Universitat
Pompeu Fabra
Barcelona GSE
Thijs van Rens
Spring 2012
Advanced Macroeconomics II (first half)
Business Cycle Fluctuations and Labor Markets
Overview
In this
course, we study business cycles. In Advanced Macroeconomics I you studied
models of economic growth (and you may study this topic in more detail in the
topics course on Economic Growth in your second year). Here, we ask ourselves
why and how the economy fluctuates around its growth path. In the first half of
this course, we focus on the labor market, asking the question: why is the
unemployment rate sometimes 2% and sometimes 12%? In this half, we consider
only real models, i.e. models without money, in which business cycles are
driven by technology shocks.
We discuss
the two dominant classes of models. The real business cycle (RBC) model is
basically the neoclassical growth model extended with a labor supply choice. If
we interpret hours worked by the representative worker as a measure of
aggregate employment, then we can use the model to describe fluctuations on the
labor market. In search and matching models on the other hand, there is a
continuum of workers and a continuum of firms. In these models, labor
fluctuates along the extensive margin, i.e. the number of employed workers
varies rather than the number of hours that each employee works. Neither model performs well at matching the data on business cycle
fluctuations on the labor market, and we discuss various extensions that
have been proposed to improve the models.
We conclude
this half of the course by showing that, despite their very different
interpretations, the RBC model and the search and matching model are remarkably
similar in structure. We will also discuss some recent literature that tries to
address the main shortcoming of both models: their failure to match the
amplitude of fluctuations in (un)employment.
Course
website (first half): www.thijsvanrens.com/macroII
Grading
Your grade
for this half of the course will be based on weekly problem sets (20%) and a
midterm exam (80%). The midterm will take place in the week of May 10 and will
contain short answer questions as well as some longer problems. Your final course
grade will be the simple average of your grades in the first and second halves
of the course.
The weekly
problem sets are meant to help you understand the material and prepare for the
exam. There will be a problem set every week, posted on the course website
after the Tuesday lecture and due at the beginning of class on Monday the week
after. Solutions that are handed in late will not be graded. You are encouraged
to do the problem sets in groups of 2 or –at most– 3 students. Please hand hand in one copy of the solutions for the group. However, I
strongly recommend you not to divide up the problems, but rather to work on all
problems together. It will be hard to do well on the exam without the practice
you get from doing all problems.
Lien will
discuss the problem sets in the practice session. No written solutions will be
made available, so you should make sure to attend the practice sessions if you
have problems solving the problem sets.
Reading List
I might
update the reading list as we go along, so please check the course website for
updates. Starred readings will be discussed in class. Non-starred readings are
classics for background reading, recent articles on
the topic or -in the case of textbooks- alternative readings. I will only
briefly discuss these in class and you are therefore responsible for the global
content but not for the details of these readings.
1. Real
Business Cycle models
*David Romer (1996). Advanced Macroeconomics, chapter 4
Kydland, Finn E. and Edward C. Prescott (1982). Time
to Build and Aggregate Fluctuations. Econometrica, 50(6), pp.1345-1370.
*King,
Robert G. and Sergio T. Rebelo (1999). Resuscitating Real
Business Cycles. In: John B. Taylor and Michael Woodford (eds), Handbook of Macroeconomics,
volume 1B, pp.927-1007.
2. Solving linear(ized) Rational Expectations
models
*Roger E.A. Farmer
(1999). Macroeconomics of Self-fulfilling Prophecies, chapters 1-3 and 5
*Fabio
Canova (2007). Methods
for Applied Macroeconomic Research, chapter 2 on DSGE Models, Solutions,
and Approximations
Blanchard,
O.J. and S. Fisher (1998), Lectures on Macroeconomics, sections 5.1, 5.2 and
appendix to chapter 5 (with chapter 2 as a summary of things you should know
already)
Maurice Obstfelt and Kenneth Rogoff (1996). Foundations of International Macroeconomics, supplements A and C to
chapter 2
Ljungqvist, L. and T.J. Sargent (2000). Recursive Macroeconomic Theory, section 5.5 (with the
rest of chapter 5 as background reading)
Marc Nerlove (1958). Adaptive
Expectations and Cobweb Phenomena, Quarterly Journal of Economics, 72(2),
pp. 227-240
John F. Muth (1961). Rational
Expectations and the Theory of Price Movements, Econometrica,
29(3), pp. 315-335
Olivier Jean Blanchard; Charles M. Kahn (1980). The
Solution of Linear Difference Models under Rational Expectations, Econometrica, 48(5), pp. 1305-1311
*John Y.
