STOCKHOLM SCHOOL OF ECONOMICS 1

Department of Economics

Spring 2009





RECURSIVE MACROECONOMIC THEORY


Lars Ljungqvist
Phone: 08-736 92 09, email: lars.ljungqvist@hhs.se





COURSE OUTLINE

This course has two parts: (1) frameworks in macro-labor, and (2) recursive contracts.
In the first part, we will look under the hood of three common frameworks in macro-labor,
in order to learn about the forces at work. The three frameworks are matching models, search-
island models, and the representative-family, employment-lottery model. We will also explore
recent research that postulates indivisible labor, incomplete markets and finitely-lived agents.
In the second part, we still study recursive contracts, with applications in social insurance and
incentive-constrained international trade.
The skills and understanding acquired in the course will transcend the listed topics. More
specifically, the thorough practice of formulating and solving dynamic programming
problems is generally useful to any student of economics.



EXAMINATION

Home work assignments and a written exam.


REGISTRATION
Interested students should register with Ritva Kiviharju (e-mail Ritva.Kiviharju@hhs.se,
phone 08-736 92 29, fax 08-31 32 07. ).







STOCKHOLM SCHOOL OF ECONOMICS 2
Department of Economics

Spring 2009

LITERATURE

Textbook

Recursive Macroeconomic Theory (RMT), Lars Ljungqvist and Thomas J . Sargent, MIT
Press, 2004 (second edition).


PART 1

1.a Three common approaches in macro-labor

RMT, chapter 26, Equilibrium Search and Matching.

Matching models

[1] Ljungqvist, Lars and Thomas J . Sargent (2007). Understanding European Unemployment
with Matching and Search-Island Models. Journal of Monetary Economics, 54:2139-2179.

[2] Mortensen, Dale T. and Christopher A. Pissarides (1999). Unemployment Responses to
`Skill-Biased' Technology Shocks: The Role of Labor Market Policy". Economic Journal
109:242-265.

Search models

[3] Alvarez, Fernando and Marcelo Veracierto (2001). Severance Payments in an Economy
with Frictions. Journal of Monetary Economics, 47:477-498.

[4] Gomes, J oao, J eremy Greenwood and Sergio Rebelo (2001). Equilibrium
Unemployment. Journal of Monetary Economics, 48:109-152.

[5] Lucas, Robert E., J r. and Edward C. Prescott (1974). Equilibrium Search and
Unemployment. Journal of Economic Theory, 7:188-209.

Representative family models with indivisible labor and employment lotteries

[6] Hansen, Gary D. (1985). Indivisible Labor and the Business Cycle. Journal of Monetary
Economics: 16:309-327.

[7] Ljungqvist, Lars and Thomas J . Sargent (2007). Understanding European Unemployment
with a Representative Family Model. Journal of Monetary Economics, 54:2180-2204.

[8] Rogerson, Richard (1988). Indivisible Labor, Lotteries, and Equilibrium. Journal of
Monetary Economics, 21:3-16.


STOCKHOLM SCHOOL OF ECONOMICS 3
Department of Economics

Spring 2009



1.b Indivisible labor with incomplete markets

[9] Chang, Yongsung and Sun-Bin Kim (2006). From Individual to Aggregate Labor Supply:
A Quantitative Analysis Based on Heterogeneous Agent Macroeconomy. International
Economic Review, 47:127.

[10] Ljungqvist, Lars and Thomas J . Sargent (2006). Do Taxes Explain European
Unemployment? Indivisible Labor, Human Capital, Lotteries, and Savings. In NBER
Macroeconomics Annual, edited by Daron Acemoglu and Kenneth Rogoff and Michael
Woodford. Cambridge, Mass: MIT Press.

[11] Ljungqvist, Lars and Thomas J . Sargent (2008). Taxes, Benefits, and Careers:
Complete Versus Incomplete Markets". Journal of Monetary Economics, 55: 98-125.

[12] Prescott, Edward C. (2006). Comment. In NBER Macroeconomics Annual, edited by
Daron Acemoglu and Kenneth Rogoff and Michael Woodford. Cambridge, Mass: MIT Press.

[13] Prescott, Edward C, Richard Rogerson and J ohanna Wallenius (2009). Lifetime
Aggregate Labor Supply with Endogenous Workweek Length. Review of Economic
Dynamics, 12:23-36.


1.c Labor market policy: the case of layoff costs (See [1], [2], [5], [7])

[14] Hopenhayn, Hugo and Richard Rogerson (1993). J ob Turnover and Policy Evaluation:
A General Equilibrium Analysis. Journal of Political Economy, 101:915-938.

[15] Ljungqvist, Lars (2002). How Do Layoff Costs Affect Employment? Economic
Journal, 112:829-853.


1.d Driving forces in theories of European unemployment

Matching externalities and technological change (See [2])

[16] Hornstein, Andreas, Per Krusell and Giovanni L. Violante (2007). TechnologyPolicy
Interaction in Frictional Labour-Markets. Review of Economic Studies, 74:1089-1124.

Search decisions and microeconomic turbulence

[17] Ljungqvist, Lars, and Thomas J . Sargent (2008). Two Questions about European
Unemployment. Econometrica, 76:1-29.



STOCKHOLM SCHOOL OF ECONOMICS 4
Department of Economics

Spring 2009


Labor-leisure choice and taxes (See [10], [11], [12])

[18] Prescott, Edward C. (2002). Prosperity and Depression. American Economic Review,
92:1-15.

[19] Rogerson, Richard (2008). Structural Transformation and the Deterioration of European
Labor Market Outcomes. Journal of Political Economy, 116:235-259.



PART 2

2.a Optimal Social Insurance

RMT, chapter 16, Self-Insurance.
RMT, chapter 19, Insurance versus Incentives.
RMT, chapter 20, Equilibrium without Commitment.
RMT, chapter 21, Optimal Unemployment Insurance.

Hopenhayn, Hugo A. and J uan Pablo Nicolini (1997). Optimal Unemployment Insurance.
Journal of Political Economy 105: 412438.

Kocherlakota, Narayana R. (1996). Implications of Efficient Risk Sharing without
Commitment. Review of Economic Studies 63: 595609.

Thomas, J onathan and Tim Worrall (1990). Income Fluctuation and Asymmetric
Information: An Example of a Repeated Principal-Agent Problem. Journal of Economic
Theory 51: 36790.


2.b Incentive-Constrained International Trade

RMT, chapter 23, Two Topics in International Trade.

Atkeson, Andrew G (1991). International Lending with Moral Hazard and Risk of
Repudiation. Econometrica 59: 10691089.

Bond, Eric W. and J ee-Hyeong Park (2002).Gradualism in Trade Agreements with
Asymmetric Information. Review of Economic Studies 69: 379406.

Thomas, J onathan and Tim Worrall (1994).Foreign Direct Investment and the Risk of
Expropriation. Review of Economic Studies 61: 81108.