Syllabus for Advanced Macroeconomic Theory I

Instructor. Philipp Grübener. E-mail: gruebener@econ.uni-frankfurt.de. Office: HoF,

Room 3.49.

Office Hours. By appointment. Please send me an e-mail.

Course objectives. This is the first half of the first semester course in graduate macro-
economics. It is intended for PhD and MSQE students only, with no exceptions. The
purpose of the course is to present some of the basic questions macroeconomists seek to
answer and to introduce standard models used to explain these stylized facts, like repre-
sentative and heterogeneous agent models. One emphasis of the course lies on introducing
helpful techniques, especially dynamic programming, a tool that is useful in analyzing
many questions in macroeconomics and beyond. We will also discuss some empirical
studies of macroeconomics.

Organization. Course materials, problem sets, announcements, etc., will be posted on

the course webpage in OLAT (search for “Advanced Macroeconomic Theory” or browse
through the course catalogue). Please subscribe to the course (under “Einschreibung”)
and make sure that you receive the e-mails we send through that platform.
The lectures are scheduled to take place as live class-sessions on Mondays and Tues-
days, 10.15am to 11.45am, in the House of Finance room E.20 (DZ Bank).

Requirements. There are two requirements for this course.

First, you have to hand in three problem sets one week after the assignment. These
problem sets will not be graded and returned, but they are still part of the course re-
quirements. Not handing in a problem set will lead to a reduction in the points awarded
for the final exam by 3 percent (i.e. not handing in any of the problem sets will lead to
a reduction of 9 percent in the points awarded on the final exam). The problem sets will
be discussed in class. Please keep photocopies of your problem sets prior to submitting
them for your own exam preparation. The problem sets are meant as a preparation for
the exam, so please make an effort to answer them on your own. Of course, discussing
the problem sets as well as other material with your fellow classmates is a very good idea.
Second, the grade for this part of the course will be based on an exam which will be
held in early December.

Textbooks. There is no required textbook for the course. A number of excellent text-
books cover the course material (and much more).

• Lars Ljungqvist and Thomas J. Sargent (2018). Recursive macroeconomic theory.

MIT Press

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 • Nancy L. Stokey, Robert E. Lucas, and Edward C. Prescott (1989). Recursive
methods in economic dynamics. Harvard University Press

• Jerome Adda and Russell W. Cooper (2003). Dynamic economics: quantitative

methods and applications. MIT Press

• Olivier Blanchard and Stanley Fischer (1989). Lectures on macroeconomics. MIT

Press

• David Romer (2019). Advanced Macroeconomics. New York: McGraw-Hill

We follow most closely the book by Ljungqvist and Sargent (2018). Specific references
to the most relevant sections also in the other books are provided below.

Programming skills. As part of the course, you will learn how to numerically solve
stochastic dynamic programming problems. We will use Matlab as a programming lan-
guage, but you are free to use other programming languages.
The following books cover numerical methods used to solve the models we discuss in
class:

• Kenneth L. Judd (1998). Numerical methods in economics. MIT Press

• Mario J. Miranda and Paul L. Fackler (2004). Applied computational economics

and finance. MIT Press

• Burkhard Heer and Alfred Maussner (2009). Dynamic general equilibrium modeling:
computational methods and applications. Springer Science & Business Media

• Hans Fehr and Fabian Kindermann (2018). Introduction to Computational Eco-

nomics Using Fortran. Oxford University Press

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 Course Outline

1 Basic Consumption Theory

1.1 Permanent Income Hypothesis

• Romer Chapters 8.1-8.4

• John Y. Campbell and N. Gregory Mankiw (1989). “Consumption, income, and

interest rates: Reinterpreting the time series evidence.” NBER Macroeconomics
Annual 4, pp. 185–216

• Christopher D. Carroll (2001). “A theory of the consumption function, with and

without liquidity constraints.” Journal of Economic Perspectives 15.3, pp. 23–45

• Milton Friedman (1957). A Theory of the Consumption Function. Princeton Uni-

versity Press

• Robert E. Hall (1978). “Stochastic implications of the life cycle-permanent income

hypothesis: theory and evidence.” Journal of Political Economy 86.6, pp. 971–987

• David S. Johnson, Jonathan A. Parker, and Nicholas S. Souleles (2006). “Household

expenditure and the income tax rebates of 2001.” The American Economic Review
96.5, pp. 1589–1610

• Sydney C. Ludvigson and Alexander Michaelides (2001). “Does buffer-stock saving

explain the smoothness and excess sensitivity of consumption?” The American
Economic Review 91.3, pp. 631–647

• Jonathan A. Parker (1999). “The reaction of household consumption to predictable

changes in social security taxes.” The American Economic Review 89.4, pp. 959–
973

• Nicholas S. Souleles (1999). “The response of household consumption to income tax

refunds.” The American Economic Review 89.4, pp. 947–958

1.2 Overlapping Generations Model

• Blanchard/Fischer Chapter 3

• Olivier J. Blanchard (1985). “Debt, deficits, and finite horizons.” Journal of Polit-
ical Economy 93.2, pp. 223–247

• Peter A. Diamond (1965). “National debt in a neoclassical growth model.” The

American Economic Review 55.5, pp. 1126–1150

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 • Paul A. Samuelson (1958). “An exact consumption-loan model of interest with
or without the social contrivance of money.” Journal of Political Economy 66.6,
pp. 467–482