Campbell (1994). Inspecting the Mechanism: An Analytical Approach to the
Stochastic Growth Model, Journal of Monetary Economics, 33, pp.463–506 (or NBER working paper No. 4188)
Christopher
A. Sims (2000). Solving
Linear Rational Expectations Models, lecture notes (programs)
Harald Uhlig
(1995). A toolkit
for analyzing nonlinear economic dynamic models easily, working paper (programs)
3. Business
Cycles: Data and Facts
*Stock,
James H. and Mark W. Watson (1999). Business
Cycle Fluctuations in U.S. Macroeconomic Time Series. In: John B. Taylor and Michael Woodford (eds), Handbook of Macroeconomics,
volume 1A, pp.3-64 (also NBER WP 6528)
Agresti, Anna-Maria, and Benoît Mojon (2001): "Some
Stylized Facts on the Euro Area Business Cycle" in I. Angeloni,
A. Kashyap, and B. Mojon
eds., Monetary Policy Transmission in the Euro Area, Cambridge University
Press. (also ECB WP #95)
Kydland, Finn, and Edward
C. Prescott (1990): "Business Cycles: Real Facts and a Monetary
Myth," Quartely Review, Federal Reserve Bank of
Minneapolis
*Stock,
James, and Mark W. Watson (2005): "Understanding Changes in International
Business Cycle Dynamics" Journal of the European Economic Association,
September 2005, v. 3, iss. 5, pp. 968-1006
Ramey, Garey, and Valerie A. Ramey (1995): "Cross-Country
Evidence on the Link Between Productivity and Growth" American
Economic Review, vol. 85, no. 5., 1138-1151
Backus,
David K., Patrick J. Kehoe (1992): "International Evidence on the
Historical Properties of Business Cycles," American Economic Review 82,
864-888.
Stock,
James, and Mark W. Watson (2002): "Has the Business Cycle Changed and Why?," NBER Macroeconomics Annual 2002, MIT Press. (also NBER WP #9127)
*NBER business cycle dating
committee
4. Empirical
performance of the RBC model
*Jordi Gali (1999). Technology,
Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate
Fluctuations? American Economic Review, 89(1), pp. 249-271
*Jonas D. M.
Fisher (2005). The
Dynamic Effects of Neutral and Investment-Specific Technology Shocks,
Working paper.
*Hall,
Robert E. (1997). Macroeconomic
Fluctuations and the Allocation of Time. Journal of Labor
Economics, 15(1), pp.S223-S250.
Rogerson, Richard (1988). Indivisible labor, lotteries and
equilibrium. Journal
of Monetary Economics, 21(1), pp.3-16.
Hansen, Gary
D. (1985). Indivisible Labor and the Business Cycle. Journal of Monetary Economics, 16(3),
pp.309-327.
Benhabib, Jess, Richard Rogerson and
Randall Wright (1991). Homework
in Macroeconomics: Household Production and Aggregate Fluctuations. Journal of Political Economy, 99(6), pp.1166-1187.
5.
Search and Matching models
*Richard Rogerson, Robert Shimer and Randall Wright (2005). Search
Theoretic Models of the Labor Market. Journal of Economic Literature, 43
(4): 959-988.
Christopher Pissarides
(2000). Equilibrium Unemployment
Theory, 2nd edition. Cambridge: MIT Press, chapters 1 and 2
6.
Empirical performance of the search model
*Shimer (2006). Reassessing the Ins and Outs of Unemployment, mimeo, University of Chicago.
Shigeru Fujita and Garey
Ramey (2006). The Cyclicality of Job Loss
and Hiring, Philadelphia Fed Working Paper 06-17.
Shigeru Fujita and Garey
Ramey (2007). Reassessing the Shimer Facts, Philadelphia Fed Working Paper 07-2.
Robert E. Hall (2005). Job Loss, job Finding, and
Unemployment in the U.S. Economy over the Past Fifty Years, NBER Macro
Annual.
Steve J. Davis (2005). Comments on
“Job Loss, job Finding, and Unemployment in the U.S. Economy over the Past
Fifty Years” by Robert E. Hall, NBER Macro Annual.
Jonathan L. Willis, Russell Cooper and John Haltiwanger (2007). Hours and Employment Implications of Search Frictions: Matching
Aggregate and Establishment-Level Observations, Federal Reserve Bank of Kansas
City Working Paper No. 06-14
*Robert Shimer (2005). The Cyclical Behavior of
Equilibrium Unemployment and Vacancies, American Economic Review,
95(1): 25-49.
*Marcus Hagedorn and Iourii Manovskii (2008). The Cyclical Behavior of Equilibrium Unemployment and Vacancies
Revisited, American Economic Review, v. 98, iss. 4, pp. 1692-1706
Cole, Harold L. and Richard Rogerson
(1999). Can the Mortensen-Pissarides
Matching Model Match the Business-Cycle Facts? International
Economic Review, 40(4), pp.933-959.
7.
RBC models with search frictions
David Andolfatto (1996). Business Cycles and Labor-Market Search. American Economic
Review, 86(1), pp.112-132
*Monika Merz (1995). Search
in the Labor Market and the Real Business Cycle, Journal of Monetary Economics,
36, pp.269-300
Jordi Gali and Thijs van
Rens (2010). The Vanishing Procyclicality of Labor Productivity.
Olivier Blanchard and Jordi Gali
(2008). Labor
Markets and Monetary Policy: A New Keynesian Model with Unemployment, CREI
working paper
Antonella Trigari and Mark Gertler (2006). Unemployment
Fluctuations with Staggered Nash Wage Bargaining, forthcoming in the
Journal of Political Economy
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