Curso de Graduação em Economia

[cge@fgv.br]
Disciplina: Macroeconomia Avançada I
Professor-líder/ e-mail: Pierluca Pannella [pierluca.pannella@fgv.br]

MANUAL DO ALUNO

1º SEMESTRE DE 2020
OBJETIVOS
A disciplina Macroeconomia Avançada I faz parte da trilha de Macroeconomia e tem como principal objetivo o estudo de
modelos de ciclos econômicos. Ao final do curso, espera-se que tenham adquirido a habilidade de resolver e interpretar os
modelos de “Real Business Cycles” e Novo-Keynesianos.

ESTRUTURA
Modelos de “Real Business Cycles”. Modelos Novo-Keynesianos.

CRITÉRIOS DE AVALIAÇÃO
A média final do aluno na disciplina será calculada a partir da média ponderada das avaliações abaixo descritas, multiplicada
pela nota de TUTORIAL.

AVALIAÇÃO 1: Prova Parcial. Peso = 40%.

AVALIAÇÃO 2: Prova Final. Peso = 60%.

TUTORIAL = Média das avaliações nos tutoriais. Para apuração desta média, consideram-se as N* maiores notas, em que
N*=nº tutoriais-(nº tutoriais/7) (arredondado para baixo).

A avaliação em cada tutorial varia entre 0 (zero) e 1 (um) e está baseada no julgamento do tutor quanto ao engajamento,
participação e contribuição do aluno nas discussões em grupo que ocorrem na pré e na pós-discussão. A falta no tutorial
implica a nota zero atribuída a este encontro. O tempo máximo de tolerância a atrasos é de 10 (dez) minutos e o aluno que
ultrapassar este limite não será autorizado a entrar em sala de aula tendo, portanto, nota zero atribuída a este encontro. Os
alunos ainda estão sujeitos à frequência mínima de 75% das aulas.

A média final é calculada segundo a formula abaixo:

Média Final=0,2*10*T+0,8*T*{0,4*PP+0,6*PF}

BIBLIOGRAFIA

LIVROS:
David Romer, Advanced Macroeconomics. 4th/5th Edition. (ROMER)
Jordi Gali. Monetary Policy, Inflation, and the Business Cycle. (GALI)
Jean-Pascal Benassy, Macroeconomic Theory. (BENASSY)

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ARTIGOS:
Prescott (1986): “Theory ahead of business-cycle measurement”
Uhlig (1998): “A toolkit for analyzing nonlinear dynamic stochastic models easily”
Lucas (1996): “Nobel lecture: monetary neutrality”, Journal of Public Economics
Yellen (2007): “Implications of behavioral economics for monetary policy”, FED of Boston Conference

NOTA: em alguns tutorias vocês vão precisar do Stata (ou R) e Matlab (ou Octave).

PROGRAMAÇÃO AULA-A-AULA
Problemas Tópico Bibliografia /
Data Encontro
Pós-Discussão Pré-Discussão Recurso
06/05 Lecture 1 Dynamic Optimization ROMER
08/05 Lecture 2 Dynamic Optimization ROMER
11/05 Tutorial 1 1 Measuring Business Cycles ROMER
13/05 Tutorial 1 1 2 Measuring Business Cycles ROMER
15/05 Tutorial 2 2 3 Two-Period RBC ROMER
18/05 Tutorial 3 3 4 The Role of Uncertainty ROMER
20/05 Tutorial 4 4 5 Adding Capital in RBC model ROMER
22/05 Tutorial 5 5 6 Log-linearizing an RBC model ROMER
25/05 Tutorial 6 6 Simulations in Dynare ROMER
27/05 Prova
Intermediária
29/05 Lecture 3 Introduction to New-Keynesian Models ROMER and
GALI
01/06 Lecture 4 Introduction to New-Keynesian Models ROMER and
GALI
03/06 Tutorial 7 7 Money, Inflation and Output ROMER
05/06 Tutorial 7 7 8 Money, Inflation and Output ROMER
08/06 Tutorial 8 8 9 The Lucas Critique ROMER
10/06 Tutorial 9 9 10 The New-Keynesian IS curve ROMER and
GALI
15/06 Tutorial 10 10 11 Monopolistic Competition ROMER and
GALI
17/06 Tutorial 11 11 12 The New-Keynesian Phillips Curve ROMER and
GALI
19/06 Tutorial 12 12 The Taylor Rule ROMER and
GALI
22/06 Lecture 5 Resumo
24/06 Lecture 6 Resumo

