Macroeconomic Theory II


This course is the divided in two parts. The first part develops the core model of macroeconomics. The second part introduces extensions and frontier research.

General characterization





Responsible teacher

Francesco Franco


Weekly - Available soon

Total - Available soon

Teaching language



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lntroduction Class 1
The state of Macro. Short history of modern thought. Facts. Time series concepts.

State  of Macro

[1j Olivier J. Blanchard, "The state of Macro", NBER Working Paper No. 14259 August 2008.
[2j Ricardo J. Caballero, Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome, Journal of Economic Perspectives-Volume 24, Number 4-Fall 2010-Pages 85-102
[3j Rebuilding macroeconomic theory
Equilibrium Business Cycle

[1j Robert Lucas. An Equilibrium Model of the Business Cycle JPE, 1975, Vol. 83, no. 6
[2j Lucas Robert, "Methods and Problems in Business Cycle Theory" , KMCB vol. 12, no.4, 1980.
[3j Kydland and Prescott. Time to Build and Aggregate Fluctuations Econometrica, 1982, Volume 50, Issue 6 Time Series
[1j Sims, C. A.. (1980). Macroeconomics and Reality. Econometrica, 48(1), 1-48.
[2j Blanchard, O. J., & Quah, D.. (1989). The Dynamic Effects of Aggregate Demand and Supply Disturbances. The American Economic Review, 79(4), 655-673.
[3j Time Series Analysis, Hamilton Princeton Press, chapter 2.
[4j Lars Peter Hansen, Thomas J. Sargent, Formulating and estimating dynamic linear rational expectations models, Journal of Economic Dynamics and Control, Volume 2, 1980, Pages 7-46
[5j Stock, J. and M. Watson, "Business Cycle Fluctuations in U.S. Macroeconomic Time Series," Chapter 1, Volume 1A, Handbook of Macroeconomics, J. Taylor and M. Woodford eds, North Holland, 1999.

The Neoclassical Stochastic Growth Model & RBC
Class 1-2 The optimal problem. Intertemporal choice, shocks, uncertainty. The first order conditions. Solving the model. Value functions. Log-linearization. Special cases and other short cuts. Equivalence between centralized and decentralized economies. The consumption problem in the decentralized economy. Solving the model numerically, and by log-linearization.


[1j BF, Chapter 2 and Section 6-2.
[2j SL, Chapters 2 Campbell J., Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model, JME, 33, June 1994, 463-506
[3j Uhlig H. 11A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily.11
[4j Kydland and Prescott. Time to Build and Aggregate Fluctuations Econometrica, 1982, Volume 50, Issue 6 Methods
[1j Blanchard, Olivier J. and Charles M. Kahn, "The Solution of Linear Difference Models under Rational Expectations," Econometrica, 1980, 48, 1305-1311.
[2j Sims Christopher. Solving Linear Rational Expectations Models.

Computing and Evaluating the RBC
Class 3 Successes and failures of the RBC.

[1j King Robert and Sergio Rebelo. Rescuscitating Real Business Cycle. Handbook of Macroeconomics edited by John B. Taylor,
Michael Woodford 2001 Link
[2j Software:
Class 4 Double coincidence of wants. Consumption loanable funds. Money in the Uitlity function. Clower constraint. Neutrality. Superneutrality. Dynamics.

[1j Jordi Gali, "Monetary Policy. Inflation and the Business Cycle" chap 2. Princeton 2015 [2j Carl Walsh "Monetary Theory and Policy", 2nd Edition MIT 2003 chap 2 and chap 3.
[3j Cooley, Thomas and Gary Hansen. " The inflation tax in a Real Business Cycle model." AER 1989 (September)

lmperfect competition, nominal rigidities: NKM
Class 5-6 Nominal rigidites, imperfect competition, demand determined output. Introduction to NKM.

