ECO 7207  

Macroeconomics II

Tuesdays and Thursdays, 9:30 - 10:45

Room HLS 180
Note: This syllabus is subject to random, arbitrary revisions, reflecting my status as a capricious, tenured faculty member.

In this course we study some important models and ideas in the field of economic growth. This course is called macroeconomics II, but it is not a macroeconomics course: it is a growth course, and we will review both macro and micro models and evidence.

Requirements and Grading

1. Homework assignments account for 20% of the grade. You may work in groups and hand in a collective assignment.
2. There will be two short essay requirements. You will be required to select two papers on growth during the semester, and for each of them you will write a "referee report". Each essay should be around 1,500 words. We will talk in class about the expected format and content of these essays. The first of these is due no later than October 30. The second is due no later than November 30. Each essay counts for 20% of the grade.
3. You will be required to present one of these referee reports to the class. We will talk in class about what I want you to focus on in these presentations. The presentation accounts for 10% of the grade.
4. The final exam, which will be held during exam week at the time assigned by the university, will account for 30% of the grade.

The following material lists the topics that will be covered along with the required readings. I will be discussing other papers as we go along, some of them in quite some detail. In addition, we will when necessary have some mathematical digressions on various topics.

The Macroeconomic Facts

It is, of course, helpful to know what are the main facts to be explained. We begin by briefly surveying some of the main features of the macro-economic data that we would like to explain.

Parente, Stephen, and Ed Prescott (1993): "Changes in the wealth of nations." Federal Reserve Bank of Minneapolis Quarterly Review, Spring.

Sala-i-Martin, Xavier (1996): "The Classical Approach to Convergence Analysis." Economic Journal, 106:1019-1036.

Citations for additional papers I discuss can be found here.
Homework Assignment 1

Proximate Sources of Income Differences
A. Lots of measurement, little theory. There is an enormous empirical literature regressing just about every available data set on growth rates (or income levels).

Levine, Ross and David Renelt (1992): "A sensitivity analysis of cross-country growth regressions." American Economic Review, 82(4):942-963.

Sala-i-Martin, Xavier (1997): "I just ran two million regressions." American Economic Review, 87(2):178-183.

Durlauf, Steven N. (2001): "Manifesto for a growth econometrics." Journal of Econometrics, 100(1):65-69.

B. More theory, a little less measurement. A second approach is to reduce the scope of the empirical inquiry, providing more structure with the aid of theoretical model.

Lucas, Robert E. (1990): "Why doesn't capital flow from rich to poor countries?" American Economic Review, Papers and Proceedings, 80(2): 92-96.

Mankiw, N. Gregory, David Romer and David N. Weil (1992): "A contribution to the empirics of economic growth." Quarterly Journal of Economics, 107(2):407-437.

Citations for additional papers I discuss can be found here.
Homework Assignment 2. The data set you need is here.

Optimal Control
We will have a rapid review of optimal control theory.
Thompson, Peter (2005): Optimal Control, Chapter 2 in Lecture Notes on Dynamic Modeling, FIU manuscript.
Homework Assignment 3

Differences in Aggregate Capital Levels
Variations on the neoclassical growth model are used to explain why some countries may differ in their levels of physical capital.

V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan (1996): "The poverty of nations: a quantitative exploration." Staff Report 204, Federal Reserve Bank of Minneapolis.

Jovanovic, Boyan, and Rafael Rob (1997): "Solow vs. Solow. Machine prices and development." NBER working paper 5871.

Cole, L., G. Mailath, and A.  Postlethwaite (1992):"Social norms, saving behavior and growth." Journal of Political Economy, 100(6):1092-1125.

Citations for additional papers I discuss can be found here.

Capital is Allocated to the Wrong Uses
Capital may not be allocated to the most efficient firms, so even if two countries have the same aggregate level of capital they can differ in income.

Bencivenga, Valerie, and Bruce Smith (1991): "Financial Intermediation and Endogenous Growth." Review of Economic Studies, 58:195-209.

Acemoglu, Daron, and Fabrizio Zillibotti (1997): "Was Prometheus unbound by chance? Risk, diversification, and growth." Journal of Political Economy, 105:709-751.

Citations for additional papers I discuss can be found here.

Human Capital Differences
Differences in the accumulation of human capital may account for large differences in income, but assessing just how important education is turns out to be difficult.

Lucas, Robert E. (1988): "On the mechanics of economic development." Journal of Monetary Economics, 22:3-42.

Bils, Mark and Peter J. Klenow (2000): "Does schooling cause growth?" American Economic Review, 90(5):1160-1183.

Citations for additional papers I discuss can be found here.

R&D Based Models of Growth
R&D-driven growth models are the most explicit about the introduction of new technologies.

Grossman, Gene, and Elhanan Helpman (1991): Innovation and Growth in the Global Economy, Cambridge, MA: MIT Press,  chapters 3 and 4.

Jones, Charles I. (1995): "Time Series Tests of Endogenous Growth Models." Quarterly Journal of Economics, 110:495-525.

Jones, Charles I. (1999): "Growth: With or Without Scale Effects?" American Economic Review, Papers and Proceedings, 89(2):139-144.

Citations for additional papers I discuss can be found here.

Learning By Doing
The third major engine of technical change is learning by doing. There are, unfortunately, serious difficulties in measuring its importance.

Lucas, Robert E. (1993): "Making a miracle." Econometrica, 61(2):251-272.

Thompson, Peter (2001): "How much did the Liberty shipbuilders learn?" Journal of Political Economy, 109(1):103-137.

Citations for additional papers I discuss can be found here.

International Technology Diffusion
Previous models assume that capital or technology do not freely flow from one country to another. What is the evidence for this assumption, and what might be the explanation?

Jaffe, Adam B., Manuel Trajtenberg, Rebecca Henderson (1993): "Geographic localization of knowledge spillovers as evidenced by patent citations." Quarterly Journal of Economics 108(3):577-598.

Thompson, Peter, and Melanie Fox Kean (2005): "Patent citations and the geography of knowledge spillovers: A reassessment." American Economic Review, 95(1): 450-460,

Parente, Stephen L., and Edward C. Prescott (1994): "Barriers to technology adoption and development." Journal of Political Economy, 102(2):298-321.

Krugman, Paul (1979): "A model of innovation, technology transfer, and the world distribution of income," Journal of Political Economy, 87(2):253-266.

Citations for additional papers I discuss can be found here.