Macroeconomic Theory Jeffrey Parker, Reed College Paper of the week
Assigned paper
Barro, Robert J. 1987. Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918. Journal of Monetary Economics 20 (2):221-47. (Available through e-reserves.)
Reading suggestions
This paper is discussed on pages 75-77 of Romer.
Compare Barro's Figure 2 to Romer's Figure 2.10.
Questions for analysis
Barro uses wars as episodes of temporary increases in government spending. If we are to think of these situations as corresponding to the temporary ΔG as in romer's Section 2.7, what must we assume about the length and outcome of the war? How reasonable are these assumptions?
Barro uses long-term nominal interest rates whereas r in Romer's presentation of the Ramsey model is the instantaneous (shortest-term) real rate. How do nominal rates relate to real rates? How do long-term rates relate to short-term rates? (Take a look at Romer's Section 11.2 if you need a hint.) Given these issues of nominal/real and short/long, what other factors must be held constant in order for Barro's analysis to be valid? How reasonable it is to assume that these are constant over the sample, during which Britain was mostly on the gold standard?
Briefly summarize the results of Section 2.4. To what extent do they conform to the predictions of the Ramsey model in Romer's Section 2.7?