Advanced Topics in Economics (Macro)


The objective of the course is to go over the main workhorse models in macro, with an emphasis on models with heterogenous agents, and to show some leading applications of these models in recent literature. By the end of the course one should know the basic toolkits to solve and simulate macro models and should be able to apply/extend them for research purposes.

General characterization





Responsible teacher

Joao B. Duarte


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Teaching language



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1.    Incomplete markets, no aggregate uncertainty

•    Aiyagari, S.R. (1993), Explaining Financial Market Facts: the Importance of Incomplete Markets and Transaction Costs, Federal Reserve Bank of Minneapolis Quarterly Review 17 (No. 1), 1731.
•    Aiyagari, S.R. (1994), Uninsured Idiosyncratic Risk and Aggregate Saving, Quarterly Journal of Economics 109, 659684.
•    Castan ?eda, A., J. D ??az-Gim ?enez, and J.-V. R ??os-Rull (2003), Accounting for the U.S. Earnings and Wealth Inequality, Journal of Political Economy 111, 814857.
•    Covas, F. (2005), Uninsured Idiosyncratic Production Risk with Borrowing Con- straints, manuscript (forthcoming in the Journal of Economic Dynamics and Control).
•    Deaton, A. (1991), Saving and Liquidity Constraints, Econometrica 59, 12211248.
•    Huggett, M. (1993), The Risk-Free Rate in Heterogeneous-Agents, Incomplete Markets Economies, Journal of Economic Dynamics and Control 17, 953969.
•    Huggett, M. (1997), The One-Sector Growth Model with Idiosyncratic Shocks: Steady States and Dynamics, Journal of Monetary Economics 39, 385403.
•    Ljungqvist, L. and T.J. Sargent (2004), Chapters 16 and 17 in Recursive Macroeconomic Theory (Second Edition), MIT Press.
•    Storesletten, K., C. Telmer, and A. Yaron (2004), Consumption and Risk Sharing over the Life Cycle, Journal of Monetary Economics 51, 609633.

2.    Heterogeneity and business cycle analysis

•    Den Haan, W. (2001) The Importance of the Number of Different Agents in a Heterogeneous Asset-Pricing Model, Journal of Economic Dynamics and Control 25, 721746.
•    Heaton, J. and D.J. Lucas (1996), Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing, Journal of Political Economy 104, 443487.
•    Krusell, P. and A.A. Smith, Jr. (1997), Income and Wealth Heterogeneity, Portfolio Selection, and Equilibrium Asset Returns, Macroeconomic Dynamics 1, 387422.
•    Krusell, P. and Smith, A. A. (1998). Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy, 106(5):867–896
•    Krusell, P. and A.A. Smith, Jr. (2006), Quantitative Macroeconomic Models with Heterogeneous Agents (joint with Anthony A. Smith, Jr.); forthcoming in Blundell, R., Newey, W., and Persson, T. (eds), Advances in Economics and Econometrics: Theory and Applications, Ninth World Congress, Cambridge University Press.
•    Krueger, D., Mitman, K., and Perri, F. (2016). Macroeconomics and heterogeneity, including inequality. In Taylor, J. and Uhlig, H., editors, Handbook of Macroeconomics, second edition. Elsevier
•    Kubler, F. and K. Schmedders (2002), Recursive Equilibria in Economies with In- complete Markets, Macroeconomic Dynamics 6, 284306.
•    Miao, J. (2003), Competitive Equilibria of Economies with a Continuum of Consumers and Aggregate Shocks, manuscript (
•    Telmer, C. (1993), Asset Pricing Puzzles and Incomplete Markets, Journal of Finance 48, 18031832.

