Quantitative Macro with Heterogeneity

ECO2103H: Topics in Macroeconomic Theory

University of Toronto, 2019 Winter

Reading List PDF Version


  • Jan 23: Room change: Today we are meeting in RW 143.
  • Jan 9: If you haven't joined the Slack group, please do so ASAP. Email me for an invitation link.
  • Jan 9: Outline is posted.


Course Description

This course covers the topics at the nexus of macro and labor economics with an emphasis on household heterogeneity. The main goals of this course are to expose students to research questions at the current frontier, discuss a variety of open questions in this area that can lead to research papers (or possibly to a dissertation), and familiarize with the tools necessary to tackle these questions. We cover the research that links theoretical models to the data in a serious manner using quantitative and empirical methods.

Course Requirements

Weekly Reading. For each topic I have listed more than ten papers. I recommend you to read all of these papers (at least to the extent to broadly learn what question each paper is answering, how it is answering and what the answer is). There are three or four papers marked with three stars (***) for each paper. Reading these papers is mandatory for the class. We will discuss these papers in detail and you should read them before class.

Weekly Referee Report. Every week you will write a no longer than 1 page referee report on one ***-paper from that week’s reading list. In one third or half of the report you will summarize the main contribution of the paper. In the rest of the report you will discuss its main weakness(es) and/or strength(s) to justify your recommendation to the editor. As an economist, it is very important that you can communicate your ideas clearly and concisely. Thus, you will also discuss your referee report in the class in not more than two minutes.

Literature Review. You will present a topic from the reading list which you’re particularly interested in and consider doing research in (if your area of interest is not included in the tentative reading list you can talk to me). In particular, you will introduce the key stylized facts and important questions and issues in this literature and critically discuss 3 or 4 of the most important papers which are probably going to be the ***-papers. In discussing these papers, you should present the key assumptions and the economic mechanisms that drive the paper’s main results as well as model’s ability to fit both the targeted features of the data and untargeted other aspects (out of sample predictions). Discuss what happens to model’s fit to the data if some of the key assumptions are relaxed. And then tell us whether there is enough evidence from the data to believe in these assumptions and the economic mechanism at play. Hopefully this critical discussion of the literature will lead you to come up with some important open questions. Thus, in the end you will talk about these open questions by explaining why they are still not satisfactorily answered, what the limitations are in addressing these questions. In your presentation, you will take questions from the class and answer them. You should be able to answer the questions on the papers you present as well as the authors of these papers. While preparing for this assignment you will meet with me regularly at least once a week.

Research Proposal. The research proposal should outline a clear research question and describe how you intend to answer the question posed (which data set you would use, a description of the model, the algorithm for solving it, etc). The proposal will be judged based on the originality of the idea (or the importance of the contribution), the feasibility of the exercise and how specific and detailed the proposal is. An ideal proposal would be one where someone else could take it and follow the steps you describe to answer the question.

Weekly Schedule, Selected Papers and Slides

Week #1: Introduction

  • Introduction Slides
  • “Evolution of Modern Business Cycle Models: Accounting for the Great Recession”, Patrick J. Kehoe, Virgilui Midrigan, and Elana Pastorino, 2018 NBER Working Paper
  • Nakamura, Emi, and Jón Steinsson. Identification in macroeconomics. No. w23968. National Bureau of Economic Research, 2017.
  • “Quantitative Macroeconomics with Heterogeneous Households,” Jonathan Heathcote, Kjetil Storesletten, and Gianluca Violante, Annual Review of Economics, 2009.

Week #2 and #3: Individual Income Fluctuations

  • Income Risk Slides
  • Guvenen, Fatih, Fatih Karahan, Serdar Ozkan and Jae Song (2016): “What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Dynamics?”
  • Arellano, M., Blundell, R. and Bonhomme, S. (2017). “Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework.” ECMA
  • Altonji, Joseph G., Anthony A. Smith, and Ivan Vidangos. "Modeling earnings dynamics." Econometrica 81, no. 4 (2013): 1395-1454.
  • Browning, Martin, Mette Ejrnaes, and Javier Alvarez: “Modelling Income Processes with Lots of Heterogeneity,” Review of Economic Studies, 2010.

