Welcome to Econ 229! Posted below are course information, reading list, and various supplemental materials.

• The class is not offered in 2009-2010.

Changes will be posted throughout the quarter. Please check before class.
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General Information
Econ 229 is a second-year Ph.D. class. Econ 204A&B or equivalent preparation is required.

The class meets TR 2:00-3:15, NH 2111.
My office is open to graduate students any time. Official office hours are TR 3:30-4:30.

The class requirements are (a) active participation and leadership in class discussions, (b) research paper, and (c) final exam. Details TBA.

Econ 229 will focus on three areas in the area of fiscal and monetary policy: (1) government budget constraints and government solvency; (2) optimal tax policy; (3) time-consistency and political-economy issues. We first examine these issues in a series of models, first deterministic, then -- after a digression into asset pricing -- in stochastic models.   

Notes on Readings
Most readings are journal articles and working papers. There is no required textbook. Recommended are:

1.    Lars Ljungqvist and Thomas Sargent, Recursive Macroeconomic Theory, MIT Press.
2.    Carl Walsh, Monetary Theory and Policy, MIT Press.
3.    David Romer, Advanced Macroeconomics, McGraw-Hill.

All three books are reserved at the RBR. Articles are either available online (see link) or in a course folder in the Econ graduate office (indicated by "Folder" in the reading list).
Some of the online links rely on UCSB site licences and may not work from an off-campus server. Regretably, links sometimes vanish; therefore: Please let me know if a link does not work or if an article is suddenly unavailable.

Organization
In many class sessions, one of you will serve as discussion leader. Everyone is expected to do the assigned required readings before class and be prepared to lead the discussion. Discussion leaders are selected at random. I usually summarize recommended/optional articles and present my own papers.

Leading a discussion means to present the reading as well as you can with reasonable preparation. That is, a good presentation should (a) give a concise summary of 'straightforward' sections and (b) identify sections you find difficult, so class discussion can focus on the latter. Put differently, if you know the reading well enough to ask good questions, you are not expected to know the answers.

The exam is about the literature covered in class.

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Course Outline and Reading List
Articles marked with a dot (•) are required readings. All other articles are optional, either background readings or references to related works. Assignments tend to change as the quarter proceeds. So don't print this page; rather bookmark it and check before each class.

Introduction (Class #1 - Sept.25)
- Romer, Advanced Macroeconomics, ch.11.1-4. Recommended.

Part A: Deterministic Models

A1. The Government Budget

The Intertemporal Budget Constraint (Class #2 - Sept.30)
• Ljungqvist/Sargent, Recursive Macroeconomic Theory, ch.10. [RBR] Read before class; I will summarize. Notes (now with corrections)
• O'Connell and Zeldes, 1988, Rational Ponzi Games, International Economic Review 29, 431-450. Be prepared to lead discussion. (For reference: Notes from 204A)

Monetization (Class #3a - Oct.2)
• For motivation: US budget data.
• Walsh, Monetary Theory and Policy, ch.4, pp.136-142. [Folder/RBR] Read before class; I will summarize. Notes

Government Budgets (Class #3b - Oct.7)
• continue with Walsh.
• McCallum, Bennett, 1984, Are Bond-financed Deficits Inflationary? A Ricardian Analysis, Journal of Political Economy 92, 123-135. Read before class; I will summarize.

Measurement - Balance Sheets and Generational Accounts (Class #4 - Oct.9)
• US Budget, Analytical perspectives, ch.13 (Stewartship), pp.179-196. Read before class; I will summarize.
- Jagadeesh Gokhale and Kent Smetters, 2005, Fiscal and Generational Imbalances: An Update, working paper. [Folder] Optional; I will summarize.
• Auerbach, Gokhale, Kotlikoff, 1994, Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy, The Journal of Economic Perspectives 8, pp. 73-94. Be prepared to lead discussion.
- Auerbach, Kotlikoff, and Leibfritz, 1999, Generational Accounting around the World, University of Chicago, ch.4. [Folder] Recommended; I will summarize.
- Bohn, 1992, Budget Deficits and Government Accounting, Carnegie-Rochester Conference Series on Public Policy 37, 1-84. Optional.

A2. Optimal Policy with Commitment

Ramsey Taxation (Classes #5-6 - Oct.14&21)
• Ljungqvist/Sargent, Recursive Macroeconomic Theory, ch.15, pp. 478-496. Read carefully!
• Chamley, 1986, Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives, Econometrica 54, 607-622. Be prepared to lead discussion; read Ljungvist/Sargent's summary first.
- Barro, Robert, 1979, On the Determination of Public Debt, Journal of Political Economy 87, 940-971. Optional: classic optimal tax paper.

A3. Time Inconsistency and Political Economy

The Time Consistency Problem (Class #7 - Oct.23)
• Fischer, 1980, Dynamic Inconsistency, Cooperation, and the Benevolent Dissembling Government, JEDC. Be prepared to lead discussion.
Continued Oct.28:
• Kydland and Prescott, 1977, Rules Rather Than Discretion: The Inconsistency of Optimal Plans, Journal of Political Economy 85, 473-491. Be prepared to lead discussion.

Monetary models (Class #8 - Oct.28)
- Walsh, Monetary Theory and Policy, ch.8, 363-385. [Folder/RBR] Recommended: summarizes Barro-Gordon model. (Optional: pp. 385-425 [RBR only]: reviews 'solutions' to the inconsistency problem.)
• Barro and Gordon, 1983, A Positive Theory of Monetary Policy in a Natural Rate Economy, Journal of Political Economy 91, 589-610. Be prepared to discuss; read Walsh's summary first.
- Calvo, 1988, Servicing the Public Debt: The Role of Expectations, American Economic Review 78, 647-661. Optional: I will summarize.

