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Recursive methods provide powerful ways to pose and solve problems in dynamic macroeconomics. Recursive Macroeconomic Theory offers both an introduction to recursive methods and more advanced material. Only practice in solving diverse problems fully conveys the advantages of the recursive approach, so the book provides many applications. This fourth edition features two new chapters and substantial revisions to other chapters that demonstrate the power of recursive methods.
One new chapter applies the recursive approach to Ramsey taxation and sharply characterizes the time inconsistency of optimal policies. These insights are used in other chapters to simplify recursive formulations of Ramsey plans and credible government policies. The second new chapter explores the mechanics of matching models and identifies a common channel through which productivity shocks are magnified.
Other chapters have been refined and extended, including new material on heterogeneous beliefs in models of both complete and incomplete markets and a deeper account of forces that shape aggregate labor supply elasticities in life cycle models. The book is suitable for first - and second - year graduate courses in macroeconomics. Most chapters conclude with exercises ; many exercises and examples use Matlab or Python.