MACROECONOMIC ANALYSIS

AND POLICY

www.parisschoolofeconomics.eu PSE SUMMER SCHOOL

From June 18 to June 22, 2018

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

OVERVIEW

The Macroeconomic Analysis and Policy module is made of courses dealing with topics at the frontier of policy-relevant research: monetary and fiscal policy; heterogeneous households, inequality and redistribution (“HANK” models); financial crises; bubbles; labor markets and unemployment; and international linkages.

The courses are taught by leading research and teaching figures in their respective fields. Emphasis is put on introducing tools and developing intuition. All courses review core, standard models useful for understanding crises and recessions, and the role of policy therein. Each course contains at least one part that deals with recent research at the frontier.

PREREQUISITES

A pre-requisite knowledge of macroeconomics at intermediate (Master or very strong undergraduate) level is preferable, although not formally required. PROFESSORS

Florin Bilbiie is Professor of Economics at the Paris School of Economics and Université Paris 1 Panthéon-Sorbonne, Research Fellow of the CEPR and Scientific Director of Chair Banque de France. He joined PSE in 2010 after Oxford University (Nuffield College) and HEC Paris, and held visiting positions with several central banks (ECB, Bank of England, Riksbank, etc.), the National Bureau of Economic Research, New York University (NYC and Abu Dhabi) and CREi Barcelona. Florin’s research focuses on business cycles and the role, effects and optimal design of monetary and fiscal policies, in environments with firm entry/product creation, heterogeneous agents (limited participation), and/or complementarities. His research was published in Journal of Political Economy, Journal of Economic Theory, Journal of Monetary Economics, among others. http://www.parisschoolofeconomics.eu/en/bilbiie-florin/

Jean-Olivier Hairault is Professor of Economics at Université Paris 1 Panthéon-Sorbonne and the Paris School of Economics and IZA Research Fellow. He joined Paris 1 in 1997 after holding positions at University of Paris-Dauphine and University of Lille 1. He is Deputy Director of PSE in charge of Education program and co-director of the Master APE. He is also Director of the Macroeconomic Observatory of Cepremap. Jean-Olivier’s research focuses on business cycles and labor market dynamics; his recent main topic is the source of unemployment fluctuations, with a particular interest for a life-cycle approach and the relative contribution of job separation and job finding rates. He is also interested in the impact of structural changes and polarization on job reallocation, and the role of labor market institutions. His research was published in Journal of European Economic Association, Economic Journal, Journal of Public Economics, International Economic Review and European Economic Review among others. https://www.parisschoolofeconomics.eu/fr/hairault-jean-olivier/

Jean Imbs is a Professor at the Paris School of Economics and a Research Director at France’s CNRS. Until 2010, he was a Professor at the London Business School, and at the University of Lausanne. His research focuses on international macroeconomics, with an interest in the consequences of microeconomic complexity for macroeconomic phenomena. He consults regularly with most major policy institutions, including the International Monetary Fund, the World Bank, the European Central Bank, the Bank of England, and many other central banks around the world. He taught at

MACROECONOMIC ANALYSIS AND POLICY From June 18 to June 22, 2018

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

Princeton University, the University of Chicago Booth School of Business, New York University, INSEAD, HEC Paris, and for policymakers or investment professionals in France and the United Kingdom. http://www.parisschoolofeconomics.eu/en/imbs-jean/ Romain Rancière is professor of economics at University of Southern California, Los Angeles since 2016 and a research fellow at NBER and CEPR. He was previously a Professor of Economics at Paris School of Economics and an economist at the research department of the IMF. His research areas are Macroeconomics and International Finance with a special emphasis on Financial Crises. He has widely published on these topics in journals such as the Quarterly Journal of Economics, American Economic Review or the Journal of Monetary Economics. He has also served as consultant for various central banks. http://www.romainranciere.com/

Gilles Saint-Paul is Professor of Economics at the Paris School of Economics and Ecole Normale Superieure ENS, and Global University Professor at New York University Abu Dhabi. He is also a research fellow of CEPR, IZA and CES-Ifo and a former member of the Conseil d'Analyse Economique. He served as consultant for various central banks, ministries, and international institutions. His research spanning a variety of topics in macroeconomics (from labor markets to political economy to bubbles to fiscal policy) has been published in leading journals such as the American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, and others. He is also the author of several books. http://www.parisschoolofeconomics.eu/en/saint-paul-gilles/

