Lecture Notes in Macroeconomics
John C. DriscollBrown University and NBER
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December 3, 2001
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Department of Economics, Brown University, Box B, Providence RI 02912. Phone(401) 863-1584, Fax (401) 863-1970, email:John Driscoll@brown.edu, web:http:
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econ.pstc.brown.edu
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Copyright John C. Driscoll, 1999, 2000, 2001. All rightsreserved. Do not reproduce without permission. Comments welcome. I especiallythank David Weil, on whose notes substantial parts of the chapters on Money andPrices and Investment are based. Kyung Mook Lim and Wataru Miyanaga provideddetailed corrections to typographical errors. Several classes of Brown students haveprovided suggestions and corrections. All remaining errors are mine.
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Contents
1 Money and Prices 1
1.1 De
fi
nitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1.1 Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1.2 Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 The History of Money . . . . . . . . . . . . . . . . . . . . . . . . 31.3 The Demand for Money . . . . . . . . . . . . . . . . . . . . . . . 41.3.1 The Baumol-Tobin Model of Money Demand . . . . . . . 41.4 Money in Dynamic General Equilibrium . . . . . . . . . . . . . . 61.4.1 Discrete Time . . . . . . . . . . . . . . . . . . . . . . . . . 71.4.2 Continuous Time . . . . . . . . . . . . . . . . . . . . . . . 101.4.3 Solving the Model . . . . . . . . . . . . . . . . . . . . . . 131.5 The optimum quantity of money . . . . . . . . . . . . . . . . . . 141.5.1 The Quantity Theory of Money . . . . . . . . . . . . . . . 141.6 Seigniorage, Hyperin
fl
ation and the Cost of In
fl
ation . . . . . . . 161.7 Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2 Nominal Rigidities and Economic Fluctuations 27
2.1 Old Keynesian Economics: The Neoclassical Synthesis . . . . . . 282.1.1 Open Economy . . . . . . . . . . . . . . . . . . . . . . . . 312.1.2 Aggregate Supply . . . . . . . . . . . . . . . . . . . . . . 332.2 Disequilibrium Economics . . . . . . . . . . . . . . . . . . . . . . 362.2.1 Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362.2.2 The Walrasian Benchmark Case . . . . . . . . . . . . . . 372.2.3 Exogenously Fixed Price . . . . . . . . . . . . . . . . . . . 382.2.4 Exogenously Fixed Nominal Wage . . . . . . . . . . . . . 392.2.5 Both prices and wages in
fl
exible . . . . . . . . . . . . . . 392.2.6 Analysis of this model . . . . . . . . . . . . . . . . . . . . 402.3 Imperfect Information Models . . . . . . . . . . . . . . . . . . . . 412.4 New Keynesian Models . . . . . . . . . . . . . . . . . . . . . . . . 432.4.1 Contracting Models . . . . . . . . . . . . . . . . . . . . . 432.4.2 Predetermined Wages . . . . . . . . . . . . . . . . . . . . 442.4.3 Fixed Wages . . . . . . . . . . . . . . . . . . . . . . . . . 472.5 Imperfect Competition and New Keynesian Economics . . . . . . 502.5.1 Macroeconomic E
ff
ects of Imperfect Competition . . . . . 50iii
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