AØKK08360U Summerschool 2017: Dynamic Political Economy
MSc programme in Economics – elective course
This course introduces students to modeling policy choices in a dynamic setting. It starts with applications of dynamic programming techniques to incentive problems, both for the design of policies, their credibility. We then characterize equilibrium when policies themselves are endogenous and equilibria are restricted to be Markov. Most examples will be on fiscal policy.
Students are expected to learn the logic behind dynamic programming with incentive problems and their applications to the understanding of contract design. Students will be taught the basic framework of dynamic voting models that use dynamic programming tools for economic and political decisión simultaneously. At the end of the course the student is expected to understand, and be proficient in the application of the concepts and methods from the models covered in the course. The student should show competence in analyzing a macroeconomic problem, where the above‐mentioned concepts and methods are central, that is competence in solving such models and explaining in economic terms the results and implications and how they derive from the assumptions of the model.
The particularly good performance, corresponding to the top mark, is characterized by a complete fulfillment of these learning objectives.
Some lectures will have time dedicated to solving problems sets that will be given in advance
Basic textbook: Ljungqvist L. and T. Sargent "Recursive Macroeconomic Theory" (2004) MIT Press (or later editions).
1 Optimal taxation. Self insurance.
LS chapter 15 and 16
Lucas R. and N. Stokey "Optimal Monetary and Fiscal Policy in an Economy without Capital" (1983), Journal of Monetary Economics, 12(1), 55-94
Barro R. "On the Determination of Public Debt" (1979), Journal of Political Economy, 87, 940-971
Aiyagari S., A. Marcet, T. Sargent and J. Seppala, "Optimal Taxation without State Contingent Debt" (2002), Journal of Political Economy, 110(6), 1220-1254
2 Social insurance with incentive problems. Dynamic contracts.
LS chapters 19 and 20
Kocherlakota N. (1996) "Implications of Efficient Risk Sharing without Commitment" Review of Economic Studies, 63(4)
Kletzer and M. Wright, (2000) "Sovereign Debt as Intertemporal Barter", American Economic Review, Vol 90(3), 621-39
Gonzalez-Eiras M. (2016) "Why Might the Old Want to Honor Sovereign Debt", working paper
3 Optimal unemployment insurance. Redistribution.
LS chapter 21
Hopenhayn H. and J. Nicolini (1997) "Optimal Unemployment Insurance" Journal of Political Economy, 105(2)
Shimer R. and I. Werning (2007) "Reservation Wages and Unemployment Insurance", Quarterly Journal of Economics, 122(3), 1145-85
Werning I. "Optimal Fiscal Policy with Redistribution" (2007), Quarterly Journal of Economics, Vol 122(3), 925-967
4 Credible government policies. Fiscal and monetary.
LS chapter 22
Abreu D., D. Pearce and E. Stacchetti (1990) "Toward a Theory of Discounted Repeated Games with Imperfect Monitoring" Econometrica, 58 (5)
Phelan C. and E. Stacchetti (2001) "Sequential Equilibria in a Ramsey Tax Model" Econometrica, 69(6)
Athey S., A. Atkeson, and P. Kehoe, (2005) "The Optimal Degree of Discretion in Monetary Policy." Econometrica, 73(5), 1431-75
5 Dynamic voting. Positive theory of taxation.
Krusell P., V. Quadrini and J. Rios-Rull "Politico-economic Equilibrium and Economic Growth" (1997) Journal of Economic Dynamics and Control, 21
Krusell P. and J. Rios-Rull (1999) "On the Size of the US Government: Political Economy in the Neoclassical Growth Model", American Economic Review, 89(5), 1156-81
Farhi E., C. Sleet, I. Werning and S. Yeltekin, (2012) "Non-linear Capital Taxation
Without Commitment", Review of Economic Studies, 79, 1469–1493
6 Dynamic voting. Social security
Forni L. (2005) "Social security as Markov equilibrium in OLG models", Review of Economic Dynamics, 8, 178-194.
Gonzalez-Eiras M. (2011) "Social security as Markov equilibrium in OLG models: a note", Review of Economic Dynamics, 14, 549-552.
Gonzalez-Eiras M. and D. Niepelt (2008) "The future of social security", Journal of Monetary Economics, 55 (2), 197-218.
Song Z. (2011) "The dynamics of inequality and social security in general equilibrium", Review of Economic Dynamics, 14(4), 613-635.
Gonzalez-Eiras M. and D. Niepelt (2012) "Ageing, Government Budgets, Retirement, and Growth", European Economic Review, European Economic Review, Vol. 56(1), 97-115.
7 Dynamic voting. Debt
Battaglini M. and Coate S., (2008) "A Dynamic Theory of Public Spending, Taxation and Debt", American Economic Review, 98(1)
Song, Z., Storesletten, K. and Zilibotti, F. (2012) "Rotten parents and disciplined chil-
dren: A politico-economic theory of public expenditure and debt", Econometrica
Gonzalez-Eiras M. and D. Niepelt (2015) "Politico-Economic Equivalence", Review of Economic Dynamics, 18, 843-862
8 Dynamic voting. Sovereign debt
Arellano C. (2008) "Default Risk and Income Fluctuations in Emerging Economies", American Economic Review, 98(3) 690-712(23).
Niepelt D. (2014) "Debt maturity without commitment", Journal of Monetary Economics, 68, S37–S54.
Sunder-Plassmann L. (2016) "Writing off sovereign debt: Default and recovery rates over the cycle", working paper.
9 Dynamic voting. Other
Gonzalez-Eiras M. and D. Niepelt (2016) "Fiscal Federalism, Taxation and Grants", working paper
Pei Y. and Z. Yie (2016) "A Quantitative Theory of Time-Consistent Unemployment Insurance", working paper
PhD students may take this course and complete a research module. For this on addition of the requirements stated above, they must write a term paper that has to be handed in by October 1, 2017.
Timetable and venue:
To see the time and location of the lectures press the link seen under "Se skema" in the left side of the page or
Please press the link (partly in English):
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-B5-5F17; [Name of course]”
-Select Report Type: “List – Week Days”
-Select Period: “Forår/Spring – Weeks 4-29”
Press: “ View Timetable”
for enrolled students. More information about registration, schedule, rules, courses etc. can be found at the student intranet (KUnet) for courses (English) andstudent intranet (KUnet) for courses (Danish).
Registration and information for foreign students not enrolled please find more information at Study Economics.
- 7,5 ECTS
- Type of assessment
- Written assignment, 48 hourstake-home exam. The exam assignment is given in English and must be answered in English.
- Exam registration requirements
Full participation at the summerschool is mandatory and the student must actively participate in all activities.
- All aids allowed
- Marking scale
- 7-point grading scale
- Censorship form
- External censorship
100 % censurship
- Exam period
July 22, from 10.00 AM to July 24, at 10.00 AM, 2017.
Phd-studentes must hand in a term paper by October 1, 2017.
The re-exam will take place in the exam period December 2017 - January 2018. The exact day and time of the exam will be informed at the student intranet for Summer schools and in the Self-Service at KUnet during Autumn 2017.
If only a few students have registered for the re-exam, the exam might change to an oral exam including the date, time and place for the exam, which will be informed by the Examination Office.
Criteria for exam assesment
Students are assessed on the extent to which they master the learning outcome for the course.