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PROBLEM 1: Measuring Business Cycles
Macroeconomics is devoted to the understanding of the economy as a whole. Classical economists
originally focused on the determinants of long run development (Adam Smiths’s main book, pub-
lished in 1776, is called “An Inquiry into the Nature and Causes of the Wealth of Nations”). It is
in the last century that macroeconomists found convenient to distinguish between “long run” and
“short run” when looking at aggregate variables. Countries at different stages of development all
present fluctuations in aggregate output and employment. These fluctuations may occur over a
long period (50 years or more): in this case, it is more appropriate to analyze institutional changes.
However, large variations also occur with short periodicity (typically, between 5 and 10 years).
Short-run fluctuations are usually called “business cycles” and they have been a main research ob-
ject in Macroeconomics. A big part of the debate among macroeconomists is about recognizing the
main forces driving business cycles.
To build a good model of short run dynamics, first we should know the recurrent properties of
business cycles. We can explore them downloading quarterly data for US Real GDP per capita,
real personal consumption expenditure per capita, real gross private domestic investment, civilian
unemployment rate, hours worked (average weekly hours of production and nonsupervisory em-
ployees), inflation (% change of consumer price index for all urban consumers), real M2 money
stock and total credit to private non-financial sector from the FRED website (if you want, you can
replicate the exercise also with data for Brazil or other countries).
A time series yt for t = 1, 2, ..., T , can be represented as the sum of a trend and a cycle component:

yt = ytT + ytC .

The identification and measuring of a cycle obviously depends on the statistical model we want to
adopt to define each component. The simplest way is to separate the deviation from a linear trend:

yt = α + βt + εt → ytC = yt − (α + βt) .

A more sophisticated measurement is the Hodrick-Prescott filter. The trend component is obtained
by the following minimization problem:

−1
( T T
)
X
2 X
2
ytT T
ytT ytT T


min yt − +λ yt+1 − − − yt−1 .
ytT
t=1 t=2

Choosing a “good” value for λ, we can separate and interpret the different components of the
aggregate variables (suggestion: transform in logs, except for unemployment and inflation).

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REFERENCES
1. Romer, Ch. 5.1 and 5.2

2. Prescott (1986): “Theory ahead of business-cycle measurement”

3. Optional: Hamilton (2018): “Why You Should Never Use the Hodrick-Prescott Filter”, Review
of Economics and Statistics

4. Data: https://fred.stlouisfed.org/

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PROBLEM 2: Real Business Cycles in a Two-Period Horizon:
Comovement of Aggregate Variables
In the early 80s, Finn Kydland and Edward Prescott proposed their idea of business fluctuations.
They claimed that business-cycle phenomenas could be described by adding exogenous disturbances
in the technology parameter of the classical Walrasian growth model. Their theory of Real Business
Cycles has been extremely influential in the Macroeconomic literature (especially in the 80s, right
after the oil crisis). Even if nowadays (almost) all macroeconomists admit market imperfections
in their models, RBC theory was important for introducing new modeling features and address
important questions.
In this Tutorial, we want to study the relation between technology shocks and real variables
simplifying the RBC framework to a 2-period model. A simple utility function for the representative
household could be:

U = [log c1 + b log (1 − l1 )] + βE1 [log c2 + b log (1 − l2 )] ,

where lt is the supply of labor. We can assume an exogenous interest rate (1 + r) and that the
production function of the economy is linear in hours of labor: At Lt . A2 is stochastic: at time 1,
the agent only knows its distribution.
To confirm or reject the model, download quarterly data for US Real GDP per capita and Real
Output per Hour of All Persons (Nonfarm Business Sector) from FRED website.

