Macroeconomic policy is one of the most important policy domains, and the tools of macroeconomics are among the most valuable for policy makers. Yet there has been, up to now, a wide gulf between the level at which macroeconomics is taught at the undergraduate level and the level at which it is practiced. At the same time, doctoral-level textbooks are usually not targeted at a policy audience, making advanced macroeconomics less accessible to current and aspiring practitioners.
This book, born out of the Masters course the authors taught for many years at the Harvard Kennedy School, fills this gap. It introduces the tools of dynamic optimization in the context of economic growth, and then applies them to a wide range of policy questions – ranging from pensions, consumption, investment and finance, to the most recent developments in fiscal and monetary policy. It does so with the requisite rigor, but also with a light touch, and an unyielding focus on their application to policy-making, as befits the authors’ own practical experience.
Advanced Macroeconomics: An Easy Guide is bound to become a great resource for graduate and advanced undergraduate students, and practitioners alike.
“A tour de force. Presenting modern macro theory rigorously but simply, and showing why it helps understand complex macroeconomic events and macroeconomic policies.” — Olivier Blanchard
“This terrifically useful text fills the considerable gap between standard intermediate macroeconomics texts and the more technical text aimed at PhD economics courses. The authors cover the core models of modern macroeconomics with clarity and elegance, filling in details that PhD texts too often leave out. At the same time, the authors draw on their own extensive policy experience to provide thoughtful policy motivation and historical context throughout. Advanced undergraduates, public policy students and indeed many economics PhD students will find it a pleasure to read, and a valuable long-term resource.” — Kenneth Rogoff (Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University, former Chief Economist and Director of Research at the IMF)
“This is an excellent and highly rigorous yet accessible guide to fundamental macroeconomic frameworks that underpin research and policy making in the world. The content reflects the unique perspective of authors who have worked at the highest levels of both government and academia. This makes the book essential reading for serious practitioners, students, and researchers.” — Gita Gopinath (John Zwaanstra Professor of International Studies and of Economics at Harvard University, Chief Economist and Director of Research at the IMF)
