Banco Central de Reserva del Peru

These lectures study decision problems of households and firms in a dynamic stochastic setting. To do so, the course will develop a number of tools and apply them to agents' choice problems and equilibrium. A primary tool is dynamic programming. The course will provide the basic foundations of dynamic programming, both in theory and through numerical analysis. Another tool is the use of simulated method of moments to estimate economic models.

After developing these tools, the course turns to applictions. Household dynamic choices will include intertemporal consumption, labor supply, portfolio adjustment and durable expenditures. The role of borrowing constraints will be explored. A theme will be the interaction of discrete and continuus choices. For the firm part of the courese, the focus will be on dynamic factor demand.

Lecture 1: Household Finance: Portfolio Choice and Borrowing Constraints

· Overview of Dynamic Programming

i. Asset Pricing Example

ii. Cake Eating Problems

· Household Intertemporal Choice

i. Household Consumption/ Saving: the Euler Equation

ii. Household Portfolio Adjustment

iii. Borrowing Constraints

Lecture 2: Durables

· Household Durable Demand

i. Discrete Choice: Car replacement

ii. Lifecycle model with Borrowing Constraints

· Firm Capital Demand

i. Q Theory

ii. Lumpy Investment

iii. General Equilibrium

Optional Textbook: Jerome Adda and Russell Cooper Dynamic Economics: Quantitative Methods and Applications, MIT Press, 2003.

C. Seminar on Dynamic Labor Demand

“The Employment and Output Effects of Short-time Work in Germany”