REFERENCES
1. Romer, Ch. 5.2, 5.3 and 5.4

2. Data: https://fred.stlouisfed.org/

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PROBLEM 3: Real Business Cycles: the Role of Uncertainty
Many economists claim that changes in uncertainty are a main driver for business cycles. For
example Stock and Watson (2012) claimed that “the main contributions to the decline in output and
employment during the 2007-2009 recession are estimated to come from financial and uncertainty
shocks.” In this tutorial we want to study what a simple RBC model can say about this.
Consider the following version of an RBC model. A representative household maximizes utility
at every time t:
∞
X
Ut = β t Et [log ct + b log (1 − lt )] .
t=0

Assume that the household can invest in a storing technology paying an exogenous deterministic
1
return (1 + r) = β in the following period. The production function of the economy is linear in
hours of labor At Lt . At follows a stochastic process with constant mean Ā and variance σ. Markets
are competitive.
Use quarterly data for US Real GDP per capita and the CBOE Volatility Index from FRED
website as an empirical reference in the discussion.

REFERENCES
1. Romer, Ch. 5.3, 5.4 and 5.5

2. Data: https://fred.stlouisfed.org/

3. Optional: Bloom, Floetotto, Jaimovich, Saporta-Eksten and Terry (2018): “Really uncertain
business cycles”, Econometrica

4. Optional: Stock and Watson (2012): “Disentangling the Channels of the 2007-2009 Recession”,
NBER Working Paper

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PROBLEM 4: Capital in the RBC Model
So far, we have assumed that labor was the only productive input. However, this is not a reasonable
assumption in the study of business cycles. Hall (2014) analyzed the reasons for output stagnation
after the 2008 financial crisis and concluded that “the single biggest contributor was a shortfall in
business capital” (check the data on shares of domestic investment from FRED). In this Tutorial,
we will study the investment decision and how it induces an effect on production.
Assume that capital is the only input: Yt = At Kt . A fraction δ of the capital stock depreciates
in every period. The utility of the representative agent is:
∞
X
Ut = β t Et [log ct ] .
t=0

For simplicity, assume that the representative agent obtains an exogenous wage w ≥ 0 in every t.
Capital markets are competitive and the equilibrium return is rt+1 . At has mean Ā and variance
σ.

REFERENCES
1. Romer, Ch. 5.3, 5.4 and 5.5

2. Data: https://fred.stlouisfed.org/

3. Optional: Hall (2014): “Quantifying the Lasting Harm to the U.S. Economy from the Financial
Crisis”, NBER Macroeconomics Annual

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PROBLEM 5: Log-Linearizing an RBC model
The standard infinite horizon RBC model is one of the simplest dynamic economic models. However,
it cannot be solved analytically (except for very special cases). This is because it is composed by
non-linear difference equations. Macroeconomists are interested not only in the qualitative results of
their models. They also like to provide quantitative predictions. For example, in 2009, an American
RBC macroeconomist probably wanted to obtain a forecast of how the economy would evolve after
the 3% drop in 2008 output.
One possible option to solve an RBC model is relying on numerical solutions: the model must
be solved by a computing program (such as Matlab). Alternatively, the model must be simplified
into a system of linear equations. This is what the log-linearization method does.
Consider the following RBC model with Cobb-Douglas production function:

Yt = At Ktα L1−α
t .

A fraction δ of the capital stock depreciates in every period. The representative agent maximizes
utility:
∞
c1−σ
X  
t t
Ut = β Et .
t=0
1−σ

He can supply one unit of labor at no cost to earn labor income wt . Total income can be allo-
cated between consumption and investment in capital. Finally, productivity follows a first-order
autoregressive process:
ln At = ρ ln At−1 + εt ,

where εt is a white-noise disturbance.

REFERENCES
1. Uhlig H.: “A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily”

2. Romer, Ch. 5.6, 5.7 and 5.8

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PROBLEM 6: Simulating an RBC Model on Dynare
Solving for a dynamic stochastic model is laborious, even after we took a log-linear approximation.
That is why a group of economists designed a software to quickly solve these models: Dynare.
Not all macroeconomists like Dynare. This is because it provides numerical solutions to complex
models hiding the channel underneath. However, Dynare is widely used to simulate RBC and,
more generally, Dynamic Stochastic General Equilibrium models, especially in central banks. In
this tutorial we will simulate our RBC model with Dynare.
Dynare is able to compute numerically the non-stochastic steady state of a dynamic model.
Therefore, it derives (always numerically) a log-linearization of the model around the steady state
and plot the impulse responses of the variables. The required input is the system of equations that
solves the model.
In Dynare, we can analyze the response of a more complex model to a negative TFP shock. For
example, we can add elastic labor supply to the model from Problem 5.

