M.I.T. Macroeconometric models. Reading list and final exam. Modigliani, 1973

 

Core macroeconomic theory was taught in a sequence of four half-semester courses at M.I.T. In this post we encounter the third course of the sequence (typically taken in the fall term of the second year of residency) that was dedicated to Keynesian macroeconometric models and taught by Franco Modigliani in 1973.

In the same folder is a qualifying exam for 14.454, Macro IV which would be a waiver examination given before the term begins. There is no year indicated on this exam, but the content of the questions clearly matches that of the empirical macro course 14.453 offered in 1973. In the fall term of 1973, the quantitative macro and the dynamic macro switched their order which is probably the reason for the confusion about the course number at the start of the term.

Economics in the Rear-view Mirror thanks Juan C. A. Acosta who copied the course syllabus and final examination that are found in the Franco Modigliani Papers (Box T7) at the Duke University Economists’ Papers Project and has graciously shared them for transcription here. 

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14.453 MACRO THEORY III
Fall 1973, 2nd Half

I – ECONOMETRIC MODELS

Tinbergen, J. Statistical Testing of Business Cycles, Theory II. Business Cycles in the U.S.A.
Klein, L. R. & A. S. Goldberger. An Econometric Model of the United States, 1955; Impact Multipliers & Dynamic Properties of the K-G Model, 1959.
Suits, D. B. “Forecasting and Analysis with an Econometric Model”, AER, March, 1962. Reprinted in Readings in Business Cycles.
Hymans, S. H. & H. T. Shapiro. The Michigan Quarterly Econometric Model of the U.S. Economy, 1973.
_____________, Revision as of June, 1973 – Mimeo
Green, G. R., M. Liebenberg, A. A. Hirsh. “Short and Long Term Simulations with the OBE Econometric Model” in Econometric Models of Cyclical Behavior, Studies in Income and Wealth, Vol. 36.
Fair, R. C. A Short Run Forecasting Model of the United States Economy, 1971.
Adams, G. F. & David M. Rowe, “Forecasts and Simulations from the Wharton Econometric Model”, Multilith.

ECONOMETRIC FORECASTING SYSTEM

1 – DR1 Quarterly Model
2 – Operations Overview

Fromm, G. & L. R. Klein. “A Comparison of Eleven Econometric Models of the United States”, AER, Papers and Proceedings, May, 1973, pp. 385-393.
Fair, R. C. “Forecasts from the Fair Model and Comparison of the Recent Forecasting Record of Seven Forecasters – July, 1973”. Princeton University – Multilith. 
Tsurumi, H. “A Comparison of Econometric Macro Models in Three Countries”, AER, May 1973.
Moriguchi, C. “Forecasting and Simulation Analysis of the World Economy”, AER, May, 1973.

THE MPS MODEL

Equations in the MIT-Penn-SSRC Model of the United States, January, 1973.
Data Directory, January, 1973.
Ando & Modigliani, “Econometric Analysis of Stabilization Policy,” AER, May, 1969.
Ando, A. K. “Basic Structure of the MPS Model” –Multilith.
Modigliani, F. “The Channels of Monetary Policy in the FMP Econometric Model of the U. S.” – Multilith.

II – THE CONSUMPTION FUNCTION

Keynes, J. M. The General Theory of Employment, Interest & Money, Ch. 8 & 9.
Modigliani, F. Lecture Notes on Monetary Theory, Part IV, Section A&B, (especially A.4 to B.2)
Brady, D.S. & Friedman, R. D. “Savings and the Income Distribution”, Studies in Income and Wealth, Vol. X, pp. 247-265.
Duesenberry, J. S. Income, Saving and the Theory of Consumer Behavior.
Modigliani, F. “Fluctuations in the Saving Income Ratio: A Problem in Economic Forecasting”, in Studies in Income and Wealth, Vol. XI, National Bureau of Economic Research, 1949.
_____________, “The Life Cycle Hypothesis of Saving Twenty Years Later”, Multilith.
_____________ and Brumberg, F. “Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data”, in K. Kurihara, (ed.) Post-Keynesian Economics, New Brunswick, 1954.
_____________ and _____________, “Utility Analysis and Aggregate Consumption Functions: An Attempt at Integration”, unpublished.
Merton, R. C. “Optimum Consumption and Portfolio Rules in a Continuous-Time Model”, Journal of Economic Theory, December, 1971.
Dreze and Modigliani, “Consumption Decisions under Uncertainty”, Journal of Economic Theory 5, 1972.
Modigliani, F. “The Life Cycle Hypothesis of Saving, the Demand for Wealth and the Supply of Capital” Social Research, Summer 1966.
_____________, “The Life Cycle Hypothesis of Saving and Inter-country Differences in the Saving Ratio”, in Induction, Growth and Trade, Essays in Honor of Sir Roy Harrod, 1970.
Ando, A. and Modigliani, F. “The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests,” American Economic Review, March, 1963.
Modigliani, F. “Monetary Policy and Consumption: Linkages via Interest Rate and Wealth Effects in the FMP Model”, in Consumer Spending and Monetary Policy: the Linkages, The Federal Reserve Bank of Boston, 1971; and Appendix by Ando and Modigliani, “Consumption and Consumer Expenditure”.
Kaldor, N. Essays in Value and Distribution, London, 1960.
Tobin, J. “Life Cycle Saving and Balanced Growth”, in Ten Economic Essays in the Tradition of Irving Fisher, 1967.
_____________ and Dolde, W. C. “Wealth, Liquidity and Consumption”, in Consumer Spending and Monetary Policy: the Linkages, The Federal Reserve Bank of Boston, 1971.
Mayer, T. Permanent Income, Wealth, and Consumption, 1972.