Political Economy (Class #9 - Oct.30)
• Persson and Svensson, 1989, Why a Stubborn Conservative would run a Deficit: Policy with Time-Inconsistent Preferences, Quarterly Journal of Economics. Be prepared to lead discussion.
- Alesina and Tabellini, 1990, Voting on the Budget Deficit, American Economic Review 80, 37-49. Optional: another classic paper.
- Cukierman and Meltzer, 1989, A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework, American Economic Review 79, 713-732.  Optional: I will summarize.

Part B: Stochastic Models

B1.  Asset pricing, with applications to public debt

Asset pricing (Class #10 - Nov.4)
• Ljungqvist/Sargent, Recursive Macroeconomic Theory, ch.8.1-8.9, ch.12.1-5, ch.13.1-13.2 & 13.5-8. Read before class; I will present.

The Intertemporal Budget Constraint (Class #11 - Nov.6)
• Bohn, 1995, The Sustainability of Budget Deficits in a Stochastic Economy, Journal of Money, Credit, and Banking 27, February 1995, 257-271. Read before class; I will summarize.
• Abel, Mankiw, Summer, and Zeckhauser, Assessing Dynamic Efficiency: Theory and Evidence, Review of Economic Studies 56, 1989, 1-20. Be prepared to lead discussion.
- Ljungqvist/Sargent, Recursive Macroeconomic Theory, ch.13.10-12. Recommended; I will summarize.
- Trabandt/Uhlig, 2005, How Far Are We From The Slippery Slope? The Laffer Curve Revisited, working paper, Humboldt University Berlin. [Folder] Assignment TBA.

Econometrics of debt policy (Class #12 - Nov.13-18)
• Notes for class.
• Bohn, 2008, The Sustainability of Fiscal Policy in The United States, Sec.2.1-2.4. [Folder] Read before class; I will summarize.
• Bohn, 2007, Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint? Journal of Monetary Economics 54, 1837–1847. Recommended; I will summarize.
- Hamilton, James, and Majoree Flavin, 1986, On the Limitations of Government Borrowing: A Framework for Empirical Testing, American Economic Review 76, 808-819.  Recommended: classic paper.

 
Fiscal Reaction Functions (Class #13 - Nov.25)
• Notes for class.
• Bohn, 2008, The Sustainability of Fiscal Policy in The United States, Sec.2.5ff. [Folder] Read before class; I will summarize.
- Bohn, 1998, The Behavior of U.S. Public Debt and Deficits, The Quarterly Journal of Economics 113. Recommended; background for 2008 paper.
- Mendoza and Ostry, 2007, International Evidence on Fiscal Solvency: Is Fiscal Policy “Responsible”? NBER Working Paper 12947. Recommended; I will summarize.
- Celasun, Debrun, and Ostry, 2006, Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A “Fan-Chart” Approach, IMF working paper. Recommended; I will summarize.

B2. Optimal policy in infinitely-lived agent models

Ramsey Taxation (Classes #14-15 - Dec.2&4)
- Ljungqvist/Sargent, Recursive Macroeconomic Theory, ch.15, pp. 497-527. Recommended: Summarizes several articles listed below.
•  Chari, V.V., Larry Christiano, and Patrick Kehoe, 1994, Optimal Fiscal Policy in a Business Cycle Model, Journal of Political Economy 102, August 1994, 617-652. Be prepared to lead discussion; read Ljungvist/Sargent's summary first.
- Bohn 1994, Optimal State-Contingent Capital Taxation: When is there an Indeterminacy? Journal of Monetary Economics 34, 125-137. Read before class; I will summarize.
• Lucas, Robert, and Nancy Stokey, 1983, Optimal Fiscal and Monetary Policy in an Economy without Capital, Journal of Monetary Economics 12, 55-93. Be prepared to lead discussion; read Ljungvist/Sargent's summary first.
- Aiyagari et al, Optimal Taxation without State Contingent Debt, Journal of Political Economy 110, 2002. Optional (time permitting): Good paper, also summarized in Ljungvist/Sargent.

Debt management (Class #16 - Dec.4)
• Persson, Persson, and Svensson, 2006, Time Consistency of Fiscal and Monetary Policy: A Solution, Econometrica 74, 193–212. Recommended; I will summarize.
- Bohn, 1990, Tax-Smoothing with Financial Instruments, American Economic Review 80,
December 1990, 1217-1230. Recommended; I will summarize.
- Bohn, 1988, Why Do we Have Nominal Government Debt? Journal of Monetary Economics 21, 127-140. Recommended; I will summarize.
• Cole, Harold, and Patrick Kehoe, 2000, Self-Fulfilling Debt Crises, Review of Economic Studies 67, 91-116. Assignment TBA.

Dynamic Mirrlees taxation
(omit - if the topic interests you, best talk to Marek)

B3. Optimal policy in overlapping generations models

Intergenerational Risk Sharing
• Bohn, 2007, Intergenerational Risk Sharing and Fiscal Policy, working paper. Read before class; I will summarize.
- Peled, Informational diversity over time and the optimality of monetary equilibria, Journal of Economic Theory 28, 1982, 255-274. Optional; I will summarize..
Political Economy (Class #18b - Dec.4)
- Cooley, Thomas, and Jorge Soarez, 1999, A Positive Theory of Social Security Based on Reputation, Journal of Political Economy 107, 135-160. Recommended; I will summarize.
- Bohn, 1999, Will Social Security and Medicare Remain Viable as the U.S. Population is Aging? Carnegie-Rochester Conference Series 50, 1-53. Optional; I will summarize.

Final exam: Dec.10, 4-6pm.

This page and the resources above are for UCSB students only. © Henning Bohn 2004-08
Please send any comments to bohn@econ.ucsb.edu