Recursive Macroeconomic Theory, Third Edition

by Lars Ljungqvist and Thomas J. Sargent

ISBN: 9780262312004 | Copyright 2012

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Recursive methods offer a powerful approach for characterizing and solving complicated problems in dynamic macroeconomics. Recursive Macroeconomic Theory provides both an introduction to recursive methods and advanced material, mixing tools and sample applications. Only experience in solving practical problems fully conveys the power of the recursive approach, and the book provides many applications. This third edition offers substantial new material, with three entirely new chapters and significant revisions to others. The new content reflects recent developments in the field, further illustrating the power and pervasiveness of recursive methods.

New chapters cover asset pricing empirics with possible resolutions to puzzles; analysis of credible government policy that entails state variables other than reputation; and foundations of aggregate labor supply with time averaging replacing employment lotteries. Other new material includes a multi-country analysis of taxation in a growth model, elaborations of the fiscal theory of the price level, and age externalities in a matching model.

The book is suitable for both first- and second-year graduate courses in macroeconomics and monetary economics. Most chapters conclude with exercises. Many exercises and examples use Matlab programs, which are cited in a special index at the end of the book.

Lars Ljungqvist and Thomas Sargent’s book provides comprehensive, how-to-do-it coverage of the methods of modern macroeconomic dynamics, illustrated with dozens of applications to real economic problems. It is both an encyclopedic, up-to-date reference and a practical teaching tool.

Robert Lucas University of Chicago; Nobel Laureate in Economic Sciences, 1995

I have used this book repeatedly in teaching first year graduate macroeconomics and it is truly a tour-de-force. It presents the issues in a clear way, analyzes them with precise mathematics, and, importantly, has exciting problems that are just begging for smart students to solve them. Graduate students that carefully read this book and do every exercise can call themselves well-educated in modern macroeconomics. All serious practicing macroeconomists should have a copy of this book on their shelves, and its pages should be well-worn.

Patrick Kehoe Department of Economics, University of Minnesota
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Contents (pg. 5)
Acknowledgments (pg. 19)
Preface to the third edition (pg. 20)
Part I The imperialism of recursive methods (pg. 37)
Chapter 1 Overview (pg. 39)
Part II Tools (pg. 63)
Chapter 2 Time Series (pg. 65)
Chapter 3 Dynamic Programming (pg. 139)
Chapter 4 Practical Dynamic Programming (pg. 149)
Chapter 5 Linear Quadratic Dynamic Programming (pg. 163)
Chapter 6 Search, Matching, and Unemployment (pg. 195)
Part III Competitive equilibria and applications (pg. 261)
Chapter 7 Recursive (Partial) Equilibrium (pg. 263)
Chapter 8 Equilibrium with Complete Markets (pg. 287)
Chapter 9 Overlapping Generations Models (pg. 351)
Chapter 10 Ricardian Equivalence (pg. 399)
Chapter 11 Fiscal Policies in a Growth Model (pg. 412)
Chapter 12 Recursive Competitive Equilibria (pg. 492)
Chapter 13 Asset Pricing Theory (pg. 518)
Chapter 14 Asset Pricing Empirics (pg. 552)
Chapter 15 Economic Growth (pg. 620)
Chapter 16 Optimal Taxation with Commitment (pg. 650)
Part IV The savings problem and Bewley models (pg. 734)
Chapter 17 Self-Insurance (pg. 736)
Chapter 18 Incomplete Markets Models (pg. 762)
Part V Recursive contracts (pg. 810)
Chapter 19 Dynamic Stackelberg Problems (pg. 812)
Chapter 20 Insurance Versus Incentives (pg. 834)
Chapter 21 Equilibrium without Commitment (pg. 896)
Chapter 22 Optimal Unemployment Insurance (pg. 950)
Chapter 23 Credible Government Policies, I (pg. 974)
Chapter 24 Credible Government Policies, II (pg. 1022)
Chapter 25 Two Topics in International Trade (pg. 1042)
Part VI Classical monetary and labor economics (pg. 1080)
Chapter 26 Fiscal-Monetary Theories of Inflation (pg. 1082)
Chapter 27 Credit and Currency (pg. 1130)
Chapter 28 Equilibrium Search and Matching (pg. 1166)
Chapter 29 Foundations of Aggregate Labor Supply (pg. 1240)
Part VII Technical appendices (pg. 1292)
Appendix A. Functional Analysis (pg. 1294)
Appendix B. Linear projections and hidden Markov models (pg. 1306)
References (pg. 1312)
Subject Index (pg. 1346)
Author Index (pg. 1352)
Matlab Index (pg. 1358)

Lars Ljungqvist

Lars Ljungqvist is Professor of Economics at the Stockholm School of Economics.

Thomas J. Sargent

Thomas J. Sargent is Berkley Professor of Economics and Business at New York University and Senior Fellow at the Hoover Institution. He was the recipient of the 2011 Nobel Prize in Economics.

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