Module Code and Title:       CET308          Advanced Economic Theories (Elective 2)

Programme:                          BA Development Economics

Credit Value:                         12

Module Tutor:                       Sanjeev Mehta

General objective: The module is intended to help prepare students for higher studies in economics. The module places emphasis is on dynamic models, role of expectations, information, and implications of inter-temporal optimization. The module also deals with the solution concepts for normal form and extensive form games along with a variety of economic applications.

Learning outcomes – On completion of this module, learners should be able to:

1. Discuss contemporary advanced economic theory across a broad spectrum of microeconomic and macroeconomic topics.
2. Apply the theories to explain contemporary economic problems
3. Apply a theory to a specific problem.
4. Identify the types and sources of changes in macroeconomics.
5. Explain the techniques of inter-temporal optimisation.
6. Describe dynamic investment models.
7. Analyse the role of expectations in macroeconomic models.
8. Analyse the impact of international financial markets on domestic investment.
9. Differentiate between different types of games.
10. Apply pay-off matrices for decision making.

Learning and Teaching Approach: This module will be taught by means of lectures, tutorials, classroom workshops, group work, and self-directed study. Lectures will aim at explanation of various concepts and theories. Tutorials will be an integral part of the module, and it is expected that much of the learning and application of econometric concepts will be achieved through these tutorials. The focus of the learning-teaching approach would be enhancing students’ abilities to understand each model and its underlying assumption, so that they can apply appropriate models and make correct interpretations. It is also expected that students will spend additional hours on reading, problem solving and econometric estimation each week.

Assessment Approach:

A. Individual Assignment: Portion of Final Marks: 10%

Students will complete a review of a recent piece of primary literature related to modern economic theories and their applications. The assignment should have a maximum limit of 500 words.

• 1%       Brief background
• 3%       Description of the main findings
• 3%       Analysis of the methodology
• 3%       Critical review of the conclusions

B. Class Tests (2): Portion of Final Marks: 20%

Two written tests will be conducted that will comprise 45 min duration and cover 4 weeks of material. One test will cover topics from advance macroeconomic models and another from game theory.

C. Individual project: Portion of Final Mark: 20%

Project will be given after midterm exams. A student will be required to simulate a given model (macroeconomic/ microeconomic) and submit a report on simulation results using data supplied by tutor. Report word limit: 1000 words. The report will be followed up with a 10 min presentation, including Q&A.

• 3%       Description of the simulation model
• 2%       Methodology
• 6%       Discussion on findings
• 2%       Timely submission of the report
• 2%       Structure of the report
• 2%       Presentation of report
• 3%       Defence of the work in Q&A session

D. Midterm Examination: Portion of Final Mark: 20%

Students will take a written exam of 1.5 hr duration covering topics up to the mid-point of the semester.

Pre-requisites: CET103 Introductory Macroeconomics, CET206 Intermediate Macroeconomics

Subject matter:

1. Review of Aggregate Supply-Aggregate Demand Model
   • Aggregate labour market, adaptive expectations, nominal wage rigidities
   • Aggregate demand, review of IS-LM model, effectiveness of fiscal and monetary policy
   • Adaptive expectations hypothesis and stability in the AS-AD model
2. Rational Expectations and Implications for Economic Policy
   • Rational expectations hypothesis, policy ineffectiveness proposition
   • Overlapping wage contracts
3. Introduction to Dynamic Models
   • Dynamic investment theory, investment subsidy
   • Dynamic IS-LM model, open economy and international financial markets, Dornbusch overshooting model
4. Economic Growth
   • Stylized facts; Solow-Swan model
   • Ramsey model: phase diagram, efficiency properties of the Ramsey model, fiscal policy in the Ramsey model, Ricardian equivalence, some reasons for non-equivalence
   • Endogenous growth, some issues in growth for open economies
5. Overlapping Generations Model
   • Diamond-Samuelson model: equilibrium, dynamics and stability, efficiency
6. Normal form games
   • Normal form, dominant and dominated strategies, dominance solvability
   • Mixed strategies
   • Nash equilibrium
   • Symmetric single population games; applications
7. Extensive form games with perfect information
   • Game tree, strategies
   • Sub-game perfection
   • Backward induction in finite games
   • Commitment; bargaining, other applications

Reading List:

1. Essential Reading
   • Blanchard, O. J. & Fischer, S. (2000). Lectures on Macroeconomic Prentice Hall of India Private Limited.
   • Osborne, M. J. (2004). An Introduction to Game Theory. Oxford University Press.
   • Romer, D. (2006). Advanced Macroeconomics. McGraw-Hill.
2. Additional Reading
   • Barro, R. J. and Sala-i-Martin, X. (2007). Economic Growth. Prentice Hall of India Private Limited.
   • Hoy, M et al. (2001). Mathematics for Economics. The MIT Press.
   • Heijdra, B. J. (2009). The Foundations of Modern Macroeconomics. Oxford University Press.

Date: January 15, 2016