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Macroeconomic Theory
Dirk Krueger
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Department of EconomicsUniversity of PennsylvaniaAugust 2007
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I am grateful to my teachers in Minnesota, V.V Chari, Timothy Kehoe and EdwardPrescott, my colleagues at Stanford, Robert Hall, Beatrix Paal and Tom Sargent,my co-authors Juan Carlos Conesa, Jesus Fernandez-Villaverde and Fabrizio Perri aswell as Victor Rios-Rull for helping me to learn modern macroeconomic theory. Allremaining errors are mine alone.
 
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Contents
1 Overview and Summary 12 A Simple Dynamic Economy 5
2.1 General Principles for Specifying a Model . . . . . . . . . . . . . 52.2 An Example Economy . . . . . . . . . . . . . . . . . . . . . . . . 62.2.1 De…nition of Competitive Equilibrium . . . . . . . . . . . 72.2.2 Solving for the Equilibrium . . . . . . . . . . . . . . . . . 82.2.3 Pareto Optimality and the First Welfare Theorem . . . . 112.2.4 Negishi’s (1960) Method to Compute Equilibria . . . . . . 132.2.5 Sequential Markets Equilibrium . . . . . . . . . . . . . . . 182.3 Appendix: Some Facts about Utility Functions . . . . . . . . . . 23
3 The Neoclassical Growth Model in Discrete Time 27
3.1 Setup of the Model . . . . . . . . . . . . . . . . . . . . . . . . . . 273.2 Optimal Growth: Pareto Optimal Allocations . . . . . . . . . . . 283.2.1 Social Planner Problem in Sequential Formulation . . . . 293.2.2 Recursive Formulation of Social Planner Problem . . . . . 313.2.3 An Example . . . . . . . . . . . . . . . . . . . . . . . . . 333.2.4 The Euler Equation Approach and Transversality Condi-tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393.3 Competitive Equilibrium Growth . . . . . . . . . . . . . . . . . . 483.3.1 De…nition of Competitive Equilibrium . . . . . . . . . . . 493.3.2 Characterization of the Competitive Equilibrium and theWelfare Theorems . . . . . . . . . . . . . . . . . . . . . . 513.3.3 Sequential Markets Equilibrium . . . . . . . . . . . . . . . 553.3.4 Recursive Competitive Equilibrium . . . . . . . . . . . . . 56
4 Mathematical Preliminaries 57
4.1 Complete Metric Spaces . . . . . . . . . . . . . . . . . . . . . . . 584.2 Convergence of Sequences . . . . . . . . . . . . . . . . . . . . . . 594.3 The Contraction Mapping Theorem . . . . . . . . . . . . . . . . 634.4 The Theorem of the Maximum . . . . . . . . . . . . . . . . . . . 69iii
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