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UNIVERSITY OF MARYLAND Department of Economics Economics 601, Second Half Fall 2008 drazen@econ.umd.

edu Allan Drazen TYD 4118J, 5-3477 Office Hrs M,W 11-12, by appt. Macroeconomic Analysis I We will continue the discussion of dynamic macroeconomic models, with emphasis on capital accumulation, growth, continuous-time optimization, time inconsistency, and investment. The webpage for the course, where lecture notes and problem sets can be found, is In addition to lecture, you should attend the discussion section each week. Eighty percent of your second-half grade will be based on an exam to be given on Saturday December 19, 8-10 AM. The remaining twenty percent of your grade will be based on problem sets, which you may work on in teams if you wish. Overall grade is the average of first and second half. Main sources are lecture notes and articles (at JSTOR). Reference will be made to: Romer, Advanced Macroeconomics (R, 3rd ed.), Ljunqvist and Sargent, Recursive Macroeconomic Theory (LS, 2nd ed.), Blanchard and Fischer, Lectures on Macroeconomics (BF), and Dixit and Pindyck, Investment under Uncertainty (DP). Reading List 1. Basic Growth Models Solow, Overlapping Generations * Lecture Notes on Solow Growth Model * Lecture Notes on OLG Model * Diamond, P. "National Debt in a NeoClassical Growth Model," AER, December 1965 BF, chapter 3.1,3.2 2. Optimal Growth * Lecture Notes on Optimal Growth Lecture Notes on Dynamic Programming Stokey and Lucas, Recursive Methods in Dynamic Economics, ch. 2.1 R, p. 48-80, BF, chapter 6.2

2 3. Endogenous Growth * R, chapter 3 * Azariadis and Drazen, Threshold Externalities in Economic Development, QJE, May 1990 * Lecture Notes on Romer model * P.M. Romer, Endogenous Technological Change, JPE 1990, S71-S102. LS, chapter 14 4. Political Economy of Growth * Lecture Notes on Political Economy Meltzer, A. and S. Richard (1981), A Rational Theory of the Size of Government, Journal of Political Economy 89, 914-27. * Persson, T. and G. Tabellini (1994), Is Inequality Harmful for Growth?, American Economic Review 84, 600-621. 5. Time Inconsistency in Capital Taxation * Lecture Notes on Time Inconsistency * Fischer, S. (1980), "Dynamic Inconsistency, Cooperation, and the Benevolent Dissembling Government," Journal of Economic Dynamics and Control 2, 93-107. Kydland and Prescott, Rules Rather than Discretion: The Inconsistency of Optimal Plans, JPE 85, 1977. 6. Mathematical Methods (pages from DP will be made available) * Continuous Time Optimization Lecture Notes on Continuous Time Optimization * Basic Stochastic Processes and Brownian Motion DP, pp. 59-67 * Optimal Stopping DP, pp. 93-104, 128-130 Policy Uncertainty Drazen and Helpman, Inflationary Consequences of Anticipated Macroeconomic Policies, Review of Economic Studies 57, 1990. 7. Investment * Lecture Notes on Investment * Hayashi, Tobins marginal Q and average Q: a Neoclassical Interpretation Econometrica, January 1982. * Abel and Eberly, A Unified Model of Investment under Uncertainty, AER, December 1994. DP, chapter 5