Programme Supervisor: Florin Bilbiie

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

SCHEDULE

Monday June, 18th 9 am - 9.30 am Welcome coffee 9.30 am - 11 am Florin Bilbiie, Macro Policies in Simple Heterogeneous-Agent New Keynesian Models 11 am - 11.15 am Break 11.15 am - 12.45 pm Florin Bilbiie, Macro Policies in Simple Heterogeneous-Agent New Keynesian Models 12.45 pm - 2 pm Lunch 2 pm - 3.30 pm Florin Bilbiie, Macro Policies in Simple Heterogeneous-Agent New Keynesian Models 3.30 pm - 3.45 pm Break 3.45 pm - 5.15 pm Florin Bilbiie, Macro Policies in Simple Heterogeneous-Agent New Keynesian Models From 6 pm Welcome Cocktail

Tuesday June, 19th 9.30 am - 11 am Jean-Olivier Hairault, Unemployment, Labor Markets, and Policies 11 am - 11.15 am Break 11.15 am - 12.45 pm Jean-Olivier Hairault, Unemployment, Labor Markets, and Policies 12.45 pm - 2.15 pm Lunch 2.15 pm - 3.45 pm Jean-Olivier Hairault, Unemployment, Labor Markets, and Policies 3.45 pm - 4 pm Break 4 pm - 5.30 pm Jean-Olivier Hairault, Unemployment, Labor Markets, and Policies From 6 pm Social event

Wednesday June, 20th 9.30 am - 11 am Jean Imbs, International Macroeconomics 11 am - 11.15 am Break 11.15 am - 12.45 pm Jean Imbs, International Macroeconomics 12.45 pm - 2.15 pm Lunch 2.15 pm - 3.45 pm Jean Imbs, International Macroeconomics 3.45 pm - 4 pm Break 4 pm - 5.30 pm Jean Imbs, International Macroeconomics 6 pm - 7 pm François Bourguignon, Plenary lecture

Thursday June, 21st 9.30 am - 11 am Gilles Saint-Paul, Bubbles 11 am - 11.15 am Break 11.15 am - 12.45 pm Gilles Saint-Paul, Bubbles 12.45 pm - 2 pm Lunch 2 pm - 3.30 pm Gilles Saint-Paul, Bubbles 3.30 pm - 3.45 pm Break 3.45 pm - 5.15 pm Gilles Saint-Paul, Bubbles From 6 pm Social event

Friday June, 22nd 9.30 am - 11 am Romain Rancière, Financial Crises: A Post-2008 Perspective 11 am - 11.15 am Break 11.15 am - 12.45 pm Romain Rancière, Financial Crises: A Post-2008 Perspective 12.45 pm - 2 pm Lunch 2 pm - 3.30 pm Romain Rancière, Financial Crises: A Post-2008 Perspective 3.30 pm - 3.45 pm Break 3.45 pm - 5.15 pm Romain Rancière, Financial Crises: A Post-2008 Perspective From 6 pm Social Farewell cocktail/certificates

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

OBJECTIVES

What can we learn (if anything) that is useful for policy in crisis times from current state-of-the-art macroeconomic models of the “New Keynesian” (NK) type (dynamic forward-looking general-equilibrium models with nominal and real rigidities) and their recent heterogeneous-agent extensions?