III – THE INVESTMENT FUNCTION

Keynes, J. M., General Theory, Chapters 11 and 12.
Jorgenson, D. W. “Econometric Studies of Investment Behavior”, Journal of Economic Literature, Dec. 1971.
_____________ and R. E. Hall, “Application of the Theory of Optimum Capital Allocation” in Tax Incentives and Capital Spending, (edited by Fromm).
Bischoff, C. W. “The Effects of Alternative Lag Distributions”, in Tax Incentives and Capital Spending, G. Fromm, ed., Brookings Institution, 1971.
Ando, Modigliani, Rasche & Turnovsky, “On the Role of Expectations of Price and Technological Change in an Investment Function”. Multilith.
Eisner, E., and M. I. Nadiri, “Investment Behavior and Neoclassical Theory.” Review of Economics and Statistics. Vol. 50, August 1968.
_____________, “Neoclassical Theory of Investment Behavior: A Comment.” Review of Economics and Statistics, Vol. 52, May 1970.
Bischoff, C. W., “Hypothesis Testing and the Demand for Capital Goods,” The Review of Economics and Statistics, August 1969.
_____________, “Business Investment in the 1970’s: A Comparison of Models”, Brookings Papers on Economic Activity, 1, 1971.
Nadiri, I. M. “An Alternative Model of Business Investment Spending”, Brookings Papers on Economic Activity, 3, 1972.
Kalchbrenner, J. H. “A Model of the Housing Sector”, Chapter 6, in Savings, Deposits, Mortgages and Housing, Studies for the Federal Reserve-MIT-Penn Economic Model, (eds. Gramlich and Jaffee), 1972.
Ando and Modigliani, “Consumption and Consumer Expenditure”, pages 9-17, (APPENDIX A), Multilith.

IV – FINANCIAL MARKETS

Tobin, J. “A General Equilibrium Approach to Monetary Theory”, JMCB, February, 1969.
Brainard, W. and J. Tobin. “Pitfalls in Financial Model Building”, AER, May, 1968.
Ando and Modigliani. “Some Reflections on Describing Structures of Financial Sectors”. Multilith.
Ando, A. K. “Some Comments on Brainard-Tobin Framework for Financial Analysis”. Multilith.
Modigliani, F., Rasche, R. and J. P. Cooper, “Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest,” Journal of Money, Credit and Banking, 2, 1970.
Modigliani, F. and R. Shiller, “Inflation, Rational Expectations, and the Term Structure of Interest Rates,” Economica, February, 1973.
Jaffee, D. M., and F. Modigliani, “A Theory and Test of Credit Rationing”, American Economic Review, December, 1969.
_____________, Credit Rationing and the Commercial Loan Market, John Wiley and Sons, 1971.
Gramlich, & Jaffee, editors, Saving Deposits, Mortgages and Housing, Chapters 1 to 5, and 7.
Modigliani, F. “The Valuation of Corporate Stock”. Multilith.

V – WAGES, PRICES, EXPECTATIONS

Phillips, A. W. “The Relation between Unemployment and the Rate of Change of Money Wages in the U. K.” Economica, November 1958.
Lipsey, R. G. “The Relation between Unemployment and the Rate of Change of Money Wage Rate in the U. K.: A Further Analysis”, Economica, 1961.
Phelps et al. Macro Economic Foundations of Employment and Inflation Theory, See especially the two contributions of Holt.
The Econometrics of Price Determination Conference, Board of Governors of the Federal Reserve System and SSRCs.

De Menil and Enzler, “Prices and Wages in the FR-MIT-Penn Econometric Model”.
Tobin, “The Wage-Price Mechanism: Overview of the Conference”.
Hyman, “Prices and Price Behavior in Three U.S. Econometric Models”.
Nordhaus, “Recent Developments in Price Dynamics”.
Lucas, “Econometric Testing of Natural Rate Hypothesis”.

