The University of Hong Kong

Faculty of Business and Economics

School of Economics and Finance
ECON6012 Macroeconomic Theory
I. General Information
Instructor: Dr. Yulei Luo
Email: yluo@econ.hku.hk
Office: K.K.Leung Building 916
Phone: 2859-1042
Office hours: Friday 3:00 5:00 pm or by appointment
Lecture times: Thursday 2:00-5:00pm
Place: MWT6
II. Course Description and Objectives
This is the first course in macroeconomics for PhD students in economics of HKU. It is largely based on
dynamic optimization and general equilibrium theory. Students are expected to learn the key tools (e.g.,
optimal control and dynamic programming) and canonical models of modern dynamic macroeconomics,
and use them to study economic growth, business cycles, consumption, savings, investment, asset
pricing, and government policies.
III. Course Evaluation
Your final grade for this course will be evaluated by
Problem sets: 15%
Midterm Exam: 30%
Final Exam: 55%
There are approximately 4 problem sets. Some of the problem sets will involve using Matlab (or any
other software you are familiar with) for numerical computation. Students are encouraged to study in
small groups. However, the homework assignments that you hand in must be your own work. Students
should submit the problem sets before the deadlines are due. The midterm exam is open book and open
notes, and the final exam is closed book and closed notes. The dates of the midterm and final exams will
be announced in class.
IV. Course Readings
Course readings include my lecture notes, plus a selection of other sources, including the following
reference books, and some journal articles and working papers. The reference books are not mandatory.
Main reference books:
Krusell, Per, Lecture notes for Macroeconomics I, 2004, available at:
http://www.econ.yale.edu/smith/econ510a/book.pdf
Ljungqvist, Lars, and Thomas J. Sargent, Recursive Macroeconomic Theory, MIT Press, 2nd
edition, 2004.
McCandless, George, The ABCs of RBCs An Introduction to Dynamic Macroeconomic
Models, 2008.
Romer, David, Advanced Macroeconomics, McGraw-Hill Press, 4th edition, 2011.
Williamson, Stephen, Notes on Macroeconomic Theory, 2006, available at:
http://www.artsci.wustl.edu/~swilliam/courses/notes06.pdf
Some other useful references that you might want to look at include:
Blanchard, Olivier and Stanley Fischer, Lectures on Macroeconomics, 1989.

Gal, Jordi, Monetary Policy, Inflation and the Business Cycle: An Introduction to the New
Keynesian Framework, 2008.
Miao, Jianjun, Economic Dynamics: Discrete Time, available at:
http://people.bu.edu/miaoj/DynamicsI.pdf
Obstfeld, Maurice and Kenneth Rogoff, Foundations of International Macroeconomics, 1996.
Sargent, Thomas J., Macroeconomic Theory, 2nd edition, 1987.
Stokey, Nancy and Robert Lucas with Edward Prescott, Recursive Methods in Economic
Dynamics, 1989.
Wickens, Michael, Macroeconomic Theory: A Dynamic General Equilibrium Approach, 2nd
edition, 2012.

Some useful textbooks for mathematics for economists include:

Chiang, Alpha C. and Kevin Wainwright, Fundamental Methods of Mathematical Economics,
2005.
Simon, Carl P. and Lawrence E. Blume, Mathematics for Economists, 1994.
V. Course Schedule and Reading List (Preliminary)
*Any revision of this course outline will be announced in class and posted on
http://www.sef.hku.hk/~yluo/teaching/econ6012/econ6012_2012.htm. The required readings will be
marked with * in the course schedule.
Lectures 1 and 2: Intertemporal Optimization (Optimal Control and Dynamic Programming)
1. Lecture notes for Macroeconomics I, Chapters 1, 2, 3*.
2. Recursive Macroeconomic Theory, Chapters 1, 3*.
3. The ABCs of RBCs, Chapters 4.
4. Notes on Macroeconomic Theory, Chapter 3.
Lectures 3 and 4: Optimal Economic Growth and Competitive Equilibrium
1. Lecture notes for Macroeconomics I, Chapters 4*, 5*.
2. The ABCs of RBCs, Chapters 1, 2, 3.
3. Advanced Macroeconomics, Chapters 1, 2, 3*.
4. Notes on Macroeconomic Theory, Chapter 3.
5. Lucas, Robert (1988), On the Mechanics of Economic Development, Journal of Monetary
Economics 22, 3-42.
6. Rebelo, Sergio T. (1991), Long-run Policy Analysis and Long-run Growth, Journal of
Political Economy, 99: 500-521.
7. Romer, Paul (1986), Increasing Returns and Long-run Growth, Journal of Political Economy,
94: 1002-1037.
Lecture 5: Uncertainty, Rational Expectations, and Economic Dynamics
1. Lecture notes for Macroeconomics I, Chapter 6
2. Recursive Macroeconomic Theory, Chapters 2*, 4, and 5. *.
3. Notes on Macroeconomic Theory, Chapter 5.
4. Blanchard, Olivier and Charles Kahn (1981), The Solution of Linear Difference Models under
Rational Expectations, Econometrica, 48-5, 1305-1313.
5. Hansen, Lars Peter and Thomas J. Sargent (1980), Formulating and Estimating Dynamic Linear
Rational Expectations Models, Journal of Economic Dynamics and Control 2(1), 7-46.
6. Muth, John (1961)*, Rational Expectations and the Theory of Price Movements,
Econometrica, 29, 315-335.
7. Sims, Christopher (2001), Solving Linear Rational Expectations Models, Computational
Economics, 20(1-2), 1-20.

