Macro III Mark Huggett Office Hours: 9-10 Wednesday Class: Tuesday 9:30-12 in ICC 120 e-mail: mh5@georgetown.edu Homepage: http://www9.georgetown.edu/faculty/mh5/ Course Description: This course is divided into two parts. Part I presents computational methods that are useful for solving dynamic optimization problems and for computing equilibria. The spirit of this part is to build confidence in using computational methods and recursive methods in particular. Part II considers Applications. The applications start with a substantive question and employ computation to make possible a project that would otherwise be impossible. Applications come from different areas of macroeconomics. One role of the Applications part of the course is to give students an idea of the status of active research areas. Requirements: 1. Students will be given quite a few homework problems that involve computation. Students may work in two-person teams to do all assignments and presentations. 2. Teams will be asked to present homework results in class. Teams will also present papers from the Applications section of the course. Papers are grouped by theme. Most of the papers make use of computational methods and have an empirical component. A typical presentation will involve presenting (i) the main question of the paper, (ii) the main computational approach and (iii) the main result. The idea is NOT to give a full seminar and NOT to waste time on items that are not central. Instead, quickly (15 minutes or a little longer) present items (i)-(iii) and then give a few interesting comments in regards to these items. An interesting comment might describe what is critical for the main result or indicate the degree to which data properties determine a main quantitative result. The general presentation strategy is a version of Grasp the large. Let go of the small. 3. There will be a take-home final exam. You will have a few weeks to complete it. Here are some ground rules. Students can talk about exam problems in the hallway. However, all students should do their own work as to (i) writing up answers, (ii) producing algorithm and computer code, (iii) producing numerical answers and (iv) producing any theoretical claims. References on Computational Methods and Recursive Methods: Numerical Methods in Economics- Judd (1998) Dynamic Economics: Quantitative Methods... - Adda and Cooper (2003) Dynamic General Equilibrium Modelling:... - Heer and Maussner (2005) 1
Numerical Recipes in Fortran- Press et al (1992) Recursive Methods in Economic Dynamics - Stokey and Lucas (1989) OUTLINE: PART I 1. Background Readings Sargent and Ljungqvist (2004). Read a brief history of the notion of the state and Part 1: The Imperialism of Recursive Methods. Rust (2006), Judd (1998, CH 1), Bona and Santos (1996) 2. Dynamic Programming Finite horizon problems Infinite horizon problems Reference: Stokey and Lucas (1989), Rust (2006) and White (1978) 3. Computation of Solutions to DP Problems a Finite DP Problems Finite Horizon Infinite Horizon Howard s Algorithm b Continuous DP Problems Working on Bellman s Equation Discrete Methods Smooth Methods Working on Euler Equations c Quadrature and Discretizing a Markov Process d Simulating Optimal Decision Rules e If Euler Eq. Error is Small, Then How Good is the Approximation? Reference: Tauchen (1986), Tauchen and Hussey (1991), Judd (1998), Rust (1996), Santos (2000), Stokey and Lucas (1989) 4. Computing Equilibria in Growth Models a time domain methods b recursive methods c approximating about a steady state d models with idiosyncratic and/or aggregate risk 2
Reference: Judd (1998, Ch 16), Huggett (1997), Aiyagari (1994), Rios Rull (1996), Krusell and Smith (1998), Uhlig (1995), Den Haan (2011), Reiter (2009) PART II: Applications 1 Macroeconomics with Consumer Heterogeneity: some basic models of inequality: Huggett (1996)*, Storesletten, Telmer and Yaron (2004)*, Huggett, Ventura and Yaron (2011)* accounting for changes in inequality: Kaymak and Poshke (2016)*, Hubmer Krusell and Smith (2017)* review papers: Heathcote, Storesletten and Violante (2010), De Nardi (2015), Meghir and Pistaferri (2010) alternative mechanisms for wealth inequality: Cagetti and De Nardi (2006), Behabib, Bisin and Zhu (2011), Hubmer Krusell and Smith (2017) facts paper: Guvenen, Karahan Ozkan and Song (2015) 2 Macroeconomics with Firm Heterogeneity: models: Hopenhayn and Rogerson (1993)*, Midrigan and Xu (2014)* review paper: Restuccia and Rogerson (2017) computational methods for firm heterogeneity: Winberry (2016), Terry (2015) 3 Progressive Taxation sufficient statistic formulae: Diamond and Saez (2011)*, Piketty and Saez (2013a), Piketty and Saez (2013b) a general top tax rate formula: Badel and Huggett (2017a)* empirics for elasticities: Saez, Slemrod and Giertz (2012)* laffer curves in GE models: Badel and Huggett (2017b)*, Guner, Lopez- Daneri and Ventura (2014), Kindermann and Krueger (2014), Trabandt and Uhlig (2011) 4 Pareto Tail Coefficient Papers: review/ general interest papers: Gabaix (2009), Jones (2015), Benhabib and Bisin (2017)* earnings/income/wealth: Gabaix, Lasry, Lions and Moll (2016) wealth: Behhabib, Bisin and Zhu (2011), Hubmer Krusell and Smith (2017), Auclert and Rognlie (2017), Behabib, Bisin and Luo (2017). wealth facts: Saez and Zucman (2016)* 3
