Material arrives in two forms: handout is in the text form and slides in the slide form.
Master’s Programme in Economics (General Track)
The course builds upon the contents of Macroeconomics 1. Hence, the student is assumed to be familiar with dynamic optimisation, household and firm behaviour, and the simple Solow growth model.
After the course, the student should
- Understand the life-cycle motives of consumption and saving decisions
- Understand how the supply of labour is affected by income effect and substitution effect
- Be familiar with the q-theory of investments
- Be able to set up a real business cycle model and understand the role of technology in business cycles
- Understand how to introduce a micro-founded upward-sloping Phillips curve
- Be able to describe the transmission of monetary policy in a New-Keynesian model
First autumn term, after completing Macroeconomics 1
The course provides an introduction to real business cycle theory and the New-Keynesian approach modelling nominal frictions and analysing monetary policy. Consumption smoothing is the key part of the mechanism in both models. Therefore, the consumption-savings decision is studied thoroughly. The standard model and the concepts are introduced using a two-period model, which is then extended to the infinite horizon. The simple two-period model is used to study household behaviour under borrowing constraints. The household problem is extended to cover both the consumption-savings decision and the labour supply decision. The effect of taxation is examined. The firms’ problem relies on the Cobb-Douglas specification of the production function. Investment behaviour both in the frictionless economy and in the economy with the investment adjustment cost is studied. The dynamic optimisation relies on the Lagrange multiplier method. The above modelling ingredients are put together to make a complete general equilibrium macroeconomic model, the real business cycle (RBC) model. The propagation of technology shocks is studied using the model. The model is augmented by imperfect competition and price rigidities. These are introduced and their impact is analysed stepwise. The complete model is called the New-Keynesian model, which facilitates analysing monetary policy.
In addition to the lecture material, selected parts of David Romer (2011): Advanced Macroeconomics (4th ed.); Sorensen P.B. & Whitta-Jacobsen H.J.: Introducing Advanced Macroeconomics (1st or 2nd ed.); Klaus Wälde: Applied Intertemporal Optimization (www.waelde.com), Part I and Chapters 7–8 that are covered in the course are recommended.
The grade on a scale from 0 (fail) to 5 is based on the sum of points earned in the final exam and the quizzes based on the homework assignments. The maximum number of points is 100, of which 60 come from the final exam and 40 can be earned in the quizzes based on the homework assignments. To pass the course, the student must earn at least 50 points in total and at least 30 points from the final exam.
The course consists of lectures (24 hours) and exercises either in separate sessions or integrated into the lectures. The lectures and exercise sessions are not mandatory. There is a written final exam based on the lecture material and the homework assignments, and four internet quizzes based on the homework assignments. The homework assignments consist of analytical exercises. They familiarise the student with the theory and calculations typically required in applying and extending the models that have been studied in the lecture. They also involve the interpretation of model economies.