This course reviews the core intuition and mechanisms of the standard NK model (the two textbooks by Woodford and Gali are good references in order to refresh or introduce students to this framework). The course uses this framework to revisit issues such as liquidity traps and zero lower bound, forward guidance and quantitative easing, and the role of fiscal stimulus in recessions (distinguishing spending, taxes, and debt); we conclude by introducing a simple “HANK” (heterogeneous-agent NK) model and studying its implications for monetary and fiscal policies, and for inequality and redistribution. COURSE STRUCTURE & REFERENCES

1. Quick review of a plain vanilla NK model - Woodford, M., (2003). “Interest and Prices: Foundations of a Theory of Monetary Policy”. Princeton University Press - Gali, J. 2010, “Monetary Policy, Inflation and the Business Cycle: An Introduction to the New Keynesian Framework”. Princeton University Press

2. Liquidity traps and zero lower bound: Forward guidance and quantitative easing - Eggertsson, G.B. and Woodford, M. (2003) "The Zero Bound On Interest Rates And Optimal Monetary Policy," Brookings Papers on Economic Activity 34, 2003-1 (2003): 139-235 - Christiano L., Eichenbaum, M. and Rebelo, S. (2011). "When Is the Government Spending Multiplier Large?," Journal of Political Economy, 119(1), pages 78 - 121 - Auerbach, A. J. and Obstfeld, M. (2005) "The Case For Open-Market Purchases In A Liquidity Trap," American Economic Review - Benhabib, J., Schmitt-Grohe, S. and Uribe, M. (2002). "Avoiding Liquidity Traps," Journal of Political Economy - Bilbiie, F. (2016) “Optimal Forward Guidance”, CEPR

3. Fiscal policy to fight a recession: Spending, taxes and public debt - Christiano, L., Eichenbaum, M. and S. Rebelo (2011). "When Is the Government Spending Multiplier Large?," Journal of Political Economy, 119(1), pages 78 - 121. - Woodford, M. (2011). "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, 3(1), p 1-35 - Eggertsson, G. (2010), "What Fiscal Policy Is Effective at Zero Interest Rates?", in: D. Acemoglu and M. Woodford, eds: NBER Macroeconomics Annual 2010, University of Chicago Press. - Bilbiie, F., Mueller, G. and Meier, A. (2008), "What Accounts for the Change in U.S. Fiscal Policy Transmission?", Journal of Money, Credit and Banking, 2008 - Bilbiie, F., Monacelli, T. and Perotti, R., (2014), “Is government spending at the zero lower bound desirable?”, NBER Working Paper - Bilbiie, F. (2011): “Non-Separable Preferences, Frisch Labor Supply and the Consumption Multiplier of Government Spending: One Solution to a Fiscal Policy Puzzle”, Journal of Money, Credit and Banking.

MACROECONOMIC ANALYSIS AND POLICY Macro Policies in Simple Heterogeneous-Agent New Keynesian Models

Florin Bilbiie

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

4. Simple HANK Models: Inequality and Policy (“HANK”: Heterogeneous-Agent New Keynesian)

4.a Monetary Policy - Bilbiie F. (2008). "Limited Asset Market Participation, Monetary Policy, and Inverted Aggregate Demand Logic". Journal of Economic Theory 140, 162-196. - Bilbiie F. (2017) “The New Keynesian Cross: Understanding Monetary Policy with Hand-to-Mouth Households” CEPR DP - McKay, A., E. Nakamura, and Steinsson, J. (2015) “The Power of Forward Guidance Revisited”, American Economic Review - Kaplan, G., Moll, B., and Violante, G. (2017) “Monetary Policy According to HANK”, American Economic Review - Bilbiie F. and Straub, R. (2013), "Asset Market Participation, Monetary Policy Rules and the Great Inflation", Review of Economics and Statistics - Bilbiie F. (2017) “The Puzzle, the Power, and the Dark Side: Forward Guidance Redux”, CEPR DP - Bilbiie, F. and Ragot, X. (2017) “Optimal Monetary Policy and Liquidity with Heterogeneous Households”, CEPR

4.b Fiscal Policy - Bilbiie, F. (2017) “Inspecting the Mechanism: Fiscal Stimulus with Heterogeneous Households” CEPR DP - Gali, J., Lopez-Salido, D. and Valles, J. (2007) “Understanding the Effects of Government Spending on Consumption”, Journal of the European Economic Association - Eggertson, G. and Krugman, P. (2013), "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach, Quarterly Journal of Economics, 127(3): 1469-1513, August.

