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Business Cycles

Giovanni Favara and Aude Pommeret
Spring 2009

This is a first year course for students in the M.Sc in Economics. The purpose of this
course is to introduce students with the basic models used to study macroeconomic
fluctuations.

The course is organized around six main topics. The first three are taught by Aude
Pommeret (on Thursday) and the remaining ones by Giovanni Favara (on Wednesday).

The extensive reading list is provided as a guide to those interested in understanding not
only the basic concepts but also pursuing research in these topics.

There will be 4 Problem Sets (PS) and a final exam. The PSs count for 50% of the final
grade, and the final exam for the remaining 50%. If the grade at the final exam is higher
than the computed weighted average, the final grade only will be counted. The same
exact conditions apply for an eventual make-up exam. Please, note that students which
have not handed in the three PSs are not eligible for a final exam.

1) Introducing Modern Business Cycle Theory (1 class)
1a) The Modern Business Cycle Theory Within the Context of
Macroeconomic Theory
Required Readings

Mankiw G. (1990), "A Quick Refresher course in Macroeconomics", Journal of Economic
Literature, vol 28, p.1645-1660, PDF

Blanchard, O., (2000), "What Do We Know About Macroeconomics that Fisher and Wicksell Did
Not?" Quarterly Journal of Economics 115, no. 4, p.1375-1410, PDF

Related Readings

Mankiw, G. (2006), “The Macroeconomist as Scientist and Engineer”, Journal of Economic
Perspectives Vol. 20, No. 4, PDF

Danthine J-P, (1997), “In search of a successor to IS-LM”, Oxford Review of Economic Policy,
13(3), p135-144, PDF.

Lucas R., (1980), “Methods and Problems in Business Cycle Theory”, Journal of Money, Credit
and Banking, 12(4), p696-715, PDF.

Ball L. No. 363-380. 1. p. King R. 86. The Journal of Political Economy. 39-69. Credit. Plosser. 6. “Expectations and the neutrality of money”. Kydland F. 326-334.. (1977). and the Optimal Money Supply Rule”. pp. 473-492. (1968). Journal of Political Economy. 91. The Journal of Political Economy. Vol.. (1986). Brookings Papers on Economic Activity. No. Vol. and Wallace N. Journal of Political Economy. and Prescott E. R. pp. n°1 . No. 1. pp.. The American Economic Review. and the Optimal Money Supply Rule”. Friedman M.. (1975). 2. Vol. Lucas R. 1-17. Vol. No. 191-205. Lucas. Brunner Cukierman and Meltzer (1980). Barro R. “The Role of Monetary Policy”. (1980). 82-93. Vol. “Some International Evidence on Output-Inflation Tradeoffs”... output and the price level in the US”. “Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence”. Fischer S. The Journal of Political Economy. Review of Economic Studies... "Rational" Expectations. Mankiw G. Vol. (1975). 74.. Hall R. “An equilibrium model of the business cycle” Journal of Political Economy. 1. No. persistent unemployment and the permanence of economic shocks”). 1-65. “Money. “Aggregate Dynamics and Staggered Contracts”. “Rules Rather than Discretion: The Inconsistency of Optimal Plans”. “Unanticipated money. Vol. and Plosser C.. Barro R. and Romer D. pp. (1972). pp. (Feb. 235-76. Vol. The American Economic Review. 971-987. Long J. . No. Journal of Economic Theory Lucas R.Other references Ball L. 63. Vol.." NBER Macroeconomics Annual. 85. 57(2). 3. “A General Disequilibrium Model of Income and Employment”. and Romer D.. The American Economic Review. 58. pp. (1990). 3. and Grossman H. "Real Rigidities and the Non-neutrality of Money". Sargent T. The American Economic Review. No. (1988). 1. pp.. (1978). No. pp. (1973). (1977). (1983). No. And C. “Stagflation. 241-254. 88... Rational Expectations. “Long-Term Contracts... Katz L. 1. The Journal of Political Economy. 83.. Taylor J. No. “Real Business Cycles”. (1978). 1. 3. pp.”Efficiency Wage Theories: A Partial Evaluation. (1984). Vol. (1971). and Prices in a Real Business Cycle”. 1-23. The Journal of Political Economy.. 61. the Optimal Monetary Instrument. 85. 1980). «The New Keynesian Economics and the Output- Inflation Trade-off».. pp. pp.