[1j Jordi Gali, "Monetary Policy. Inflation and the Business Cycle" chap 3. Princeton 2015 [2j Carl Walsh "Monetary Theory and Policy", 2nd Edition MIT 2003.
[3j Woodford "Interest & Prices", Princeton, 2003.
[4j Monopolistic Competition and the Effects of Aggregate Demand Olivier Jean Blanchard and Nobuhiro Kiyotaki The Amer- ican Economic Review Vol. 77, No. 4 (Sep., 1987), pp. 647-666
[5j Yun, Tack, 1996. 11Nominal price rigidity, money supply endogeneity, and business cycles,11 Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
[6j Alvarez, Luis J. et al.. "Sticky Prices in the Euro Area: A Summary of New Micro-evidence". Journal of the European Economic Association 4.2/3 (2006): 575-584.

Monetary Policy (interest rate  rules)
Class 7 Monetary Policy in the NKM, Discretion, Commitment, Welfare analysis and policy rules.

[1j Jordi Gali, "Monetary Policy. Inflation and the Business Cycle" chap 4-5. Princeton 2015
[2j Clarida, Richard, Jordi Gali, and Mark Gertler. 1999. 11The Science of Monetary Policy: A New Keynesian Perspective.11 Journal of Economic Literature, 37(4): 1661-1707.

Fiscal Policy (G)
Class 8 Public expenditure in classical and new keynesian models.

[1j Woodford, Michael. 2011. 11Simple Analytics of the Government Expenditure Multiplier.11 American Economic Journal: Macroeconomics, 3(1): 1-35.
[2j Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. 11When Is the Government Spending Multiplier Large?,11 Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121

Labor Market (intro)
Class 9 Wage setting, equilibrium and involuntary unemployment.
[1j Gali, Jordi. 2011b. Monetary policy and unemployment. In B. Friedman and M. Woodford, eds., Handbook of Monetary Economics, vol. 3a. Amsterdam: Elsevier B.V., 487-546.
[2j Mortensen, Dale T., and Christopher A. Pissarides. 1994. Job creation and job destruction in the theory of unemployment.
Review of Economic Studies 61: 397-415.
[3j Erceg, Christopher J., Dale W. Henderson, and Andrew T. Levin. 2000. Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46 (2): 281-314.

Open Economy (intro)
Class 10-11 Small Open Economy, Two Countries, Exchange Rate regimes, Capital Markets. The benchmark SOE model.

[1j Jordi Gal& Tommaso Monacelli, 2005. 11Monetary Policy and Exchange Rate Volatility in a Small Open Economy,11 Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
[2j Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. 11Optimal Monetary Policy in Open Economies,11 Handbook of Monetary Economics in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933 Elsevier.

Class 12

[1j Smets, Frank, and Rafael Wouters. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach". The American Economic Review 97.3 (2007): 586-606.
[2j Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans. 2005. 11Nominal Rigid- ities and the Dynamic Effects of a Shock to Monetary Policy.11 Journal of Political Econ- omy, 113(1): 1-45.

Fiscal Unions
Class 13-14-15 A model of cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities.

[1j Farhi, Emmanuel, and Ivan Werning. 2017. 11Fiscal Unions.11 American Economic Review, 107(12): 3788-3834

Optimal Capital Taxation
Class 16-17-18 consequences for allocations and welfare of capital income taxation. Chamley and Judd's zero capital tax result. Straub and Werning critique.

[1j Ludwig Straub and Ivan Werning 2015. "Positive Long Run Capital Taxation: Chamley-Judd Revisited", mimeo MIT.

Class 19-20-21 Fundamental shocks, non-fundamental shocks, non recoverable shocks.
[1j Blanchard, Olivier J., Jean-Paul L'Huillier and Guido Lorenzoni. 2013. 11News, Noise, and Fluctuations: An Empirical Exploration.11 American Economic Review, 103(7):3045-70.Link

Class 22-23-24 How is important heterogeneity for the propagation and amplification of a macroeconomic shock?

[1j TBA

Teaching method

The evaluation will be based on participation, homework and a final exam. Starred items in the reading list are required readings.

Evaluation method

The midterm is worth 50%, final is worth 50%, the homework 10%. Participation in class can add an extra 10% bonus.

Subject matter

In the first part I present neoclassical and new-keynesian work-horses models in discrete time. I will present solutions techniques that can be implemented on a computer but the emphasis is on understanding the link between the modeling assumptions and the economic implications. In this part I will cover monetary policy and fiscal policy. In the second part part I will present 4 research frontier topics based on recent papers: fiscal unions, optimal taxation, shocks and heterogeneity.


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