Basics of dynamic optimization and the DGE model of macroeconomic equilibrium. OLG models. Sticky prices. Uncertainty, expectations, and dynamics in a simple DSGE model. Asset prices and financial markets
The object of the course is to enable students to understand the macroeconomic literature published in specialized journals, and to start doing their own research with an appropriate technical equipment
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).
lectures in class
Type of Assessment
Written or oral examination, at the students' choice
The goal of the course is to acquaint students with 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 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 path with equilibrium paths generated by a simple Overlapping Generations model. Finally we discuss the role of price stickiness in generating DGE paths with "Keynesian" features. In the second part of the course we introduce uncertainty into the model assuming that some of the variables of the economy are affected by random factors in the shape of stochastic processes of the simplest kind. 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. The focus is on the comparison between rational expectations and 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. Comparison with the contingent claims approach allowa us to discuss the notions of completeness of financial markets, efficiency in risk allocation and non-diversifiable risks.