Advanced Macroeconomics Course: Social learning and Intelligent Design Ramon Marimon

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1 European University Institute Department of Economics Winter and Spring 2008 Advanced Macroeconomics Course: Social learning and Intelligent Design Ramon Marimon This is a course for second and more advanced researchers or post-docs in economics. The course will take the form of a Reading Group meeting regularly usually, on a weekly basis through the second and third terms and all participants will have to present a paper at least once. It is also designed as a Course in that participants presentations will be combined with lectures and will fulfill the requirements of a full credit advanced course (e.g., the 20 hours requirement and a paper as additional course requirement for those taking it for credit). More specifically, it is planned to run from the start of the Block III at the beginning of January and end with the Advanced Block I in mid April. Its title (and not only the title) borrows from Thomas Sargent s 2008 American Economic Association presidential address Evolution and Intelligent Design. It also borrows from Jose Luis Borges the idea that to write a good short story you need to have a good start and an end. The start is a discussion of 2008 AEA presidential address, with its references to the main contributions of an ongoing research agenda. This will set the stage for the rest of the course; in particular, depending on participants interests, more attention will be made to different parts or extensions of the paper. My emphasis on (social) learning and my interests beyond monetary theory will also count at this point. The course will end more precisely, it will have an aftermath with Sargent s Max Weber Lecture on April 16, 2008 (a recast of his presidential address) and a special session with the surviving members of the course. Although, as it often happened to Borges, our exploration may push us beyond the frame of this foreseen end

2 Provisional outline and readings 1. Reassessing rational expectations: from adaptive learning to self-confirming equilibrium Adam, Klaus, Albert Marcet, and Juan Pablo Nicolini Learning and Stock Market Volatility. Computing in economics and finance 2006, Society for Computational Economics. Allen, Franklin, Stephen Morris, and Hyun Song Shin Beauty Contests and Iterated Expectations in Asset Markets. Review of Financial Studies 19 (3): Branch, William A. and George W. Evans Intrinsic heterogeneity in expectation formation. Journal of Economic Theory 127 (1):264{ Brunnermeier, Markus K. and Jonathan A. Parker Optimal Expectations. American Economic Review 95 (4): Evans, George W. and Seppo Honkapohja Learning and Expectations in Macroeconomics. Princeton University Press. Fudenberg, Drew and David K. Levine Self-Confirming and the Lucas Critique. Unpublished manuscript, Harvard University and Washington University. Kalai, Ehud and Ehud Lehrer Rational Learning Leads to Nash Equilibrium. Econometrica 61 (5): Lucas, Robert E., Jr. 1972a. Econometric Testing of the Natural Rate Hypothesis. In The Econometrics of Price Determination: Conference, October 30-31, edited by Otto Eckstein. Washington, D.C.: Board of Governors, Federal Reserve System. Lucas, Robert E., Jr.1972b. Expectations and the neutrality of money. Journal of Economic Theory 4 (2): Marcet, Albert and Juan P. Nicolini Recurrent Hyperinations and Learning. American Economic Review 93 (5):1476{1498. Marimon, Ramon Learning from Learning in Economics. In Advances in Economics and Econometrics: Theory and Applications, edited by David Kreps and Kenneth Wallis. Cambridge University Press. Pearlman, Joseph G. and Thomas J. Sargent Knowing the Forecasts of Others. Review of Economic Dynamics 8 (2):

3 Sargent, Thomas, Noah Williams, and Tao Zha. 2006a. The Conquest of South American Inflation. Nber working papers, National Bureau of Economic Research, Inc. Sargent, Thomas J The Conquest of American Inflation. Princeton University Press. Sargent, Thomas J Evolution and Intelligent Design 2008 American Economic Association presidential address Townsend, Robert M Forecasting the Forecasts of Others. Journal of Political Economy 91 (4): Social and reinforcement learning Sandroni, Alvaro Do Markets Favor Agents Able to Make Accurate Predictions? Econometrica 68:1303{1342. Young, H. Peyton Strategic Learning and its Limits. Oxford and New York: Oxford University Press. The Arne Ryde Memorial Lectures Series Meyn, S. P Control Techniques for Complex Networks. To appear, Cambridge University Press. Marimon, Ramon, Ellen McGrattan, and Thomas J. Sargent Money as a medium of exchange in an economy with artificially intelligent agents. Journal of Economic Dynamics and Control 14 (2): Piketty Thomas : «Self-fulfilling beliefs about social status», Journal of public economics, vol. 70, no 1, 1998, p Learning and modeling: anticipated utility, the economics of ideas, and model validation Cho, In-Koo and Kenneth Kasa Learning and Model Validation. University of Illinois. Hansen, Lars Peter Beliefs, Doubts and Learning: Valuing Economic Risk. American Economic Review, Papers and Proceedings 97 (2):1-30. Kreps, David M Anticipated Utility and Dynamic Choice. In Frontiers of Research in Economic Theory: The Nancy L. Schwartz Memorial Lectures, Cambridge University Press. Sims, Christopher A Projecting Policy E_ects with Statistical Models. Revista de Analsysis Economico 3:3-20.

4 4. On limited commitment and recursive contracts Abreu D., D. Pierce and E. Stachetti. Towards a Theory of Discounted Repeated Games with Imperfect Monitoring, Econometrica, 58, (1990). Alvarez, F. and U. J. Jermann. Efficiency, Equilibrium, and Asset Pricing with Risk of Default, Econometrica, 68, (2000). Cooley, Thomas, Ramon Marimon and Vincenzo Quadrini Aggregate Consequences of Limited Contract Enforceability, Journal of Political Economy, v.112(4), Hopenhayn, H.A. and J.P. Nicolini, Optimal Unemployment Insurance Journal of Political Economy, 105(2), pp , (1997) Kehoe, P. J. and F. Perri. International Business Cycles with Endogenous Incomplete Markets, Econometrica, 70, (2002) Kocherlakota, N.R. Implications of Efficient Risk Sharing without Commitment, Review of Economic Studies, 63, (1996). Krueger, D. and Perri, F Does income inequality lead to consumption inequality? Evidence and theory. Review of Economic Studies 73, Marcet A., and R. Marimon. Communication, Commitment and Growth, Journal of Economic Theory, 58, (1992). Marcet, Albert and Ramon Marimon 2005 Recursive Contracts Marimon, Ramon and Vincenzo Quadrini Competition, Innovation and Growth with Limited Commitment Perry, Fabrizio Default and enforcement constraints The New Palgrave Dictionary of Economics, 2nd edition, edited by S. Durlauf and L. Blume, Palgrave Macmillan (Basingstoke and New York) Phelan, Christopher and Ennio Stacchetti Sequential Equilibria in a Ramsey Tax Model. Econometrica 69 (6): New dynamic public finance Golosov, Mikhail, Narayana Kocherlakota, and Aleh Tsyvinski Optimal Indirect and Capital Taxation. Review of Economic Studies 70 (3):569{587.

5 Golosov, Mikhail, Aleh Tsyvinski, and Ivan Werning New Dynamic Public Finance: A User's Guide. NBER Macroeconomics Annual Kocherlakota, Narayana R Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation. Econometrica 73 (5): Pavoni, Nicola and Gianluca Violante Optimal Welfare-to-Work Programs. Review of Economic Studies 74 (1): Werning, Ivn Tax smoothing with redistribution. Staff Report 365, Federal Reserve Bank of Minneapolis. Available at