MACROECONOMIC THEORY  I
CEU, Economics Department



Instructors:  Prof. Attila Ratfai
                    Prof. Andri Chassamboulli
Course: 4 credits
 

PART ONE

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 nine lectures will be given in five weeks, each of them lasting for 100 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 expected to come to class prepared to discuss
the day’s topic and encouraged to participate in class discussions. Besides regular class attendance, you are assumed
to carry out a fair amount of work on your own, including completing readings and homework assignments. Two problem
sets will also 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. 50% of the final grade for the course is determined in the first part. It will be based on performance on the
final exam (40%) and the homework assignments (10%). Class participation counts on the margin. The exam is comprehensive,
covering all material in class meetings, required readings and homework exercises.
Readings. Core readings denoted by asterisk in the syllabus are mandatory. Collected in the reader, they include textbook
chapters and a few important articles. The main textbook for the course is Advanced Macroeconomics by David Romer, second
edition, 2001. Extra readings include more advanced background material. If you have a strong interest in macroeconomics in
general or in a particular topic, you are encouraged to get acquainted with these readings as well. To maximize the benefit from
doing so, it is best to read the core readings prior to coming to class. The 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 strongly 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.

 
LIST OF READINGS
 
0. Preliminaries
Blanchard (2000): What Do We Know about Macroeconomics that Fisher and Wicksell Did Not?, QJE

Mankiw (2006): The Macroeconomist as Scientist and Engineer, NBER WP 12349

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. Real Business Cycles (4 lectures)
Facts, Technology and Solow Residual, Efficient Fluctuations: An RBC Model, Cost of Stabilization Policy,
Coordination Failures

*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

II. 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
 

PART TWO

Overview:

The first part of the course is on growth theory and applications. The second part will introduce
the basic theories concerning the determinants of unemployment and the cyclical behavior of the
labor market.

Textbook:

Advanced Macroeconomics, Second Edition. McGraw-Hill, 2001

Grading:

5% Homework, 45% Final Exam.
 

Starred (*) readings are required. The others are useful references. This is a preliminary
reading list and is subject to modifications.
 

LONG-RUN GROWTH

A. Some Stylized Facts.

*Chapter 1.1

De Long, Bradford (1988), “Productivity Growth, Convergence, and Welfare: Comment,” The American Economic
Review, 78(5), 1138-1154.

Barro, Robert (1991), “Economic Growth in a Cross Section of Countries,” Quarterly Journal of Economics,
16(2), 407-443.

Summers, Robert and Alan Heston, (1991), “The Penn World Table (Mark 5): An Expanded Set of International
Comparison, 1950-1988,”Quarterly Journal of Economics

Maddison, Angus, (1983), “A Comparison of Levels of GDP Per Capita in Developed and Developing Countries,”
The Journal of Economic History, 43(1), 27-47.

B. The Solow Model

*Chapter 1.2-1.7

Solow, Robert, (1956), “A Contribution to the Theory of Economic Growth," Quarterly Journal
of Economics, 70:65-94.

*Mankiw, Gregory, Romer David and Weil, David, (1992), “A Contribution to the Empirics of
Economic Growth,” The Quarterly Journal of Economics, 107(2), 4107-437.

C. The Ramsey-Cass-Koopmans Model

*Chapter 2 Part A

D. New Growth Theory

*Chapter 3 Part A

Lucas, Robert (1988), “On the Mechanics of Economic Development,” Journal of Monetary
Economics, 22, 3-42.

*Romer, Paul (1990), “Endogenous Technological Change,” Journal of Political Economy, 98,
S71-S102.

*Aghion, Philippe and Peter Howitt (1992), “A Model of Growth through Creative Destruction,”
Econometrica, 60(2), 323-351.

Romer, Paul (1994), “The Origins of Endogenous Growth,” The Journal of Economics Perspectives,
8(1), 3-22.

Jones, Charles (1995), “R&D-Based Models of Economic Growth," Journal of Political Economy,
103, 759-784.