REFERENCES
1. Dynare Reference Manual at www.dynare.org/manual/

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PROBLEM 7: Money, Inflation and Output: the Phillips Curve
One of the oldest debate in Macroeconomics is the one about the neutrality or non-neutrality of
money. David Hume (1711-1776) is usually cited as the first philosopher/economist that extensively
wrote about the role of money in the economy. In his writings he subscribed the so-called Quantity
Theory of Money, which states that prices are proportional to the amount of money. This passage
is from “Of The Balance of Trade” (1752):

“Suppose four-fifths of all the money in Great Britain to be annihilated in one night
.... Must not the price of all labour and commodities sink in proportion ...? ”.

Over the centuries, many economists have debated over the theory. Today, there exists a general
consensus on the fact that the theory holds in the long run. However, most economists also believes
that money (in the broad and/or strict sense) is non-neutral in the short run.
Our analysis should start from the data. Download quarterly data for US Real GDP per capita,
civilian unemployment rate, inflation (% change of consumer price index for all urban consumers),
nominal M2 money stock and the 3-month Treasury Bill secondary market rate from the FRED
website.

REFERENCES
1. Lucas R.H. (1996): “Nobel Lecture: Monetary Neutrality”, Journal of Political Economy

2. Optional: Wennerlind C. (2005): “David Hume’s Monetary Theory Revisited”, Journal of

Political Economy

3. Data: https://fred.stlouisfed.org/

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PROBLEM 8: The Lucas Critique
The IS-LM model is a stylized mathematical representation of Keynes’ ideas on the role of monetary
policy in the short run. An exogenous increase in money supply induces a reduction in the nominal
interest rate (through open market operations); this in turn incentivizes private demand and boosts
aggregate output. The main assumption to obtain such a result is that, in the short run, prices are
rigid, otherwise they would adjust immediately as predicted by Hume. Indeed, the addition of some
sort of nominal rigidities is the necessary condition to introduce a role for monetary disturbances
in a macroeconomic model. In the traditional New-Keynesian model, barriers to the adjustment
of nominal prices are exogenously imposed. In 1972, Lucas proposed a possible microeconomic
foundation for the existence of these aggregate nominal rigidities based on imperfect observability
of aggregate prices.
Consider the Lucas Imperfect-Information Model (as presented in Chapter 6.9 of Romer) in the
cases with perfect and imperfect information. The solutions of the model provides a formulation
of the “Lucas Critique”. The Lucas Critique is based on the assumption that economic agents
have rational expectations. However, other economists claim that the trade-off between inflation
and unemployment is driven by behavioral biases, such as “money illusion”. Discussing alternative
assumptions is relevant for policy implications.

REFERENCES
1. Romer, Ch. 6.9

2. Yellen, J. (2007): “Implications of Behavioral Economics for Monetary Policy”, Federal Reserve
Bank of Boston Conference

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PROBLEM 9: The New-Keynesian IS Curve
If the Quantity Theory of Money was right in both the long and the short run, money would be just
the unit of account for transaction. Its role would not be very interesting in macroeconomics. This
is why the RBC theory does not even include the presence of money in the economy. In accordance
with this view, some economists proposed “trivial” optimal monetary policies for central banks (for
example, Friedman proposed to set the nominal interest rate at zero).
However, we all know that central bankers prefer to actively use the interest rate instrument.
In the last 20 years, the main reference used by central bankers to define the supply of money and
set the nominal interest rate has been the New-Keynesian framework. Full New-Keynesian models
first appeared in the late 90s when some economists (in particular, Jordi Gali and Mark Gertler)
added nominal frictions in the RBC framework. The traditional new-Keynesian model is composed
of three main equations: an IS curve, a Phillips curve, and a monetary policy rule. In this tutorial
we will start introducing the New-Keynesian IS curve.
Consider the maximization problem of a representative agent with utility

∞
" #
X
t Ct1−σ L1+ϕ
t
Ut = β Et − .
t=0
1−σ 1+ϕ

Assume that the agent earns a nominal wage Wt for every hour of work Lt . In addition, the agent
can invest in a one-period bond Bt paying a non-contingent nominal interest rate it . Pt is the
nominal price of the consumption good. In addition, assume the following production function:

Yt = At Lt .

