Universitat
Pompeu Fabra
Barcelona GSE
Thijs van Rens
Spring 2010
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.crei.cat/~vanrens/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
Thijs van Rens | CREI | Department of Economics and Business
| Universitat Pompeu Fabra