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• Brief Contents
• Contents
• LIST OF FIGURES
• LIST OF TABLES
• LIST OF VARIABLES
• ABOUT THE AUTHOR
• PREFACE
• What’s different?
• Level and prerequisites
• The organization of the book
• Introduction (Chapter 1)
• The Long Run (Chapters 2–7)
• The Short Run (Chapters 8–9)
• Economic Policy (Chapters 10–11)
• The Open Economy (Chapters 12–15)
• Business Cycles, Institutions, Financial Markets (Chapters 16–18)
• Additional features
• Companion website
• Alternative course designs
• Acknowledgements
• AUTHOR’S AND PUBLISHER’S ACKNOWLEDGEMENTS
• 1 INTRODUCTION
• What is macroeconomics? Why do we use models? What
• 1.1 The big picture
• A macroeconomic model with microeconomic foundations
• Why use an economic model when we can make the argument intuitively?
• Using a model: an example
• The short and the long run
• 1.2 Organization of this book
• 1.3 Macroeconomic data
• National accounts
• Output, value added, and GDP
• Some important concepts in the national accounts
• Gross and net
• Domestic product and national income
• Income and disposable income
• Many different measures of production and income
• How much do different production sectors contribute to GDP?
• Who gets the income?
• Where do goods and services come from and how are they used?
• Savings, investment, and the current account
• How can we compare incomes between countries?
• How do we measure real growth of production?
• How do we measure inflation?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Functions of several variables
• Differentiation
• The natural logarithm
• Working with exponents
• A practical rule of thumb
• PART 1 THE LONG RUN
• 2 PRODUCTION, PRICES, ANDTHE DISTRIBUTION OF INCOME
• What determines the long-run level of income and itsdistribution
• 2.1 Production
• Production factor
• The production function
• Technological development
• The Cobb–Douglas production function
• The marginal product of labour
• 2.2 Goods markets and price-setting
• Monopolistic competition
• The price elasticity of demand
• The profit maximizing price
• Price-setting in the Cobb–Douglas case
• A simple pricing rule based on unit labour cost
• 2.3 The natural level of production
• 2.4 The real wage and the distribution of income
• The real wage
• The distribution of income
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Isoquants and constant returns to scale
• 3 INTEREST RATES AND INVESTMENT
• What factors determine investment?
• 3.1 Nominal and real interest rates, and discounting
• The price of money
• The price of goods today in terms of goods next year
• An approximate measure of the real interest rate
• Nominal and real interest rates in the last 60 years
• 3.2 Investment
• The desired capital stock and investment
• The long-run demand for captial
• The short-run demand for capital
• The investment function
• 3.3 The accelerator effect and the volatility of investment
• 3.4 Inventory and housing investmen
• What have we learned?
• Where do we go from here?
• Exercises
• AppendiX
• Investment of the firm and aggregate investment
• Adjustment costs and investment
• 4 CONSUMPTION AND THE NATURALRATE OF INTEREST
• What factors determine consumption and the real interest rate?
• 4.1 Consumption in a two-period mode
• The lifetime budget constraint
• Intertemporal preference
• The interest rate and the planned consumption path
• The effect of the real interest rate on consumption
• 4.2 Consumption in an infinite horizon model
• Sustainable consumption
• The consumption function
• A specific consumption function
• Expectations about future income
• The marginal propensity to consume
• 4.3 Liquidity constraints, demographics, durable good
• Liquidity-constrained consumers
• Demographic effects on consumption and saving
• Durable good
• 4.4 Aggregate demand and the natural rate of interest
• 4.5 The Fisher equation
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• An alternative explanation of the condition for optimalconsumption
• A specific consumption function
• The savings ratio
• Liquidity-constrained consumers
• 5 CAPITAL ACCUMULATION AND GROWTH
• Why are some countries richer than others?
• 5.1 Long-run adjustment of the capital stock for givenpopulation and technology
• Patience – a virtue?
• 5.2 Convergence
• 5.3 Population growth and technological development
• Explicit solutions for the long-run levels of capital and GDP
• The ratio of capital to production and the savings rate
• 5.4 The Golden Rule
• 5.5 Why are some countries richer than others?
• Differences in physical capital input
• Differences in human capital
• Access to technology
• Natural resources
• ‘Institution’
• 5.6 Are poor countries catching up?
• 5.7 What determines technological development?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Growth accounting
• The Solow growth model
• 6 WAGE-SETTING AND UNEMPLOYMENT
• Why is there always unemployment in a market economy?
• 6.1 Stocks and flows in the labour market
• Employed, unemployed, and outside the labour force
• Unemployment as a percentage of the labour force
• Flows
• 6.2 A model of turnover and the job-finding rate
• 6.3 A model of wage-setting and unemployment
• On-the-job search, turnover of workers, and wage-setting
• The natural rate of unemployment
• The wage-setting equation
• The natural level of employment and the real wage
• 6.4 Matching problems and search incentives
• 6.5 Wage bargaining and unions
• 6.6 Minimum wages and skill-biased technical change
• 6.7 Persistent high unemployment
• Why do unemployment rates differ between countries?
