advanced topics in macroeconomic theory and policy
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Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Faculty Development Program
ADVANCED TOPICS IN MACROECONOMIC THEORY AND POLICY
06th March to 14th March 2020
The Department of Business Economics and Teaching Learning Centre (under
PMMMNMTT), Ramanujan College, University of Delhi organized a One Week
Faculty development program on “Advanced Topics in Macroeconomic Theory and
Policy” from 06th to 14th March, 2020. Around 31 participants (young research
scholars and Assistant Professors of colleges and universities) from different parts of
the country and across varied disciplines such as Economics, Commerce, Business and
Management participated in the workshop.
Day 1: 06th March, 2020 (Friday)
Inaugural Session
The Inaugural Session of the Faculty Development Program on ‘Advanced Topics in
Macroeconomic Theory and Policy’ was held on Friday, 6th March, 2020 from 9.30 a.m.
to 10 a.m. at Room No. 115, Arts Faculty Building, University of Delhi South Campus,
presided over by Prof. Vijay Kumar Kaul (Head, Department of Business Economics and
Dean, Faculty of Applied Social Sciences and Humanities, University of Delhi). Dr. S.P.
Aggarwal (Director, TLC and Principal, Ramanujan College), Professor Mausumi Das
(Resource Person, Institute of Economic Growth), Dr. Vibhash Kumar (Coordinator,
TLC, Ramanujan College) and Dr. Ananya Ghosh Dastidar (Convenor) also shared the
dais. Prof. Kaul’s welcome addressed the tone by emphasizing the importance of
learning advanced macroeconomic tools and techniques, both for academics as well as
policy practitioners, at the current conjuncture. He appreciated the efforts made by the
organizers, the infrastructure at South Campus that facilitated the program as well as
the contribution of the participants that was fundamental for funding the FDP.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Thereafter, in his special address Dr. S.P. Aggarwal appreciated the MHRD initiative,
through the PMMMNMTT, for improving the teaching learning process via such FDPs.
The TLC, Ramanujan College had organized nearly 40 FDPs till date, but the current one
was unique as it focused on advanced research in a niche area in Economics. Given
greater autonomy, higher education institutions could design more such novel
initiatives for improving teachers’ knowledge base and quality of teaching. Finally, the
Convenor Dr. Ananya Ghosh Dastidar, thanked the Dean, FASSH, her department
colleagues and Director TLC, Ramanujan College and his supporting staff for making the
FDP possible. In particular, she thanked the participants, many of whom had travelled
long distances to participate in the FDP, despite the public health threat due to spread of
the Corona Virus infection. She reported that throughout the program, adequate
precautionary measures (e.g., use of hand sanitizers, paper napkins etc.) were being
adopted to address health concerns in view of this virus threat.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Session I & II: Introduction to Dynamic Optimization: Mausumi Das
Setting the framework of the workshop, Prof. Mausumi Das drew attention to the
structural shift in macroeconomics since eighties with the rise of the DSGE models
as the main workhorse model. Ever since it has become important in
macroeconomic modelling, both at the theoretical level as well as at the policy
level. She traced the genesis of this shift to the classic paper by Robert Lucas.
Through his critique, Lucas drew attention towards incorporating rational
expectations and forward looking behaviour of the optimising agents. This raised
questions on the models based on a priori values assigned to parameters, like in
the IS LM models. Lucas argued that it was naive to predict the effects of change in
economic policy on the basis of the historically observable data, and, made a case
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
that the rational responses of the individuals both of the forward looking nature as
well as based on rational expectations ought to be incorporated.
Even when the New Keynesian DSGE models differ from the Real Business Cycle
models, in the sense that the former incorporated issues relating to the stickiness
of wages and prices and imperfections in market structures, they are both
characterised by representative agent optimizing on an infinite horizon,
incorporating forward looking behaviour based on and rational expectations.
Given the importance of the understanding the analytics of dynamic optimization
towards appreciating these models of both RBC as well as NKE variety, Prof Das
further traced the transition from the static optimization using Lagrange to
dynamic optimization, introducing the class to the basic algebra as well as logic
behind Euler equation as well as transversality condition
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Session III & IV: Asset Pricing Models & Selected topics in International Finance:
Saumya Datta
The session began with a brief introduction to microeconomic models for pricing
financial assets such as Capital Asset Pricing Model, Arbitrage Theory, Black-Sholes
Merton Pricing Formula (for pricing of derivatives) and basic financial concepts such as
the Efficient Market hypothesisas well as the role of capital and financial markets.
Participants were then introduced to the Arrow-Debreu Model starting with crucial
assumptions, followed by its mathematical framework. Risk premium, certainty
equivalent, complete & incomplete markets, time-zero trading and the concept of an
Arrow-Debreu security are some of the topics that were covered. The session ended
with a discussion on the 2008 financial crisis highlighting the role of inter-bank lending
and the introduction of the derivative markets.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Day 2: 07th March, 2020 (Saturday)
Session I & II: Modern Business Cycle Theory: Mausumi Das
In these two sessions, the speaker discussed the dynamic programming technique
which is used to solve an optimization problem defined over infinite horizon. The
speaker started with the basic infinite horizon household optimization framework with
a representative agent - which is the primary workhorse of the modern DSGE modelling.