• Menahem E. Yaari (1965). “Uncertain lifetime, life insurance, and the theory of the
consumer.” The Review of Economic Studies 32.2, pp. 137–150

2 Dynamic Programming

2.1 Dynamic Programming Methods

• Stokey/Lucas/Prescott Chapters 3-4, 9

• Adda/Cooper Chapter 2

• Richard Bellman (1957). Dynamic Programming. Princeton University Press

• Lawrence M. Benveniste and Jose A. Scheinkman (1979). “On the differentiability

of the value function in dynamic models of economics.” Econometrica, pp. 727–732

• Dimitri P. Bertsekas (1976). Dynamic Programming and Stochastic Control. New

York: Academic Press

2.2 Deterministic Growth Model

• Ljungqvist/Sargent Chapter 3

• Stokey/Lucas/Prescott Chapter 5

2.3 Stochastic Growth Model

• Ljungqvist/Sargent Chapter 4

• Stokey/Lucas/Prescott Chapter 10

• Adda/Cooper Chapter 5

• William A. Brock and Leonard J. Mirman (1972). “Optimal economic growth and
uncertainty: the discounted case.” Journal of Economic Theory 4.3, pp. 479–513

3 Competitive Equilibria

3.1 Exchange Economy with Complete Markets

• Ljungqvist/Sargent Chapter 8

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 • John H. Cochrane (1991). “A simple test of consumption insurance.” Journal of
Political Economy 99.5, pp. 957–976

• Dirk Krueger and Fabrizio Perri (2006). “Does income inequality lead to consump-
tion inequality? Evidence and theory.” The Review of Economic Studies 73.1,
pp. 163–193

• Barbara J. Mace (1991). “Full insurance in the presence of aggregate uncertainty.”

Journal of Political Economy 99.5, pp. 928–956

3.2 Ricardian Equivalence

• Ljungqvist/Sargent Chapter 10

• Robert J. Barro (1974). “Are government bonds net wealth?” Journal of Political
Economy 82.6, pp. 1095–1117

• Robert J. Barro (1979). “On the determination of the public debt.” Journal of
Political Economy 87.5, Part 1, pp. 940–971

3.3 Equilibrium in the Growth Model

• Ljungqvist/Sargent Chapter 12

• Finn E. Kydland and Edward C. Prescott (1982). “Time to build and aggregate
fluctuations.” Econometrica, pp. 1345–1370

• Robert E. Lucas and Edward C. Prescott (1971). “Investment under uncertainty.”

Econometrica, pp. 659–681

• Edward C. Prescott and Rajnish Mehra (1980). “Recursive Competitive Equilib-

rium: The Case of Homogeneous Households.” Econometrica 48.6, pp. 1365–1379

4 Incomplete Markets

4.1 Idiosyncratic Income Shocks and Precautionary Savings

• Ljungqvist/Sargent Chapter 17

• Ricardo J. Caballero (1991). “Earnings uncertainty and aggregate wealth accumu-

lation.” The American Economic Review, pp. 859–871

• Christopher D. Carroll (1997). “Buffer-stock saving and the life cycle/permanent

income hypothesis.” The Quarterly Journal of Economics 112.1, pp. 1–55

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 • Pierre-Olivier Gourinchas and Jonathan A. Parker (2002). “Consumption over the
life cycle.” Econometrica 70.1, pp. 47–89

• Greg Kaplan and Giovanni L. Violante (2014). “A model of the consumption re-
sponse to fiscal stimulus payments.” Econometrica 82.4, pp. 1199–1239

4.2 General Equilibrium Heterogeneous Agent Models

• Ljungqvist/Sargent Chapter 18

• Yves Achdou, Jiequn Han, Jean-Michel Lasry, Pierre-Louis Lions, and Benjamin
Moll (2022). “Income and wealth distribution in macroeconomics: A continuous-
time approach.” The Review of Economic Studies 89.1, pp. 45–86

• S. Rao Aiyagari (1994). “Uninsured idiosyncratic risk and aggregate saving.” The
Quarterly Journal of Economics 109.3, pp. 659–684

• Ana Castaneda, Javier Diaz-Gimenez, and Jose-Victor Rios-Rull (2003). “Account-

ing for the US earnings and wealth inequality.” Journal of Political Economy 111.4,
pp. 818–857

• Mariacristina De Nardi and Giulio Fella (2017). “Saving and wealth inequality.”
Review of Economic Dynamics 26, pp. 280–300

• Jonathan Heathcote, Kjetil Storesletten, and Giovanni L. Violante (2014). “Con-

sumption and labor supply with partial insurance: An analytical framework.” The
American Economic Review 104.7, pp. 2075–2126

• Mark Huggett (1993). “The risk-free rate in heterogeneous-agent incomplete-insurance

economies.” Journal of Economic Dynamics and Control 17.5, pp. 953–969

• Mark Huggett (1996). “Wealth distribution in life-cycle economies.” Journal of

Monetary Economics 38.3, pp. 469–494

• Per Krusell and Anthony A. Smith (1998). “Income and wealth heterogeneity in
the macroeconomy.” Journal of Political Economy 106.5, pp. 867–896