Author(s): Filipe Campante, Federico Sturzenegger, Andrés Velasco
Publisher: LSE Press
Year: 2021
Language: English
Pages: 418
City: London
Cover
Title Page
Copyright Page
Dedication Page
Short Contents
Contents
List of Figures
List of Tables
Preface
Acknowledgments
About the Authors
Chapter 1. Introduction
Note
Growth Theory
Chapter 2. Growth theory preliminaries
2.1 Why do we care about growth?
2.2 The Kaldor facts
2.3 The Solow model
2.3.1 The (neoclassical) production function
2.3.2 The law of motion of capital
2.3.3 Finding a balanced growth path
2.3.4 Transitional dynamics
2.3.5 Policy experiments
2.3.6 Dynamic inefficiency
2.3.7 Absolute and conditional convergence
2.4 Can the model account for income differentials?
2.5 The Solow model with exogenous technological change
2.6 What have we learned?
Notes
References
Chapter 3. The neoclassical growth model
3.1 The Ramsey problem
3.1.1 The consumer's problem
3.1.2 The resource constraint
3.1.3 Solution to consumer's problem
3.1.4 The balanced growth path and the Euler equation
3.1.5 A digression on inequality: Is Piketty right?
3.1.6 Transitional dynamics
3.1.7 The effects of shocks
3.2 The equivalence with the decentralised equilibrium
3.2.1 Integrating the budget constraint
3.2.2 Back to our problem
3.3 Do we have growth after all?
3.4 What have we learned?
Notes
References
Chapter 4. An application: The small open economy
4.1 Some basic macroeconomic identities
4.2 The Ramsey problem for a small open economy
4.2.1 A useful transformation
4.2.2 Solution to consumer's problem
4.2.3 Solving for the stock of domestic capital
4.2.4 The steady state consumption and current account
4.2.5 The inexistence of transitional dynamics
4.2.6 Productivity shocks and the current account
4.2.7 Sovereign wealth funds
4.3 What have we learned?
4.4 What next?
Notes
References
Chapter 5. Endogenous growth models I: Escaping diminishing returns
5.1 The curse of diminishing returns
5.2 Introducing human capital
5.2.1 Laws of motion
5.2.2 Balanced growth path
5.2.3 Still looking for endogenous growth
5.3 The AK model
5.3.1 Solution to household's problem
5.3.2 At long last, a balanced growth path with growth
5.3.3 Closing the model: The TVC and the consumption function
5.3.4 The permanent effect of transitory shocks
5.3.5 In sum
5.4 Knowledge as a factor of production
5.4.1 Learning by doing
5.4.2 Adam Smith's benefits to specialisation
5.5 Increasing returns and poverty traps
5.5.1 Poverty trap in the Solow model
5.5.2 Policy options to overcome poverty traps
5.5.3 Do poverty traps exist in practice?
5.6 What have we learned?
5.7 What next?
Notes
References
Chapter 6. Endogenous growth models II: Technological change
6.1 Modelling innovation as product specialisation
6.2 Modelling innovation in quality ladders
6.3 Policy implications
6.3.1 Distance to the technological frontier and innovation
6.3.2 Competition and innovation
6.3.3 Scale effects
6.4 The future of growth
6.5 What have we learned?
6.6 What next?
Notes
References
Chapter 7. Proximate and fundamental causes of growth
7.1 The proximate causes of economic growth
7.1.1 Growth accounting
7.1.2 Using calibration to explain income differences
7.1.3 Growth regressions
7.1.4 Explaining cross-country income differences, again
7.1.5 Summing up
7.2 The fundamental causes of economic growth
7.2.1 Luck
7.2.2 Geography
7.2.3 Culture
7.2.4 Institutions
7.3 What have we learned?
7.4 What next?
Notes
References
Overlapping Generations Models
Chapter 8. Overlapping generations models
8.1 The Samuelson-Diamond model
8.1.1 The decentralized equilibrium
8.1.2 Goods and factor market equilibrium
8.1.3 The dynamics of the capital stock
8.1.4 A workable example
8.2 Optimality
8.2.1 The steady-state marginal product of capital
8.2.2 Why is there dynamic inefficiency?
8.2.3 Are actual economies dynamically inefficient?
8.2.4 Why is this important?
8.3 Overlapping generations in continuous time
8.3.1 The closed economy
8.3.2 A simple extension
8.3.3 Revisiting the current account in the open economy
8.4 What have we learned?
Notes
References
Chapter 9. An application: Pension systems and transitions
9.1 Fully funded and pay-as-you-go systems
9.1.1 Fully funded pension system
9.1.2 Pay-as-you-go pension system
9.1.3 How do pensions affect the capital stock?
9.1.4 Pensions and welfare
9.2 Moving out of a pay-as-you-go system
9.2.1 Financing the transition with taxes on the young
9.2.2 Financing the transition by issuing debt
9.2.3 Discussion
9.2.4 Do people save enough?
9.3 What have we learned?
9.4 What next?
Notes
References
Chapter 10. Unified growth theory
10.1 From Malthus to growth
10.1.1 The post-Malthusian regime
10.1.2 Sustained economic growth
10.2 A “unified” theory
10.2.1 A simple model of the demographic transition
10.2.2 Investing in human capital
10.2.3 The dynamics of technology, education and population
10.3 The full picture
10.4 What have we learned?
10.5 What next?
Notes
References
Consumption and Investment
Chapter 11. Consumption
11.1 Consumption without uncertainty
11.1.1 The consumer's problem
11.1.2 Solving for the time profile and level of consumption
11.2 The permanent income hypothesis
11.2.1 The case of constant labour income
11.2.2 The effects of non-constant labour income
11.3 The life-cycle hypothesis
Notes
References
Chapter 12 Consumption under uncertainty and macro finance
12.1 Consumption with uncertainty
12.1.1 The random walk hypothesis
12.1.2 Testing the random walk hypothesis
12.1.3 The value function
