Krussel

Lecture notes for Macroeconomics I, 2004

Per Krusell

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Chapter 1
Introduction
These lecture notes cover a one-semester course. The overriding goal of the course is to begin provide methodological tools for advanced research in macroeconomics. The emphasis is on theory, although data guides the theoretical explorations. We build entirely on models with microfoundations, i.e., models where behavior is derived from basic assumptions on consumers’ preferences, production technologies, information, and so on.
Behavior is always assumed to be rational: given the restrictions imposed by the primitives, all actors in the economic models are assumed to maximize their objectives.
Macroeconomic studies emphasize decisions with a time dimension, such as various forms of investments. Moreover, it is often useful to assume that the time horizon is infinite. This makes dynamic optimization a necessary part of the tools we need to cover, and the first significant fraction of the course goes through, in turn, sequential maximization and dynamic programming. We assume throughout that time is discrete, since it leads to simpler and more intuitive mathematics.
The baseline macroeconomic model we use is based on the assumption of perfect competition. Current research often departs from this assumption in various ways, but it is important to understand the baseline in order to fully understand the extensions. Therefore, we also spend significant time on the concepts of dynamic competitive equilibrium, both expressed in the sequence form and recursively (using dynamic programming). In this context, the welfare properties of our dynamic equilibria are studied.
Infinite-horizon models can employ different assumptions about the time horizon of each economic actor. We study two extreme cases: (i) all consumers (really, dynasties) live forever - the infinitely-lived agent model -