MACT 1 & 2

Macro PhD Course

Course Owners:

Jerome Adda & Nicola Pavoni MACT1

Jerome Adda & Nicola Pavoni MACT2
Some of the lectures in the second term will be taught by visiting faculty.

Term: term 1 & 2.

Course Web Pages:

Jerome Adda: www.ucl.ac.uk/~uctpjea
Nicola Pavoni: www.ucl.ac.uk/~uctpnpa

Suitable for:

Compulsory for Mphil /PhD students.

Prerequisites:

Knowledge of macro, micro and econometrics at MsC level.

Aims:

To provide an introduction to dynamic problems in economics that combines the tools of dynamic
programming with numerical techniques and simulation-based econometric methods. The course bridges
the traditional gap between theoretical and empirical research and offers an integrated framework for
studying applied problems in macroeconomics and microeconomics.

In part I we first review the formal theory of dynamic optimization; we then present the numerical tools and
econometric techniques necessary to evaluate the theoretical models. We then cover growth, Real Business
Cycle models and asset pricing. In tutorial classes, students are introduced to Matlab which is used to solve
and simulate the economic models.

Part II is devoted to the application of dynamic programming to specific areas of applied economics,
including the study of stochastic growth, consumption, endogenous incomplete markets, investment
behavior or labor and the role of institutional features on dynamic choices.

The original contribution of this course lies in the integrated approach to the empirical application of
dynamic optimization programming models. This integration shows that empirical applications actually
complement the underlying theory of optimization, while dynamic programming problems provide needed
structure for estimation and policy evaluation.

Objectives:

At the end of the course, students should:

understand the formulation of dynamic recursive economic models in a way allowing application to
empirical data
understand the numerical and econometric methods used to solve and estimate these models.
be able to actually implement these models on concrete economic problems.

Teaching:

Term 1: 10 lectures and 8 tutorials with accompanying exercises, 5 practical classes.

Term 2: 10 lectures and 8 tutorials.

Assessment:
There will be two exams, an oral presentation and a take-home exam. The exam schedule will be as follow:

 mid-term exam (December), weight: 20%

 take-home exam (March), weight: 20%
 oral presentation (second term), weight: 10%
 final exam (June), weight: 50%

For the oral presentation, the students present a paper from a list during half an hour in groups of two or
three. The presentations take place towards the end of the second term.
The final exam will cover the material of the entire two terms, including the oral presentations.

Reading List:

Material from the following books will be used extensively in this course:

 Jerome Adda and Russell Cooper, MIT Press, 2003 (AC) [available here]
 Costas Azariadis, Intertemporal Macroeconomics, Cambridge, Mass.: Blackwell, 1993. (CA)
 Olivier Blanchard and Stanley Fischer, Lectures on Macroeconomics, Cambridge: MIT Press,
1989. (BF)
 David Romer, Advanced Macroeconomics, McGraw-Hill, 2001.(DR)
 Thomas Sargent, Dynamic Macroeconomic Theory, Cambridge, Mass.: Harvard University Press,
1987. (TS)
 Lars Lundquist and Thomas Sargent, Recursive Macroeconomic Theory, Cambridge, Mass.: MIT
Press, 2000. (LS)
 Nancy Stokey and Robert E. Lucas, Recursive Methods in Economic Dynamics, Cambridge,
Mass.: Harvard University Press, 1989. (SL)

In addition, the following are also useful references:

 R. Barro and Xavier Sala-i-Martin, Economic Growth, McGraw-Hill, 1995

 Deaton, A. Understanding Consumption, Oxford University Press, 1992.
 A.K. Dixit, Optimization in Economic Theory, Oxford: Oxford University Press, 1991
 N. Gregory Mankiw and David Romer, New Keynesian Economics, MIT Press, 1991.
 Andreu Mas-Colell, Michael Whinston and Jerry Green, Microeconomic Theory , Oxford
University Press, 1995.
 Thomas Sargent, Macroeconomic Theory, New York: Academic Press, 1979.
 Chirinko, R. "Business Fixed Investment Spending: A Critical Survey of Modeling Strategies,
Empirical Results and Policy Implications," Journal of Economic Literature, 31 (1993), 1875-
1912.
 Lucas, R. and E. Prescott, "Investment Under Uncertainty," Econometrica, 39 (1971), 659-81.