MA Advanced Macroeconomics

This is the class website for University College Dublin module MA Advanced Macroeconomics (ECON41620) taught by Prof. Karl Whelan in the Spring term of 2016.

The focus in this course will be on the methods that modern macroeconomics uses to model and understand time series fluctuations in the major macroeconomic variables. The first part of the course focuses on Vector Autoregression studies and Dynamic Stochastic General Equilibrium models. Later lectures focus on modelling the interactions between the financial sector and the macroeconomy.


Here is a handout with a syllabus and a full reading list.

Here are guidelines on the format and content of the final exam. (Final version).

Here is last year’s final exam

Lecture Notes

1. Introduction: Time Series and Macroeconomics

2. Vector Autoregressions

3. Examples of VAR Studies

4. VARs With Long-Run Restrictions

5. Latent Variables: The Kalman Filter

6. Solving Models with Rational Expectations

7. The Real Business Cycle Model

8. The Phillips Curve

9. The Modern New-Keyesian Model (Technical background notes).

10. Estimating DSGE Models

11. The Smets-Wouters Model

12. Default Risk, Collateral and Credit Rationing

13. Banking: Crises and Regulation

14. The Future of Macroeconomics

RATS Programmes and Data

RATS programme generating charts for the first lecture. (Data set and required HP-filter programme.)

Two RATS programmes for Monetary Policy VARs: Identification One and Identification Two (Data Set).

RATS replication files for the Laubach-Williams paper.

RATS programme that produces RBC graphs in Part 7 (using Binder-Pesaran)

Dynare Programmes

Dynare is software that works with Matlab to solve and simulate DSGE models.  You can download it here and here is a page has a quick guide to getting started.

A large number of macroeconomic models from academic papers have been coded up in Dynare and made freely available, most notably at Volker Wieland’s Macro Model Database.  See below for a number of papers and corresponding Dynare programmes.

Programme for the RBC model in Part 7

A simple new Keynesian model.

Dynare can also estimate DSGE models using Bayesian techniques. Here is a link to a working example, including data, by Joao Madeira from the University of York.

Readings and Useful Links

John Cochrane (2005). Time Series for Macroeconomics and Finance (Chapters 2, 3, 5 and 7).

Christopher Sims (1980). Macroeconomics and Reality. (JSTOR).

Lutz Kilian (1998). Small-Sample Confidence Intervals for Impulse Response Functions.

Simon Jackman (2000). Estimation and Inference via Bayesian Simulation: An Introduction to Markov Chain Monte Carlo.

Marta Bańbura, Domenico Giannone, and Lucrezia Reichlin (2008). Large Bayesian VARs.

Lutz Kilian (2009). Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market.  (Here is the working paper version)

Christiane Baumeister and Lutz Killian (2016). Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us.

Olivier Blanchard and Roberto Perotti (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output (JSTOR).

James Stock and Mark Watson (2001). Vector Autoregressions.

Glenn Rudebusch (1998). Do Measures of Monetary Policy in a Var Make Sense?(JSTOR).

Christopher Sims (1998). Comment on Glenn Rudebusch’s Do Measures of Monetary Policy in a Var Make Sense? (JSTOR).

Jordi Gali (1999). Technology, Employment and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations? (JSTOR).

Karl Whelan (2009). Technology Shocks and Hours Worked: Checking for Robust Conclusions.

Thomas Laubach and John C. Williams (2001). Measuring the Natural Rate of Interest. Updated estimates from the Laubach-Williams model from the San Francisco Fed.

Robert Lucas (1976). Econometric Policy Evaluation: A Critique.

Nicholas Higham and Hyun-Min Him (2002). Numerical Analysis of a Quadratic Matrix Equation.

Harald Uhlig (1995). A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily.

Timothy Cogley and James Nason (1995). Output Dynamics in Real-Business-Cycle Models.

Milton Friedman: The Role of Monetary Policy.

Robert J. Gordon: The History of the Phillips Curve: Consensus and Bifurcation

John M. Roberts. New Keynesian Economics and the Phillips Curve (JSTOR).

