Overview

For the past few decades almost all research in macroeconomics has been based on the assumption that macroeconomic aggregates can be characterized ‘as if’ they were chosen by a single representative agent (RA). When there is only one infinitely-lived agent the asset markets become irrelevant. They simply determine the price of a security at which the RA chooses not to trade with himself.  This course is about an alternative frameworks for macroeconomics in which there are multiple agents. 

The framework for the lectures is that of temporary equilibrium TE theory;  the idea that individuals meet sequentially in markets and trade commodities subject to a set of beliefs about the future. Because TE models often have multiple rational expectations equilibria, the beliefs of individuals are important in selecting which equilibrium occurs.

We will study two classes of TE models: one class  -- the overlapping generations model (OLG) -- arrives at agent heterogeneity through an explicit model of population demographics. As the length of life increases, the dimension of the state space increases as we must keep track of the behaviors of each  cohort.  A clever simplification - the perpetual youth model - arrives at a model with an infinite dimensional state space carried by the wealth distribution across birth cohorts. Although that sounds complicated, the model is such that the infinite dimensional distribution does not matter for the behavior of the aggregate dynamics. 

We will also study a second class of models with an infinite dimensional state space. This class of heterogeneous agent (HA) models assumes that there are many infinitely-lived agents but the markets structure is incomplete. People face uninsurable idiosyncratic uncertainty and, as a consequence, the wealth distribution enters the model as a state variable. These models date back to Aiyagari, 1994 and recent work in the field is referred to as the Heterogeneous Agent New Keynesian (HANK) model.  

An important theme of the course will be to introduce you to open research questions in the literature on OLG and HA models and to suggest fruitful topics that you may choose to take up for a Ph.D. thesis.

Lecture 1: Introduction to temporary equilibrium theory

Lecture Slides Reading Farmer [1], Grandmont [2], Hicks [3]

Lecture 2: Overlapping generations models with multiple goods

Lecture Slides

Lecture 3: Overlapping generations model with uncertainty

Lecture Slides

Lecture 4: The perpetual youth model

Lecture Slides

Lecture 5: The Heterogeneous agent model

Lecture Slides. TBA

Links to Readings

  1. Farmer, Roger E.A. “Macroeconomics and Equilibrium,” Ph.D. Thesis UWO Chapter 1 [Link to pdf]

  2. Grandmont, Jean Michel “Temporary Equilibrium Theory”, Econometrica 1977, [link here]

  3. Hicks, John R. Value and Capital 1939 [link here]

  4. Spear, Stephen E. and Warren Young. Overlapping Generations.

  5. Kehoe, Timothy and David K. Levine. “Comparative Statics and Perfect Foresight in Infinite Horizon Economies”. (Kehoe & Levine, 1985) [link to pdf]. Pages 439 – 452.

  6. Kehoe, Timothy and David K. Levine. “Indeterminacy of Relative Prices in Overlapping Generations Models”. (Kehoe & Levine, 1983) [link to pdf]

  7. Gale, David. “Pure Exchange Equilibria of Dynamic Economic Models”. (Gale, 1973). [link to pdf]

  8. Samuelson, Paul. “An exact consumption loan model of interest with or without the social contrivance of money”.  (Samuelson, 1958). [Link to pdf]

  9. Schmitt-Grohé, Stephanie and Martín Uribe “Solving Dynamic General Equilibrium Models Using a Second- Order Approximation to the Policy Function”, (Schmitt-Grohé-Uribe 2004). [Link to pdf].

  10. Levintal, Oren “Fifth Order Perturbation Solutions to DSGE Models” (Levintal 2017). [Link to pdf]. [Appendix Link here].

  11. Farmer, Roger and Pawel Zabczyk, “Monetary and Fiscal Policy when People Have Finite Lives” [Link here]

  12. Blanchard, Olivier, “Debt, Deficits and Finite Horizons”, (Blanchard 1985). [Link here].

  13. Farmer, Roger, “Pricing Assets in a Perpetual Youth Model”, (Farmer 2018). [Link here].

  14. Farmer, Roger, Carine Nourry and Alain Venditti “Debt Deficits and Finite Horizons, the Stochastic Case” (Farmer-Nourry-Venditti 2011), [Link here].

  15. Farmer, Roger E. A. “The Indeterminacy Agenda in Macroeconomics" Oxford Encyclopedia of Economics and Finance (Farmer 2020). [Link here].

This page will updated regularly and I will make frequent edits to the slides as the course progresses.

Last updated: 2/19/1026