphasis on Europe,
working paper

I. Consumption and Savings (4 lectures)
LC/PIH with Certainty, Stochastic Version of PIH & Empirical Applications, Interest Rate and Savings, Asset Pricing,
Precautionary Savings, Liquidity Constraints, Durable Goods, Incomplete  Optimization
*Romer (2001): Advanced Macroeconomics, Ch 7
*Browning and Crossley (2001): The Life Cycle Model of Consumption and Saving, JEP
*Carroll (2001): A Theory of the Consumption Function, with and without Liquidity Constraints, JEP
*Laibson (1998): Life-Cycle Consumption and Hyperbolic Discount Functions, EER
Attanasio (1999): Consumption, Handbook of Macroeconomics, Ch 11
Barsky, Mankiw and Zeldes (1986): Ricardian Consumers with Keynesian Propensities, AER
Campbell (1999): Asset Prices, Consumption, and the Business Cycle, Handbook of Macroeconomics, Ch 19
Carroll (1997): Buffer-Stock Saving and the Life-Cycle/Permanent Income Hypothesis, QJE
Carroll (2001): Requiem for the Representative Consumer, AER
Deaton (1992): Understanding Consumption, Oxford UP
Gourinchas and Parker (2001): The Empirical Importance of Precautionary Saving, AER
Hall (1978): Stochastic Implications of the Life Cycle, Permanent Income Hypothesis, JPE
Meghir (2004): A Retrospective on Friedman’s Theory of Permanent Income, EJ

II. Investment in Physical Capital and Inventories (4 lectures)
Cost of Capital, Investment Tax Credit, Q Theory, Irreversible Investment, Lumpiness and Uncertainty, Financial
Imperfections,  Inventory Accumulation
*Blanchard and Fischer (1994): Lectures on Macroeconomics, Ch 6.4
*Chirinko (1996): Finance Constraints, Liquidity, and Investment Spending: Theoretical Restrictions and  International
Evidence, working paper
*Hubbard (1994): Investment under Uncertainty: Keeping One’s Option Open, Sections 1-3, JEL
Caballero (1999): Aggregate Investment, Handbook of Macroeconomics, Ch 12
Chirinko (1993): Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy  Implications,
Dixit and Pindyck (1994): Investment under Uncertainty, Princeton UP
Hall (2000): The Stock Market and Capital Accumulation, AER
Ramey and West (1999): Inventories, Handbook of Macroeconomics, Ch 13
Romer (2001): Advanced Macroeconomics, Ch 8
Tobin and Golub (1998): Money, Credit and Capital, Ch 6

III. Real Business Cycles (4 lectures)
Facts, Technology and Solow Residual, Efficient Fluctuations: An RBC Model, Cost of Stabilization Policy, Coordination
*Barlevy (2005): The Cost of Business Cycles and the Benefits of Stabilization, Fed of Chicago ER
*Basu and Fernald (2002): Aggregate Productivity and Aggregate Technology, EER
*Kydland and Prescott (1990): Business Cycles: Real Facts and Monetary Myths, Fed of Minneapolis QR
*Mankiw (1989): Real Business Cycles: A New Keynesian Perspective, JEP
*Prescott (1986): Theory Ahead of Business Cycle Measurement, Fed of Minneapolis QR and CRCSPP
*Plosser (1989): Understanding Real Business Cycles, JEP
*Romer (2001): Advanced Macroeconomics, Ch 4, Ch 5.6
Agenor, McDermott and Prasad (1999): Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts,
IMF Working Paper #35
Barro and King (1984): Time-Separable Preferences and Intertemporal Substitution Models of Business Cycles, QJE
Basu and Taylor (1999): Business Cycles in International Historical Perspective, JEP
Benczúr and Rátfai (2005): Economic Fluctuations in Central and Eastern Europe. The Facts, manuscript
Bryant (1983): A Simple Rational-Expectations Keynes-Type Model, QJE
Caballero and Lyons (1992): External Effects in U.S. Procyclical Productivity, JME
Cooper (2002): Estimation and Identification of Structural Parameters in the Presence of Multiple Equilibria,
NBER WP #8941
Kydland and Zaragaza (1997): Is the Business Cycle of Argentina ‘Different’?, Fed of Dallas ER
Lucas (1977): Understanding Business Cycles, CRCSPP
Rebelo (2005): Real Business Cycle Models: Past, Present, and Future, NBER WP #11401
Romer (2001): Advanced Macroeconomics, Ch 6.11
Shapiro (1987): Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?,  AER
Woodford (1987): Three Questions about Sunspot Equilibria as an Explanation of Economic Fluctuations, AER

IV. Monetary Business Cycles (4 lectures)
The Lucas Critique, Rational Expectations, Policy Effectiveness, Imperfect Competition, Price Stickiness and Staggered
Adjustment, Inflation Dynamics
*Gali (1999): The Return of the Phillips Curve and Other Recent Developments in Business Cycle Theory, manuscript
*Gali (2005): Has the Inflation Process Changed? A Comment, manuscript
*Romer (1993): The New Keynesian Synthesis, JEP
*Romer (2001): Advanced Macroeconomics, Ch 6, Ch 5.5
*Wolman (2000): The Frequency and Costs of Individual Price Adjustment, Fed of Richmond EQ
Akerlof and Yellen (1985): A Near-Rational Model of the Business Cycle with Wage and Price Inertia, QJE
Ball (1994): Credible Disinflation with Staggered Price Setting, AER
Ball and Mankiw (1994): Asymmetric Price Adjustment and Economic Fluctuations, EJ
Ball and Mankiw (1994): A Sticky Price Manifesto, NBER WP #4677
Ball, Mankiw and Romer (1988): The New Keynesian Economics and the Output-Inflation Trade-off, BPEA
Fischer (1977): Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule, JPE
Lucas (1976): Econometric Policy Evaluation: A Critique, CRCSPP
Lucas (1973): Some International Evidence on Output-Inflation Tradeoffs, AER
Mankiw (1985): Small Menu Costs and Large Business Cycles, QJE
Rotemberg (1987): New Keynesian Microfoundations, NBER Macroeconomics Annual
Taylor (1979): Staggered Wage Setting in a Macro Model, AER
Taylor (1999): Staggered Price and Wage Setting in Macroeconomics, NBER WP #6754