Week #4, #5, and #6: Wage Inequality Over the Life Cycle

  • Lifetime Inequality Slides
  • Bagger, Jesper, et al. "Tenure, experience, human capital, and wages: A tractable equilibrium search model of wage dynamics." The American Economic Review 104.6 (2014): 1551-1596.
  • Jarosch, Gregor, Ezra Oberfield, and Esteban Rossi-Hansberg. Learning from Coworkers. No. w25418. National Bureau of Economic Research, 2019.
  • Herkenhoff, Kyle, Jeremy Lise, Guido Menzio, and Gordon M. Phillips. Production and Learning in Teams. No. w25179. National Bureau of Economic Research, 2018.
  • Andreas Hornstein, Per Krusell, and Giovanni L Violante. Frictional wage dispersion in search models: A quantitative assessment. AER
  • Kuruscu, Burhanettin (2006): “Training and Lifetime Income, American Economic Review, Vol. 96
  • Jarosch, Gregor. "Searching for job security and the consequences of job loss." manuscript, Stanford University (2015).
  • Abowd, John M., Francis Kramarz, and David N. Margolis. “High wage workers and high wage firms.” Econometrica 67, no. 2 (1999): 251-333.

Week #7 and #8: Trends in Wage Distribution

  • Trends in Wage Inequality Slides
  • Acemoglu, Daron, and David Autor. "Skills, tasks and technologies: Implications for employment and earnings." In Handbook of labor economics, vol. 4, pp. 1043-1171. Elsevier, 2011.
  • Kambourov and Manovskii (2009): “Occupational Mobility and Wage Inequality,” Review of Economic Studies.
  • Sergio Ocampo, “A Task-Based Theory of Occupations with Multidimensional Heterogeneity”, JMP
  • Lindenlaub, Ilse. “Sorting multidimensional types: Theory and application.” The Review of Economic Studies 84, no. 2 (2017): 718-789.
  • Guvenen, Fatih, Burhanettin Kuruscu, and Serdar Ozkan. "Taxation of human capital and wage inequality: A cross-country analysis." Review of Economic Studies 81, no. 2 (2013): 818-850.

Week #9: Decline in Labor Share

  • Dylan's labor share slides
  • Karabarbounis and Neiman (2013) – The Global Decline of the Labor Share, QJE 129(1)
  • Elsby, Hobijn and Sahin (2013) – The decline of the US labor share, Brookings Papers
  • Autor, Dorn, Katz, Patterson and van Reenen (2017) – The Fall of the Labor Share and the Rise of Superstar Firms, Working Paper
  • Barkai (2017) – Declining Labor and Capital Shares, Working Paper
  • Karabarbounis, Loukas, and Brent Neiman. “Accounting for factorless income.” In NBER Macroeconomics Annual 2018, volume 33. University of Chicago Press, 2018
  • De Loecker, Jan, and Jan Eeckhout. The rise of market power and the macroeconomic implications. NBER No. w23687, 2017.

Week #10: Precautionary Savings under Frictional Labor Market

  • KRUSELL, P.; MUKOYAMA, T.; SAHIN, A. (2010), “Labour-market matching with precautionary savings and aggregate fluctuations.” The Review of Economic Studies, v. 77, n. 4, p. 1477-1507.
  • Lise, Jeremy. “On-the-job search and precautionary savings.” Review of Economic Studies 80, no. 3 (2012): 1086-1113.
  • BRADLEY, J.; POSTEL-VINAY, F.; TURON, H. (2017), “Public sector wage policy and labor market equilibrium: a structural model”, Journal of the European Economic Association, v. 15, n. 6, p. 1214-1257.

Week #12: Heterogenous Agents New-Keynesian Models

HANK slides