Richard Clarida, Jordi Gali, and Mark Gertler (1999). The Science of Monetary Policy: A New Keynesian Perspective.

Jordi Gali and Mark Gertler (1999). Inflation Dynamics: A Structural Econometric Analysis

Jeremy Rudd and Karl Whelan (2005). Modelling Inflation Dynamics: A Critical Review of Recent Research

Julio Rotemberg and Michael Woodford (1997). An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy.

Alistair Hall, Atsushi Inoue, James Nason and Barbara Rossi (2010). Information Criteria for Impulse Response Function Matching Estimation of DSGE Models.

Peter Ireland (2004).  A Method for Taking Models to the Data.

Francisco Ruge-Murcia (2007). Methods to Estimate Dynamic Stochastic General Equilibrium Models.

Jesus Fernández-Villaverde (2009). The Econometrics of DGSE Models.

Frank Smets and Rafael Wouters (2007). Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach. (ECB working paper version here; appendix with full model here).

Video of Chris Sims at INET conference: How Empirical Evidence Does or Does Not Influence Economic Thinking.

Ben Bernanke and Mark Gertler (1989). Agency Costs, Net Worth, and Business Fluctuations.

Ben Bernanke, Mark Gertler and Simon Gilchrist (1999): The Financial Accelerator in a Quantitative Business Cycle Framework.

Mark Gertler’s lecture notes on financial frictions.

Joseph Stiglitz and Andrew Weiss (1981). Credit Rationing in Markets with Imperfect Information.

Charles Goodhart (1998): Two Concepts of Money

Piergiorgio Alessandri and Andrew Haldane (Bank of England): Banking on the State

Simon Johnson: Economic Recovery And The Coming Financial Crisis.

Douglas Diamond and Raghuram Rajan: The Credit Crisis: Conjectures about Causes and Remedies

Documentation for the Basle 2 Internal Ratings Based model.

Philipp Hildebrand: Is Basel II Enough? The Benefits of a Leverage Ratio

New York Times: Risk Mismangement

Patrick Honohan: Bank Failures: The Limits of Risk Modelling

Andrew Haldane and Vasileios Madouros. The Dog and the Frisbee.

Karl Whelan: Containing Systemic Risk

Ben Bernanke: Implications of the Financial Crisis for Economics

Tobias Adrian and Hyun Song Shin (2008). Liquidity and Leverage.

Andrew Crockett: Marrying the Micro- and Macro-Prudential Dimensions of Financial Stability

Samuel Hanson, Anil Kashyap and Jeremy Stein: A Macroprudential Approach to Financial Regulation

Basle 3 Agreement

Accenture: Basle 3 Handbook

Andrew Haldane: The Bank and the banks.

Financial Stability Board press release on TLAC.

Bank of England (2009). RAMSI: a top-down stress-testing model

Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro (2010): Rethinking Macroeconomic Policy

Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro (2013): Rethinking Macroeconomic Policy II: Getting Granular.

Olivier Blanchard: Five Lessons for Economists from the Financial Crisis

Lawrence Summers (1991): The Scientific Illusion in Empirical Macroeconomics

Ricardo Cabellero (2010): Macroeconomics after the Crisis : Time to Deal with the Pretense-of-Knowledge Syndrome

Advanced Macroeconomics (ECON30120)

This is the class website for University College Dublin module Advanced Macroeconomics (ECON 30120) being taught by Professor Karl Whelan in Spring 2015.

Here is a handout describing how the module will work.  This material will be covered in the opening lecture (slides here).


Here are guidelines for the final exam including sample questions for Sections 1 and 2 of the exam (Final version: April 15). Here is the handout with sample questions for Section 3. (Final version: April 15).

The final exam will take place on Wednesday May 13th at Noon at RDS Simmonscourt.

