Modelling Information, Learning and Expectations in Macroeconomics

PhD Course, Economics Department, New York University, Spring 2008

Wednesdays, 3.30-5.30, Room 736, 19 West 4th Street

Office Hours: Mondays, 2-4, Room 626, 19 West 4th Street

Overview

Many economic decisions depend on expectations about either inherently unobservable variables or about future realisations of a variable. Different theories of expectations formation will therefore have different implications for economic behavior. This course aims at equipping students with the tools needed to model two alternative theories to the full information rational expectations hypothesis: (i) Imperfectly informed, but model consistent, expectations and (ii) boundedly rational expectations, that is, expectations formed without complete knowledge of the structure of the economy. Both theories have delivered interesting results, ranging from positive predictions about the dynamics of aggregate time series and asset prices, to normative implications about the value of public information and the design of monetary policy. The substantive results from the literature will be discussed along with the specific techniques that were employed to derive them. The Kalman filter is an indispensable tool for modelling information and learning, and some time will initially be devoted to deriving the filter and exploring its properties.

Syllabus

Lecture 1 Overview and some basics
Lecture Notes 1

Lecture 2 Solving Full Information Rational Expectations Models
Lecture Notes 2
MatLab Code

Lecture 3-4 The Kalman Filter
Lecture Notes 3
Optimal Filtering, Anderson and Moore, 2005

Homework 1 (due Tuesday February 26)

Lecture 5 LQ Optimal Control with Signal Extraction From Endogenous Variables
Optimal Monetary Policy with Real Time Signal Extraction from the Bond Market , Nimark (2007)
and
Indicator variables for optimal policy under assymmetric information, Svensson and Woodford, (JEDC 2004)
Slides

Lecture 6 Higher Order Expectations and Forecasting the Forecast of Others
Forecasting the Forecasts of Others, Townsend, (JPE 1983)
Social Value of Public Information, Morris and Shin, (AER 2002)
Slides

Lecture 7 Solving Models with Private Information and Strategic Interaction
Imperfect Common Knowledge and the Effects of Monetary Policy, Woodford (2002)
Dynamic Higher Order Expectations, Nimark (2007)
Slides

Lecture 8 The Information Revealed by Market Outcomes
Forecasting the Forecasts of Others, Townsend, (JPE 1983)
Equilibrium with Signal Extraction from Endogenous Variables, Sargent, (JEDC 1991)
Forecasting teh Forecasts of Others in the frequency Domain , Kasa, (RED 2000)
Knowing the Forecasts of Others,Pearlman and Sargent, (RED 2005)
Invertible and Non-Invertible Information Sets in Dynamic Stochastic General Equilibrium, Baxter, Graham and Wright, (2008)
Slides

Lecture 9 Policy and Private Information
Optimal Monetary Policy and Imperfect Common Knowledge, Adam, (JME 2007)
Optimal Monetary Policy with Uncertain Fundamentals and Dispersed Information, Lorenzoni, (2008)
Policy with Dispersed Information, Angeletos and Pavan, (2007)
Slides

Lecture 10 Bounded Rationality and Learning: The Basics
Learning and Expectations in Macroeconomics, Ch 1-4, Evans and Honkapohja (2001)
Optimal Filtering, Section 3.3, Anderson and Moore, 2005
Slides

Lecture 11 Learning and Policy Makers' Models
The Conquest of American Inflation, Sargent (1999)
Learning and Model Validation, Cho and Kasa (2007)
Slides

Lecture 12 Learning Induced Dynamics
Expectations, Learning and Macroeconomic Persistence, Milani, JME (2001)
Learning in Financial Markets Generates Excess Volatility and and Predictability in Stock Prices, Timmermann, QJE (1993)
Slides

Lecture 13 Course Review and Wrap-up
Slides