Macroeconomy and Capital Markets

1. Frictionless benchmark (a) Capital market and financial market (b) Representation (c) Ownership of capital 2. Real friction (a) Time to build (b) Convex adjustment cost (c) Fixed adjustment cost (d) Partial irreversibility (e) Capital misallocation (f) The business cycle implications (g) Student Presentation: • Lucas (1967) • Abel (1983) • Khan and Thomas (2008) • Asker, Collard-Wexler, and De Loecker (2014) 3. Financial friction (a) Student Presentation: • Diamond and Dybvig (1983) • Bernanke and Gertler (1989) • Kiyotaki and Moore (1997) (b) Corporate saving glut 4. Entry, exit, and entrepreneurship (a) Entry and exit (b) Occupation choice and labor supply (c) Student Presentation: • Lucas (1978) • Clementi and Palazzo (2016) 5. Intangible capital (a) Modelling intangible capital (b) Measurement (c) Intangibles and firm-level finance (d) Student Presentation: • Crouzet and Eberly (2021)

Lecture on basic theory + Student presentation and discussion

Homework (50%) – Analytical questions – Replication of Khan and Thomas (2008) without the aggregate uncertainty. – Replication of Khan and Thomas (2008) with the aggregate uncertainty: Bonus credit (+ 20%) Presentation (30%) – A student needs to select a paper on the list below and present the summary of the paper during the class. Students can form a group to present a single paper. The presenters are expected to present the work as if him/herself is the author of the paper. The assignment of the paper will be first-come, first-served. * Lucas (1967) * Abel (1983) * Khan and Thomas (2008) * Asker, Collard-Wexler, and De Loecker (2014) * Diamond and Dybvig (1983) * Bernanke and Gertler (1989) * Kiyotaki and Moore (1997) * Lucas (1978) * Clementi and Palazzo (2016) * Crouzet and Eberly (2021) – Students are required to visit my office at least once to discuss the paper before the presentation. The meeting will take around 30 mins, and the discussion will be about 1) the core message of the paper, 2) the qualitative evaluation of the paper’s contribution to the literature, and 3) the contents to be presented during the class. To schedule a meeting, please write an email to me. Research proposal (20%) – A short proposal (2-3 pages) that includes basic figures or tables that sharply highlight the research plan.

Ljungqvist and Sargent (2018) (“LS”) Recursive Macroeconomic Theory, 4th ed, MIT Press. Stokey, Lucas and Prescott (1989) (“SLP”) Recursive Methods in Economic Dynamics, Harvard University Press.

ABEL, A. B. (1983): “Optimal Investment Under Uncertainty,” American Economic Review, 7. ASKER, J., A. COLLARD-WEXLER, AND J. DE LOECKER (2014): “Dynamic Inputs and Resource (Mis)Allocation,” Journal of Political Economy, 122, 1013–1063. BERNANKE, B. AND M. GERTLER (1989): “Agency Costs, Net Worth, and Business Fluctu- ations,” American Economic Review, 19. CHANG, Y. AND S.-B. KIM (2007): “Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations,” American Economic Review, 97, 1939–1956. CLEMENTI, G. L. AND B. PALAZZO (2016): “Entry, Exit, Firm Dynamics, and Aggregate Fluctuations,” American Economic Journal: Macroeconomics, 8, 1–41. CROUZET, N. AND J. EBERLY (2021): “Intangibles, markups, and the measurement of pro- ductivity growth,” Journal of Monetary Economics, 124, S92–S109. DIAMOND, D. W. AND P. H. DYBVIG (1983): “Bank Runs, Deposit Insurance, and Liquid- ity,” JOURNAL OF POLITICAL ECONOMY, 19. KHAN, A. AND J. K. THOMAS (2008): “Idiosyncratic Shocks and the Role of Nonconvexi- ties in Plant and Aggregate Investment Dynamics,” Econometrica, 76, 395–436. KIYOTAKI, N. AND J. MOORE (1997): “Credit Cycles,” The Journal of Political Economy, 105, 211–248. LEE, H. (2022): “Striking While the Iron Is Cold: Fragility after a Surge of Lumpy Invest- ments,” Working Paper, 68. LUCAS, R. E. (1967): “Adjustment Costs and the Theory of Supply,” Journal of Political Economy, 75, 321–334. ——— (1978): “On the Size Distribution of Business Firms,” The Bell Journal of Economics, 17. QUADRINI, V. (2009): “Entrepreneurship in macroeconomics,” Annals of Finance, 5, 295– 311. WINBERRY, T. (2021): “Lumpy Investment, Business Cycles, and Stimulus Policy,” Ameri- can Economic Review, 111, 364–396.

Pre-requisite • A first-year Ph.D.-level macroeconomics. • Basic dynamic programming skills. – Homework requires replication of computational results of well-known papers. – Any computational language is welcomed, but the solution will be given in MATLAB. Auditing Permission is needed from the instructor to sit in on the class. Auditing students are re- quired to participate in the class by fulfilling all the requirements specified below.