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Table Of Contents

CHAPTER 1
On the Concept and Measurement of Capital
The Expenditure Approach
The Income Approach
The Underground Economy
Real per capita GDP
CHAPTER 2
2.2 The Household Sector
2.3 The Business Sector
2.3 Households and Firms Together
4.1 Decision-Making Under Uncertainty
4.2 Animal Spirits
CHAPTER 3
CHAPTER 4
2.1 Preferences and Endowments
2.2 Robinson Crusoe
2.3 An International Bond Market
3.1 A Transitory Increase in Current GDP
3.2 Good News/Bad News
3.3 A Permanent Increase in GDP
3.4 A Real Interest Rate Shock
5.1 General Equilibrium in a 2-Period Endowment Economy
5.2 A World Recession
CHAPTER 5
6.1 Ricardian Equivalence Revisited
6.2 Government Spending Shocks
6.3 Barro’s Tax-Smoothing Argument
6.4 U.S. Fiscal Policy
CHAPTER 6
3.2 Optimal Investment Expenditure
4.1 The Investment Choice: Maximizing Wealth
4.2 The Consumption-Saving Choice: Maximizing Utility
CHAPTER 7
2.2 A Model of Employment Transitions
3.2 A Model of Unemployment
CHAPTER 8
4.1 The Golden Rule Allocation
Long-Run Neutrality
Short-Run Neutrality
Short-Run Non-Neutrality
CHAPTER 9
CHAPTER 10
On Capital as Private Money
A Useful Simplification
Broad Money and the Money Multiplier
Rate of Return Dominance
A Liquidity Trap
CHAPTER 11
Understanding Nominal Exchange Rate Indeterminacy
A Multilateral Fixed Exchange Rate Regime
Fixing the Exchange Rate Unilaterally
Constant Exchange Rate Equilibria
Volatile Exchange Rate Equilibria with Constant Fundamentals
CHAPTER 12
Classical Antiquity (500 B.C. - 500 A.D.)
The Middle Ages (500 A.D. - 1450 A.D.)
The Renaissance and Baroque Period (1450 A.D. - 1750 A.D.)
An Improvement in Health Conditions
CHAPTER 13
Steady State in the Solow Model
Differences in Saving Rates
A Specific-Factors Model
A Simple Model
Initial Conditions and Nonconvergence
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Macroeconomic Theory and Policy- David Andolfatto

Macroeconomic Theory and Policy- David Andolfatto

Ratings: (0)|Views: 64|Likes:
Published by Michael Harnack
Preface

The field of macroeconomic theory has evolved rapidly over the last quarter
century. This evolution has manifested itself primarily in terms of methodological
developments, rather than in the set of questions that interest macroeconomists.
These methodological developments entail the use of language and tools
that are based on microeconomic theory (including game theory). Modern cohorts
of PhD students are taught how to interpret macroeconomic phenomena
in terms of model economies consisting of economic actors with explicit goals
facing explicit constraints. Aggregate outcomes (model predictions) must satisfy
a specified consistency (equilibrium) requirement. This methodology is in
stark contrast to earlier methods that rely primarily on aggregate reduced-form
equations to describe how an economy functions. Unfortunately (from my perspective),
most introductory and intermediate macroeconomic textbooks today
continue to employ these earlier (and outdated) methods. It is time to move
on. This text is designed to help.
The main challenge in teaching macroeconomics to undergraduates using the
modern methodology has to be the added technical (primarily mathematical)
requirements that the approach demands. The frontier of the discipline utilizes
models that are so complicated, they can only be solved using numerical
methods. But while one cannot really do justice to the richness of the modern
approach, I believe that one can convey many basic lessons and insights
by employing a sequence of simplified models that build on each other. Much,
if not all, of this basic intuition can be exposited by way of simple diagrams
(and high-school algebra). This is what I try to do. You can judge for yourself
whether you think I am successful in this endeavor.

I would like to comment on a criticism that one often hears regarding the
modern approach; in particular, its apparent reliance on the ‘representative
agent’ hypothesis. As it turns out, I do make extensive (but not exclusive)
use of this simplifying assumption. One should be aware, however, that the
modern approach in no way depends on the representative agent formulation
(there is nothing that prevents one from introducing as much heterogeneity that
is desired). The representative agent hypothesis is used nowadays primarily as
a pedagogical device. While some conclusions are no doubt sensitive to the
assumption, there are many that are not (and it is these latter conclusions that
deserve emphasis). In any case, I find it ironic that the criticism is most often
leveled by those who prefer the older methodology; which, by its very nature, is
typically cast in terms of a representative agent (e.g., in the form of an aggregate
consumption function that makes no reference to individual differences).