Modigliani and Tarantelli, “A Generalization of the Phillips Curve for a Developing Country”, Review of Economic Studies, April, 1973.
Eckstein and Brinner, “The Inflation Process in the United States”, Joint Economic Committee, Congress of the U.S., 92 Congress, 2^ndSession.
Modigliani, “New Developments on the Oligopoly Front”, Journal of Political Economy, Vol. 66, June 1958.
Lucas, R. “Some International Evidence on Output-Inflation Tradeoffs”, AER, June, 1973.
Sargent, T. J. “Rational Expectations, The Real Interest Rate and the ‘Natural’ Rate of Unemployment.” Multilith—forthcoming in Brookings Papers on Economic Activity, 2, 1973.
Gordon, R. J. “The Welfare Cost of Higher Unemployment”, Brookings Papers on Economic Activity, 1, 1973.
Turnovsky, S. J. “Empirical Evidence on the Formation of Price Expectations”, J.A.S.A., December 1970.
de Menil and Bhalla, “Direct Measurement of Popular Price Expectations”—Princeton University Econometric Research Program, Memorandum No. 149.
de Menil, G. “Rationality in Popular Price Expectations”. Multilith.

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QUALIFYING EXAM FOR 14.454 (sic)
MACRO IV (sic)

Time Period: Less than two hours
Answer at least 2 questions

1. Tests carried out for a number of countries of the major alternative models purporting to explain aggregate consumption (Duesenberry-Modigliani, permanent income, life cycle, Kaldorian model) are typically found to fit the data quite well, and the difference in fit is generally not large.
   1. give a brief description of each of the above models
   2. what explanation, if any, can be advanced for the empirical finding that there are no substantial differences in the closeness of fit in the various models
   3. does the fact that the alternative models fit roughly as well imply that it makes little difference which of these equations is incorporated in an econometric model
      1. rom the point of view of forecasting
      2. from the point of view of predicting the effect of alternative monetary and fiscal policies
2. Consider the coefficient estimates of the St. Louis “reduced form model”.
   1. what are possible and likely sources of biases in these coefficients? (Be sure to explain what you mean by bias in this context.)
   2. are these estimates consistent with the monetarist view of the working of the economy?
   3. with the view embodied in the standard econometric models of the U.S.?
   4. with the view embodied in the MPS model? (optional)
3. The “multiplier” played an important role in early Keynesian thinking.
   1. review how this notion has developed since that time.
   2. in the light of (i), describe the kind of simulations you would perform in order to evaluate the “multiplier effect of an increase in government expenditure” implied by one of the major contemporary econometric models of the U.S.
   3. can an estimate of the above multiplier be inferred from the coefficients of the St. Louis “reduced form model”?

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14.453 MACRO THEORY
FINAL EXAMINATION

Franco Modigliani
Wednesday, 12/19/73

1 ½ hours

Answer Question I and at least one other question

1. Enclosed is a forecast for the U.S. economy generated by the MPS Model in October 1973, before the so-called oil crisis. Assume an exogenous reduction in oil imports of 3 million barrels per day (representing somewhat over 15% of the consumption of oil implicit in the above forecast) beginning in the fourth quarter of ’73, and becoming fully effective from the first quarter of ’74.
   1. analyze the likely effects of this event on the above projections of real and money GNP and its components, assuming no change in monetary and fiscal policy.
   2. what changes in economic policy, if any, would you recommend, and why?
   3. can the MPS model (or analogous macro-econometric models) be used without major modification, to simulate the effects of the reduction in oil supply? Explain.

(Note: the monetary policy assumed in the projection is a growth of the money supply at 6% in ’73.4, at 6.5% in the first half of ‘74, and 7% thereafter.)

2. The “multiplier” played an important role in early Keynesian thinking.
   1. 1. review how this notion has developed since that time.
      2. in the light of (i.), describe the kind of simulations you would perform in order to evaluate the “multiplier effect of an increase in government expenditure” implied by one of the major contemporary econometric models of the U.S.
      3. can an estimate of the above multiplier be inferred from the coefficients of the St. Louis “reduced form model”?
3. Formulate your model of the short and long run determinants of the price level. Use your theory to evaluate the often expressed view that fiscal policy should be used to control real output and monetary policy to control prices.
4. Discuss the role of price expectations in macro-economic analysis, and review the present state of knowledge with respect to the modeling of price expectational variables in macro-econometric models.

1973_14453_exam_MPSoutputReduced

Source:   Duke University. David M. Rubenstein Rare Book and Manuscript Library. Economists’ Papers Archive. Franco Modigliani Papers, Box T7.

Image Source: Franco Modigliani picture from the MIT Museum Website.