Mankiw, Gregory (1995), “The Growth of Nations,” Brookings Papers on Economic Activity,
1995(1), 25th Anniversary Issue, 275-326.

Campos, Nauro and Fabrizio Coricelli (2000), “Growth in Transition: What we know, What we
don’t and What we should”, working paper.

Howitt, Peter (2000), “Endogenous Growth and Cross-Country Income Differences,” The American
Economic Review, 91(4), 829-846.

E. Cross-Country Income Differences

*Chapter 3 Part B Sections 3.8-3.9
*Hall, Robert and Charles Jones (1999), “Why Do Some Countries Produce So Much More Output
per Worker than Others?” Quarterly Journal of Economics, 114, 83-116.

Parente, Stephen and Edward Prescott (1999), “Monopoly Rights: A Barrier to Riches,” American
Economic Review, 89 (December), 1216-1233.

Acemoglu, Daron, Simon Johnson, and James Robinson. (2001), “The Colonial Origins of
Comparative Development: An Empirical Investigation,” American Economic Review, 91
(December), 1369

THEORIES OF UNEMPLOYMENT

*Chapter 9.1

A. Efficiency Wages

*Chapter 9.2-9.4

*Solow, Robert (1979), “Another Possible Source of Wage Stickiness,” Journal of Macroeconomics,
1, 79-82.

Weiss, Andrew (1980), “Job Queues and Layoffs in Labor Markets with Flexible Wages,” Journal
of Political Economy, 88, 526-538.

Akerlof, George (1982), “Labor Contracts as Partial Gift Exchange,” Quarterly Journal of Economics,
97, 543 - 569.

Shapiro, Carl, and Joseph Stiglitz (1984), “Equilibrium Unemployment ads a Worker Discipline
Device,” American Economic Review, 74(3), 433-444.

Shapiro, Carl, and Joseph Stiglitz (1985), “Can Unemployment be Involuntary? Reply,” American
Economic Review, 75(December), 1215-1217.

*Katz, Lawrence (1986), “Efficiency Wage Theories: A Partial Evaluation,” NBER Macroeconomics
Annual, 235-289.

Krueger, Alan and Lawrence Summers (1988), “Efficiency Wages and the Inter-Industry Wage
Structure”, Econometrica, 56, 259 - 294.

Akerlof, George (1990), “The Fair Wage-Effort Hypothesis and Unemployment,” Quarterly
Journal of Economics, 105, 255 - 283

Blinder, Alan and Dan Choi (1990), “A Shred of Evidence on Theories of Wage Stickiness,”
Quarterly Journal of Economics, 103, 1003 - 1015.

Cappelli, Peter and Keith Chauvin (1991), “An Interplant Test of the Efficiency Wage Hypothesis,”
Quarterly Journal of Economics, 106, 769 - 787.

Gomme, Paul (1999), "Shirking, Unemployment and Aggregate Fluctuations”, International
Economic Review, 40 (1).

B. Implicit Contracts

*Chapter 9.5

*Azariades, Costas (1975), “Implicit Contracts and Underemployment Equilibria,” Journal of
Political Economy 83, 1183-1202.

Calvo, Guillermo (1979), “Quasi-Walrasian Theories of Unemployment,” American Economic
Review, Papers and Proceedings,69(2), 102-107.

*Rosen S. (1985), “Implicit Contracts: A Survey,” Journal of Economic Literature, 23, 1144-1175.

Beaudry P. and DiNardo J. (1991), “The Effect of Implicit Contracts on the Movement of Wages
Over the Business Cycle: Evidence from Micro Data,” Journal of Political Economy, 99, 665-688.

Boldrin M. and Horvath M. (1995), “Labor Contracts and the Business Cycle,” Journal of Political
Economy, 103, 972-1004.

Ramey et al. (1997), “Contractual Fragility, Job Destruction, and Business Cycles,” Quarterly
Journal of Economics.

Caballero, R. and M. Hammour (1998), “The Macroeconomics of Specificity," Journal of
Political Economy, 106(4), 724-767. Part I-III.

