Macroeconomics II

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Course TypeCourse CodeNo. Of Credits
Foundation ElectiveSLS2EC1064

Semester: II Semester

Course Coordinator and Team: Dr. Parag Waknis
Email of the Course Coordinator: parag[at]aud[dot]ac[dot]in
Pre-requisite: Macroeconomics I
Aim: Macroeconomics II continues from its sister course Macroeconomics I offered in the first semester of M.A.
Economics at AUD. After dealing with asset pricing, this course will introduce you to the departures from
standard frictionless Arrow-Debreu world. Topics covered will include self insurance, incomplete market
models, labor search models, Insurance and Incentives.
Course Outcomes
At the end of the course students should be able to:

  1. List the salient features of business cycles in the emerging markets and contrast them with those of developed countries.
  2. Describe the basic building blocks of a macroeconomic model in terms of agents, preferences, technology, and the underlying equilibrium concept.
  3. Derive the equilibrium properties of a standard Real Business Cycle (RBC) model.
  4. Evaluate the implications of different specifications for consumer preferences for the equilibrium prop- erties of the standard RBC model.
  5. Evaluate the implications of changes in preference specifications for asset pricing using the Lucas Asset Pricing model.
  6. Describe the implications of incomplete markets models like the Aiyagari model for the aggregate savings behavior and capital formation. 1
  7. Evaluate the usefulness of different macroeconomic models in understanding and explaining empirical regularities.


  1. (a) Review of Chapter 8 and 12, LS2012. Some coverage of history of macroeconomic thought, current methodological debates and their relevance to the macroeconomic environments characterizing developing countries.  (b) Review of Dynamic Programming: Chapter 4, McCandless.
  2. Asset Pricing, Chapter 13, LS2012.
  3. Self Insurance, Chapter 17, LS2012.
  4. Incomplete Market Models, Chapter 18, LS2012.
  5. Insurance and Incentives, Chapter 20, LS2012.
  6. Equilibrium Unemployment Models, Chapters 1-3 (DMP) & Chapter 28 (LS2012).

The following books will be used for the course:

  1. Ljungqvist Lars & Thomas Sargent (2012), Recursive Macroeconomic Theory, The MIT Press, Third Edition. (LS2012)
  2. McCandless George (2008), The ABCs of RBCs, Harvard University Press. (McCandless)
  3. Pissarides Chrsitopher A (2000), Equilibrium Unemployment Theory, Oxford University Press, Second Edition. (DMP)

The following articles will be used during the course:

  1. Mark Aguiar & Gita Gopinath, 2007. “Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  2. S. Rao Aiyagari, 1994. “Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
  3. Robert J. Barro & Robert G. King, 1984. “Time-Separable Preferences and Intertemporal-Substitution
  4. Models of Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 817-839.
  5. Greenwood, Jeremy Hercowitz, Zvi & Huffman, Gregory W, 1988. “Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.

Grading Scheme:
Your final grade will be determined as follows:

ComponentPercentage Contribution
Problem Sets (problems and questions based on research articles)30%
Exams 1 (a class test based on material covered during first half of the semester.)35%
Exams 2 (a class test based on material covered during first half of the semester.)35%