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

OBJECTIVES

This class purports to review recent developments in labor macroeconomics. This course reviews the core intuition and mechanisms of the standard search and matching model with and without capital accumulation. It uses this framework to study the unemployment volatility issue. It starts in a first part with an empirical investigation of the relative contribution of separations and hirings to the unemployment volatility and presents different extensions dealing with the Shimer’s puzzle (the inability of the standard model to explain the observed unemployment volatility). In a second part, the course introduces equilibrium unemployment in DSGE models. In particular, it will present the different ways to deal with the heterogeneity issue raised by the co-existence of employed and unemployed households. In conclusion, optimal monetary policy will be reinvestigating in presence of unemployment.

COURSE STRUCTURE & REFERENCES 1. Relative contributions of separations and findings to unemployment volatility

- Barnichon, R. (2010b). Productivity and unemployment over the business cycle. Journal of Monetar Economics, 57(8), 1013 – 1025. - Blanchard, O.&Diamond, P. (1989). The beveridge curve. Brookings Papers on Economic Activity, 20(1), 1-76. - Blanchard, O. & Diamond, P. (1990). The cyclical behovior of the gross flows of u.s. workers. Brookings Papers on Economic Activity, 21(2), 85–156. - Canova, F., Lopez-Salido, D., & Michelacci, C. (2013). The ins and outs of unemployment: An analysis conditional on technology shocks. The Economic Journal, 123(569), 515–539. - Elsby, M. W. L., Hobijn, B., & Åahin, A. (2013). Unemployment Dynamics in the OECD. Review of Economics and Statistics. - Fujita, S. (2011). Dynamics of worker flows and vacancies: Evidence from the sign restriction approach. Journal of Applied Econometrics. - Fujita, S. & Ramey, G. (2009). The cyclicality of separation and job finding rates. International Economic Review, 50(2), 415–430. - Hairault, J. O., Le Barbanchon, T., & Sopraseuth, T. (2015). The cyclicality of the separation and job finding rates in France. European Economic Review. - Petrongolo, B. & Pissarides, C. A. (2008). The ins and outs of european unemployment. The American Economic Review, 98(2), 256–262. - Shimer, R. (2012). Reassessing the ins and outs of unemployment. Review of Economic Dynamics. - Smith, J. C. (2011). The ins and outs of uk unemployment. The Economic Journal, 121(552), 402–444.

2. Unemployment fluctuations in the matching model : solving the Shimer’s Puzzle

- Den Haan, W. J., Ramey, G., & Watson, J. (2000). Job destruction and propagation of shocks. Fujita, S. & Ramey, G. (2012), ‘Exogenous versus endogenous separation’, American Economic Journal : Macroeconomics 4(4), 68–93. - Gomme, P. & Lkhagvasuren, D. (2015), 'Worker search effort as an amplification mechanism', Journal of Monetary Econmics 75.

MACROECONOMIC ANALYSIS AND POLICY

Unemployment, Labor Markets, and Policies

Jean-Olivier Hairault

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

- Hagendorn, M. & Manovskii, I. (2008), ‘The cyclical behavior of equilibrium unemployment and vacancies revisited’, American Economic Review 98(4), 1692–1706. - Hall, R. E. (2005), ‘Employment fluctuations with equilibrium wage stickiness’, American Economic Review 95(1), 50–65. - Hall, R. E. & Milgrom, P. R. (2008), ‘The limited influence of unemployment on the wage bargain’, American Economic Review 98(4), 1653–1674. - Mortensen, D. & Pissarides, C. (1994), ‘Job creation and job destruction in the theory of unemployment’, Review of Economic Studies 61, 397–415. - Nagypal, E. & Mortensen, D. (2007), ‘More on unemployment and vacancy fluctuations’, Review of Economic Dynamics 10(3), 327–347. - Pissarides, C. (2009), ‘The unemployment volatility puzzle: is wage stickiness the answer?’, Econometrica 77(5), 1339–1369. - Pissarides, C. (2000). Equilibrium Unemployment Theory. MIT Press. - Shimer, R. (2005b). The Cyclical Behavior of Equilibrium and Vacancies Unemployment. American Economic Review, 90(3), 482–498.