PDF Cooley. Woodford. (19879. “Lectures on Macroeconomics” Ch. and chapter 7. and M. Chapter 1 Uhlig.S. Ljungqvist L." Journal of Money.. vol. and M. PDF King. (1997). 77(2).1-16. and M. 2004. (1995) Related Readings Campbell J.. "Business Cycle Fluctuations in U. 1999. 29(1). PDF Stock. PDF. p. “Has the Business Cycle Changed? Evidence and Explanations (August 2003) PDF 2) The Real Business Cycle Model (3 classes) 2a) The Basic Model Required Readings Campbell John (1994) “ Inspecting the Mechanism: An analytical approach to the stochastic growth model”. chapter 4. Taylor and M. Stock. JME 33. North Holland. Advanced Macroeconomics. "Permanent and Transitory Components in Macroeconomic Fluctuations." American Economic Review. PDF Stock. Harald. p. "A toolkit for analyzing nonlinear dynamic stochastic models easily. Prescott. p. North Holland. Woodford. pages 478-488.." Journal of Economic Perspective 2. J. and Prescott E. no. Business Cycles: An Empirical Investigation.S. "Postwar U. and S.1b) Fluctuations and facts Required Readings Baxter M." in . 575–593. Review of Economics and Statistics. J. Watson. Related reading Romer. D. 3 (Summer 1988): 147-174. and E. and King R: (1999)." Chapter 1 in Handbook of Macroeconomics. Vol 1A. " Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series ". "Variable Trends in Economic Time Series... “Economic Growth and Business Cycles”. T. 1999. Macroeconomic Time Series. (2001). part B. Recursive Macroeconomic Theory. Credit and Banking. T. and Mankiw G. J. chapter 1 in Frontiers of Business Cycle Research. Watson. Sargent. and T. R... vol.. Edited by J. 81(4). Watson. 463-506.H. Cooley.. 9. Rebelo. Edited by J.111-17. Taylor and M. PDF Blanchard O. R. Editor. Fisher.C. Vol 1A. “Resuscitating real Business Cycles” Chapter 14 in Handbook of Macroeconomics. PDF Hodrick. and S.

“Real Business Cycle Models: Past. “Some Skeptical Observation on Real Business Cycle Theory”. New York. R. PDF Prescott. R. 4 (Fall 1986): 28-32. Vol. and E.. and Future. 3. Taylor and M. W1140. no. eds. Journal of Monetary Economics 21.. PDF Summers. C.. R. 1B. The Basic Neoclassical Model”. Journal of Economic Perspective. No. S. 927-1007.C. 2004. “Understanding Real Business Cycles”. no. Amsterdam." Section 3 in Advance Information on the Bank of Sweden Prize in Economic Sciences. growth and Business Cycles: I. "Resuscitating Real Business Cycles. Woodford.” Federal Reserve Bank of Minneapolis Quarterly Review 10. North Holland. no. New Directions. Journal of Monetary Economics. E. F. PDF Plosser C. Plosser and Sergio Rebelo. Growth and Business Cycles: II. and S. PDF Manuelli. 3. Fall. Oxford University Press. pp. Netherlands. Computational Methods for the Study of Dynamic Economies. pp.. “Production. “Response to a Skeptic” Federal Reserve Bank of Minneapolis Quarterly Review.G. H. Netherlands: Elsevier. Federal Reserve Bank of Minneapolis Quarterly Review 10. Oxford (1999). 4 (Fall 1986): 9-22..I. L.. 4 (Fall 1986): 23-27. 195–232. 1988b. C. PDF . E. Present. Rebelo. PDF Kydland." Chapter 14 in Handbook of Macroeconomics. PDF Related Readings King. PDF Campbell John (1994) “ Inspecting the Mechanism: An analytical approach to the stochastic growth model”. Vol. 3-8. NY. 10. “Real Business Cycles: A New Keynesian Perspective”. 3 (Summer 1989) pages 51-77. Modern Business Cycle Analysis: A Guide to the Prescott- Summers Debate.. Edited by J.” NBER Working Paper No. pp. PDF Mankiw G. 1999. 3 (Summer 1989) pages 79-90.E. 309-341 Sergio Rebelo. “Theory Ahead of Business Cycle Measurement. Federal Reserve Bank of Minneapolis Quarterly Review. 21. JME 33. 30-61. 1986.. R. Prescott’s “Contribution to Dynamic Macroeconomics. Vol. King. Journal of Economic Perspective. No.T. PDF 2b) Endogenous Labor Supply Required readings King. Vol. Plosser. PDF 2c) Evaluation of RBC models Required Readings Prescott.Ramon Marimon and Andrew Scott. e Rebelo. 463-506. C. Production.

