Economics 510 Robert Carpenter

Reading List Fall 1998

Course Structure:

This objective of this is to prepare students for the macroeconomics preliminary examination by providing them with some exposure to fundemental and current research in macroeconomics. I expect the students to read the papers carefully prior to class. Everyone should be ready to discuss the papers in detail and answer questions about the papers.

Exams:

All students are required to take both the midterm and final examination. The exams will be given at convenient times, coordinated with the exam schedule in other first-year Ph.D. courses. I will try to mimic the format and depth of the qualifying exams. The exams in this class will last 3 to 4 hours; you will not have to worry about time pressure.

Assigned Reading

The assigned reading is very important in this course. A major objective of all the first-year Ph.D. courses is to introduce you to reading original sources of economic research. This is often more difficult than reading textbook treatments. Do not be surprised if you find some of the reading difficult, so do I, and for that matter, so does everyone else. Generally, you should try to comprehend the economic substance of the assigned reading rather than the technical detail. Learning how to separate the two is an important skill; best that you acquire it early. Let me know if you have trouble with the readings.

Students often wonder about the importance of readings v. lectures. The amount of time that we have is far too short to cover all aspects of the assigned readings in lecture. I will make an effort to talk about the most important points, and I hope you will find these comments helpful in writing your papers and exams. However, if you really wish to master the material and be adequately prepared for the prelim, the reading is very important. Many ideas in the reading that are not covered in class may be important, even essential, to good exam answers. More importantly, these readings are very important to your careers as economists.

I have indicated the material that I believe we will discuss in the greatest detail with an asterisk. However, you are responsible for all of the material on the reading list, especially if we cover any portion of that article in class. If we do not, then your responsibility is to be familiar with the general importance of the paper and its contribution to the broader macroeconomics research agenda.

I strongly recommend that you purchase the book and Felderer and Homburg and The General Theory. You may wish to have a copy of the textbooks by Blanchard and Fischer and Sargent. I always used a good intermediate macroeconomics textbook for reference when I studied for prelims (they help to build intuition). Good textbooks for this purpose include, but are certainly not limited to, Mankiw, Abel and Bernanke, and Dornbusch and Fischer. Branson and Scarth both have more technical material and are often used in programs with masters degrees.

Lastly, I may add to, delete from, or reorder the material on the syllabus from time to time.

Texts

Abel and Bernanke or Mankiw, Macroeconomics. (for reference, any other intermediate text will serve)

*Felderer and Homberg. Macroeconomics and New Macroeconomics.

*Keynes, The General Theory

Romer, David. Advanced Macroeconomics

Office Hours:

I will announce the times that I will hold office hours soon. If you need to see me outside of those times, I would appreciate it if you make an appointment.

Course Outline

Foundations of Modern Macroeconomic Theory

I. Neoclassical Macroeconomic Models

*GT, chapters 1,2.

*Felderer and Homberg, chapter 4.

Frank, Jeff. The New Keynesian Economics, St. Martins Press, 1986. pp. 25-76, 82-92.

*Patinkin, Don. Money, Interest and Prices, Chapter 13.

II. Keynesian Macroeconomic Models

*General Theory. 1-3, 8-13, 17, 18.

*Felderer and Homberg, chapter 5, 11.

*Clower, Robert. “The Keynesian Counterrevolution: A Theoretical Appraisal,” in F.H. Hahn and F.P.R. Brechling, eds. The Theory of Interest Rates, Macmillan, 1965.

*Leihonhufvud, Axel. “Keynes and the Classics: Two Lectures,” reprinted in Information and Coordination, Axel Leihonhufvud. Oxford University Press. 1981.

*Hicks, Sir John. “Mr. Keynes and the Classics: A Suggested Interpretation,” Econometrica, April, 1937.

*Leijonhufvud, Axel. “Effective Demand Failures,” reprinted in Information and Coordination, Axel Leihonhufvud. Oxford University Press. 1981.