3.    Precautionary savings, Labor market risk and Aggregate Fluctuations

•    Ravn, M. O. and Sterk, V. (2018). Macroeconomic fluctuations with hank & sam: an analytical approach. Working paper
•    Bayer,C.,Lu ?tticke,R.,Pham-Dao,L.,andTjaden,V.(2015).Precautionary savings, illiquid assets, and the aggregate consequences of shocks to household income risk. Working paper. Revise and resubmit, Econometrica
•    Den Haan, W., Rendahl, P., and Riegler, M. (2015). Unemployment (fears) and deflationary spirals. CEPR Discussion Paper 10814
•    Ravn, M. O. and Sterk, V. (2013). Job uncertainty and deep recessions. Working paper. conditionally accepted, Journal of Monetary Economics
•    Guerrieri, V. and Lorenzoni, G. (2015). Credit crises, precautionary savings, and the liquidity trap. mimeo

4.    Incomplete markets, heterogeneity, and monetary policy

•    Gornemann, N., Kuester, K., and Nakajima, M. (2012). Monetary policy with het- erogeneous agents. Working paper 12-21, Federal Reserve Bank of Philadelphia
•    Kaplan, G., Moll, B., and Violante, G. (2016). Monetary policy according to hank. Working paper
•    Werning, I. (2015). Incomplete markets and aggregate demand. Working paper
•    Auclert, A. (2016). Monetary policy and the redistribution channel. Working paper
•    Lu ?tticke, R. (2015). Transmission of monetary policy with heterogeneity in household portfolios. Working paper
•    Hagedorn, M., Manovskii, I., and Mitman, K. (2017). Monetary policy in incomplete market models: Theory and evidence. mimeo

5.    Fiscal Policy and Unconventional Monetary Policy

•    McKay, A., Nakamura, E., and Steinsson, J. (2015). The power of forward guidance revisited. Working paper. forthcoming, American Economic Review
•    Hagedorn, M., Manovskii, I., Luo, J., and Mitman, K. (2018a). Forward guidance. mimeo
•    Cochrane, J. H. (2015). The new-keynesian liquidity trap. Working paper, University of Chicago Booth School of Business
•    Hagedorn, M., Manovskii, I., and Mitman, K. (2018b). The fiscal multiplier. available at
•    Brinca, P., Holter, H. A., Krusell, P., and Malafry, L. (2016). Fiscal multipliers in the 21st century. Journal of Monetary Economics, 77:53 – 69
•    Oh, H. and Reis, R. (2012). Targeted transfers and the fiscal response to the great recession. Journal of Monetary Economics, 59, Supplement:50 – 64
•    McKay, A. and Reis, R. (Forthcoming). The role of automatic stabilizers in the u.s. business cycle. Econometrica
•    Farhi, E. and Werning, I. (2013). Fiscal multipliers: Liquidity traps and currency unions. mimeo
•    Bhandari, A., Evans, D., Golosov, M., and Sargent, T. (2017). Fiscal policy and debt management with incomplete markets. Quarterly Journal of Economics
•    Bhandari, A., Evans, D., Golosov, M., and Sargent, T. (2018). Inequality, business cycles and monetary-fiscal- policy
6.    Housing and Aggregate Fluctuations

•    Kaplan, G., Mitman, K., and Violante, G. (2017). The housing boom and bust: Model meets evidence. Working paper
•    Hedlund, A. (2015). Failure to launch: Housing, debt overhang, and the inflation option during the great recession
•    Hedlund, A., Karahan, F., Mitman, K., and Ozkan, S. (2016). Monetary policy, heterogeneity and the housing channel. Working paper
•    Dias and Duarte (2016) Monetary Policy and Housing the Business Cycle: What do Housing Rents have to say? Mimeo.


Teaching method

The course will be applied in nature with a hands-on approach. We will go over examples of models solving and simulating them in Python.

Evaluation method

The final grade will be based on class participation (which includes homework) and on a research proposal.

Final grade = 0.5*participation + 0.5*research proposal

The research proposal consists of a written research project on applied macro topics discussed in class.

Subject matter

1 - Representative agent model 2 – Recursive Methods
3 - Models with (exogenously) incomplete markets: equilibrium determination of wealth in- equality (the Aiyagary model)
4- Models with aggregate uncertainty (the Krusell and Smith model)

5 - Heterogeneity and macroeconomic policy: implications of heterogeneity for the transmission and efficacy of monetary and fiscal policy.


Programs where the course is taught: