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The course provides an introduction to real business cycle theory and the New-Keynesian approach modelling nominal frictions and analysing monetary policy. Consumption smoothing is the key part of the mechanism in both models. Therefore, the consumption-savings decision is studied thoroughly. The standard model and the concepts are introduced using a two-period model, which is then extended to the infinite horizon. The simple two-period model is used to study household behaviour under borrowing constraints. The household problem is extended to cover both the consumption-savings decision and the labour supply decision. The effect of taxation is examined. The firms’ problem relies on the Cobb-Douglas specification of the production function. Investment behaviour both in the frictionless economy and in the economy with the investment adjustment cost is studied. The dynamic optimisation relies on the Lagrange multiplier method.

The above modelling ingredients are put together to make a complete general equilibrium macroeconomic model, the real business cycle (RBC) model. The propagation of technology shocks is studied using the model. The model is augmented by imperfect competition and price rigidities. These are introduced and their impact is analysed stepwise. The complete model is called the New-Keynesian model, which facilitates analysing monetary policy.

The course extends the analysis of Macroeconomics 1 to infinite horizon setting. It provides an introduction to the real business cycle theory and to the New-Keynesian approach modelling nominal frictions and analyzing monetary policy. Households’ consumption behavior is emphasized since it is the key part of the mechanism in both models. Firms’ investment and labor demand behavior is studied. The dynamic optimization relies on the Lagrange multiplier method. The above modelling ingredients are put together to make a complete general equilibrium macroeconomic model, the real business cycle (RBC) model. The propagation of technology shocks is studied using the model and the mechanisms therein. The New-Keynesian model augments the real business cycle model with imperfect competition and price rigidities. It is used to analyze monetary policy. Economic growth part introduces endogenous growth model and human capital and their impact on the economic growth. The course also covers the basics of an overlapping-generation model and labor market frictions.

  • Completion method: contact teaching
  • Schedule: can be found in Course Page and Sisu
  • Study materials: can be found in Moodle
    • Tips for enrolling in a Moodle course area can be found here

Please register for the course in the UH Sisu with your UH username, further instructions can be found here.

    • Code: no equivalent code
    • Target groups: MSc (not suitable for PhD students)
    • Credit points: 5
    • Credit transfer: apply for inclusion in Sisu
    • Code: 2694
    • Target groups: MSc (not suitable for PhD students)
    • Credit points: 5 cr
    • Credit transfer: apply for substitution in Sisu
    • Code: ECOM-G313

    • Target groups: MSc (not suitable for rMSc and PhD students)

    • Credit points: 5

    • Not suitable for PhD students

After the course, the student should:

  • Understand the life-cycle motives of consumption and saving decisions 
  • Understand how uncertainty affects households’ decision.
  • Be familiar with the q-theory of investments
  • Be able to set up a real business cycle model and understand the role of technology in business cycles
  • Understand how to introduce a micro-founded upward-sloping Phillips curve
  • Be able to describe the transmission of monetary policy in a New-Keynesian model
  • Be able to extend the basic Solow model, for example, to education and natural resources
  • To understand how human capital and innovation affects economic growth.
  • To understand frictions in the labor market and the sources of unemployment