California Institute of Technology

Ec 123: Macroeconomics

Professor: KC Border
Email: kcb@caltech.edu

Tu–Th, 10:30–11:55 a.m.
228 Baxter Hall

For two centuries economics has been know as “the dismal science.” This course, especially today, will do little to change that reputation. We will discuss the timely and depressing topics of social security, national debt, health care, the trade deficit, the credit and mortgage crisis, the stock market collapse, the cost of the war in Iraq, the price of oil, and the economic policies of the Presidential candidates, using economists' theoretical models of aggregate economic variables.

There are two texts recommended for the course. The main text is

• Macroeconomics: An Integrated Approach by Alan Auerbach and Laurence Kotlikoff. It presents a simple, but modern, approach to the subject that uses an overlapping generations framework for discussion. It largely ignores the role of uncertainty. It has the virtue of being relatively inexpensive as textbooks go these days.

The secondary recommended text is

• The ABCs of RBCs by George McCandless. It is a brand new text that introduces contemporary approaches to macroeconomics involving time and uncertainty.

One of the prerequisites for this course is listed as a modest ability to program in a language such as Mathematica or Matlab. For instance, the computation of the steady-state of an economy involve solving non-polynomial equations numerically, the solution of investment problems involves solving dynamic programs by iteration to find the value function, and we shall do some nonlinear curve fitting. These problems are not hard given the built in functions in Matlab and Mathematica, and sample code will be provided. I myself have no formal training in either of these programs and flunked the only programming class I ever took, and still am able to make things work. But I probably won't be of much help in debugging your code.

Homework assignments

Assignments are due in class at the beginning of the lecture.

• Assignment 1: Computational fiscal policy analysis. Due April 17. (Sample Mathematica^® notebook for computing a steady state.)
• Assignment 2: Computational fiscal policy analysis. Due April 29.

Supplementary Notes and Additional Readings

The U.S. Economy

• Statistical Overview of the U.S. Economy (Lecture 1) (6.7M, April 1, 2008)
• The National Bureau of Economic Research's list of U.S. Business Cycles

Production of GDP

• Charles Cobb and Paul Douglas, A theory of production, American Economic Review 18(1928): 139–165. JSTOR
• Paul Anthony Samuelson. 1962. Parable and Realism in Capital Theory: The Surrogate Production Function. Review of Economic Studies 29: 193–206. JSTOR
• Notes on the Cobb–Douglas production function ( 64K, May 6, 2008)
• Notes on Euler's theorem on homogeneity (constant returns to scale). ( 96K, September 28, 2004)

The Overlapping Generations Model

• Paul Samuelson, An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money, Journal of Political Economy 66(1958): 467–482. JSTOR
• Richard T. Boylan and Richard D. McKelvey. 1995. Voting over Economic Plans. American Economic Review 85: 860–871. JSTOR
• Notes on the simple overlapping generations model with production. (138K, April 8, 2008)
• Notes on the growth in the overlapping generations model with production. (195K, April 10, 2008)

Generational Accounting

• Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff. 1994. Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy. Journal of Economic Perspectives 8: 73–94. JSTOR
• Robert Haveman. 1994. Should Generational Accounts Replace Public Budgets and Deficits? Journal of Economic Perspectives 8: 95–111. JSTOR

Social Security

• David I. Laibson, Andrea Repetto, Jeremy Tobacman, Robert E. Hall, William G. Gale, and George A. Akerlof. 1998. Self-Control and Saving for Retirement. Brookings Papers on Economic Activity 1998: 91–196. JSTOR
• Special issue of The Economists' Voice dealing with Social Security. December 2004.
• Antonio Rangel. Social Security Reform: Efficiency Gains vs. Intergenerational Redistribution, unpublished manuscript, 1998. Author's web site

The cost of war

• Joseph E. Stiglitz. “War at Any Cost? The Total Economic Costs of the War Beyond the Federal Budget,” Testimony before the Joint Economic Committee. February 28, 2008. On line.
• Joseph E. Stiglitz and Linda J. Bilmes. April 2008. The $3 Trillion War. Vanity Fair. On line.
• Eyeing the wages of war: Review of Stiglitz and Bilmes. The Economist. March 13, 2008. On line.

Business Cycle Volatility

• Christina Romer. 1986. New Estimates of Prewar Gross National Product and Unemployment. Journal of Economic History 46: 341–352. JSTOR
• Christina Romer. 1986. The Instability of the Prewar Economy Reconsidered: A Critical Examination of Historical Macroeconomic Data. Journal of Economic History 46: 494–496. JSTOR
• Christina D. Romer. 1986. Is the Stabilization of the Postwar Economy a Figment of the Data? American Economic Review 76: 314–334. JSTOR

Unemployment and Uncertainty

• Costas Azariadis. 1975. Implicit Contracts and Underemployment Equilibria. Journal of Political Economy 83: 1183–1202. JSTOR
• Costas Azariadis. 1976. On the Incidence of Unemployment. Review of Economic Studies 43: 115–125. JSTOR
• Boyan Jovanovic. 1979. Job Matching and the Theory of Turnover. Journal of Political Economy 87: 972–990. JSTOR
• Notes on inflexible wages. ( 73K, May 6, 2008)
• Sargent on job search. ( 62K, May 5, 2005)
• Sargent on job matching. (133K, December 4, 2003)
• Notes on risk aversion. (228K, November 12, 2003)
• Notes on stochastic dominance. (133K, October 31, 2001)

Dynamic Programming

• Notes on dynamic programming and the consumption/saving decision. (103K, May 6, 2008)

Asset Pricing

• Notes on Lucas's tree model of asset pricing. ( 96K, May 12, 2005)
• Robert E. Lucas, Jr. 1978. Asset Prices in an Exchange Economy. Econometrica 46: 1429–1445. JSTOR
• Notes on arbitrage-free pricing of assets. (224K, May 18, 2006)
• Franco Modigliani and Merton H. Miller. 1958. The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review 48: 261–297. JSTOR
• Joseph E. Stiglitz. 1969. A Re-Examination of the Modigliani–Miller Theorem. American Economic Review 59: 784–793. JSTOR

Money

• Money in an OG Model, introductory notes. (208K, April 2, 2008)
• Paul Anthony Samuelson. 1958. An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money. Journal of Political Economy 66: 467–482. JSTOR
• Neil Wallace. 1977. On Simplifying the Theory of Fiat Money. Staff Report 22, Minneapolis Federal Reserve Bank.
• Nobuhiro Kiyotaki and Randall Wright. 1989. On Money as a Medium of Exchange. Journal of Political Economy 97: 927–954. JSTOR
• Nobuhiro Kiyotaki and Randall Wright. 1993. A Search-Theoretic Approach to Monetary Economics. American Economic Review 83: 63–77. JSTOR
• Edward J. Green. 1999. We Need to Think Straight about Electronic Payments. Journal of Money, Credit and Banking 31: 668–670. JSTOR
• Edward J. Green. 2002. Payment Arrangements and Inflation. American Economic Review 92: 51–57. JSTOR