MA course at the University of Bern.

Lectures and exercises follow these notes (December 1, 2009). Dates and times: Wed 10-12 and 14-16. Rooms: See university course site. Exam date, time, location: December 16, 2009; 14-16; A 003 UniS, Schanzeneckstrasse 1. Last year’s exam. Office hours arranged individually, after the lectures.

Why study this material? Some observers claim that the recent crisis points to a failure of economics and in particular, macroeconomics. It is argued that macroeconomic models are based on unrealistic assumptions and that modelers are driven by a desire to build abstract, formally appealing rather than empirically relevant models. Much of this criticism is unwarranted and reflects ignorance about the state of economic research. The modeling kit of economists far exceeds the baseline, frictionless models that are taught at the entry level of Master or PhD studies and against much of the current criticism is directed. For example, contractual or informational frictions—central to understanding the recent crisis—are the focus of a significant body of research in macroeconomics and other fields, past and present. Good Master or PhD programs teach models focusing on such frictions at the advanced level. But for students to be able to follow richer models with such “realistic” frictions, they must be familiar with the basic concepts, and these basic concepts are best taught in the context of simple, to-the-point baseline models. One may criticize the selection of models taught in advanced Master or PhD courses (as does Paul Krugman in the New York Times); the more fundamental critique against economics and in particular, macroeconomics does not make much sense.