C. Insiders versus Outsiders

*Chapter 9.6-9.7

*Solow, Robert (1985), “Insiders and Outsiders in Wage Determination,” Scandinavian Journal of
Economics, 87, 411-428.

*Blanchard, Olivier, and Lawrence Summers (1986), “Hysteresis and the European Unemployment
Problem,” NBER Macroeconomics Annual, 1, Cambridge, Mass: MIT Press, 15-77

Lindbeck, Assar, and Dennis Snower, (1988), "Cooperation, Harassment and Involuntary
Unemployment: An Insider-Outsider Approach", American Economic Review, 167-188.

Lindbeck, Assar, and Dennis Snower (1989), “The Insider-Outsider Theory of Employment and
Unemployment,” Cambridge, Mass.: MIT Press, ch. 3,5.

Lindbeck, Assar, and Dennis Snower (2001), “Insiders versus Outsiders,” Journal of Economic
Perspectives, 15 (1), 165-188.

D. Search and Matching

D.1. Theory

A useful book is: Pissarides C. (2000): Equilibrium Unemployment Theory, Blackwell.

*Chapter 9.8

Diamond, Peter (1982), “Aggregate-Demand Management in Search Equilibrium,” Journal of
Political Economy, 90(5), 1982.

Blanchard, Oliver and Peter Diamond, (1989) “The Beveridge Curve,” Brookings Papers on
Economic Activity, 2, 85-155.

Hosios, A. (1990), “On the Efficiency of Matching and Related Models,” Review of Economic
Studies, 57, 279-298.

*Mortensen, Dale and Christopher Pissarides (1994), “Job Creation and Destruction in the
Theory of Unemployment,” Review of Economic Studies, 61(3), 397-415.

Mortensen, Dale and Christopher Pissarides. (1999), “ New Developments in Models of Search
in the Labor Market,” In O. Ashenfelter and D. Card (Eds.) Handbook of Labor Economics.

D.2 Cyclical Variations in Turnover

A useful book is: Davis, S., Haltiwanger, J. and  Schuh, S. (1996).  Job Creation and Destruction.
MIT Press, Cambridge, MA.

*Davis, Steven and John Haltiwanger (1990) "Gross Job Creation and Destruction: Microeconomic
Evidence and Macroeconomic Implications,” NBER Macroeconomics Annual, 123-168.

Blanchard, Olivier and Diamond Peter (1990), “The Cyclical Behavior of the Gross Flows of U.S.
Workers,” Brookings Papers on Economic Activity; 2, 85-155.

Davis, Steven and John Haltiwanger (1992), “Gross Job Creation, Gross Job Creation and
Employment Reallocation,” Quarterly Journal of Economics, 107, 819-864.

Foote, Chris (1998), “Trend Employment Growth and the Bunching of Job Creation and Destruction,”
Quarterly Journal of Economics, 113, 809-834.

D.3 Can the Theory Explain the facts?

Cole, H.  and Rogerson, R. (1999), “Can the Mortensen-Pissarides Matching Model Match the
Business Cycle Facts?”, International Economic Review, 40, 933-960.

Shimer, Robert (2005), “The Cyclical Behavior of Equilibrium Unemployment and Vacancies,”
The American Economic Review, 95(1), pp. 25.

E. Fluctuations in Real Wages

Bils M. (1985), “Real Wages over the Business Cycle: Evidence from Panel Data,” Journal of
Political Economy

*Barksy R., Parker J. and Solon G. (1994), “Measuring the Cyclicality of Real Wages: How Important
is the Composition Bias?” Quarterly Journal of Economics, 109, 1-25.

Abraham, Katharine and John Haltiwanger (1995), "Real Wages and the Business Cycle,” Journal of
Economic Literature, 33(3), 1215-1264.

Bowlus, Audra, Haoming, Liu, and Robinson, Chris (2002), “Business Cycle Models, Aggregation
and Real Wage Cyclicality,” Journal of Labor Economics, 20 (2), 308-335.

F. Empirical Applications

*Chapter 9.9