• Why is unemployment so much higher than it wasin the 1960s?
• Do temporary shocks have persistent effects on employment?
• 6.8 Long-term unemployment
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Gross flows in the labour market
• An explicit solution for the optimal wage and the natural rateof unemployment
• 7 MONEY AND INFLATIONIN THE LONG RUN
• What determines the long-run rateof inflation?
• 7.1 The functions of money
• 7.2 Money and inflation in the long run
• 7.3 Alternative definitions of money
• Monetary base
• M1
• Broad money aggregate
• 7.4 Does money growth explain inflation?
• 7.5 Money deman
• The interest rate and money demand
• Inflation and real money holdings
• 7.6 Seignorage
• 7.7 Should we dislike inflation?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Transaction habits, demand for money, and the money multiplier
• PART 2 THE SHORT RUN
• 8 THE INTEREST RATE ANDPRODUCTION IN THE SHORT RUN
• What causes short-run fluctuations in productionand employment?
• 8.1 Goods market equilibrium and the multiplier effect
• 8.2 How the interest rate affects demand and production
• The IS curve
• The multiplier and the slope of the IS curve
• The IS curve and the natural rate of interest
• 8.3 The money market and the interest rate
• The LM curv
• 8.4 Equilibrium in the goods and money market
• 8.5 Effects of exogenous shocks and policy in the IS-LM model
• An increase in the money supply
• A shock to aggregate demand with constant money supply
• A shock to aggregate demand with constant interest rate
• 8.6 Does monetary policy really matter?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• The slope of the LM curve
• 9 ECONOMIC ACTIVITY ANDINFLATION IN THE SHORT RUN
• Is there a choice between low inflation and low unemployment?
• 9.1 Unemployment and wage inflation
• 9.2 Unemployment and price inflation
• 9.3 Inflation and the output gap
• 9.4 Information delays, contracts, and staggered wage
• 9.5 Is there a choice between low inflation and lowunemployment?
• Assumption 1: The price level is expected to remain unchanged
• Assumption 2: Wage setters expect inflation to continue
• Assumption 3: A strict and credible inflation target
• 9.6 What does the data say?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Proof that the rigid wage is equal to the expected wage
• PART 3 Economic Policy
• 10 MONETARY POLICY
• How should the central bank react to news about the economy?
• 10.1 The objectives of monetary policy
• 10.2 How should the central bank react to shocks?
• An exogenous increase in money demand
• A demand shock
• A cost–push shock
• An unexpected and permanent increase in productivity
• An increase in the expected rate of inflation
• 10.3 Using macro data to set the interest rate
• News about production
• News about inflation
• 10.4 The Taylor Rule
• 10.5 Rational expectations
• 10.6 The rise and fall of inflation
• 10.7 The instruments of monetary policy
• The interbank market for overnight borrowing
• How the central bank lends and borrows to control theinterbank rate
• Control over the interest rate and the demand for money
• Reserve requirements
• The interbank rate and other interest rates
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Derivation of a monetary policy rule
• Rational expectations and inflation targeting
• 11 FISCAL POLICY
• Are government finances sustainable? How does fiscal policyaffect economic activity?
• 11.1 How large is the public sector?
• 11.2 Sustainable government finances
• Are government finances under control?
• 11.3 Fiscal policy in the short run
• Crowding out
• 11.4 Do lower taxes really make us richer?
• Proof of Ricardian equivalence
• Deviations from Ricardian equivalence
• 11.5 Fiscal policy and the business cycle
• Policy lags
• Automatic stabilizers
• The structural budget deficit
• 11.6 Empirical evidence on fiscal policy
• Effects of fiscal policy shocks
• The stabilizing role of the government
• Is there any evidence of active counter-cyclical policy?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Ricardian equivalence in the infinite horizon case
• PART 4 The Open Economy
• 12 EXPORTS, IMPORTS, ANDINTERNATIONAL FINANCIAL MARKETS
• How do globalized markets for goods, services, and loans affectthe economy?
• 12.1 The small open economy
• 12.2 The real exchange rate
• 12.3 Imports, exports, and aggregate demand
• Goods market equilibrium in the small open economy
• The effect of the real exchange rate on net exports
• A look at the data
• 12.4 Savings, investment, and the current account
• 12.5 The interest parity condition
• The implications of interest parity under fixed and floatingexchange rates
• 12.6 Globalization in the markets for goods and servicesand the financial markets
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• The real exchange rate in terms of prices of productionand consumption
• The Marshall–Lerner condition
• Derivation of the consumption and import functions
• The balance of payments
• 13 THEOPENECONOMYIN THE LONG RUN
• What factors determine the current account, the real exchangerate, and the long-run levels of income
• 13.1 Real and nominal interest rates in the open economy
• 13.2 The current account and the real exchange rate
• The relation between the budget deficit and the currentaccount deficit
• Does a current account deficit lead to depreciation ofthe currency?
