Macroeconomics: Institutions, Instability, and the Financial System

Reviews
Preface
How to use the Online Resource Centre
Acknowledgements
List of figures
List of tables
Abbreviations

1 The demand side
1.1 Overview
1.1.1 Facts about the demand side and business cycles
1.1.2 Introducing the IS curve
1.2 Modelling
1.2.1 Goods market equilibrium
1.2.2 The multiplier
1.2.3 The 15 curve
124 Forward—looking behaviour
1.2.5 Consumption
1.2.6 Investment
1.2.7 Consumption, investment and the IS curve
1.3 Conclusions
1.4 Appendix
141 Real and nominal interest rates and the Fisher equation
1.4.2 Deriving the Euler equation and the PIH consumption function
1.5 Questions
1.5.1 Checklist questions
1.5.2 Problems and questions for discussion
2 The supply side
2.1 Overview
2.1.1 Unemployment
2.1.2 Why the labour market does not clear
2.1.3 Supply side effects on unemployment
2.1.4 Nominal rigidities and demand-side policy
2.1.5 Facts about the supply side
2.2 Modelling
2.2.1 Supply side effects on unemployment
2.2.2 Nominal rigidities, inflation and the business cycle
2.3 Applications
2.4 Conclusions
2.5 Appendix
2.5.1 The textbook model: competitive markets and complete contracts
2.5.2 The mark—up and the elasticity of demand
2.5.3 Deriving the PS curve including the tax wedge
2.6 Questions
2.6.1 Checklist questions
2.6.2 Problems and questions for discussion
3 The 3-equation model and macroeconomic policy
3.1 Overview
3.1.1 The role of the central bank in stabilization
3.1.2 Inflation and deflation
3.1.3 Introduction to the 3—equation model
3.2 Modelling
3.2.1 The 3-equation model
3.2.2 Using the 3-equation model
3.3 Applications
3.3.1 A temporary demand shock
3.3.2 Forecasting and lags
3.3.3 The deflation trap
3.3.4 A supply shock
3.4 Conclusions
3.5 Appendix
3.5.1 The 3-equation model in more detail
3.6 Questions
3.6.1 Checklist questions
3.6.2 Problems and questions for discussion
4 Expectations
4.1 Introduction
4.2 Risk, uncertainty and expectations
4.2.1 Risk and uncertainty
4.2.2 Expectations formation in real-world situations
4.2.3 The rational expectations hypothesis (REH)
4.3 Phillips curves, expectations and inflation
4.4 Expectations and the 3—equation model
4.4.1 A graphical example
4.4.2 Comparison of adaptive and rational inflation expectations
4.4.3 Central bank communication and anchoring inflation expectations
4.5 The Lucas critique
4.6 Expectations hypotheses, inflation bias and time inconsistency
4.6.1 Adaptive expections and inflation bias
4.6.2 Rational expectations, inflation bias and time inconsistency
4.6.3 Approaches to mitigate inflation bias
4.7 Conclusions
4.8 Questions
4.8.1 Checklist questions
4.8.2 Problems and questions for discussion
5 Money, banking and the macro-economy
5.1 Introduction
5.2 Money and the macro—economy
5.2.1 Money
522 Money supply and money demand
5.2.3 Money, banks and the 3—equation model
5.3 A modern financial system
5.3.1 The central bank sets the policy interest rate
5.32 The mark—up of the lending rate over the policy rate
5.33 Banks, credit constraints and collateral
5.3.4 The role of banks in a fractional reserve system
5.3.5 Governance arrangements: banks, central bank and government
5.4 The financial system and balance sheets
5.5 Banks and macro stabilization
5.5.1 Example: an investment boom shifts the IS curve
5.6 Conclusions
5.7 Appendix
5.7.1 Modelling the banking mark—up (r — rP)
5.8 Questions
5.8.1 Checklistquestions
5.8.2 Problems and questions for discussion
The financial sector and crises
6.1 Introduction
6.2 Bank behaviour, cycles and crises
6.2.1 Bank behaviour and the macro—economy
6.2.2 Financial crises and their cost to the economy
623 Financial cycles and business cycles
6.3 Basic mechanisms
6.3.1 Asset price bubbles