REFERENCES
1. Gali, Ch. 1, 2 and 3

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PROBLEM 10: Monopolistic Competition
In order to introduce a role for monetary policy, we need to add two frictions in the RBC framework.
The first one is nominal rigidities: prices cannot be freely adjusted. We will discuss this feature in
the next Tutorial. The second friction is imperfect competition. The traditional New-Keynesian
model assumes that each firm produces a differentiated good and has some monopolistic power in
its good market. Our representative agent still maximizes

∞
" #
X
t Ct1−σ L1+ϕ
t
Ut = β Et − ;
t=0
1−σ 1+ϕ

however, now Ct is a composite good made of a continuum of different varieties of goods. Specifically,
we assume that ε
ˆ 1 ε−1
 ε−1
Ct = Ct (i) ε
di with ε > 1,
0

where Ct (i) is the quantity of goods produced by firm i. ε is the elasticity of substitution among
varieties. The aggregate expenditure for goods is now
ˆ 1
Pt (i) Ct (i) di,
0

where Pt (i) is the price of the good produced by firm i.

As in Problem 9, assume that the agent earns a nominal wage Wt for every hour of work Lt . In
addition, the agent can invest in a one-period bond Bt paying a non-contingent nominal interest
rate it . Finally, assume the following production function:

Yt = At Lt (i) .

This framework generates an optimal relative demand for a specific variety and an optimal
monopolistic price by each firm.

REFERENCES
1. Gali, Ch. 1, 2 and 3

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PROBLEM 11: Sticky Prices and the New-Keynesian Phillips
Curve
There exist different ways to model nominal rigidities. For example, firms may face constraints
on the frequency at which they can adjust their prices. Alternatively, firms may have to pay a
cost whenever they want to change their prices. From a qualitative point of view, all these models
produce similar results. A change in the nominal interest rate is not automatically offset by a
change in inflation.
In this problem, we will study the most popular model of price stickiness, the one proposed by
Calvo (1983). Assume that in each period a firm can reset its price with probability (1 − θ). This
also means that, in each period only a fraction (1 − θ) of firms change its price. This implies that
around a steady state with zero inflation it is

πt = pt − pt−1 = (1 − θ) (p∗t − pt−1 )

where pt = log Pt and p∗t = log Pt∗ is the price set by the firms that can change at time t.
From this model of staggered prices we can derive the New-Keynesian Phillips Curve, linking
inflation and deviations in marginal costs. However, both the IS and the Phillips Curve can be
expressed in terms of output to analyze the real effect of a change in the interest rate.

REFERENCES
1. Gali, Ch. 2 and 3

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PROBLEM 12: The Taylor Rule
The IS curve and the Phillips curve that we have found in the previous problems depend on the
output gap (current and future), the inflation (current and future), and finally on it+1 . This is the
policy variable of our model. Then, in order to close the model, we need to specify an interest rate
“rule”.
John Taylor proposed an approximative rule for central banks in 1993, before the emergence
of New-Keynesian models. The principle behind the rule is that a central bank should commit
to respond to changes in inflation and output gap, in order to stabilize the two variables. In this
problem, we will consider the following simple rule:

it+1 = ρ + φπ πt + φy (yt − ȳt ) + νt with φπ > 0 and φy > 0.

This equation closes our model together with the IS curve and the Phillips curve. In order to obtain
a unique equilibrium, the response of the central bank should be strong enough. Intuitively, φπ and
φy must be large enough so that expectations for future inflation and output cannot drive changes
in current variables.
The shock νt can be interpreted as an exogenous monetary shock. Assume the following process:

νt = ρν νt−1 + ενt .

Finally, let us keep the possibility of having a technology shock as in the RBC model:

at = ρa at−1 + εat .

We now have all the pieces to simulate our model!

REFERENCES
1. Gali, Ch. 3

2. Dynare Reference Manual at www.dynare.org/manual/

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