• 13.3 Investment and growth in the open economy
• 13.4 The current account and the long-run level offoreign debt
• 13.5 How integrated are world financial markets?
• 13.6 Should current account balance be an objectiveof policy?
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• Reasons for long-term trends in real exchange rates
• The Scandinavian model of inflation
• 14 THE OPEN ECONOMY IN THESHORT RUN
• What roles do fiscal and monetary policies play under fixed andfloating exchange rates?
• 14.1 The Mundell–Fleming model
• 14.2 A fixed exchange rate
• How does a central bank fix the exchange rate?
• Macroeconomic equilibrium with a fixed exchange rate
• The effect of the real exchange rate on aggregate demand
• Devaluation and revaluation
• 14.3 Monetary union
• 14.4 A floating exchange rate
• Monetary policy with a floating exchange rate
• Fiscal policy with a constant money supply
• Fiscal policy and the central bank reaction to the shock
• Exchange rate expectations and the importance of the exchangerate channel
• The roles of monetary and fiscal policy under fixed and floatingexchange rates
• 14.5 Long-run adjustment with fixed and floatingexchange rates
• 14.6 Evidence on the exchange rate channel
• What have we learned?
• Where do we go from here?
• Exercises
• Appendix
• The case when the expected future exchange rate is equal to thecurrent exchange rate
• 15 EXCHANGE RATE SYSTEMS ANDMONETARY UNION
• What are the advantages and disadvantages of fixed and floatingexchange rates, and monetary union?
• 15.1 Fixed exchange rate systems
• The gold standard
• The Bretton Woods system
• The EMS, the ERM, currency baskets, and target zones
• Speculation, exchange rate crises, and devaluation cycles
• Deregulation of capital flows and the sustainability of fixedexchange rates
• 15.2 Floating exchange rates and inflation targeting
• 15.3 The pros and cons of monetary union
• Microeconomic aspects: efficiency and trade
• Macroeconomic aspects: stability
• Optimum currency areas
• 15.4 The fiscal framework in EMU
• 15.5 Ten years with the euro
• Trade
• Macroeconomic performance on the union level
• Macroeconomic developments in individual countries
• Fiscal policy
• The response to the debt crisis by the European Union16
• Conclusion
• What have we learned?
• Exercises
• Appendix
• The forward market and covered interest parity
• The no bail out clause and the excessive deficit procedure
• PART 5 Business cycles,policymaking, financialmarkets
• 16 BUSINESS CYCLES
• What are business cycles and why do they occur?
• 16.1 The trend and the cycle
• A linear trend
• The Hodrick–Prescott filter
• A stochastic trend
• Comparison of alternative measures
• How long do business cycles last?
• 16.2 Co-movement of macroeconomic variables
• 16.3 What drives the business cycles?
• Shocks
• Amplification mechanisms
• 16.4 Should we care about business cycles?
• What have we learned?
• Exercises
• Appendix
• The Hodrick–Prescott filter
• 17 INSTITUTIONS AND ECONOMIC POLICY
• How do institutions shape economic policy?
• 17.1 Inflation bias
• Solutions to the inflation bias problem
• Reforms of the institutional framework for monetary policy
• 17.2 Deficit bias
• How serious is the problem of high government debt?
• Reasons for deficit bias
• Reforms of the framework for fiscal policymaking
• Myopia and public investments
• Gross debt or net debt?
• Dealing with an ageing population
• What have we learned?
• Exercises
• 18 FINANCIAL MARKETS
• What roles do financial markets and institutions play?
• 18.1 Debt and equity
• Debt, equity, and risk
• Why debt finance?
• Debt, equity, and incentives to take risk
• 18.2 The financial accelerator
• 18.3 The stock market and Tobin’s q
• The stock market as a predictor of future economicdevelopments
• Tobin’s q theory of investment
• 18.4 Banks and other financial intermediaries
• Banks as managers of credit
• Banks as liquidity providers
• 18.5 Bank runs and banking regulation
• Bank runs
• Contagion and financial crises
• Banking regulation
• 18.6 Recent developments in the financial industry
• Wholesale financing
• Quasi-banks
• Securitization
• 18.7 The financial crisis in 2007–2009
• Short-run crisis management
• Measures to avoid future financial crises
• Conclusion
• 18.8 Macroeconomic management of financial crises
• Increases in margins charged by the banks
• The zero lower bound on the interest rate
• What have we learned?
• Exercises
• Appendix
• Tobin’sqtheory of investment with debt and equity,and monopolistic competition
• KEY EQUATIONS
• Production and prices
• The real interest rate, investment, and consumption
• Long-run growth
• The labour market and the Phillips curve
• Government debt
• The open economy
• Production and the interest rate in the short run
• INDEX