3. Unemployment in DSGE : Heterogeneity issues

- Andolfatto, D. (1996), ‘Business cycles and labor-market search’, The American Economic Review (1), 112–132. - Aiyagari, S. R. (1994), Uninsured idiosyncratic risk and aggregate savings ,Quarterly Journal of Economics, vol. 109, pp. 659-684. - Challe, E. and Ragot, X. (2014), “Precautionary saving over the business cycle.” Economic Journal. - Christiano, L., Eichenbaum, M. & Trabandt, M. (2016), 'Unemployment and business cycles', Econometrica 84(4), 1523-1569. - Gertler, M., Sala, L. and Trigari, A. (2008), “An estimated monetary DSGE model with unemployment and staggered nominal wage bargaining.” Journal of Money, Credit and Banking, 40, 1713–1764. - Krusell, P., Mukoyama, T. and Sahin, A. (2011), Labor-market matching with precautionary savings and aggregate fluctuations, Review of Economic Studies, vol. 77 (4), pp. 1477-1507. - Krusell, P. and Smith, A.A. (1998), Income and wealth heterogeneity in the macroeconomy, Journal of Political Economy, vol. 106(5), pp. 867-89 - Merz, M. (1995). Search in the labor market and the real business cycle. Journal of monetary Economics, 36(2), 269–300. - Ravn, M. and Sterk, V. (2013), “Job uncertainty and deep recessions.” London. Report, University College. - Trigari, A. (2009), “Equilibrium unemployment, job flows, and inflation dynamics.” Journal of Money, Credit and Banking, 41, 1–33.

4. Optimal monetary policy with unemployment

- Blanchard, O. and Galí, J. (2010), “Labor markets and monetary policy: A new Keynesian model with unemployment.” American Economic Journal:Macroeconomics, 2, 1–30. - Galí, J. (2010), “Monetary policy and unemployment.” In Handbook of Monetary Economics, Vol. 3, Chapter 10 (B. M. Friedman and M. Woodford, eds.), 487–546, Elsevier. - Walsh, C. E. (2005), “Labor market search, sticky prices, and interest rate policies.” Review of Economic Dynamics, 8, 829–849. [438, 441]

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

OBJECTIVES

This class purports to review recent developments in international macroeconomics. The range of topics we cover corresponds to recent advances in the field, and is meant to give students a flavor of the current state of the art in international macro: global imbalances, exchange rates, contagion, and capital flows. COURSE STRUCTURE & REFERENCES

1. Global Imbalances - The intertemporal approach to the current account, Dynamics of the current account, The transfer problem, Valuation Effects, Credit Constraints. - Obstfeld, M., and Rogoff K. (2005). “The Unsustainable US Current Account Position Revisited”, Brookings Papers on Economic Activity , issue 1, 67-123. - Gourinchas, P.O. and Rey, H. (2007), “From World Banker to World Venture Capitalist: The US External Adjustment and The Exorbitant Privilege”, in "G7 Current Account Imbalances: Sustainability and Adjustment", Richard Clarida, editor, The University of Chicago Press, 2007, pp. 11-55.

2. Exchange Rates - Rogoff K. (1996) "The Purchasing Power Parity Puzzle", Journal of Economic Literature Vol. 34, No. 2. (Jun., 1996), pp. 647-668. - Obstfeld M. and Rogoff, K. (2000) "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?", NBER Macro Annual 2000, also NBER working paper 7777. - Meese, R. and Rogoff, K. (1983) “Empirical Exchange Rate Models of the 70s: Do They Fit Out Of Sample?”, Journal of International Economics. - Gourinchas, P.O. and H. Rey, “International Financial Adjustment”, Journal of Political Economy, August 2007. - Bacchetta P. and van Wincoop, E. (2006) "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?", American Economic Review, June 2006.