Lecture Notes and Slides

1. Introducing the IS-MP-PC Model. Slides here.

2. Analysing the IS-MP-PC Model. Slides here.

3. The Taylor Principle. Slides here.

4. The Zero Lower Bound and the Liquidity Trap. Slides here.

5. Rational Expectations and Asset Prices.Slides here.

6. Rational Expectations and Consumption. Slides here.

7. Exchange Rates, Interest Rates and Expectations. Slides here.

8. Growth Accounting. Slides here.

9. The Solow Model.  Slides here.

10. Determinants of Total Factor Productivity. Slides here.

11. Before Growth: The Malthusian Model. Slides here.

12. Population & Resources: Malthus and the Environment. Slides here.

14. Revision



Carl Walsh (2002): Teaching Inflation Targeting: An Analysis for Intermediate Macro

Milton Friedman (1968): The Role of Monetary Policy.

John Taylor (1993): Discretion Versus Policy Rules in Practice

Bank of England (2012): State of the Art of Inflation Targeting

Richard Clarida, Jordi Gali and Mark Gertler (2000): Monetary Policy Rules
and Macroeconomic Stability: Evidence and Some Theory

Ben Bernanke (2003):  Some Thoughts on Monetary Policy in Japan

Lars Svensson (2003). Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others

Paul Krugman (2012): Earth to Ben Bernanke. Chairman Bernanke Should Listen to Professor Bernanke

Robert Shiller (1981): Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?

John Campbell and Robert Shiller (2001). Valuation Ratios and the Long-Run Stock Market Outlook: An Update.

NBER Workshop on Behavioural Finance.

Robert Lucas (1976). Econometric Policy Evaluation: A Critique.

Robert Hall (1978). Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence.

John Campbell and Gregory Mankiw (1990). Permanent Income, Current Income, and Consumption

Robert Barro (1974). Are Government Bonds Net Wealth?

Jonathan Parker, Nicholas Souleles, David Johnson and Robert McClelland (2011).Consumer Spending and the Economic Stimulus Payments of 2008.

Jonathan Parker (1999). The Reaction of Household Consumption to Predictable Changes in Social Security Taxes.

Chang-Tai Hsieh (2003). Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund

Bureau of Labor Statistics MFP Trends up to 2013

Karl Whelan: Is the U.S. Set for an Era of Slow Growth?

Alwyn Young: A Tale of Two Cities: Factor Accumulation and Technical Change
in Hong Kong and Singapore

Robert Solow: A Contribution to the Theory of Economic Growth

Edward Miguel and Gerard Roland: The Long Run Impact of Bombing Vietnam

Paul Krugman: The Myth of Asia’s Miracle.

Kieran McQuinn and Karl Whelan: Europe’s Long-Term Growth Prospects: With and Without Structural Reforms

Paul Romer: Endogenous Technological Change.

Robert Gordon (2012): Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds

Robert Gordon (2014): The Demise of U.S. Growth: Restatement, Rebuttal and Reflections

Joel Mokyr (2013): Is Technological Progress a Thing of the Past?

Robert E. Hall and Charles I. Jones. Why Do Some Countries Produce So Much More Output per Worker than Others?

Douglass North. Institutional Change: A Framework of Analysis.

Daron Acemoglu, Simon Johnson and James Robinson. The Colonial Origins of Comparative Development: An Empirical Investigation.

Dani Rodrik, Arvind Subramanian, and Francesco Trebbi. Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development.

Robert Gillanders and Karl Whelan. Open For Business? Institutions, Business Environment and Economic Development.

Gregory Clark (2007). A Farewell to Alms. Chapter One: The Sixteen Page Economic History of the World.

Gregory Clark (2007). A Farewell to Alms. Chapter Two: The Logic of the Malthusian Economy.

Thomas Malthus (1798). An Essay on the Principle of Population.

Gapminder: Wonderful animated graphs on health, incomes and other things.

Jared Diamond (2005). Collapse: How Societies Choose to Fail or Succeed.

James Brander and M. Scott Taylor (1998). The Simple Economics of Easter Island: A Ricardo-Malthus Model of Renewable Resource Use.

Is the U.S. Set for an Era of Slow Growth?

