Structural macroeconomics


Course objective: The purpose of this 12-hour course is to introduce students to the kind of applied dynamics stochastic general equilibrium (aka DSGE) modelling that is currently used in international institutions as well as applied research centres and central banks around the world. The first step will consist in extending the basic three-equation dynamic New Keynesian model (as introduced, e.g. in the M1 Macroeconomics 1 course) into a fully quantitative DSGE model (along the line of Smets and Wouters, 2007). The course will then turn to the more recent developments in the applied DSGE literature, notably by introducing frictions in the labour and financial markets (search and matching in the labour market, financial accelerator and credit spreads, borrowing constraints, imperfect consumption insurance and household heterogeneity, and so on). Students attending this should eventually be able to fully comprehend, and possibly extend, medium-scale DSGE models currently in use. 
Note: this course provides the theory of DSGE models, plus some basic acquaintance with their simulation. The estimation of structural models, as well as the variety of alternative empirical approaches, are covered in the Applied Macroeconometrics course, which is a natural continuation of this course. 

Prerequisites: M1 Macroeconomics 1 course or equivalent. The M2 Monetary Economics course can occasionally help but is not required. 

Marking: Marking will be based on an applied project. Students will have to replicate a quantitative paper via simulations and run extensive sensitivity analysis. 


Lecture 1. The workhorse DSGE model 
Lecture 2: Labor market frictions 
Lecture 3: Heterogenous households 
Lecture 4: Financial frictions and investment 


• David Andolfatto (1996), Business Cycles and Labor-Market Search, American Economic Review, 86 (1), pp. 112–32 
• Florin O. Bilbiie (2018), The New Keynesian Cross, Working Paper. 
• Ben S. Bernanke and Mark Gertler (1989), Agency Costs, Net Worth, and Business Fluctuations, American Economic Review, 79(1), pp. 14–31. 
• Ben S. Bernanke, Mark Gertler, and Simon Gilchrist (1999), The Financial Accelerator in a Quantitative Business Cycle Framework, in Handbook of Monetary Economics, 1C, pp. 1341-1393. 
• Olivier J. Blanchard and Jordi Gali (2010), Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment, American Economic Journal: Macroeconomics, 2(2), 2010, 1-30. 
• Edouard Challe, Julien Matheron, Xavier Ragot and Juan Rubio-Ramirez (2017), Precautionary Saving and Aggregate Demand, Quantitative Economics, 8(2), pp. 435-478. 
• Lawrence J. Christiano, Martin Eichenbaum and Charles L. Evans (2005), Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, 113(1), pp. 1-45. 

• Lawrence J. Christiano, Martin Eichenbaum and Matthias Trabandt (2018), On DSGE Models, Journal of Economic Perspectives, 32(3). 
• Lawrence J. Christiano, Martin Eichenbaum and Matthias Trabandt (2016), Unemployment and Business Cycles, Econometrica, 84(4), pp. 1523-1569. 
• Lawrence J. Christiano, Roberto Motto and Massimo Rostagno (2014), Risk Shocks, American Economic Review, 104(1), pp. 27-65. 
• Lawrence J. Christiano, Mathias Trabandt, and Karl Walentin (2010), DSGE Models for Monetary Policy Analysis, in Handbook of Monetary Economics, 3, pp. 285-367. 
• Davide Debortoli and Jordi Gali (2018), Monetary Policy with Heterogeneous Agents: Insights from TANK models, Working Paper. 
• Marco Del Negro, Stefano Eusepi, Marc Giannoni, Argia Sbordone, Andrea Tambalotti, Matthew Cocci, Raiden Hasegawa and Henry Linder (2013), The FRBNY DSGE Model, Federal Reserve Bank of New York Staff Reports 647, October. 
• Christopher J. Erceg, Dale W. Henderson and Andrew T. Levin (2000), Optimal Monetary Policy with Staggered Wage and Price Contracts, Journal of Monetary Economics, 46(2), pp. 281–313. 
• Jordi Gali (2018), The State of New Keynesian Economics, Journal of Economic Perspectives, 32(3), pp. 87-112. 
• Jordi Gali (2011), Monetary Policy and Unemployment, in B. Friedman and M. Woodfords (eds.) Handbook of Monetary Economics, vol. 3A, Elsevier B.V., 2011, pp. 487-546. 
• Jordi Gali, J. David López-Salido and J. Vallés (2007), Understanding the Effects of Government Spending on Consumption, Journal of the European Economic Association, 5 (1), pp. 227-270. 
• Jordi Gali, Frank Smets and Rafael Wouters (2011), Unemployment in an Estimated New Keynesian Model, NBER Macroeconomics Annual, University of Chicago Press, pp. 329-360. 
• Mark Gertler and Nobuhiro Kiyotaki (2010), Financial Intermediation and Credit Policy in Business Cycle Analysis, in Handbook of Monetary Economics, 3, pp. 547-599. 
• Mark Gertler, Luca Sala and Antonella Trigari (2008), An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining, Journal of Money, Credit and Banking, 40(8), pp. 1713-1764. 
• Robert E. Hall (2005), Employment Fluctuations with Equilibrium Wage Stickiness, American Economic Review, 95, pp. 50-65. 
• Matteo Iacoviello (2005), House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle, American Economic Review, 95, pp. 739-764. 
• Alejandro Justiniano, Giorgio E. Primiceri, and Andrea Tambalotti. (2010), Investment Shocks and Business Cycles, Journal of Monetary Economics, 57(2), pp. 132-145. 
• Alejandro Justiniano, Giorgio E. Primiceri, and Andrea Tambalotti (2011), Investment Shocks and the Relative Price of Investment, Review of Economic Dynamics, 14(1), pp. 102-121. 
• Sylvain Leduc and Zheng Liu (2016), Uncertainty Shocks are Aggregate Demand Shocks, Journal of Monetary Economics, 82, pp. 20-35. 
• Jesper Lindé, Frank Smets and Rafael Wouters (2016). Challenges for Central Banks´ Macro Models, Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden). 
• Monika Merz (1995), Search in the Labor Market and the Real Business Cycle, Journal of Monetary Economics, 36(2), pp. 269-300. 
• Frank Smets and Rafael Wouters (2007), Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach, American Economic Review, 97(3), pp. 586-606.