Advanced Macroeconomics (2025)

Applied Economics Research Center

University of Karachi

Instructor: Tehseen Iqbal Time: Saturday. 11:00 am – 2:pm

E-mail: tehseen.iqbal@aerc.edu.pk Room: 1 –

Course Description:

This course aims to provide training in modern, advanced macroeconomic theory and

gives students a thorough understanding of some fundamental workhorse models in

macroeconomics research used to deal with economic problems. The focus of the

course will be on providing the students with the analytical tools, problem solving

and numerical techniques which are necessary to carry out research in macroeco-

nomics. The course consists of macroeconomic models based on individual forward-

looking behaviour of firms and households and starts with introduction of optimizing

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behaviour of economic agents and models that form the basis of the real business

cycle theory where the cycle and economic growth are treated simultaneously. Then

follows New Keynesian models of the business cycle, which rely on temporarily fixed

prices and wages. The causes of temporarily fixed prices and wages are studied in

detail. Next, fiscal and monetary policy are analyzed. Finally, the issues related

to the financial market imperfections and their impacts on macroeconomic activities

are discussed.

Prerequisites: Good understanding of basic macroeconomic models and their math-

ematical foundation is necessary to enrol in this module. The course will cover a

sequence of mathematical models. This will require familiarity with multivariate

calculus and constrained optimization. Things like using the chain rule, setting up

a Lagrangian, taking logarithms of functions of multiple variables and differentiat-

ing must be familiar to you. An undergraduate-level understanding of probability,

statistics, graph theory and linear algebra is also included in prerequisites.

Class Policy: Regular attendance is essential and expected.

Student hours: After class, or by request/appointment. Please contact me via

e-mail (including a short description of your problem or question).

Requirements: Download and install dynare. Throughout the class, we will use

Matlab to run the dynare.

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Interesting links: There is a number of great websites for additional and interest-

ing information, see for instance Dynare, Dynare Forum, Penn World Table , NBER

Working Papers and IMF Publications.

Grading scheme:

Overall grade for the course will be determined using a weighted average of all as-

signments, term report, mid term and final exams. The distribution of the marks is

as follows:

Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%

Term report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%

Mid term Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Final Exam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Textbook:

The most important material is a set of slides/notes that I will provide before each

lecture. However students may find the following graduate textbooks useful for

different parts of the course.

Chugh S. K., Modern Macroeconomics, The MIT Press, 2015.

Galı̀ J., Monetary Policy, Inflation and the Business Cycle. An Introduction to the

New Keynesian Framework, Princeton University Press, 2008.

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Heijdra B. J, Foundations of Modern Macroeconomics, Oxford University Press,

2009.

Joseph P. Daniels, David D. Van Hoose, International monetary and financial

economics, South-Western College Pub, 2004

Lars Ljungqvist and Thomas J. Sargent, Recursive Macroeconomic Theory,

The MIT Press, 2018

McCandless G., The ABCs of RBCs, Harvard University Press, 2008

Romer D., Advanced Macroeconomics, McGraw-Hill, 2011. An advanced under-

graduate introduction to Modern Macroeconomics:

Wickens M., Macroeconomic Theory. A Dynamic General Equilibrium Approach,

Princeton University Press, 2011.

Uribe M. and S. Schmitt-Grohé, Open Economy Macroeconomics, Princeton

University Press, 2017.

Content

Following is the list of topics I plan to cover. Whether we will cover all the topics

will depend on the pace we manage to keep. For some topics, I list seminal literature

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contributions that were the foundation of the work in that research area and the

relevant chapter of different textbooks. Once again, the slides/notes that will be

provied will be most important and required study material.

1. Introduction to Macroeconomics: The Short and Long-run.

- Required readings:

SWJ: Chapter 1 and 2

Joseph E Stiglitz,2018 , “Where Modern Macroeconomics Went Wrong”,

Oxford Review of Economic Policy, 34: 70–106

Romer, D. 2016, “Trouble with Macroeconomics”

2. Business Cycle facts and Measurement

- Required readings:

SWJ: Chapter 14

MS: Chapter 1

3. Rational Expectation and Policy Ineffectiveness Proposition

- Required readings:

HBJ: Chapter 3

4. Microeconomic Foundations of Macroeconomics.

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 4.1 The microeconomics of intertemporal consumption.