She discussed the consumption-savings choices of a representative household over
infinite horizon when markets are perfect. Having discussed the household problem, the
Planner’s problem was analysed. It is well-known in the literature that when agents are
rational and have complete information, the representative household’s choice problem
under perfect market (with no externalities) coincides with the planner’s problem (First
Welfare Theorem).
The speaker also discussed the method of solving the difference equations with various
types of boundary conditions and then used these solutions to characterise the dynamic
properties of the economy. She then extended the perfect market framework to
incorporate: labour-leisure choice on part of the household. Next she broadened the
scope of the model by introducing heterogeneity across households by assuming that
household differ in terms of their initial asset holding (asset heterogeneity but
homogenous preferences).
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Session IV: States of Growth of Indian States: Sabysachi Kar
The focus of this session was to understand the convergence/ divergence in growth
across Indian States. A three tier approach of (i) Identifying clubs (showing
convergence) across regions in India, (ii) identifying growth breaks and (iii) studying
the impact of growth breaks on club convergence was discussed. A stochastic kennel
graph was studied to understand if there has been any club convergence over the years
in India. This was further explored by using a technique given by Phillip and Sul (2007)
to identify growth clubs, highlighting, beta and sigma convergence. Convergence is
defined in terms of relative transition coefficient and semi parametric estimation was
adopted. Bai and Perron’s estimation strategy to identify growth breaks was also
discussed. Finally, the last part of the session focussed upon assessing the impact of the
identified growth breaks on the convergence of clubs using a regression framework.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Day 3: 11th March, 2020(Wednesday)
Session I & II: Technology and Endogenous Growth Models: Meeta K Mehra
These two sessions started with brief discussion of Solow model of growth theory and
Augmented Solow model which are models of endogenous growth with constant
returns to scale. The sessions then focussed on three endogenous growth models, (i) AK
model – Convex Endogenous Growth Model, given by Rebelo, 1990 (ii) Model of public
infrastructure –Fiscal expenditure of government given by Barro, 1990 (iii) Learning by
doing models – Increasing Rates of Return given by Romer 1986. The three models were
discussed in details; solving for the competitive equilibrium and commandeconomy
(planner’s equilibrium) using the dynamic optimization techniques. The steady state
equilibrium paths were discussed. The assumptions and different implications of the
three models were analysed. The session ended with discussing the relationship
between increasing returns and endogenous growth. This session was extended further
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
on the last day of the workshop (Session III, Day 5, 13th March, 2020(Friday), with a
discussion on the Lucas Model of Human Capital Accumulation stressing upon the role
of externalities. This was followed by discussing the Roemer Model which introduced a
separate R&D Sector to explain the endogenous framework.
Session III & IV: New Keynesian Models: Theory and Simulations Using Dynare:
Jyotirmoy Bhattacharya
The session focussed on discussing the New Keynesian Models, which are extensions of
Real Business Cycle (RBC) Models. Real Business cycles were already dealt in detail in
the first two days of the workshop. These models incorporated money and interest in
the RBC models and introduced some rigidities in the prices and wages in the economy.
As there is no point in controlling money supply, the main objective of the monetary
policy is to fix the nominal interest rate. The model assumedrational expectations in the
agents’ behaviour and was discussed and derived in the session. The important take
away from the model is that policy regimes matter in the economic decisions. As long as
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
people choose and adopt a forecast (based on Central Bank policy rule), the policy
regimes play an important role in determining growth in the economies.
The basic introduction to the software Dynare used for the empirical exercise was also
covered. The practical application of the model and simulation exercise was
demonstrated along with a brief discussion on interpreting the empirical results. This
gave a good exposure to the participants as most of them were working on this software
for the first time.
Day 4: 12th March, 2020(Thursday)
Session I & II: An Introduction to Demand Side Growth Models –I: Subrata Guha
Prof Subrata Guha drew the attention of the participants to the literature on
demand-side growth theories. Contrasting the demand constrained models from
the umpteen number of supply-constrained models, he drew attention to the
differences in the approaches of the neo-Keynesians, from the neo-Kaleckians.
Whereas the pricing under the neo-Kaleckian framework was based on mark-up,
that of the neo-Keynesian models were based on competitive markets. The degree
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of monopoly and collective wage bargaining plays an important role in the
determination of pricing under the neo Kaleckian framework.
