ECO 311 – Macroeconomics: A Mathematical Approach

Spring 2018
Professor Gianluca Violante

General Information
Lecture Times: Tuesday and Thursday 1:30-2:50 pm
Location: 145 Peyton Hall
Office Hours: Wednesday 1:30-2:30 pm, 191 JRRB. For alternative times, please contact
me by email at [email protected]
Preceptors: Riccardo A. Cioffi [email protected] and Maximilian J. Vogler
[email protected]. See the registrar website for the times and location of precepts.
Pre-requisites: ECO 100, ECO 101 and (MAT 175 or MAT 201).
Warning: The course makes extensive use of mathematics, mainly differential calculus and
constrained maximization, at a similar level to that used in ECO 310. This allows both
a deeper analysis of the microeconomic foundations of macroeconomic theory and a more
quantitative analysis of the models. As a result the course will be less “practical” and
more “theoretical” than ECO 301. Students who do not find a quantitative approach to the
material appealing should take ECO 301 instead, which covers similar topics with less math
(but also less attention to microeconomic foundations).
Attendance: Students are expected and strongly advised to attend every lecture, since
some of the material is not covered thoroughly by the textbook, and because each topic
builds on the previous ones. Students are also strongly advised to attend precepts because
that’s where the solution to problems sets will be presented each week. Problem sets are the
best preparation for the exams.
Problem Sets: A problem set will be posted on Blackboard every Thursday and students
will have until Thursday of the following week to solve it. Students must hand in on time at
least 3/4 of the total to receive a passing grade. It’s acceptable to work in groups to solve
the problem sets, but each student must hand in a separate solution. Solutions for each
problem set will be explained at precepts. The preceptor is responsible for the problem sets
and their grading. Therefore, all questions related to the problem sets, including requests

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for extensions, should be submitted to the preceptor. Graded problem sets will be returned
at the precept the following week. Grades for problem sets are “check, check minus, and
check plus.” I will use the performance on the problem sets as a guide in case the student is
marginal for the final course grade.
Examinations: There will be two midterms (March 15 and April 12) each counting for
25% of the final grade. The final exam is cumulative and counts for the remaining 50%.
There is no make-up examination for the midterms. If you skip one of the midterms, then
the final exam will count for 75%, and if you miss both it will count for 100% of the final
grade. Before the final exam, you can opt to drop the grade of one or both midterms. Again,
if you elect to drop one of the midterms, the final will count for 75%, and if you drop both
it will count for 100%. This decision must be communicated to the preceptors by the last
day of class.
Textbooks and class notes: Unfortunately, there does not exist a textbook with the
proper level and focus for this course. Nonetheless, parts of the course will follow Stephen
Williamson “Macroeconomics, 6/E ”. Publisher: Pearson. The fifth edition of the book is
also acceptable. The textbook will be used as a guide and a reference book, but I do not
follow it verbatim. I will make class notes and other reading material available in Blackboard
after every class. Class notes and scientific articles will be your main source of learning, but
without attending the lectures you’ll have a hard time make sense of them. Another book
that you may find useful for the growth theory part of the course is Introduction to Economic
Growth, 3/E by Chad Jones and Dietrich Vollrath, Publisher: Norton.
Objectives: The goal of this course is to to provide a rigorous framework for understanding
modern macroeconomics. We will develop formal mathematical models where the behavior
of optimizing agents (households, firms, government, etc.) is aggregated in the economy
through the notion of equilibrium. With the help of this framework, we will be able to discuss
some of the most important topics studied in macroeconomic research (e.g., consumption,
investment, labor supply, economic fluctuations, growth, unemployment, inequality, asset
pricing, bubbles, ...), and confront our model with various sources of macro data. We will
also be able to address some key policy questions (e.g., taxation, social security, stabilization
policies, policies fostering growth) and derive “optimal” policy prescriptions.

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 Course Outline
In what follows, I outline the topics that I plan to cover in the course. This initial summary
is subject to change, as time goes by and as we find together the right pace for the course.
The updated versions of the syllabus will be posted regularly on the course website.

• Primitives of an Economy: Agents, Preferences, Budget constraint, Commodity

set, Household problem, Production technology, Firm’s problem, Government budget
constraint, Market structure.

• Competitive Equilibrium in a Static Economy: Formal definition of competitive

equilibrium in a static economy, Comparative statics across competitive equilibria.

• Pareto Optimality: Social planner problem, Equivalence of equilibrium and efficient

allocations, Welfare theorems.

• Intertemporal Macroeconomics: Introduction to dynamic optimization.

• Consumption and Savings: Intertemporal substitution and the optimal consumption-

saving decision of the household, Permanent Income Hypothesis, Motives for saving,
Credit market imperfections: 1) borrowing constraints, 2) wedges between borrowing
and lending rates.

• Competitive Equilibrium in a Dynamic Economy: Definition of competitive

equilibrium in a two-period production economy.

• Fiscal Policy: Ricardian equivalence between taxes and debt in financing government
expenditures, Optimal taxation, Demographic trends, Comparison between PAYG and
fully-funded system, Overlapping generations models.

• Investment Theory: Optimal investment problem of the firm with an infinite hori-
zon, q-theory of investment, Impact of corporate taxation on investment.

• Asset Pricing: How to price assets (stochastic discount factors), Determination of the
equity premium (why stocks pay more than T-Bills), Bubbles, Understanding financial
crises.

• Labor Markets: Unemployment, labor force participation and labor market flows,
Search model, Matching model, Role of unemployment insurance and job creation
subsidies.

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• Economic Growth: Empirical evidence on cross-country disparity, Growth account-
ing, Solow growth model, Exogenous technical change in the Solow model, AK Model,
Human Capital, Growth models with R&D, Schumpeterian growth, Policy analysis in
growth models, Proximate vs fundamental causes of growth, Ramsey growth model.

• Technological Change and Inequality: Facts on the recent income inequality

trends, The effect of technical progress on the income distribution, the “Piketty view”
of income and wealth inequality.

• Business Cycles: Facts and measurement, “Real” business cycles driven by produc-
tivity shocks and “Financial” business cycles driven by financial factors.

• Money and Monetary Policy: Neutrality of money, Models where money has real
effects, Conventional and “unconventional” monetary policy, Liquidity traps.