Business Cycle Theory and Policy (Tutorial)

The course introduces students to two modern theories of business cycles: Real Business Cycle theory and New Keynesian theory. A standard Real Business Cycle model will be formally stated and solved. Afterwards, a standard New Keynesian model will be formally stated and solved. Finally, we are going to use these two models for policy analysis. Students are supposed to learn how to state and solve modern business cycle models.

Instructors: Prof. Dr. A. Meyer-Gohde (exception: Prof. Dr. M. Trabandt in Fall 2021) Dates: Fall 2020, Fall 2021

Textbook King, Robert, and Sergio Rebelo (2000): “Resuscitating Real Business Cycles,” In Handbook of Macroeconomics, edited by John Taylor and Michael Woodford, volume 1B, North-Holland.

Course Outline Part I: Real Business Cycle Theory

1. Stating a standard RBC model
2. The problem of the representative firm
3. The problem of the representative household
4. Log-linearizing the equations characterizing equilibrium
5. Applying a solution method for linear rational expectations models
6. The equilibrium responses to an aggregate technology shock Part II: New Keynesian Theory
7. Stating a standard New Keynesian model
8. The problem of the representative household
9. The price setting problem of firms
10. Log-linearizing the equations characterizing equilibrium
11. The New Keynesian Phillips curve
12. Applying a solution method for linear rational expectations models
13. The equilibrium responses to a monetary policy shock
14. The equilibrium responses to an aggregate technology shock