6.3.2 The financial accelerator
6.4 The housing feedback process and the 3-equation model
641 Credit constrained households, housing collateral and house prices
642 A plain vanilla financial crisis
6.4.3 Housing feedback process and the 3-equation model
6.5 The bank leverage—centred feedback process
6.5.1 Investment bank behaviour and leverage
6.6 A balance sheet recession and the financial accelerator
6.7 Conclusions
6.8 Appendix
6.8.1 Modelling the housing—centred positive feedback process
6.8.2 A positive feedback model of investment bank behaviour
6.9 Questions
691 Checklistquestions
6.9.2 Problems and questions for discussion
7 The global financial crisis: applying the models
71 Introduction
7.2 Pre—crisis financial system: incentives, instruments and actors
7.2.1 Incentives
7.2.2 lnstruments
7.2.3 Actors
7.3 The upswing of the financial cycle
7.4 The crisis
7.4.1 The scale of the crisis and nature of the post-crisis recession
7.4.2 The credit crunch
7.4.3 The crisis, macroeconomic policy and the 3-equation model
7.5 Policy intervention in the crisis
7.5.1 What went wrong in the Great Depression?
7.5.2 Monetary and fiscal policy in the crisis phase
753 Austerity policies in the post-crisis recession
7.5.4 Fixing banks first may mean less government debt later
7.6 Conclusions
7.7 Questions
7.7.1 Checklistquestions
7.7.2 Problems and questions for discussion
8 Growth, fluctuations and innovation
8.1 Introduction
8.2 Short- and medium-run macro models and growth theory
8.3 Growth concepts and useful tools
8.4 The Solow model
8.4.1 The model
8.4.2 Steady state or balanced growth
8.5 The Solow model and cross-country performance
8.6 Technological progress in the Solow model
8.6.1 Technological progress and steady state growth
8.6.2 Growth accounting: measuring the impact of technology
8.7 Endogenous growth: the Romer model
8.7.1 Research and development
8.7.2 Endogenous growth and endogenous technological progress: the Romer model
8.8 Schumpeterian growth: the Aghion—Howitt model
8.8.1 Creative destruction, competition and Schumpeterian growth
8.8.2 Schumpeterian growth and business cycle fluctuations
8.9 Conclusions
8.10 Questions
810.1 Checklistquestions
8.10.2 Problems and questions for discussion
9 The 3-equation model in the open economy
9.1 Overview
9.2 Modelling
9.2.1 The foreign exchange market and the UIP condition
9.2.2 Medium-run equilibrium in the open economy and the AD — ERU model
9.2.3 AD curve
9.2.4 Stabilization under flexible exchange rates: 3-equation model and RX curve
9.2.5 Inflation shock: Comparing closed and open economies
9.3 Applications
9.3.1 Demand and supply shocks: the 3—equation and AD—ERU models
9.3.2 Exchange rate overshooting
9.3.3 Exchange rate volatility
9.4 Conclusions
9.5 Appendix
9.5.1 Deriving the real UIP condition
9.5.2 The 3—equation model in more detail
9.5.3 Derivation of (1 — A) and its properties
9.5.4 Geometry ofthe RX curve: varying the parameters
9.6 Questions
9.6.1 Checklistquestions
9.6.2 Problems and questions for discussion
'IO The open economy: the demand and supply sides
10.1 Overview
10.1.1 The open economy accounting framework
10.1.2 The demand side, trade balance and the supply side
10.2 Modelling
10.2.1 The demand side and trade balance
10.2.2 The supply side in the open economy
10.2.3 The medium-run model: AD-BT—ERU
10.3 Application
10.3.1 The UK economy before the crisis
10.4 Conclusions
10.5 Appendix
10.6 Questions
10.6.1 Checklistquestions
1062 Problems and questions for discussion
11 Extending the open economy model: oil shocks and imbalances
11.1 Overview
11.11 How does a commodity price rise affect the macro—economy?
11.1.2 Interpreting an economy’s sector financial balances: does a current account
imbalance matter?