4.2 Inflation and interest rate in consumption saving framework.

4.3 Static and dynamic consumption-labour framework.

- Required readings:

SK: Chapter 2,3,4 and 5

BH: Chapter: 16

5. Real Business Cycle Models.

- Required readings:

SK: Chapter 14

DR: Chapter: 5

6. Perturbation Methods and Simulation of RBC Models in dynare

- Required readings:

Lecture notes

7. Role of Money in RBC Models

- Required readings:

SK: 15

CW: Chapter: 2

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 Clarida, R., J. Galı́, and M. Gertler (1999), “The Science of Mon-

etary Policy: A New Keynesian Perspective,” Journal of Economic Liter-

ature 37: 1661-1707

Robert E. Lucas, 1996, “Monetary Neutrality”, Journal of Political

Economy 104: 661-682. .

8. Optimal Monetary Policy: Welfare, Trade-off and Time Inconsistency problem

- Required readings:

SK: 17

CW: Chapter: 6

Alberto Alesina and Lawrence H. Summers, 1993, “Central Bank

Independence and Macroeconomic Performance: Some Comparative Evi-

dence”, Journal of Money, Credit and Banking, 151-162.

Kydland, F. E., and E. C. Prescott (1977), “Rules Rather Than

Discretion: The Inconsistency of Optimal Plans”, Journal of Political

Economy 85: 473-491.

Thomas J. Sargent and Neil Wallace, 1981, “Some Unpleasant Mon-

etarist Arithmetic”, Federal Reserve Bank of Minneapolis Quarterly Re-

view.

Taylor, J. B. (1993), “Discretion vs. Policy Rules in Practice”, Carnegie-

Rochester Conference Series on Public Policy 39: 195-214

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 9. Fiscal Policy in RBC framework

9.1 Optimal fiscal policy

9.2 Optimal capital taxation with commitment

9.3 Dynamics of Fiscal Policy Shocks in RBC framework.

- Required readings:

SK: Chapter 19

LSH: Chapter: 15

Chamley, C. P. (1986), “Optimal taxation of capital income in general

equilibrium with infinite lives”, Econometrica, 54(3): 607–22.

Judd, K. L. (1985), “Redistributive taxation in a simple perfect fore-

sight model”, Journal of Public Economics.

Woodford, Michael, 2010, “Simple Analytics of the Government Ex-

penditure Multiplier”, American Economic Journal.

10. A New Keynesian model of Sticky Prices: Menu Costs and the Rotemberg

Model

- Required readings:

SK: Chapter 13, 22 and 23

DR: Chapter: 6

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 Calvo, G. A. (1983), “Staggered Prices in a Utility Maximizing Frame-

work”, Journal of Monetary Economics 12: 383-398.

Dixit, A. K., and J. E. Stiglitz (1977), “Monopolistic Competition

and Optimum Product Diversity”, American Economic Review 67: 297-

308.

Rotemberg, J. J. (1982), “Monopolistic Price Adjustment and Aggre-

gate Output”, Review of Economic Studies 49: 517-531

11. Analysis of Macroeconomic policies in New-Keynesian DSGE Model

- Required readings:

GJ: Chapter 3

DR: Chapter: 7

Romer, D. 2000, “Keynesian Macroeconomics without the LM Curve”,

Journal of Economic Perspectives 14: 149-169.

Smets F. and R. Wouters (2003), “An Estimated Dynamic Stochastic

General Equilibrium Model of the Euro Area”, Journal of the European

Economic Association, 1, 1123-1175.

12. Interactions between Monetary and Fiscal Policies

- Required readings:

SK: Chapter 16

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 GJ: Chapter: 7

13. Monetary and fiscal policies in open economy

- Required readings:

GJ: Chapter 7

JD: Chapter: 10,11 and 12

14. Financial market and monetary policy

- Required readings:

SK: Chapter 8

CW: Chapter: 10

15. Financial Accelerator and Frictions

- Required readings:

SK: Chapter 21

Bernanke, B. B., M. Gertler, and S. Gilchrist, 1999, “The Finan-

cial Accelerator in a Quantitative Business Cycle Framework”, in Taylor,

J. B., and M. Woodford (eds.), Handbook of Macroeconomics, Elsevier:

16. Economic growth in long run

16.1 Exogenous growth models

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 16.2 Endogenous growth models

- Required readings:

SWJ: Chapter 3,5 and 8

DR: Chapter: 1 and 3

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