Contemporary Debates in Macroeconomics

Explanations of Cyclical Movements within a Classical Framework

III. New Classical Economics

Overview

*Felderer and Homberg 10

*Blinder, Alan S. “Keynes After Lucas,” American Economic Review, 1986?

Macro models based on Rational Expectations

*Friedman, M. “The Role of Monetary Policy,” American Economic Review, 1968.

*Lucas, Robert and Thomas Sargent, “After Keynesian Macroeconomics,” in After the Phillops Curve: Persistance of High Inflation and High Unemployment, Federal Reserve Bank of Boston, 1978

*Sargent, Thomas and Neil Wallace. “Rational Expectations and the Theory of Economic Policy,” Journal of Monetary Economics 1976, vol 2.

*Friedman, B. “Optimal Expectations and the Extreme Information Assumptions of Rational Expectations Macromodels,” Journal of Monetary Economics, 1979.

*Lucas, Robert. “Econometric Policy Evaluation: A Critque,” Journal of Monetary Economics 1976 (supplement).

IV. Equilibrium Business Cycle Theory

*Lucas, Robert E., “Understanding Business Cycles,” Carnegie-Rochester Conference on Public Policy, 5 (1976), pp.7-29.

*Lucas, Robert E., “Some International Evidence on Output-Inflation Tradeoffs,” American Economic Review, 63 (June 1973), pp. 325-334.

Barro, Robert J. “The Equilibrium Approach to Business Cycles,” in Money, Expectations and Business Cycles, New York: Academic Press, 1981.

V. Real Business Cycle Theory

Overview

*Plosser, Charles. “Understanding Real Business Cycles,” Journal of Economic Perspectives, 3(3), 1989.

*Mankiw, N. Gregory. “Real Business Cycles: A New Keynesian Perspective,” Journal of Economic Perspectives, 3(3), 1989.

Simple Real Business Cycle models and their critics

*Long and Plosser. “Real Business Cycles,” Journal of Political Economy, 1983?

*Prescott, Edward C. “Theory Ahead of Business Cycle Measurement,” Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1986.

*Summers, Laurence. “Some Skeptical Observations on Real Business Cycle Theory,” Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1986.

*King, Robert and Charles Plosser. “Money Credit and Prices in a Real Business Cycle,” American Economic Review, 74(3), June 1984.

VI. “New” Keynesian Economics

Overview

*Mankiw, N. Gregory. “Recent Developments in Macroeconomics,” NBER Working Paper #2474.

Ball, Laurence, N. Gregory Mankiw, and David Romer. “The New Keynesian Economics and the Output Inflation Tradeoff, Brookings Papers on Economic Activity, 1:1988.

Wage and Price Rigidity in Rational Expectations Models:

*Fischer, Stanley. “Long-Term Contracts, Rational Expectations and the Optimal Money Supply Rule,” Journal of Political Economy, 85 pp. 191-205.

Taylor, John B. “Staggered Wage Setting in a Macro Model,” American Economic Review, vol. 69, May 1979 pp. 108-113.

*Barro, Robert J. “Long-Term Contracting, Sticky Prices and Monetary Policy,” Journal of Monetary Economics, 3 pp. 305-316.

Models Incorporating Imperfect Competition

*Mankiw, N. Gregory. “Small Menu costs and Large business Cycles: A Macroeconomic Model of Monopoly,” Quarterly Journal of Economics, 100, May 1985, pp. 529-39.

Blanchard, Olivier and Nobuhiro Kiyotaki. “Monopolistic Competition and the Effects of Aggregate Demand,” American Economic Review, vol. 77, September 1987, pp. 647-66.

*Hall, Robert E. “Market Structure and Macroeconomic Fluctuations,” Brookings Papers on Economic Activity, 2:1986.

Capital Market Failures

Theoretical Impact of Capital Market Imperfections:

*Stiglitz, Joseph and Andrew Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review, 71(3), pp. 393-410.

*Myers, Stewart C. and Nicholas S. Majluf. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have,” Journal of Financial Economics, 13, 1984.