3. Contagion and capital flows - Backus, D. and Smith, G. (1993) "Consumption and Real Exchange Rates in Dynamic Economies with Nontraded Goods", Journal of International Economics, 25. - Lewis, K. (1996), "What can explain the apparent lack of consumption risk sharing?" Journal of Political Economy 104 (April): 267-97. - Gourinchas P-O. and Jeanne, O. (2006) "The Elusive Gains from International Financial Integration", Review of Economic Studies, July 2006

MACROECONOMIC ANALYSIS AND POLICY

International Macroeconomics

Jean Imbs

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

OBJECTIVES

This course is the introduction to the literature on asset bubbles. A bubble is a deviation of an asset price from its fundamental value. We want to understand the conditions under which bubbles arise as well as their allocative consequences. The course will start with the analysis of rational bubbles in partial equilibrium. It will then examine the possibility of bubbles in general equilibrium models with overlapping generations, where they are similar to a Ponzi game and their sustainability depends on whether or not the autarkic economy is dynamically inefficient, i.e. involves excess savings. We will then move on to a more recent literature, studying the consequences of bubbles for long-term growth, their role in models of financial accelerators, and the conditions for bubbles to arise in models with boundedly rational agents. We will conclude with recent papers on the effects of monetary policy on bubbles. COURSE STRUCTURE & REFERENCES

1. Rational bubbles in partial equilibrium - Barlevy, G. (2007) "Economic theory and asset bubbles", Federal Reserve Bank of Chicago Eco. Perspectives - Blanchard, O. J., and Watson, M. W. (1982): Bubbles, Rational Expectations, and Financial Markets, in Crisis in the Economic and Financial Structure, ed. by P. Wachtel, pp. 295ñ315. Lexington, Lexington, MA. - Froot, K. and Obstfeld, M. (1991): "Intrinsic bubbles: the case of stock prices" American Economic Review 81(5) 1189-1124 - Shiller, R. J. (1981): “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review, 71, 421— 436.

2. Bubbles in overlapping Generations models and dynamic inefficiency - Abel, A., Mankiw, N. G.; Summers, L. H. and R. J. Zeckhauser (1989): "Assessing Dynamic Efficiency: Theory and Evidence" Review of Economic Studies - Cass, D. (1972), "On Capital Overaccumulation in the Aggregative Neoclassical Model of Economic Growth: A Complete Characterization", Journal of Economic Theory, 4, 200-223. - Tirole, J., 1985 "Asset bubbles and overlapping generations", Econometrica - Tirole, J. (1982): "On the Possibility of Speculation under Rational Expectations" Econometrica, 50, 1163-1182

3. Bubbles in endogenous growth models - Olivier, J., (200) "Growth-enhancing bubbles", International Economic Review, 41, 1, 133-151 - Saint-Paul, G. (1992) "Fiscal policy in an endogenous geowth model", Quarterly Journal of Economics - Saint-Paul, G. (2005), "Fiscal Policy and Economic Growth: the Role of Financial Intermediation", Review of International Economics, vol. 13, n° 3, 2005.

4. Bubbles as collateral: Financial accelerator - Caballero, R. and Krishnamurthy A. (2006) "Bubbles and capital flow volatility: Causes and risk management", Journal of Monetary Economics, 53, 35-53 - Farhi, E. Tirole and J. (2011), "Bubbly liquidity" Review of Economic Studies - Kocherlakota, N. (2009), "Bursting bubbles: Consequences and Cures" Federal Reserve Board of Minneapolis Working Paper - Martin, A. and Ventura, J. (2012), "Economic growth with bubbles", American Economic Review, 102 (6), 2012, 3033-3058 - Martin, A. and Ventura, J. (2011), "Theoretical notes on bubbles and the current crisis", IMF Economic Review 59 (1), 2011, 6-40

MACROECONOMIC ANALYSIS AND POLICY

Bubbles

Gilles Saint-Paul

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

5. Learning bubbles by boundedly rational agents

- Marcet A. & Nicolini J.P. (2008), "Stock Market Volatility and Learning" - Brock, W. A., and Hommes C. H. (1998): “Heterogeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model,” Journal of Economic Dynamics and Control, 22, 1235—1274. - Carceles-Poveda, E., and Giannitsarou, C. (2007): “Asset Pricing with Adaptive Learning,” Review of Economic Dynamics - Cecchetti, S., Lam, P.-S. and Mark, N. C. (2000): “Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?,” American Economic Review, 90, 787—805. - Bullard, J., and Duffy, J. (2001): “Learning and Excess Volatility,” Macroeconomic Dynamics, 5, 272—302. - Timmermann, A. (1993): “How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices,” Quarterly Journal of Economics, 108, 1135—1145.