1113 Inflation targeting in a two-bloc world
1114 Different medium»run ’growth’ strategies can cause global imbalances
11.2 Modelling
11.2.1 Oil shocks
11.2.2 Current account imbalances
11.23 Sector financial balances
11.2.4 Global interdependence and imbalances
11.2.5 A 2—bloc model with inflation—targeting central banks
11.3 Conclusions
11.4 Appendix
1141 Dynamic adjustment to a shock in the 2—bloc model
11.5 Questions
1151 Checklist questions
11.5.2 Problems and questions for discussion
12 The Eurozone
12.1 Introduction
12.1.1 Origins of the Eurozone and the theory of an optimal currency area
12.1.2 The Eurozone’s performance in its first ten years
12.2 The Eurozone policy regime
12.2.1 The Maastricht policy assignment
12.2.2 Monetary policy in the Eurozone
12.2.3 Fiscal policy in the Eurozone
12.3 Stabilization in the Eurozone: common shocks
12.4 Stabilization in the Eurozone: country—specific shocks
12.4.1 ls stabilization policy necessary for country-specific shocks.7
12.4.2 The real exchange rate (competitiveness) channel
12.4.3 The real interest rate channel
12.4.4 Using fiscal policy to stabilize
12.4.5 The real exchange rate channel—internal devaluation
12.4.6 Conclusions about stabilization policy in the Eurozone
12.5 Eurozone governance, sovereign risk and the banking system
12.5.1 Governance arrangements: banks. governments and central bank
12.5.2 Governance solutions
12.6 Conclusions
12.7 Questions
12.7.1 Checklistquestions
12.7.2 Problems and questions for discussion
13 Monetary policy
13.1 Introduction
13.2 Monetary policy and the economy’s nominal anchor
13.2.1 The classical dichotomy and the nominal anchor
13.2.2 From theory to practice: monetary policy and inflation in the 19705 and 19805
132.3 The inflation target as the nominal anchor
13.3 Modelling
13.3.1 Active rule—based policy
13.3.2 Central bank preferences: sacrifice ratios and costly disinflation
13.3.3 The MR equation and Taylor rules
13.4 The modern monetary policy framework—practice
13.4.1 Taylor rules in practice
13.5 Monetary policy and the global financial crisis
13.5.1 Asset price bubbles and central bank intervention
13.5.2 Unorthodox monetary policy in the Great Recession
13.6 Post-crisis reform of financial regulation and the macro policy framework
13.6.1 The failures ofthe conventional macroeconomic policy framework
13.6.2 Post—crisis reforms for a safer financial system
13.7 Conclusions
13.8 Questions
13.8.1 Checklistquestions
13.8.2 Problems and questions for discussion
14 Fiscal policy
14.1 Introduction
14.2 Fiscal policy’s role in stabilization
14.2.1 The scope of fiscal policy
14.2.2 The effects ofdiscretionary fiscal policy
14.2.3 The automatic stabilizers
14.3 Debt dynamics
14.3.1 The government’s budget identity
14.3.2 Debt dynamics
14.3.3 The costs of high and rising government debt
14.3.4 Can fiscal consolidation be expansionary?
14.4 The government’s budget constraint and Ricardian equivalence
14.4.1 Ricardian equivalence and the PIH
14.4.2 Ricardian equivalence and fiscal policy effectiveness
14.5 Deficit bias and the political economy of debt
14.5.1 Causes ofdeficit bias
14.5.2 Why deficit bias may vary across countries
14.5.3 Approaches to tackle deficit bias
14.6 Conclusions
14.7 Questions
14.7.1 Checklistquestions
14.7.2 Problems and questions for discussion
15 Supply-side policy, institutions and unemployment
15.1 Introduction
15.2 Flows, matching and the Beveridge curve
15.3 Unions and wageAsetting arrangements
15.4 Efficiency wage models
15.41 A micro model of efficiency wage setting
15.4.2 What is the empirical evidence on efficiency wages?
15.5 Hysteresis and persistence in unemployment
15.6 Unemployment in OECD countries
15.6.1 Definitions: employment, unemployment and inactivity
15.6.2 Overview
15.6.3 Empirical studies
15.7 Labour market behaviour in the crisis
15.7.1 US unemployment during the crisis
15.7.2 European unemployment during the crisis
15.8 Conclusions
15.9 Questions
15.9.1 Checklist questions
1592 Problems and questions for discussion
16 Real Business Cycle and New Keynesian models
16.1 Introduction
16.2 The real business cycle model
1621 Introduction
16.2.2 The RBC model and business cycle facts
16.2.3 The model and its properties
16.2.4 Results
16.2.5 Criticisms ofthe RBC model
16.2.6 The impact of RBC modelling
16.3 The New Keynesian model and stabilization policy
1631 The New Keynesian Phillips curve
16.3.2 Stabilization bias
16.3.3 NK DSGE modelling
16.4 Conclusions
16.5 Questions
16.5.1 Checklist questions
16.5.2 Problems and questions for discussion
Bibliography
Index