Aims

Recursive methods - breaking a dynamic problem into a sequence of problems- constitute a powerful approach to study dynamic economics and provides fertile ground to develop intuition alongside formal analysis. It is also widely used in equilibrium modelling in virtually all economic fields.

The module starts by introducing the basic tools and then moves to its applications in labour economics and its links to marriage decisions, before moving to study equilibrium models of monetary economics, economics of the housing market, as well as the economics of crime and consumer markets.

After taking the module, students will be equipped with the tools to study, understand and extend existing equilibrium model is these and other suitable fields of economics, and to build their own models to study economic issues, and use them for empirical research. This ensures students are qualified for doctoral research and taught PhD pertinent courses.

Students will also be equipped with the theoretical and empirical knowledge for employment as a practitioner in policy research and/or analysis.
Where the readings below are not recent, they are considered the seminal papers and still used as the basic model to be adapted for new research.

Outline Of Syllabus

1. The basic tools and an introduction (Week 1)
-       Bellman equations in discrete and continuous time.
-       McCall’s model of intertemporal job search and the concept of reservation strategies.

2.The Burdett-Mortensen Model of wage dispersion. (Week 2 and 3)
-       On-the-job search and wage dispersion, efficiency, endogenous search intensity
-       An empirical view: On-the-job search vs frictionless markets.

3. The Diamond-Mortensen-Pissarides (DMP) Model of Unemployment (Weeks 3 and 4)
-       Endogenous unemployment in the DMP model of the labour market, efficiency.
-       Policy and economics shocks
-       An empirical view: Matching models vs frictionless markets

4. The empirical content of recursive equilibrium models.

5. Models to study the intersection between family and labour economics – theory and empirics (Weeks 6 and 7)
-       A model of endogenous marriage wage premium (and links to the beauty premium).
-       Marriage wage premium and productivity heterogeneity.
-       Marriage wage premium and contract type heterogeneity.

6. Models to study the intersection between family and labour economics – Policy applications
-       Gender differences as equilibrium outcomes.
-       Affirmative action
-       Gender based vs gender neutral subsidy; financing of subsidy.

7. Models of Consumer Economics (Week 8)

-       Dynamic models of noisy search and price dispersion

8. Monetary Economics (Weeks 9 and 10)
-       Kiyotaki -Wright search model of money
-       A new suggestion for simplifying the theory of money.

Shocks and policy applications

9. A model of the housing market (Weeks 11 and 12)

-       A dynamic model of the housing market to address empirical regularities: structural “vacancy” rates, short run movements around it, turnover, slow reacting supply of houses.

10. The Economics of Crime (Weeks 13 and 14)

-       Dynamic models theory to study the empirical relationship between crime, inequality, and unemployment

Teaching Rationale And Relationship

Achieving the knowledge and learning outcomes will be through a) Lectures – to expose the students to the relevant theory and b) Small group teaching – to reinforce the knowledge acquired in lectures and analyse the reasons for the direction taken in the different theoretical frameworks studied. Independent study is essential for students to become familiar and master the material covered.

Assessment Rationale And Relationship

Unseen written exam is the only way to assess graduate level microeconomic theory in a manner that is consistent with the market practice among economics departments. The learning outcomes cannot be achieved via alternative methods of assessment. The formative assessment will give students the opportunity to receive feedback on their degree of understanding before the summative assessment.