The mood surrounding the U.S. economy is finally picking up. The housing market is recovering, consumer sentiment is getting off the floor and, most importantly, unemployment is falling. However, Ben Bernanke, ever the dismal economist, has managed to find the cloud at the end of this silver lining. In a speech this week, Bernanke pointed out that falling unemployment in a period of sluggish growth has worrying implications for the future. Bernanke said:

Output normally has to increase at about its longer-term trend just to create enough jobs to absorb new entrants to the labor market, and faster-than-trend growth is usually needed to reduce unemployment. So the fact that unemployment has declined in recent years despite economic growth at about 2 percent suggests that the growth rate of potential output must have recently been lower than the roughly 2-1/2 percent rate that appeared to be in place before the crisis

In other words, what everyone sees as good news (falling unemployment) is actually a sign that the economy is set to grow at a slow pace over the next few years.

If you find that thought a bit depressing then don’t read the rest of this article.

Bernanke pointed to a number of ways in which the financial crisis may have slowed the potential growth rate of the economy but he seems to believe the economy will recover to its normal growth rate once the financial sector has sorted itself out.  However, there are there are reasons to believe that slow rates of growth are perhaps here to stay.

Economic growth comes from two sources: Growth in the number of workers and growth in the average amount of output these workers produce (i.e. productivity growth).  The news on both fronts is bad.

Start with productivity growth.  Normally at this point in a business cycle, productivity is growing at a fast pace as under-utilized workers get busier and businesses increase their investment in productivity-enhancing equipment. However, average productivity growth over the past two years has been under 1 percent.

Traditionally, productivity growth has been driven by the invention of new technologies. When I worked for Alan Greenspan at the Federal Reserve in the late 1990s and early 2000s, he and other Fed staff believed that new computing technologies were driving increases in productivity growth (with good reason – my own research at the time suggested these effects were real).

It may appear that we still live in a world where new technologies are being developed all the time, with smartphones, computing tablets and lots of other new devices coming on stream all the time.  However, some of those who know the technology industry well are sceptical about whether the true pace of advance is a fast today as previously.  Peter Theil, founder of Paypal, points out in this article in the Financial Times co-authored with Garry Kasparov, that technological innovation is now confined to a very small part of the economy and that people are missing the stagnation of innovation in the rest of the economy.

In a recent paper, Northwestern University economist Robert Gordon, perhaps the profession’s sharpest observer of technological history, offers a telling thought experiment that provides a comparison of the true value of recent innovation compared to the advances of the past:

You are required to make a choice between option A and option B. With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002. Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets.

No prizes for guessing which option most people pick.  Gordon warns that “Future growth in real GDP per capita will be slower than in any extended period since the late 19th century.”

Looking beyond productivity growth, the trends for the other element of economic growth, increases in the numbers at work, are perhaps even less encouraging.  While employment may be growing because of the falling unemployment rate, there is little to suggest there is enough momentum to produce a fast pace of increase in employment over the next decade.

After many years of steady growth, there has been almost no growth in the labor force in recent years.   This is partly driven by slower population growth but also by the reversal of a long trend of rising female participation in the labor force.

Another factor restraining the growth in numbers at work is the aging of the U.S. population. Projections from the Census Bureau show there will be a large increase in the dependency ratio (i.e. the ratio of people not working to people working) over the next decade because of the large increase in numbers of retired people as the baby-boomers step out of the workforce.

Taken together, these calculations suggest a future average growth rate for the U.S. economy that is far lower than people have been used to.

If this scenario comes to pass, it  would have serious implications for future political decisions.  As in most countries, political tensions in the United States often come down to arguments about how to divide up a growing economic cake.  If the economic cake stops growing, these tensions would become more severe.  Even more complex is the question of what to do about promises made to future generations that are premised on the assumption of years of strong growth if that growth never shows up.

How Much Would Ireland Benefit from Replacing the Promissory Notes with a Long-Term Bond?

Lots of people I’ve spoken with about the dreaded Anglo promissory notes are mystified at why the Irish government seems willing to replace the notes with a 40-year bond.  Isn’t it just replacing one kind of debt with another? Won’t we just end up paying more over the long-run? Here‘s a post where I try to answer these questions. Warning: This is a tricky topic and it’s an unusually wonkish post.