ECON 372 Dynamic Economic Analysis: Tools and Intuition (Not offered 1998-99)

Most of the tools of traditional economics focus on one-time decisions: how much to spend, given a budget constraint; or how much to produce, given prices and costs. Many important issues, however, involve decisions that must be repeated over time or made sequentially. For example, we might be interested in how best to use an exhaustible resource, or how to accumulate capital efficiently. More concretely, we might be interested in how alternative social security policies would affect savings behavior. To address such questions, economists have increasingly drawn on a collection of mathematical tools-often called dynamic optimization theory-to support economic institutions. This course will introduce students to the tool kit of dynamic economic analysis. We will study the calculus of variations and optimal control theory, introducing as needed such tools as difference and differential equations and integral calculus. But although we will approach these tools rigorously, we will strive constantly to link technique to economic intuition-and to ask when and how these tools can help us to address economic problems. We will read some classic papers applying dynamic tools to economic problems-relating to issues such as asset pricing, monopoly behavior, labor demand, inflation-unemployment tradeoffs, and firm investment. We will also consider the limitations of such stylized models. This class is intended primarily for students with an interest in the use of mathematics for economics, and for those students who are contemplating graduate study in economics. Economics 251 is a prerequisite for the class, along with Math 104; Math 105 is highly recommended. Students with a background in computer programming may have the option to substitute some computational exercises for certain problem sets. Students will be evaluated on the basis of problem sets and exams.

GOLLIN