6. Bubbles and monetary policy - Franklin A. and Gale, D. (2001), "Asset Price Bubbles and Monetary Policy", Wharton WP. - Bernanke, B. S., and Gertler, M. (1999) "Monetary Policy and Asset Price Volatility" in New Challenges for Monetary Policy, Kansas City: Federal Reserve Bank of Kansas City. - Bernanke, B. S., and Gertler, M. (2001) "Should Central Banks Respond to Movements in Asset Prices?" American Economic Review, May. - Filardo F., Andrew J. (2000) "Asset Prices and Monetary Policy" Federal Reserve Bank of Kansas City Economic Review, 3rd Quarter. - Galí, J., "Monetary policy and rational asset price bubbles" NBER Working Paper 18806 http://www.nber.org/papers/w18806 - Gertler, M. (1998) "Asset Prices and Monetary Policy" in Bank for International Settlements, Asset Prices and Monetary Policy: Four Views. Basle: BIS. - Weil, P. (1987), "Confidence and the real value of money in an overlapping generations economy", Quarterly Journal of Economics, 102, 1, 1-22.

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

OBJECTIVES

The purpose of this course is to provide a post-2008 perspective on the key facts and mechanisms about financial crises. The course will mix empirics with theory. The empirical facts will provide a long run perspective on the recurrence of different types of financial crises and recap on how the 2008 is (or isn't) different. The theory will be introduced through very simple canonical models, putting the emphasis on intuition and insight. The course will be concluded by a special focus on Inequality and Crises.

TOPICS AND REFERENCES

1. Financial Crises throughout history Key Issue: How often do we see crises of each type? What are their costs in the short and in the long run?

a. Definitions: banking crisis, currency crisis, and sovereign debt crises. b. 800 hundred years of financial crisis

- Reinhart, C. and Rogoff, K. (2009) “This Time is Different: Eight Centuries of Financial Folly”. Princeton U. Press

c. Systemic Banking Crises - Laeven, L. and Valencia F. (2012) "Systemic Banking Crises Database: An Update," IMF Working Papers 12/163, IMF

d. Frequency and Costs of Banking Crises.Crises and Long Run Growth - Rancière, R. ; Tornell A. and Westermann F. (2008) "Systemic Crises and Growth," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 359-406, 02

e. The 2008 crisis and ifs aftemaths: What more did we learn?

2. Key Crisis Models Key Issue: How much are crisis driven by fundamentals and/or by panic behavior?

a. Panics and Bank Runs - Diamond, D. and Dybvig, P. (1983) "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June

b. Fundamental Crises - Allen, F. and Gale, D. (2000) "Optimal currency crises," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 177-230, December - Douglas, G. and Franklin, A. (1998) "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08

c. The role of information in crises - Morris, S. and Shin, H. S. (1998), “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks,” American Economic Review, 88, 587–597

d. Asymmetric Information and Market Freeze - Kurlat, P. (2013) "Lemons Markets and the Transmission of Aggregate Shocks, "American Economic Review

MACROECONOMIC ANALYSIS AND POLICY

Financial Crises: A post-2008 Perspective

Romain Rancière

PSE SUMMER SCHOOL 2018 MACROECONOMIC ANALYSIS AND POLICY

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

3. Micro / Macro-Prudential Regulation and Policy Interventions during Crises Key Issue: How can we best prevent crises and how shall we react to their incidence?

a. Preventing Crises: Micro and Macro-Prudential Regulation.

i. Deposit Insurance - Freixas, X. and Rochet, J.C. (2008) The Microeconomics of Banking, 2nd Edition, Princeton University Press

ii. Capital Requirement - Freixas, X. and Rochet, J.C. (2008) The Microeconomics of Banking, 2nd Edition, Princeton University Press

iii. The Role of Monetary Policy - Stein, J. (2012) Monetary Policy as Financial-Stability Regulation. Quarterly Journal of Economics 127, no. 1: 57-95

b. Resolving Crises:

i. Bailouts and Restructuring - Tirole, J. (2012) "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning." American Economic Review, 102(1): 29-59

ii. Liquidity Traps - Cochrane, J. (2013) “The New-Keynesian Liquidity Trap”, mimeo University of Chicago

c. Time Inconsistency Issues.