Whereas in the neo-Kaleckian framework, in the short run, a higher rate of
accumulation leads to higher capacity utilization, which further enhances profit
rate, in the neo-Keynesian mechanism, higher rate of accumulation, results in
higher markup, resulting in a higher profit rate. (with the capacity utilization ‘z’
remaining the same) . In fact, the differences follows from the assumptions related
to market structures in the two schools. He further compared and contrasted the
dynamic impact of increase in savings (paradox of thrift) under the neo-Kaleckian
as against the neo-Keynesian school. Whereas in the neo-Keynesian setup, price
adjustment was the route, under the neo-Kaleckian framework, quantity
adjustment through changes in capacity utilization occurred.
Prof. Guha further drew attention to the article by Bhaduri and Marglin, which
illustrates multiple possibilities under capitalism. The possibility of co-operative
capitalism (wage-led growth) wherein the profits increase with an increasing share
of wages was highlighted. He concluded his lecture by drawing attention to the
studies of a neo-Harrodian genre which characterise growth in capitalist
economies within the narrow corridors of instability, as against the steady state
perspectives of the other approaches.
Session III and IV: Studying Macroeconomic relationships using VAR: Lokendra
Kumawat
This session focussed on the empirical techniques used to analyse dynamic
relationships in macroeconomic variables. The distributed lag models were discussed.
However, these models are restrictive in nature and do not allow for feedback effects.
The macroeconomic variables are generally endogenous and hence feedback effects
cannot be ignored. The two ways to take into account this endogeneity in variables were
discussed. The first is the use of Simultaneous Equation Models. They suffer from
limitations of dichotomy of endogenous and exogenous variables in the model and
restrictions for identifications of the model. The session then dealt in detailed
discussion of Vector Auto Regression (which overcomes limitations of the previous
models). The specification of VAR was discussed which included selection of variables,
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
selection of lags, choice of deterministic components, estimation of the parameters and
checking for adequacy of the parameters. The uses of VAR for forecasting, checking for
granger causality and innovation accounting were elaborated along with the
understanding of impulse response functions. At the last, the structural decomposition
of VAR model was also covered.
The session also demonstrated the practical application of VAR model. A two series
model of money supply and index of industrial production was taken to provide first-
hand experience of running VAR model to the participants, to analyse the results and
check for different diagnostics tests for model accuracy.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Day 5: 13th March, 2020(Friday)
Session I & II: Empirical Issues in Macroeconomic Models: Rudrani Bhattacharya
The sessions focussed on providing detailed discussion on the empirical research in
macroeconomics and the steps followed for carrying out time series techniques for
empirical analysis. The focus was on the estimation of monetary policy transmission for
the Indian economy. The closed economy model was assumed. The dynamic IS and
Inflation Augmented Phillips Curve were discussed along with Taylor’s Rule (monetary
policy response of central bank) to close the above two equations model. VAR technique
is adopted for such model due to endogeneityof variables. The steps followed to
estimate the output gap were elaborated, which included (i) De-seasonalize the
variables. The method adopted depends on the type of seasonality. For fixed
seasonality, dummy variable approach is adopted. For stochastic seasonality,
autoregressive process is adopted. In this respect, Seasonal ARIMA (Auto Regressive
Integrated Moving Average) approach was elaborated. (ii) De-trend the variable (iii)
Unit root test. The different tests for unit root and conditions to choose a particular test
result were discussed. Lastly, the session focussed on the approachesand data used to
find the factors affecting food inflation. Both demand side factors and supply side is
captured to estimate the demand – supply gap for all goods to analyse the policies to
stabilise food inflation in the economy.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
Session IV: Should Central Banks Respond to Food Inflation? : Chetan Ghate
The session focussed on the analysing two issues for the Indian economy –Should
Central Bank target food inflation? And whether it would create consumption inequality
in the economy? The session looked at the model of two sectors comprising of
Agriculture and Manufacturing. The model also included heterogeneity of agents by
including two agents –Rich and Poor. The model featured as explicit procurement and
redistributive motive of the government. The government taxes the rich agent, procures
grain and redistributea fraction of it to the poor. Household optimization over
consumption and disutility over labour was derived and aggregate agricultural
consumption was estimated. Two shocks were then introduced in the model:
Procurement shock and Redistribution Shock, both following AR (1) process. The
equilibrium was derived using Dynamic IS curve, Inflation Augmented Phillips curve
and Taylor’s rule.
Department of Business Economics, Ramanujan College University of Delhi University of Delhi
The model then tried to simulate the effects of two shocks: (i) agricultural productivity
shocks and concluded that productivity increase leads to fall in price of agricultural
goods and worsening of terms of trade. Real wage increases for both sectors but
employment effects vary. Employment in agricultural sector falls and in manufacturing
sector increases, emphasizing the disparity of the two sectors. (ii) Single period
procurement and redistribution shock.Here, price of agricultural good increases and
terms of trade improves. Real wage also increases but the impact on employment differs
from above (as productivity has not increased). Employment in agriculture sector
increases and in manufacturing sector goes down. This leads to poor agents getting
better off and lessening of inequality in the economy. Prof. Ghate’s discussion was based
on work in progress and working paper version of his paper would be officially
available around June 2020.
*****
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