5 Agent Heterogeneity and New-Keynesian Models: Auclert (2017), McKay and Reis (2016), Kaplan, Moll and Violante (2015), Broer, Hansen, Krusell, Oberg (2016) 4
References: Aiyagari (1994), Unisured Idiosyncratic Risk and Aggregate Savings, QJE, 109, 659. Auclert (2017), Monetary Policy and the Redistribution Channel, manuscript. Auclert and Rognlie (2017), AER P and P. Badel and Huggett (2017a) The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve, JME Badel and Huggett (2017b) Taxing Top Earners: A Human Capital Perspective, manuscript. Benhabib and Bisin (2017), Skewed Wealth Distributions, NBER 21924. Behabib, Bisin and Zhu (2011), The distribution of wealth..., Econometrica. Behabib, Bisin and Luo (2017), AEA: P and P, Earnings Inequality and Other Determinants of Wealth Inequality Berger, Guerrieri, Lorenzoni, Vavra (2015), House Prices and Consumer Spending Bloom, Guvenen, Price, Song and von Wachter (2015), Firming Up Inequality. Broer, Hansen, Krusell, Oberg (2016), The New Keynesian Transmission Mechanism: A Heterogeneous-Agent Perspective, NBER. Cagetti and De Nardi (2006), Entreprenuership, Frictions and Weath, JPE Cooper and Adda (2003) Dynamic Economics: Quantitative Methods and Applications, MIT Press. De Nardi (2015), QUANTITATIVE MODELS OF WEALTH INEQUAL- ITY: A SURVEY, NBER. Den Haan (2011) Solving Models w/ heterogeneous Agents, JEDC Diamond and Saez (2011), The Case for a Progressive Tax, Journal of Economic Perspectives. Gabaix (2009), Power Laws in Economics and Finanace, Annual Reviews. Gabaix, Lasry, Lions, Moll (2016), The Dynamics of Inequality, Econometrica. 5
Guner, Lopez-Daneri and Ventura (2014), Heterogeneity and Government Revenues: Higher Taxes at the Top? Guvenen, Karahan, Ozkan and Song (2016) What do data on Millions of US Workers Reveal about Life-Cycle Earnings Risk?, manuscript Heathcote Storesletten and Violante (2010) Annual Reviews of Economics. Hopenhayn and Rogerson (1993), Job Turnover and Policy Evaluation: A General Equilibrium Analysis, JPE, 101, 915-38. Hubmer, J., Krusell, P. and A. Smith, Jr.(2016), The Historical Evolution of the Wealth Distribution: A Quantitative-Theoretic Investigation, NBER Working Paper 23011. Huggett (1996), Wealth Distribution..., JME, 38, 469-94. Huggett (1997), The One-Sector Growth Model with Idiosyncratic Shocks: Steady States and Dynamics, JME, 39, 385-403. Huggett, Ventura and Yaron (2011) Sources of Lifetime Inequality, AER. Jones (2015), Pareto and Piketty..., Journal of Economic Perspectives. Judd (1998) Numerical Methods in Economics; MIT Press. Kaplan, Moll and Violante (2015), Monetary Policy According to HANK, NBER 21897 Kaymak and Poschke (2016), The Evolution of Wealth Inequality Over Half a Century, JME. Kindermann and Krueger (2014) The Redistributive Benefits of Progressive Labor and capital Income Taxation. Krusell and Smith (1998) JPE. McKay and Reis (2016), The Role of Automatic Stabilizers in the US Business Cycle, Econometrica. Meghir and Pistaferri (2010), Earnings, COnsumpiton and Lifecycle Choices, NBER 15914. Midrigan and Xu (2014), Finance and Misallocation: Evidence from Plantlevel Data, AER 422-58. Piketty and Saez (2013a), Optimal Labor Income Taxation, Handbook of Public Economics. Piketty and Saez (2013)b, Optimal Inheritence Taxation, Econometrica. 6
Press et al (1992) Numerical Recipes in Fortran, Cambridge University Press; Second Edition. Reiter (2009) Solving Heterogenous agent models..., JEDC. Restuccia and Rogerson (2017), The Causes and Costs of Misallocation, NBER 23422. Rios Rull (1996), Life Cycle Economies and Aggregate Fluctuations, RES, 63, 465-90. Rust (1996) Numerical Dynamic Programming in Economics; in Handbook of Computational Economics; ed. Amman, Kendrick and Rust; Elsevier Science. Rust (2006) Dynamic Programming - http://gemini.econ.umd.edu/jrust/research/papers/dp.pdf Saez, Slemrod and Giertz (2012), The Elasticity fo Taxable Income with Respect to Marginal tax Rates, Journal of Economic Literature, 3-30. Saez and Zucman (2016), Weath Distribution..., QJE. Sargent and Ljungqvist (2004), Recursive Macroeconomic Theory, second edition. Santos (2000a) Numerical Solution of Dynamic Economic Models, in Handbook of Macroeconomics. Santos (2000b) Accuracy of Numerical Solutions Using the Euler Equation Residual, Econometrica, 68, 1377-1402. Stokey and Lucas (1989), Recursive Methods in Economic Dynamics. Storesletten, Telmer and Yaron (2004), Consumption and Risk Sharing Over the Life Cycle, JME. Tauchen (1986), Finite State Markov Chain Approximations..., Economics Letters, 20, 177-81. Tauchen and Hussey (1991), Quadrature Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models, Econometrica, 59, 371-96. Terry (2015), Alternative Methods for Solving Heterogeneous Firm Models. Trabandt and Uhlig (2011), The Laffer Curve Revisited, JME 58, 305-27. Uhlig (1995) A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily. 7
Winberry (2016), Toolbox for Solving and Estimating Heterogeneous Agent Macro Models White (1978) Finite Dynamic Programming, John Wiley. 8