Amsterdam. pp. vol. 245-273. Netherlands: Elsevier. T. “Labor Hoarding and the Business Cycle..245-273. and J.430-450. Rebelo. E. T. S. L. and Eichenbaum M.. Carnegie-Rochester Conference Series on Public Policy 41. Journal of Political Economy 101. Vol. 510-533. and J Fisher ‘Asset Pricing Lessons for Modeling Business Cycles. M. 295-364. Taylor and M.Burnside. and Rebelo S. 1995. M. 1B. American Economic Review. “Output Dynamics in Real Business Cycle Models”. J.. Federal reserve Bank of Minneapolis. Economics Perspective: Federal Reserve Bank of Chicago. Labor hoarding and the business cycle. (1992). Eichenbaum. "Resuscitating Real Business Cycles.. “Asymmetric business cycles: Theory and time-series evidence”. 1993. and King R. X. 1993. “Productive Externalities and Business Cycles”.. “The new view of growth and business cycles” Economics Perspective: Federal Reserve Bank of Chicago. Netherlands. “Shocks”. Journal of Monetary Economics.. J. J. 77-81. Christiano. PDF Boldrin. Scott. PDF Christiano L. 1997.. PDF Gabaix. New York. American Economic Review. PDF Christiano L. vol.“ Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations” . 2005. p. C. “Impulse Dynamics and Propagation Mechanism in a Real Business Cycle Models”. D. Nakamura. PDF Fisher. 1999. and T.. Journal of Political Economy. J..”. NY. 82(3). 927-1007.. “The granular origins of aggregate fluctuations”.p. 101(2). PDF 3) Labor Market and Money (2 classes) 3a) Labor Market : Neo-classical and Search Required readings Baxter M. PDF Cochrane. A. (1999).(1993). M.." Chapter 14 in Handbook of Macroeconomics. 2d) Time Series Representations of the Business Cycle Cogley.DP53. PDF . Nason.’ American Economic Review. Edited by J. and J. 2001. Woodford. 2001. “Deconstructing the Success of RBC” mimeo Harvard University. Christiano. 85 492-511. 40. Fitzgerald. Cogley. North Holland. R. 43(1) pp. “The business cycle: It’s still a puzzle”. Economics Letters. Rebelo S. PDF King. 1994. 2001. (1991). Nason. PDF Burnside C. MIT Working Paper. PDF Acemoglu.

Second Edition. Rogerson.). Chapter 24 Cooley.D. Advanced Macroeconomics. Chapter 5. Journal of Monetary Economics. Woodford. J. “Indivisible Labor and the Business Cycle. PDF Cooley. O. The MIT Press." Chapter 3 in Interest Rate and Prices. F. 2. Chapter 8. Monetary Theory and Policy. 1989. pp.. and S. D. Related Readings Hansen. MIT press.” Journal of Monetary Economics. Cooley (Ed. Frontiers of Business Cycle Research.MA. M. 2004. Chapter 5. 16. 10. T. McGraw-Hill. 2006. 3. (1988). R. 733—748. Second Edition. Lotteries and Equilibrium. Vol. Chapter 6. Hansen “Money and the business cycle. D. 2006. Recursive Macroeconomic Theory. PDF Kydland “ Business Cycles and Aggregate Labor Market Fluctuations”: in Cooley T. Gary D. Romer. Monetary Theory and Policy. Chapter 1. 3-16. and Randall Wright (1992): "The Labor Market in Real Business Cycle Theory. T. Fischer (1989) Lectures on Macroeconomics. and G. Ljungqvist L. 21. Frontiers of Real Business Cycles. Walsh C. "Optimizing Models with Nominal Rigidities. pp. Hansen “The Inflation Tax in a Real Business Cycle Model”. MIT press. Princeton. F. Princeton University Press. Sargent. “The Basic New Keynesian Model” Chapter 3 (2006) manuscript. Cambridge. eds.Hansen. 4) Monopolistic Competition and the New Keynesian Model (3 Classes) 4a) Monopolistic Competition and Price Rigidities Required Readings Blanchard.. F. and T. D. J. (1996). 3b) Introducing Money Required Readings Walsh C. G. (1985). Indivisible Labor. 1995." Federal Reserve Bank of Minneapolis Quarterly Review. Princeton University Press. New York. 309-327. and G.” In T. Inflation Dynamics with Staggered Price Setting. PDF . 1995. Vol. American Economic Review 79. Gali.

