Dynamic optimization and models of dynamic general equilibrium. Sticky prices. Uncertainty, expectations, and dynamics in a simple stochastic model. Asset prices and financial markets
The purpose of the course is to enable students to understand the macroeconomic literature published in specialized journals and to start doing research in the field
Prerequisites
Students are supposed to have attended classes of Mathematics for Economics, and to be familiar with the basics of Macroeconomics at the elementary level (National Accounts; Fiscal and monetary policy; IS-LM and AD-AS models of an open economy).
Teaching Methods
lectures in class
Type of Assessment
Written and/or oral examination, at the students' choice
Course program
The course aims to present the basic features of the Dynamic Stochastic General Equilibrium model (DSGE). We start with an introduction to methods of mathematical dynamic optimization and show how these methods are applied to the analysis of intertemporal equilibrium consumption-accumulation paths in a deterministic (or “certainty-equivalent”) environment. The DGE path is characterized both in terms of a “command” economy and as equilibrium of a decentralized perfectly competitive economy. There follows a brief comparison of the DGE model with equilibrium paths generated by a simple Overlapping Generations model. Finally, we discuss the role of price stickiness in generating “Keynesian” features in the DGE model.
In the second part of the course we add uncertainty to the model by introducing simple dynamic stochastic factors operating in the economy. We explain the assumption of Bayesian expectations, and use a sketchy model of economy driven by an autoregressive process to show how different ways of modeling expectation formation affect the dynamics of the system. We focus on rational expectations versus adaptive expectations. These notions are applied to the analysis of the representative household’s choice among risky assets. We discuss the concepts of risk involved in the utility-based and consumption-based Capital Asset Pricing Model. A comparison with the contingent claims approach is used in order to discuss the notions of completeness of financial markets, efficiency in risk allocation and non-diversifiable risks.
The last part of the course will be occupied by reading together and discussing a macroeconomic paper chosen from the current economic literature.