Gertler, Mark. “Financial Structure and Aggregate Economic Activity: An Overview,” Journal of Money, Credit, and Banking, 20(3), August 1988,

Macroeconomic Impacts of Imperfect Capital Markets

*Blinder, Alan S. and Joseph Stiglitz. “Money, Credit Constraints and Economic Activity, American Economic Review, May 1983.

*Bernanke, Ben. “Bankruptcy, Liquidity and Recession,” American Economic Review, May 1983.

Hubbard, R. Glenn, “Capital Market Imperfections and Investment,” mimeo, Columbia University, June 1995.

Empirical Implications of Capital Market Failures

*Fazzari, Steven M. and Bruce Petersen. “Investment Smoothing with Working Capital: Measuring the Impact of Internal Finance Constraints,” RAND Journal of Economics, 1993.

*Fazzari, Steven M., R. Glenn Hubbard, and Bruce Petersen. “Finance and Investment Reconsidered,” Brookings Papers on Economic Activity, 1988:1

*Carpenter, Robert E., Steven M. Fazzari, and Bruce C. Petersen. “Inventory Investment, Internal Finance Fluctuations, and the Business Cycle, Brookings Papers on Economic Activity 1994:2.

Zeldes, Stephen. “Consumption and Liquidity Constraints: An Empirical Investigation,” Journal of Political Economy, April 1989.

Capital Market Failures and the Transmission of Monetary Policy

The Bank Lending Channel

Bernanke, Ben and Alan Blinder. 1992 “The Federal Funds Rate and the Channels of Monetary Transmission,” American Economic Review, 82

Kashyap, Anil, Jeremy Stein, and David Wilcox. 1994 “Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance,” American Economic Review, 83.

*Oliner Stephen, and Glenn D. Rudebusch. “Is there a Bank Credit Channel for Monetary Policy,”

*Kashyap, Anil, Owen Lamont,and Jeremy Stein. 1994 “Credit Conditions and the Cyclical Behavior of Inventories,” Quarterly Journal of Economics, 109, 565-92

The Collateral Channel

*Gertler Mark, and Simon Gilchrist. 1994 “Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms,” Quarterly Journal of Economics, 109

*Bernanke, Ben and Mark Gertler, “Inside the Black Box: The Credit Channel of Monetary Transmission,” Journal of Economic Perspectives, Fall 1995.

The Internal Finance Channel and a synthesis of the literature

*Carpenter, Robert E., Steven M. Fazzari, and Bruce C. Petersen. “Three Financing Constraint Hypotheses and Inventory Investment: New Tests Using Time and Sectoral Heterogeneity,” mimeo, September 1995.

Post Keynesian Perspectives on Investment

Minsky, Hyman. John Maynard Keynes, chapters 4,5,6.

VII. Microfoundations of the Labor Market

Alchian, A. “Information Costs, Pricing and Resource Unemployment,” in E. Phelps ed. Microeconomic Foundations of Employment and Inflation Theory.

Efficiency Wage Models

*Yellen, Janet L. “Efficiency Wage Models of Unemployment,” American Economic Review, May 1984.

*Shapiro and Stiglitz. “Equilibrium Unemployment as a Worker-Dicipline Device, American Economic Review, June 1984.

Mankiw, Rotemberg, and Summers. “Intertemporal Substitution in Macroeconomics,” QJE 1985.

VIII. Neoclassical Refinements of the Real Sector

Consumption

*Friedman, Milton. A Theory of the Consumption Function, pp. 20-37

*Hall, Robert. “Stochastic Implications of the Permanent Income Hypothesis,” Journal of Political Economy, 1978.

Investment

GT, 12.

*Chrinko, Robert S. “Business Fixed Investment Spending: A Critical Survey of Modeling Strategies, Empirical Results, and Policy Implications,” Journal of Economic Literature.

Inventory Investment

*Blinder, Alan S. and Louis J. Maccini. “The Resurgence of Inventory Research: What Have We Learned?” Journal of Economic Surveys, 5(4), 1991, pp. 291-328.

Metzler. “The Nature and Stability of Inventory Cycles,” Review of Economics and Statistics, 1941.