PDF Calvo. .L. 4b) The New Keynesian Model Required Readings Gali. Woodford “The Cyclical Behavior of Prices and Costs. December. Laurence. PDF Bils. Dotsey. NBER Macro Annual 1997. Nelson. "The New IS-LM model: Language.Some Evidence on the Importance of Sticky Prices. Lucas. and Limits. And M. Review of Economic Studies." Economic Quarterly 86. 383-398. 2004. 1999. 838-855. and David Romer (1990): "Real Rigidities and the Non-Neutrality of Money". Hansen.". 12(3).Gregory. G. PDF Golosov. B. PDF King. R. In J. 151-197. 114(2).).” Handbook of Macroeconomics. and Banking 31. Logic. (1998).J.. Staggered price and wage setting in macroeconomics. J. R. Turnovsky. and A. Inflation. PDF Gali. PDF Taylor.E.”The Cyclical Behavior of Marginal Cost and Price. B. Mankiw (1994): "A Sticky-Price Manifesto". and P. M. . and N. PDF . “The Neo Neoclassical Synthesis”. T. May 1999. 77(5). Also available as NBER WP 8767 (February 2002). M. 112(5). “An optimizing IS-LM specification for monetary policy and business cycle analysis. 2006. III. Bils. Laurence. Woodford (Eds. September 1983. B. Dewatripont. Handbook of Macroeconomics. “The Basic New Keynesian Model” Chapter 3 (2006) manuscript. Carnegie-Rochester Conference Series. R. and M. M. and the Business Cycle. vol. and R. "New Perspectives on Monetary Policy. and E. “Menu Costs and the Phillips Curve”. (Federal Reserve Bank of Richmond. in Advances in Economic Theory..”. Cambridge University Press 2003. 1051-1135. PDF Related Readings King. J. King. 3 (Summer 2000): 45-103.J.985. J.” American Economic Review. Wolman. Goodfriend. M. Taylor and M. Journal of Political Economy. Journal of Money. PDF Rotemberg. edited by: M. 1999. “State Dependet Pricing and the General Equilibrium Dynamics of Money and Output” Quarterly Journal of Economics.Related Readings Ball. 655-690.”Staggered Prices in a Utility Maximizing Framework” Journal of Monetary Economics.).G. 1(2). PDF McCallum. and S.. Chapter 16. 947. . no. Credit. December 1987. L. J. Klenov.MIT Mimeo. 57:183-203 PDF Ball.

Woodford. 1151—1180. Kehoe and Ellen R. Econometrica 68(5). Gali. Interest and Prices. and M. September 2002. 2003 Princeton University Press 5) Labor Market Frictions : the Matching Model (2 classes) Pissarides.. L. Taylor and M. Foundations of a Theory of Monetary Policy.Woodford. Woodford. Netherlands: Elsevier. Chapter 4 in Interest & Prices: Foundations of a Theory of Monetary Policy.. Vol. ISBN: 0444501568. Handbook of Macroeconomics (ch. Gertler. Equilibrium Unemployment Theory. J. V. M. PDF Clarida. PDF Clarida.. 147-180. Labor market frictions and employment fluctuations. PDF Recommended Readings Goodfriend. 1A. Amsterdam. eds. 2nd edition. PDF Rotemberg J. 17). 1. and M. Princeton University Press 2003. M.. Chapter 1 Christiano. Hall. 1-45. J. R. Gertler “Monetary policy rules and macroeconomic stability: Evidence and some theory. R. “An Optimization based Econometric Framework for the Evaluation of the Monetary Policy” NBER Macro Annual 1997. “Monetary policy in the New Neoclassical Synthesis: A Primer. and C. Evans “Nominal rigidities and the dynamic effects of a shock to monetary policy. R. Eichenbaum.. C. "Monetary Policy Shocks: What Have We Learned and to what End?" Handbook of Macroeconomics. Chapter 5. M. NJ Chari. Galí.” . 2006. PDF Christiano.. L. 65-148. Edited by J. "The Science of Monetary Policy: A New Keynesian Perspective. Journal of Political Economy 113(1).” 2005. North Holland. NY.. PDF 4c) Monetary Policy Required Readings Walsh Carl: Monetary Theory and Policy. New York. and C. McGrattan (1996): "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?". MIT Press.” mimeo Federal Bank of Richmond. M. M. 1999. Amsterdam: Elsevier Science . Evans.. J. J. 1999. L. Princeton. Taylor and M. 2000 Quarterly Journal of Economics 115.Woodford. and M. MIT press. PDF Woodford. pp. Partick J.V. Netherlands." Journal of Economic Literature (December 1999): 1661-1707. vol. Second Edition.B. Eichenbaum.

