Lecture notes for Macroeconomics I, 2004
                      Per Krusell
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               Chapter 1
               Introduction
               These lecture notes cover a one-semester course. The overriding goal of the course is
               to begin provide methodological tools for advanced research in macroeconomics. The
               emphasis is on theory, although data guides the theoretical explorations. We build en-
               tirely on models with microfoundations, i.e., models where behavior is derived from basic
               assumptions on consumers’ preferences, production technologies, information, and so on.
               Behavior is always assumed to be rational: given the restrictions imposed by the primi-
               tives, all actors in the economic models are assumed to maximize their objectives.
                   Macroeconomic studies emphasize decisions with a time dimension, such as various
               forms of investments. Moreover, it is often useful to assume that the time horizon is
               infinite.   This makes dynamic optimization a necessary part of the tools we need to
               cover, and the first significant fraction of the course goes through, in turn, sequential
               maximization and dynamic programming. We assume throughout that time is discrete,
               since it leads to simpler and more intuitive mathematics.
                   Thebaseline macroeconomic model we use is based on the assumption of perfect com-
               petition. Current research often departs from this assumption in various ways, but it is
               important to understand the baseline in order to fully understand the extensions. There-
               fore, we also spend significant time on the concepts of dynamic competitive equilibrium,
               both expressed in the sequence form and recursively (using dynamic programming). In
               this context, the welfare properties of our dynamic equilibria are studied.
                   Infinite-horizon models can employ different assumptions about the time horizon of
               eacheconomicactor. Westudytwoextremecases: (i)allconsumers(really, dynasties)live
               forever - the infinitely-lived agent model - and (ii) consumers have finite and deterministic
               lifetimes but there are consumers of different generations living at any point in time -
               the overlapping-generations model. These two cases share many features but also have
               important differences. Most of the course material is built on infinitely-lived agents, but
               we also study the overlapping-generations model in some depth.
                   Finally, many macroeconomic issues involve uncertainty. Therefore, we spend some
               time on how to introduce it into our models, both mathematically and in terms of eco-
               nomic concepts.
                   The second part of the course notes goes over some important macroeconomic topics.
               These involve growth and business cycle analysis, asset pricing, fiscal policy, monetary
               economics, unemployment, and inequality. Here, few new tools are introduced; we instead
               simply apply the tools from the first part of the course.
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