i. Balancing Ex-ante Moral Hazard Risks and Ex-Post Efficient Crisis intervention - Keister, T. (2009) “Bank Runs and Institutions: The Perils of Intervention”, American Economic Review

4. Inequality and Crises Key Issue: Does Inequality cause Crises?

a. 1929 vs. 2008 b. Income Inequality, Wealth Inequality, and Consumption Inequality c. Propensity to Save d. Inequality Leverage and Crises

- Kumhof, M.; Rancière, R. and Winant, P. (2015) "Inequality, Leverage and Crises," American Economic Review

PSE SUMMER SCHOOL 2018 www.parisschoolofeconomics.eu

HOW TO APPLY TO THE PSE SUMMER SCHOOL 2018 Presentation Our one-week programmes are entirely run in English. Each includes a total of around 30 hours instruction and workshops and consists of different thematic courses that are complementary. You are expected to participate in all of the courses; you can follow only one programme per week, but can apply to two consecutive ones. At the end of the programme, you will receive a certificate. Each programme is equivalent to 3 ECTS (European Credit Transfer System). Students interested in this transfer should contact their universities.

Here are the links to the different programmes (lectures, Professors, schedule, prerequisites etc.):

First week - from June 18 to June 22 Second week - from June 25 to June 29

CLIMATE CHANGE

MACROECO. MICROECO. MIGRATION ECONOMICS

TRADE BOUNDED RATIONALITY

DEVELOPMENT EXPERIMENTAL ECONOMICS

HEALTH INDUSTRIAL ORGANIZATION [not offered in 2018]

Participant profiles and selection The PSE Summer School is aimed at professionals, researchers, as well as graduate students in Economics and Finance (Masters and PhD). Undergraduate students in Economics will be considered only if their profile is exceptionally strong.

To be included in your application file: • A current Curriculum Vitae in pdf format • A copy of your most advanced degree • A short motivation text

• A profile picture [not used per se in the application process] • For Students: proof of status • Optional - Letter(s) of recommendation

On www.pse-application.eu, candidates are invited to submit their applications on a rolling-basis. You can start the process whenever you want, create and save your profile step by step. Once we get your final submission, your applications file will be evaluated within 10 days until May 31, 2018 based on availability of spots in the relevant programs. Once accepted, you will be requested to pay the total fees within 30 days*. Your participation will then be confirmed, and you will receive detailed information about the courses, workshops, and social events, as well as suggestions for accommodation.

* For those applying after May 10, 2018, the payment deadline is in any case June 10, 2018.

Fees Fees include lunches and social events, as well as the welcome and the farewell cocktails. The fees do not include accommodation, transport or any other services.

Applicants not sponsored by their organizations

Fees for Students = 1200€ Fees for other Participants = 1500€

Applicants sponsored by their organizations Excluding applicants from Universities (non-sponsored fees applies)

Fees = 2000€

A 250€ discount will be offered on each additional programme. For example: if you are a student attending 2 weeks, the total fees will be 2150€

Note that PSE Alumni, Students and Members receive a 10% discount.

Cancellation policy - Confirmed participants who wish to cancel must do so in writing by email. When withdrawing from the programme, participants will have their tuition fees partially refunded as follows:

- Cancellation before May 1st, 2018: 80% refund - Cancellation before June 1st, 2018: 50% refund - Cancellation after June 1st, 2018: no refund possible

Any questions? summer-school@psemail.eu

The 2018 Edition will take place at PSE in the 14th arrondissement of Paris. A new 12500 m² building houses around 1500 researchers, students, and administrative teams of the PSE and the Ecole normale supérieure. The 1-hectare Jourdan campus offers ideal conditions: numerous classrooms and working spaces, a 300 places amphitheater, a library with more than 50000 books, a student home…

More (online) about the Jourdan Campus – google maps, gallery, video

A SUMMER ON THE JOURDAN CAMPUS…

www.parisschoolofeconomics.eu

SUMMER SCHOOL

2018, PARIS