Macroeconomics

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Macroeconomics

• Miniterm II

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Macroeconomics of the short term fluctuations

• Part I Money and Inflation
• Part II Empirical facts about short term
  fluctuations
• Part III Keynesian theories of the business
  cycles IS-LM model
• Part IV Neoclassical theories of the business
  cycles, Real Business Cycles models, New
  Keynesian macro

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Short history of macroMankiw (2006) The
Macroeconomist as Scientist and Engineer, NBER
Working Paper No. 12349

• Very few economists studied macroeconomic
  fluctuations before 1930s
• D. Hume (1752) wrote on monetary policy
• A. Pigou (1927) studied business cycles
• The Great Depression inspired economists to study
  aggregate economic variables to explain
• Drop in output 31
• Unemployment 25
• Term Macroeconomics first mentioned in 1940s
  in works of F. Modigliani, P. Samuelson, R.
  Solow, J. Tobin

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Keynesian approach

• Market are not always in equilibrium, prices are
  slow to adjust, consumers are myopic
• Main steps of development
• Formulated by Keynes in The General Theory
• Formally modeled by Hicks (1937), Modigliani
  (1944) aka IS-LM model
• Various computational models based on the IS-LM
  model were widely used in 1960s

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Components of IS-LM model

• IS curve relates financial conditions and fiscal
  policies to GDP
• LM curve determines interest rates that
  equilibrate demand for money
• Phillips curve describes how price levels respond

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New Classical

• Economic agents are rational and markets are
  always in equilibrium. Cycles are due to
  uncertainty, economic shocks, and bad government
  policies
• Main advancements of neoclassical approach
• Monetarism, Friedman (1957)
• Rational expectations, Lucas (1973, 1976)
• Real business cycles, Kydland and Prescott (1982)
  Long and Plosser (1983)

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New Keynesian

• Focus on price and wage rigidities, models are
  derived from microeconomic principles
• Main works
• Systematic monetary policy has real impact Fisher
  (1977)
• Model of inflation dynamics, Taylor (1980)

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Who won?

• Empirical evidence shows that
• Prices are slow to adjust
• Real Business Cycles theories can not explain
  many of observed regularities
• But neoclassical models have more appeal from the
  theoretical point
• Based on microeconomic principles
• Rational expectations
• Next step new models based on utility
  maximization of economic agents, but introduce
  market imperfections.

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Outline of the course

• We will spend 3 lectures studying money and
  inflation
• Then we discuss some empirical facts about the
  business cycles (1 lecture)
• Then we move to the closed economy IS-LM model
  and discuss Keynesian view on aggregate demand.
  (3-4 lectures)
• Then we discuss theories that model aggregate
  supply (2 lectures)
• Finally we will talk about the real business
  cycle theory and new Keynesian economics. (3-4
  lectures)