I like the modern approach for two reasons. First, it highlights the interaction
between incentives and constraints that govern decision-making. Economics
is about decision-making and macroeconomics is concerned with explaining how
individual decisions interact to generate aggregate outcomes. This decisionmaking
process is almost entirely neglected in the older approach, which simply
describes (rather than explains) why people behave the way they do. Second,
because the modern approach insists on modeling preferences explicitly, there
is a straightforward and entirely natural way to evaluate the welfare implications
of government policy interventions. In contrast, the older approach must
rely exclusively on the modeler’s own ad hoc welfare function to make similar
statements. For example, it is often simply assumed that higher income, or
lower unemployment, or a stabilized business cycle must be welfare improving.
As it turns out, these assumptions have little or no theoretical foundation. A
qualified professional may understand the circumstances under which such an
assumptions are justified; but a student trained solely in older methods is not
likely to appreciate such subtleties (which
Preface

The field of macroeconomic theory has evolved rapidly over the last quarter
century. This evolution has manifested itself primarily in terms of methodological
developments, rather than in the set of questions that interest macroeconomists.
These methodological developments entail the use of language and tools
that are based on microeconomic theory (including game theory). Modern cohorts
of PhD students are taught how to interpret macroeconomic phenomena
in terms of model economies consisting of economic actors with explicit goals
facing explicit constraints. Aggregate outcomes (model predictions) must satisfy
a specified consistency (equilibrium) requirement. This methodology is in
stark contrast to earlier methods that rely primarily on aggregate reduced-form
equations to describe how an economy functions. Unfortunately (from my perspective),
most introductory and intermediate macroeconomic textbooks today
continue to employ these earlier (and outdated) methods. It is time to move
on. This text is designed to help.
The main challenge in teaching macroeconomics to undergraduates using the
modern methodology has to be the added technical (primarily mathematical)
requirements that the approach demands. The frontier of the discipline utilizes
models that are so complicated, they can only be solved using numerical
methods. But while one cannot really do justice to the richness of the modern
approach, I believe that one can convey many basic lessons and insights
by employing a sequence of simplified models that build on each other. Much,
if not all, of this basic intuition can be exposited by way of simple diagrams
(and high-school algebra). This is what I try to do. You can judge for yourself
whether you think I am successful in this endeavor.

I would like to comment on a criticism that one often hears regarding the
modern approach; in particular, its apparent reliance on the ‘representative
agent’ hypothesis. As it turns out, I do make extensive (but not exclusive)
use of this simplifying assumption. One should be aware, however, that the
modern approach in no way depends on the representative agent formulation
(there is nothing that prevents one from introducing as much heterogeneity that
is desired). The representative agent hypothesis is used nowadays primarily as
a pedagogical device. While some conclusions are no doubt sensitive to the
assumption, there are many that are not (and it is these latter conclusions that
deserve emphasis). In any case, I find it ironic that the criticism is most often
leveled by those who prefer the older methodology; which, by its very nature, is
typically cast in terms of a representative agent (e.g., in the form of an aggregate
consumption function that makes no reference to individual differences).

I like the modern approach for two reasons. First, it highlights the interaction
between incentives and constraints that govern decision-making. Economics
is about decision-making and macroeconomics is concerned with explaining how
individual decisions interact to generate aggregate outcomes. This decisionmaking
process is almost entirely neglected in the older approach, which simply
describes (rather than explains) why people behave the way they do. Second,
because the modern approach insists on modeling preferences explicitly, there
is a straightforward and entirely natural way to evaluate the welfare implications
of government policy interventions. In contrast, the older approach must
rely exclusively on the modeler’s own ad hoc welfare function to make similar
statements. For example, it is often simply assumed that higher income, or
lower unemployment, or a stabilized business cycle must be welfare improving.
As it turns out, these assumptions have little or no theoretical foundation. A
qualified professional may understand the circumstances under which such an
assumptions are justified; but a student trained solely in older methods is not
likely to appreciate such subtleties (which

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Categories:Types, Business/Law
Published by: Michael Harnack on Oct 24, 2010
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05/19/2012

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