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Macro Economic Analysis II: Aggregate Behavior and Asset Prices G6216 – B9207 Spring 2004 MW 9:10 – 10:25, Room 411 IAB Course Objective: To illustrate the ability of dynamic general equilibrium models to explain a wide range of macroeconomic phenomena. In particular, we will focus on the question: is it possible to develop an equilibrium model which simultaneously can explain the stylized facts of the business cycle and the financial markets? Reference Texts: (to be placed on reserve) Cooley, T. (ed.), Frontiers of Business Cycle Research, Princeton: Princeton University Press, 1995. Ljungqvist, L. and T. Sargent, Recursive Macroeconomic Theory, MIT Press, 2000. Course Outline 1. The Basic Infinite Horizon Models Solow’s Model and dynamic efficiency; the optimal growth model and its recursive representation: the functional equation of dynamic programming; properties of the value function; stochastic and deterministic steady states; numerical computation and examples. (i) Chapters 2, 3, RMT; Chapter 1, FBCR (ii) Notes on Math Preliminaries 2. Decentralizing the Basic Planning Problem and Introducing a Financial Market. Brock’s (1982) and Prescott and Mehra’s (1980) decentralization schemes; constructing a representative agent. (i) Donaldson, J. and R. Mehra, “Competitive Dynamics of an Equilibrium Intertemporal Asset Pricing Model,” Review of Economic Studies, 51 (1984), 491-508. (ii) Prescott, E.C., and R. Mehra, “Recursive Competitive Equilibrium: The Case of Homogeneous Households,” Econometrica, 48(1980), 1356-1379. (iii) Lucas, R.E. and E.C. Prescott, “A Note on Price Systems in Infinite Dimensional Spaces,” International Economics Review 13, (1972), 416-422. Donaldson, J. and J. P. Danthine, “Dynamic Decentralization,” mimeo, 2001. RMT, Chapter 7. 3. Application 1: Real Business Cycle Models and Their Solution. The stylized facts of the business cycle and the performance of the optimal growth paradigm; ca