Lectures 6 and 7: Stochastic Growth and Real Business Cycles

1. Lecture notes for Macroeconomics I, Chapter 11*.
2. The ABCs of RBCs, Chapters 5*, 6*, 7*.
3. Advanced Macroeconomics, Chapter 5.
4. Cooley, Thomas (1995)*, Frontiers of Business Cycle Research, Chapter 1.
5. Campbell, John (1994)*, Inspecting the Mechanism: An Analytical Approach to the Stochastic
Growth Model, Journal of Monetary Economics 33, 463-506.
6. King, Robert and Sergio T. Rebelo (2000)*, Resuscitating Real Business Cycles, in John
Taylor and Michael Woodford (eds.), Handbook of Macroeconomics, North-Holland.
7. King, Robert G., Plosser, Charles I., and Rebelo, Sergio T. (1988), Production, Growth and
Business Cycles: I. The Basic Neoclassical Model, Journal of Monetary Economics 21(2-3),
195-232.
8. Kydland, Finn and Edward C. Prescott (1982), Time to Build and Aggregate Fluctuations,
Econometrica 50: 1345-1370.
9. Uhlig, Harold (1999), A toolkit for analyzing nonlinear economic dynamic models, available
at: http://www2.wiwi.hu-berlin.de/institute/wpol/html/toolkit.htm.
Lectures 8 and 9: Consumption
1. Advanced Macroeconomics, Chapter 8*.
2. Notes on Macroeconomic Theory, Chapter 6.
3. Attanasio, O. P (1999), Consumption, Handbook of Macroeconomics, edited by J.B. Taylor
and M. Woodford, North Holland, 813-862.
4. Caballero, Ricardo (1990)*, Consumption Puzzles and Precautionary Savings, Journal of
Monetary Economics 25(1), 113-136.
5. Carroll, Christopher D. (1997), Buffer Stock Saving and the Life Cycle/Permanent Income
Hypothesis, Quarterly Journal of Economics CXII(1):156.
6. Flavin, Marjorie A. (1981), The Adjustment of Consumption to Changing Expectations About
Future Income, Journal of Political Economy, 89(5): 974-1009.
7. Hall, Robert (1978)*, Stochastic Implications of the Life Cycle-Permanent Income Hypothesis:
Theory and Evidence, Journal of Political Economy 86(6), 971-987.
8. Weil, Philippe (1993), Precautionary Savings and the Permanent Income Hypothesis, Review
of Economic Studies, 60(2), 367-83.
Lecture 10: Consumption, Asset Pricing, and Welfare
1. Lecture notes for Macroeconomics I, Chapter 6*.
2. Recursive Macroeconomic Theory, Chapters 13.
3. Notes on Macroeconomic Theory, Chapter 9.
4. Campbell, John (2003)*, Consumption-Based Asset Pricing, Chapter 13 in George
Constantinides, Milton Harris, and Rene Stulz eds. Handbook of the Economics of Finance.
5. Cochrane, John (2007), Financial Markets and the Real Economy, in Rajnish Mehra, Ed.
Handbook of the Equity Premium, 237-325.
6. Lucas, Robert (1978), Asset Prices in an Exchange Economy, Econometrica 46: 14291445.
7. Lucas, Robert (2003), Macroeconomic Priorities, American Economic Review, 93(1), 1-14.
8. Mehra, Rajnish and Edward C. Prescott (1985)*, The Equity Premium: A Puzzle, Journal of
Monetary Economics, 15: 145-161.
9. Mehra, Rajnish and Edward C. Prescott (2003), The Equity Premium in Retrospect, in G.
Constantinides, M. Harris and R. Stulz, Handbook of the Economics of Finance.
Lecture 11: Investment
1. Advanced Macroeconomics, Chapter 9*.

2. Caballero, Ricardo (1999), Aggregate Investment, Handbook of Macroeconomics, edited by

J.B. Taylor and M. Woodford, North Holland, 813-862.
3. Hayashi, Fumio (1982)*, Tobins Marginal q and Average q: A Neoclassical Interpretation,
Econometrica 50, 213-224.
4. Jorgenson, Dale (1963), Capital Theory and Investment Behavior, American Economic Review
53(6), 247-259.
5. Lucas, Robert, Jr. and Edward C. Prescott (1972), Investment under Uncertainty,
Econometrica 39, 659-681.
Lecture 12: Fiscal Policy
1. Advanced Macroeconomics, Chapter 12*.
2. Lecture notes for Macroeconomics I, Chapter 10.
3. Recursive Macroeconomic Theory, Chapter 11*.
4. Barro, Robert J. (1979), On the Determination of the Public Debt, Journal of Political
Economy 87, 940-971.
5. Chamley, Christopher (1986), Optimal Taxation of Capital Income in General Equilibrium with
Infinite Lives, Econometrica 54: 607-622.
6. Ghosh, Atish R. (1995), Intertemporal Tax-smoothing and the Government Budget Surplus:
Canada and the United States, Journal of Money, Credit and Banking 27, 1033-1045.
7. Leeper, Eric (1991), Equilibria under Active and Passive Monetary Policies, Journal of
Monetary Economics 27, 129147.
8. Sims, Chris A. (1994), A Simple Model for the Study of the Determination of the Price Level
and the Interaction of Monetary and Fiscal policy, Economic Theory 4, 381399.