Advanced Macroeconomics: Estimation and Analysis of Dynamic Macroeconomic Models
The course is the first in the three-part 416 series. The course focuses on a mixture of methodological tools and economic substance relevant to empirical macroeconomics. The course evaluation is based on a midterm, a final and weekly homeworks. The final may be replaced by a term paper. The recommended computer software is MATLAB and Dynare.
1. Solution and stochastic simulation of dynamic models (software used to generate the graphs in the handout, a zip file that uses Dynare to do some of the computations).
a. Perturbation methods and pruning (detailed handout on the use of symbolic algebra in MATLAB to do second order perturbation).
b. Projection methods and dynamic programming.
c. Applications: real business cycle models, later: models with sticky prices.
d. Extended discussion of first order perturbation: Blanchard-Kahn conditions for determinacy.
i. Christiano-Fisher (JEDC, 2000)
ii. Ken Judd (Numerical Methods in Economics, MIT Press, 1998).
iii. Kim-Kim-Schaumburg-Sims (JEDC, 2008) .
iv. den Haan-de Wind (2009).
v. Lombardo (2011)
2. Methods for Bayesian inference.
a. Brief overview of state space/observer representations (see Hamilton, Time Series Analysis and Prof. Primiceri’s 416 course).
b. Bayes’ rule.
c. Integration: Monte Carlo and Quadrature.
d. The Metropolis-Hastings algorithm for computing the posterior distributions of parameters.
e. Laplace approximation to the posterior distribution and Geweke’s modified harmonic mean estimator of marginal likelihood.
f. Illustration of Bayesian estimation methods using artificial data generated from simple NK model.
g. References: Smets and Wouters (AER, 2007); An and Schorfheide (Econometric Reviews, 2007); Zellner, Introduction to Bayesian Inference in Econometrics (1971). For a discussion of a Bayesian version of GMM, section 3.3.3 here. To see how model properties such as variances and impulse responses can be incorporated into priors, see. For a rigorous discussion of the parameter in the jump distribution, see.
a. Economic foundations and properties of the model.
d. Implications of the model for the zero lower bound on nominal interest rates.
i. The vulnerability to deep depression, the impact on the government spending multiplier.
e. References for the model:
i. Gali, Unemployment Fluctuations and Stabilization Policies: A New Keynesian Perspective, MIT Press; Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University;
ii. Woodford, Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.
i. My handbook of monetary economics chapter.
4. The labor market (background).
5. Extensions of dynamic models
i. The ‘timeless perspective’.
ii. Time inconsistency.
b. Financial frictions
i. Hidden effort models in banking.
ii. Dynamic contracts in the Absence of Commitment (related work: Albuquerque-Hopenhayn, 2004, RESTUD, vol. 71, No. 2; and Jonathan Thomas and Tim Worrall, 1994, ‘Foreign Direct Investment and the Risk of Expropriation,’ RESTUD, vol. 61, pp. 81-108).