Econ 4200 - Intro

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Econ 3101

Advanced Macroeconomics

Dr. Victor Li

Spring 2010

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Textbooks:

Primary: Williamson - Macroeconomics

Others: Romer, McCallum, Lecture Notes

Remark about integrating readings.

Prerequisits:

Economics ± 1001,1002, 2101,2102

Math ± Algebra, Multi-Variable Calculus,

Linear Algebra (1500, 1505, 3400)

Math Econ - 3128

You need to be familiar AND comfortable with this level

of mathematics to do well in the course.

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Grades

Website: www.homepage.villanova.edu/victor.li

Objective: To provide an introduction to modern

methods used in macroeconomic research.

* Revisit static IS-LM macro model

* Integration of macro with micro economics

* Study the dynamic process of businesscycles, economic growth, and stabilization

policy.

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Some Macro Facts and Issues

Key Measures of Macroeconomic activity:

(1) GDP (level and per capita)

(2) Productivity(3) Prices and Inflation

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U.S. Output, 1869-2005

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Figure 1.1 Per Capita Real GDP (in 2000

dollars) for the United States, 1900±2005

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GDP Growth: 1970-2008

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Macroeconomic Data and Growth

Rates Data collected over time is often referred to as time series

data. Most macro data is time series.

Let yt = an economic variable recorded at date t

The growth rate of y from date (t-1) to (t) is given by

If g is a small number (even 5% is 0.05), then

111

1!

(!

!

t

t

t

t t

t y

y

y

y

y

y y g

g g } )1ln(

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Using this, we have

)ln()ln()ln( 1 y y y g t t t

(!}

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Example

Year GDP g =(y/y g =(ln(y)

2000 10

2001 10.25 2.5% 2.46%

2002 10.50 2.44% 2.40%

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Figure 1.1 Per Capita Real GDP (in 2000

dollars) for the United States, 1900±2005

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Figure 1.2 Natur al Logarithm of Per

Capita Real GNP

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GDP movement can be divided into twoparts: trend and cyclical.

Trend GDP and productivity growthmeasures long-term economic growth.

Annual Productivity Growth

1955-73 2.12%

1973-98 1.67%What determines long-term growth and what

are the implications for policy?

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Capita Real GNP

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Capita Real GNP and Trend

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Figure 1.4 Percentage Deviations from

Trend in Per Capita Real GNP

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Figure 1.10 Percentage Deviations from

Trend in GDP, 1947±2003

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Cyclical (detrended GDP) measures the

business cycle.

(i) Largest recession was GD.

(ii) Wartimes are usually associated with

expansion. 1991-01 was longest peace time

expansion.

(iii) Historical observations:- Okun¶s Law

- Phillip¶s Curve

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(iv) Business cycles are similar in terms of co-

movement and timing.

Questions: What causes business cycles and

what¶s the role of government stabilizationpolicy? What explains short-run versus long-run

tradeoff between inflation and unemployment?

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Macro Economic Theory

Y = set of macroeconomic variables (facts)

(needs measurement)

X = set of given variables, assumptions about

how economy works.

Construction of theory: X Y

Validation of Theory

Ability to explain facts (statistical)

Theories need not be completely correct to

be useful!

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Economics as Social Science

Difference between hard-sciences and

social science is the lack of natural or

controlled experiments.

Models can be used to design artificial

economies or economic laboratories.

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The Evolution of Macro Ideas

³ A Quick Refresher Course in Macroeconomics´by N. Gregory Mankiw, J ournal of Economic Literature (Dec 1990).

³Revolution and Evolution in 20th

CenturyMacroeconomics´ by Michael Woodford,Princeton, 1999.

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Gap between ³applied´ and ³modern´ macrotheory.

Applied IS-LM, Phillips Curve

Used in textbooks, forecasters,public policy making.

Modern Developments in macro research(³academic´) of the past 30-40 years.

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At some level, gap is also caused by the degree

of complexity and rigor of models and the tools

of analysis.

Copernicus (heilocentric) versus Ptolemy(geocentric)

- Ultimately modern developments will change

the way macroeconomists view the world and

economic policy is conducted.

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Market Economics (Classical - 18th, 19th

Centuries)

- Adam Smith, David Ricardo- Free market adjustment of prices

- Classical Dichotomy

- Invisible hand, government non-intervention

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Keynesian Revolution (1930s)

- ³Birth´ of Macroeconomics

- J.MK

eynes, P. Samuelson, J.T

obin- Great Depression

- Failure of Markets and price system

- Need for active stabilization policy

- Development of basic IS-LM model andamended to include Phillips Curve

(The ³consensus´ or ³neoclassical

synthesis´ from 1930-70)

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1970s: Breakdown of the consensus.

- Empirical: Failure to account for high

inflation and unemployment

(Philips Curve breakdown).

- Theoretical: Gap between macro and

microeconomic principles.

Fails to account for howexpectations affects behavior

(the ³Lucas Critique´)

IS-LM model is, at best, incomplete.

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Monetarism & New Classical Macroeconomics

- M. Friedman , R. Lucas, T. Sargent, N.

Wallace, R. Barro.

- Economic decisions are dynamic.

- Rational expectations

- Microeconomic foundations & Market-

Clearing- Intertemporal General Equilibrium Macro

Models (³Modern Macro Models´)

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Microfoundations? Another parable of

Friedman and the billiard player.

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New Classical Theories

- imperfect information and money

- real business cycles- Sectoral shifts (search unemployment)

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New Keynesian Macroeconomics

- L. Ball, G. Mankiw, D. Romer.

- Also incorporates dynamic decisionmaking and rational expectations.

- Microeconomic foundations of sticky

wages and prices (labor contracts,monopolistic competition).

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New Neoclassical Synthesis (1990s-

Present)?

* Integration of K

eynesian and Classicalideas into modern macro models.

* Market Clearing ³Keynesian´ Models

(e.g., coordination failure)

* Emphasis on both real and nominal

shocks.

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Relation to Eco 2101

Used IS-LM model to explain both Classical

& Keynesian Theories by distinguishing

between short-run and long-run.

IS-LM as an analytical tool is at best

incomplete.

* Micro-foundations for individual behavior

* Static versus dynamic

* No explicit treatment of expectations

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Objective of this course: Develop the

foundations of modern macro theory and

apply them to studying growth, business

cycles, and economic policy.

New Classical macro models will be

emphasized:

* Benchmark model

* Led to the development of modern

macro theory.

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Things you should know about measurement

- Definition and measurement of basic concepts:

GDP, GNP prices, interest rates, budget

deficit, unemployment rate, ect.

- Real versus nominal and the price index as a

deflator.

- Measurement of saving and wealth andrelationship to investment.

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Math Review

Functions and Differentiation

Matrices

Systems of Equations Unconstrained Optimization

Constrained Optimization

Others

Econ 4200 - Intro

Documents

Transcript of Econ 4200 - Intro