Macro II (Econ 606)


Jonathan Heathcote

Tuesday / Thursday 4.15-5.30, ICC 116

Office Hours: ICC 553, Weds 2-3pm and by appointment




TA: Alejandro Badel




Course Description: This will be a pretty standard first-year macro course. In teaching first-year macro, some people focus more on theory, others more on calibration and measurement, others on numerical solution methods. A typical macroeconomic research paper has to address each element satisfactorily in order to be publishable, and I will therefore spend some time on each.


Goals: By the end of the class, you should understand:


  1. How to define a competitive equilibrium in a range of environments following three alternative approaches:
    1. Arrow-Debreu Equilibrium
    2. Sequential Markets Equilibrium
    3. Recursive Competitive Equilibrium
  2. The relationship between Pareto Optimal Allocations and Competitive Equilibria (Welfare Theorems)
  3. The relationship between Sequential Problems and Recursive Problems
  4. How (in principle) to solve Recursive Problems (Contraction Mapping Theorem etc)
  5. How to describe economies with aggregate risk, and when equilibria can still be defined recursively
  6. What calibration is, and how to do it
  7. Some basic numerical solution methods for stochastic dynamic models, and how to apply them using Gauss, Matlab or Fortran
  8. How to price assets within versions of the stochastic growth model
  9. How to describe economies with idiosyncratic risk and incomplete insurance markets
  10. The basic economic intuition underlying equilibrium consumption, savings and labor supply behavior
  11. How to describe over-lapping-generations economies, and some of their basic properties




We will almost exclusively focus on economies in which agents are infinitely-lived and time is discrete. I won’t say much about economic growth or monetary and fiscal policy (you discussed these topics to some extent with Prof. Diba) and I won’t say much about a range of potentially important frictions, such price stickiness, limited information, or enforcement constraints





Recursive Macroeconomic Theory, 2nd Edition, Ljungqvist and Sargent

Recursive Methods in Economic Dynamics, Stokey and Lucas with Prescott

Frontiers of Business Cycle Research, Cooley ed.

Macroeconomic Theory, (notes), Dirk Krueger, Frankfurt University

Hetoergeneity in Macroeconomics, (notes), Gianluca Violante, New York University


Various articles, to be determined