Macroeconomics III (Frictions and Resource Allocation)

Key macro indicators— unemployment, GDP, and productivity growth— may not follow the optimal paths determined in a frictionless economy. Recent models are much more careful in dealing with frictions agents face in reality, such as entry and exit fees, delays in finding transaction partners, information asymmetries, and limited contract enforcement. In this course, we explore the implications of heterogeneous agents facing various frictions that frustrate the allocation of resources in labor, capital and product markets.
By studying these models, students not only learn key aspects of three important topics in macroeconomics, namely labor market developments, business cycle analysis, and long-run growth, but also key building blocks that are useful by themselves.
We briefly discuss empirical regularities observed in the data regarding labor markets, firm demographics and productivity growth. After highlighting the difficulties of standard models to explain these regularities, we explore recent modifications. We start the labor market and discuss different ways to model how agents search, match, and bargain over prices. More specific examples are wage posting, Nash bargaining, and directed search. Next we turn to growth models of heterogeneous firms and study the implications of frictions for static and dynamic efficiency. Special attention will be paid to frictions in capital investment.