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 aim of the course is to enable students to understand the macroeconomic literature published in specialized journals, and to start doing research of their own with the necessary technical equipment
Students are expected 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
Students are allowed to choose between two types of exam. (1) Oral colloquium based on the contents of the lecture notes and on a selection of chapters (max 6) from Wickens to be fixed in agreement with the teachers. (2) As an alternative, two written papers to be prepared as homework on the subjects and along the lines that will be indicated by the end of May 2019 (as a reference, see the papers assigned in previous years and still available in Moodle for the years 20016-2017 and 2017-2018).
The goal of the course is to acquaint students with the basic features of the Dynamic Stochastic General Equilibrium model (DSGE). To this purpose, the first part begins with an introduction to methods of mathematical dynamic optimization and shows how these methods can be applied to the analysis of intertemporal equilibrium consumption-accumulation paths in a deterministic environment. The DGE path is characterized both as an optimal plan for a "command" economy and as a market equilibrium for a decentralized perfectly competitive economy. There follows a brief comparison of the DGE path with equilibrium paths generated by a simple class of 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 by 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 assumptions on the way that expectations are formed affect the overall 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 allows us to discuss the notions of completeness of financial markets, efficiency in risk allocation and non-diversifiable risk.