12.1.4 Precautionary savings
12.2 New frontiers in consumption theory
12.2.1 Present bias
12.3 Macroeconomics and finance
12.3.1 The consumption-CAPM
12.3.2 Equity premium puzzle
12.4 What next?
Notes
References
Chapter 13 Investment
13.1 Net present value and the WACC
13.1.1 Pindyck's option value critique
13.2 The adjustment cost model
13.2.1 Firm's problem
13.2.2 Tobin's q
13.2.3 The dynamics of investment
13.2.4 The role of x
13.3 Investment in the open economy
13.3.1 The consumer's problem
13.3.2 Bringing in the firm
13.3.3 Initial steady state
13.3.4 The surprising effects of productivity shocks
13.4 What next?
Notes
References
Short Term Fluctuations
Chapter 14. Real business cycles
14.1 The basic RBC model
14.1.1 The importance of labour supply
14.1.2 The indivisible labour solution
14.2 RBC model at work
14.2.1 Calibration: An example
14.2.2 Does it work?
14.3 Assessing the RBC contribution
14.4 What have we learned?
14.5 What next?
Notes
References
Chapter 15 (New) Keynesian theories of fluctuations: A primer
15.1 Keynesianism 101: IS-LM
15.1.1 Classical version of the IS-LM model
15.1.2 The Keynesian version of the IS-LM model
15.1.3 An interpretation: The Fed
15.1.4 From IS-LM to AS-AD
15.2 Microfoundations of incomplete nominal adjustment
15.2.1 The Lucas island model
15.2.2 The model with perfect information
15.2.3 Lucas' supply curve
15.3 Imperfect competition and nominal and real rigidities
15.4 New Keynesian DSGE models
15.4.1 The canonical New Keynesian model
15.4.2 A Taylor rule in the canonical New Keynesian model
15.4.3 Back to discrete time
15.5 What have we learned?
15.6 What next?
Notes
References
Chapter 16 Unemployment
16.1 Theories of unemployment
16.2 A model of job search
16.2.1 Introducing labour turnover
16.3 Diamond-Mortensen-Pissarides model
16.3.1 Nash bargaining
16.3.2 Unemployment over the cycle
16.4 Efficiency wages
16.4.1 Wages and effort: The Shapiro-Stiglitz model
16.5 Insider-outsider models of unemployment
16.5.1 Unemployment and rural-urban migration
16.6 What next?
Notes
References
Monetary and Fiscal Policy
Chapter 17. Fiscal policy I: Public debt and the effectiveness of fiscal policy
17.1 The government budget constraint
17.2 Ricardian equivalence
17.2.1 The effects of debt vs tax financing
17.2.2 Caveats to Ricardian equivalence
17.3 Effects of changes in government spending
17.3.1 The initial steady state
17.3.2 Permanent increase in government spending
17.3.3 Temporary increase in spending
17.4 Fiscal policy in a Keynesian world
17.4.1 The current (empirical) debate: Fiscal stimulus and fiscal adjustment
17.5 What have we learned?
17.6 What next?
17.7 Appendix
17.7.1 Debt sustainability
17.7.2 A simplified framework
17.8 Measurement issues
17.8.1 The role of inflation
17.8.2 Asset sales
17.8.3 Contingent liabilities
17.8.4 The balance sheet approach
Notes
References
Chapter 18. Fiscal policy II: The long-run determinants of fiscal policy
18.1 Tax smoothing
18.1.1 The government objective function
18.1.2 Solving the government's problem
18.1.3 The time profile of tax distortions
18.1.4 The level of tax distortions
18.1.5 The steady state
18.1.6 Changes in government expenditures
18.1.7 Countercyclical fiscal policy
18.1.8 Smoothing government spending
18.1.9 Summing up
18.2 Other determinants of fiscal policy
18.2.1 The political economy approach
18.2.2 Fiscal rules and institutions
18.3 Optimal taxation of capital in the NGM
18.4 What have we learned?
18.5 What next?
Notes
References
Chapter 19. Monetary policy: An introduction
19.1 The conundrum of money
19.1.1 Introducing money into the model
19.2 The Sidrauski model
19.2.1 Finding the rate of inflation
19.2.2 The optimal rate of inflation
19.2.3 Multiple equilibria in the Sidrauski model
19.2.4 Currency substitution
19.2.5 Superneutrality
19.3 The relation between fiscal and monetary policy
19.3.1 The inflation-tax Laffer curve
19.3.2 The inflation-tax and inflation dynamics
19.3.3 Unpleasant monetary arithmetic
19.3.4 Pleasant monetary arithmetic
19.4 The costs of inflation
19.4.1 The Tommasi model: Inflation and competition
19.4.2 Taking stock
Notes
References
Chapter 20. Rules vs Discretion
20.1 A basic framework
20.1.1 Time inconsistency
20.1.2 A brief history of monetary policy
20.2 The emergence of inflation targeting
20.2.1 A rigid inflation rule
20.2.2 Which regime is better?
20.2.3 The argument for inflation targeting
20.2.4 In sum
Notes
References
Chapter 21. Recent debates in monetary policy
21.1 The liquidity trap and the zero lower bound
21.2 Reserves and the central bank balance sheet
21.2.1 Introducing the financial sector
21.2.2 A model of quantitative easing
21.2.3 Effects of monetary policy shocks
21.3 Policy implications and extensions
21.3.1 Quantitative easing
21.3.2 Money and banking
21.3.3 Credit easing
21.4 Appendix
Notes
References
Chapter 22. New developments in monetary and fiscal policy
22.1 Secular stagnation
22.2 The fiscal theory of the price level
22.2.1 Interest rate policy in the FTPL
22.3 Rational asset bubbles
22.3.1 The basic model
22.3.2 Government debt as a bubble
22.3.3 Implications for fiscal, financial and monetary policy
22.4 Appendix 1
22.5 Appendix 2
22.6 Appendix 3
Notes
References
Appendix A. Very brief mathematical appendix
A.1 Dynamic optimisation in continuous time
A.2 Dynamic optimisation in discrete time
A.3 First-order differential equations
A.3.1 Integrating factors
A.3.2 Eigenvalues and dynamics
Notes
Appendix B. Simulating an RBC model
Appendix C. Simulating a DSGE model
Index
