Advanced Macroeconomics

Lecture 1st semester

Master in International Economics & Public Policy (MIEPP)

Lecturer: Klaus Wälde

Tutorial: Jean Roch Donsimoni

1 Introduction

The Master lecture on advanced macroeconomics teaches macroeconomic topics whereby ’advanced’ carries two meanings. First, more emphasis is put on model building and formal backgrounds of economic models than in Bachelor lectures. Students will learn about dynamic programming as a tool to solve maximization problems, will get a feeling for the role uncertainty plays in economic decision making and macroeconomics, and will learn some basics about stochastic processes required to understand e.g. the dynamics of innovation and growth or the dynamics of hiring and fi ring on labour markets.

Second, advanced is also understood in the sense of psychologically better founded decision processes of individuals. It has long been recognized that standard assumptions about preferences, which inter alia exclude confl‡icting motivations of an individual, time inconsistencies or emotions, are an obstacle to fully understanding human behaviour. This lecture will therefore teach classic models of macroeconomics and occasionally discuss extensions which take a more psychological approach to human behaviour.

The lecture will cover three macroeconomic topics: Economic growth, business cylces and unemployment. From the perspective of behavioural macroeconomics, we will discuss the role of confl‡icting motivations (dual-self models) for economic growth, of anticipatory emotions for understanding the aggregate capital stock in business cylce models and time-inconsistency for understanding the dynamics of unemployment.

2 Economic growth

2.1 The convergence debate

2.2 Theory

  • Aghion and Howitt (1998) Endogenous Growth Theory
  • –Grossman and Helpman (1991) Innovation and Growth in the Global Economy

2.3 A growth model with dual selfs

3 Business cycles

3.1 Some numbers on business cycles

3.2 The real business cycle approach

  • Kydland and Prescott (1980) “A Competitive Theory of Fluctuations and the Feasibility and Desirability of Stabilization Policy“

3.3 Natural volatility

3.4 Anticipatory emotions and business cylces

4 Unemployment

4.1 Facts about unemployment

4.2 Traditional theories of unemployment

  • Cahuc and Zylberberg (2004) Labor Economics

4.3 The search and matching approach

4.4 Behavioural views on unemployment

4.5 How to reduce unemployment without creating poverty

  • Golosov, Maziero and Menzio (forthcoming) “Taxation and Redistribution of Residual Income Inequality”

5 Conclusion: What did we learn?

A detailed list of references is in the syllabus.