Department of Economics, University of Hawaii Manoa Fall 2018

Econ 607 - Macroeconomic Theory I*

Liang Wang
Lectures: Tuesday & Thursday 10:30-11:45 in BUSAD D104
Office Hours: Tuesday and Thursday 13:15-14:15 or by appointment
Office: Saunders Hall 515B
Email Address: liang.wang@hawaii.edu
Teaching Assistant: Ivan Rivadeneyra Camino
TA Office Hours: Wednesday and Friday 10:00-11:00 or by appointment
TA Office: Saunders Hall 525
TA Email Address: irivaden@hawaii.edu

Course Description
In Macroeconomic Theory I, we will introduce a set of basic analytical tools and
models, which are the workhorses of modern macroeconomics, i.e., recursive
macroeconomics, and apply them to touch some research topics on the frontier. In the
first half of the course, we will focus on the framework and methodology. In
particular, we will study the dynamic programming method, which is widely used in
recursive macroeconomics. Then, we will apply this method to study various
macroeconomic topics and models including economic growth, overlapping-
generations models, and monetary models with an explicit micro-foundation. By the
end of the semester, students should not only get some feeling about the frontier of
modern macroeconomic research, but also possess the ability to formulate a research
question in the dynamic general equilibrium framework.

Optional Textbooks and References

Stokey, Nancy L. and Robert E. Lucas (with Edward C. Prescott) (1989) Recursive
Methods in Economic Dynamics, Harvard University Press. (Hereafter SLP)
Ljungqvist, Lars and Thomas J. Sargent (2012) Recursive Macroeconomic Theory, 3rd
Edition, The MIT Press. (Hereafter LS)
Walsh, Carl E. (2017) Monetary Theory and Policy, 4th Edition, The MIT Press.
(Hereafter CW)

Exams
There will be a midterm exam (TBA, in class) and a final exam (Tuesday, Dec 11,
9:45 - 11:45 am)1. The final exam only covers materials discussed after the midterm.

*
This syllabus is very preliminary and subject to change.
1
The time and date of the final exam is subject to any changes based on the University Final Exam
Schedule posted online at http://manoa.hawaii.edu/undergrad/schedule/final-exams/fall/.

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 Department of Economics, University of Hawaii Manoa Fall 2018

The midterm counts 40% towards the final grade, and the final counts 40%. Both are
closed book exams. We do not offer make-up exams, unless compelling evidence of
medical emergency is provided.

Homework Assignment
There will be several homework assignments during the semester, which count 20%
towards the final grade. They will be posted on the Laulima website with clear due
days. Late submission is NOT accepted. Students may choose to form study groups to
discuss the homework problems. However, each individual student is expected to
complete the homework on their own. Copying solutions from one another or from
the internet is strictly prohibited.

Course Contents:
1. Introduction to Dynamic Programming and General Equilibrium Models (SLP
Chapter 1, 2, 15; LS Chapter 1, 8)
Lucas, Robert E., Jr. (2003): “Macroeconomic Priorities,” American Economic
Review, Vol. 93, No. 1, 1-14.
“Rebuilding Macroeconomic Theory,” Oxford Review of Economic Policy, Vol. 34,
No. 1-2, 2018, pp. 1-347.

2. Mathematical Preliminaries (SLP Chapter 3)

3. Dynamic Programming under Certainty (SLP Chapter 4; LS Chapter 3)

4. Stochastic Models (SLP Chapter 7-9; LS Chapter 3)

5. Economic Growth (SLP Chapter 5; LS Chapter 15)

 Facts about Economic Growth
 Exogenous Growth Models
 Endogenous Growth Models
Cass, David (1965): “Optimum Growth in an Aggregative Model of Capital
Accumulation,” Review of Economic Studies, Vol. 32, No. 3, 233-240.
Romer, Paul (1986): “Increasing Returns and Long-Run Growth,” Journal of Political
Economy, Vol. 94, No. 5, 1002-1037.
Lucas, Robert E., Jr. (1988): “On the Mechanics of Economic Development,” Journal
of Monetary Economics, Vol. 22, No. 1, 3-42.

6. Overlapping Generations Models (with Money) (SLP Chapter 17; LS Chapter 9, 10)

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 Department of Economics, University of Hawaii Manoa Fall 2018

 A Pure Exchange Overlapping Generations Model

 Government Policies in Overlapping Generations Model
 Overlapping Generations Models with Production
Samuelson, Paul (1958): “An Exact Consumption Loan Model of Interest With or
Without the Social Contrivance of Money,” Journal of Political Economy, Vol. 66,
No. 6, 467-482.
Diamond, Peter A. (1965): “National Debt in a Neoclassical Growth Model,”
American Economic Review, Vol. 55, No. 5, 1126-1150.
Wallace, Neil (1980), “The Overlapping Generations Model of Fiat Money,” in
Models of Monetary Economies, Kareken and Wallace ed., Federal Reserve Bank of
Minneapolis, Minneapolis, MN.

7. Monetary Models with Micro-foundations (LS Chapter 26-28; CW Chapter 1-3)

 Money-in-the-Utility Model
 Transaction Cost Model
 Cash-in-Advance Model
 Search Model
Lucas, Robert E., Jr. (1980): “Equilibrium in a Pure Currency Economy,” Economic
Inquiry, Vol. 18, No. 2, 203-220.
Kiyotaki, Nobuhiro and Randall Wright (1989): “On Money as a Medium of
Exchange,” Journal of Political Economy, Vol. 97, No.4, 927-954.
Kiyotaki, Nobuhiro and Randall Wright (1993): “A Search-Theoretic Approach to
Monetary Economics,” American Economic Review, Vol. 83, No. 1, 63-77.
Trejos, Alberto and Randall Wright (1995): “Search, Bargaining, Money, and Prices,”
Journal of Political Economy, Vol. 103, No. 1, 118-141.
Lagos, Ricardo and Randall Wright (2005): “A Unified Framework for Monetary
Theory and Policy Analysis,” Journal of Political Economy, Vol. 113, No. 3, 463-484.