.Gertler.PDF Haan den. S. David (1996): Advanced Macroeconomics. “Agency Costs. Job reallocation. 893-910. Woodford. Kiyotaki.PDF Davis. Haltiwanger. Carlstrom. 1999.B. Cambridge: MIT Press. B.. and business cycles.. Elsevier Science. 79(1). and Watson.. 9. Business cycles and labor-market search. Romer. Net Worth. Chapter 8. December 1994. Net Worth. and Business Fluctuations: A Computable General Equilibrium Analysis. edited by J." Journal of Economic Literature.Moore.. Taylor and M. 933-959.” Quarterly Journal of Economics 112. Andolfatto. Haltiwanger. 2000. Quarterly Journal of Economics 107. “Contractual fragility. Job creation and destruction. . 87. and J. in Handbook of Macroeconomics (ch. R. 1341-1393. Woodford. J. Watson. pp.” American Economic Review. Gertler and S. B. G. "Structural Slumps. and Schuh. J. Gross job creation.. Fisher. gross job destruction. S. “Lectures on Macroeconomics” Ch. and S. 819-863. M. W. 1. 1784-1815.. 1999. 32(4). M..PDF Cole. G. J.. Can the Mortensen-Pissarides matching model match the business cycle facts? International Economic Review 40. Ramey..” American Economic Review. 1996.PDF Davis. April 1997. C. and M. and Business Fluctuations. New York: McGraw-Hill. 1997. Vol. 1992. Rogerson. “Credit Cycles. Job destruction and propagation of shocks. N. job destruction.PDF 6) Credit Markets and Business Cycles (2 classes) Required Readings Bernanke.Mortensen and Pissarides 1999. 873-911. 1B. S. Fuerst “Agency Costs. Vol. Gilchrist “The Financial Accelerator in a Quantitative Business Cycle Framework. American Economic Review 86 112-132. 1997) pp. and T. (December.. employment fluctuations. 482-498. 18). 105(2). D. and employment reallocation.PDF Ramey. 211-248.. H.” in Handbook of Macroeconomics.. 14-31. Related Readings Blanchard O. 1996. and unemployment. J.” Journal of Political Economy. Chapters 1 and 2. Bernanke. pages 478-488.. American Economic Review 90.. March 1989.

24. M. 1996) Vol. Zhang “Asset Prices and Business Cycles with Costly External Finance. 87-114. and M. 50-70. Reichlin. 105 (Feb.Gertler. B.Gertler. M. and the Macroeconomy: Readings and Perspectives in Modern Financial Theory. August 1988 pp. 1990). B.” in Boot and Thakor (eds. 559-596.. Bernanke. Gertler and S. 3. Intermediation. Bernanke. “Financial Structure and Aggregate Economic Activity: An Overview”. Intermediation and the Macroeconomy. P. Gomes. Summer 2000. Kocherlakota. Journal of Money Credit and Banking. F. Quarterly review. Gilchrist “The Financial Accelerator and the Flight to Quality”- The Review of Economics and Statistics (February.“ Financial Fragility and Economic Performance. Credit. (Spring 1993). A Yaron and L.). “Creating Business Cycles Through Credit Constraints” in Quarterly Review. 1. Federal Reserve Bank of New York. “ Quarterly Journal of Economics”. N. Bernanke. 2004.. Oct 2003 . Federal Reserve Bank of Minneapolis. J. No.” Review of Economic Dynamics. B. “Credit Markets.. “Credit in the Macroeconomy”. Oxford: OUP.