Economics 314

Macroeconomic Theory
Spring 2018
Jeffrey Parker, Reed College
Course Outline and Reading List

For the most part, only required readings are shown here; required readings are shown with a bold author (or, in the case of the coursebook, title). However, many sections of the Burda and Wyplosz text are only for background. If you understand the Romer chapter adequately, you don't need to read them.

The Burda and Wyplosz text is on reserve in the Reed Library. Other readings are either linked electronically from this page or are on print reserve.

Table of Contents

1. Introduction to Macroeconomics
2. Economic Growth
3. Business Cycles

4. Theories of the Short-Run Economy

5. Unemployment

6. Microfoundations of Investment
7. Macroeconomic Policy
(probably not covered)

1. Introduction to Macroeconomics 

The nature of macroeconomics. Macroeconomic models. Definitions of major macroeconomic variables. Issues in the measurement of national income and product, prices and inflation. The outlines of traditional models such as the quantity theory, IS/LM, and aggregate supply and demand as an interpretive device for understanding macroeconomic theory.

A. What Macroeconomics Is

  • Coursebook, Chapter 1.
  • Mankiw, N. Gregory, "The Macroeconomist as Scientist and Engineer," Journal of Economic Perspectives 20(4), October 2006, 29-46.
  • Romer, David, Advanced Macroeconomics, 4th ed., (New York: McGraw-Hill, 2012), Introduction. (Hereafter, "Romer.")
  • Burda, Michael, and Charles Wyplosz, Macroeconomics: A European Text, 7th ed., (Oxford: Oxford University Press, 2009), Chapters 1 and 2. (Hereafter, "Burda and Wyplosz.")
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2. Economic Growth

The long-run behavior of macroeconomies. Growth in real output. Roles of capital accumulation and technological progress in sustaining economic growth.

A. Solow's Neoclassical Growth Model

  • Coursebook, Chapter 2.
  • Burda and Wyplosz, Chapter 3. (This reading is for background only; read it if you have trouble with the Romer chapter.)
  • Romer, Chapter 1.

B. Optimal Consumer Behavior and Growth Theory

  • Coursebook, Chapter 3.
  • Burda and Wyplosz, Chapter 7. (This gives a simple, intuitive background for the consumption models we discuss in this section.)
  • Romer, Chapter 2, Sections 8.1-8.4, and Sections 12.1-12.3.

C. Modern Growth Theory

  • Coursebook, Chapter 4.
  • Romer, Chapters 3 and 4.

D. Empirical Evidence on Economic Growth

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Mid-Term Exam

The mid-term will have both an in-class component and some take-home questions.

3. Business Cycles

Properties of business-cycle fluctuations. The real business cycle theory. Keynesian theories of the business cycles.

A. Real-Business-Cycle Theory

  • Chatterjee, Satyajit, "From Cycles to Shocks: Progress in Business-Cycle Theory," Federal Reserve Bank of Philadelphia Business Review March-April 2000, 27-37. (A discussion of how business-cycle theory has evolved.) 
  • (Recommended, not required) Stock, James H., and Mark W. Watson, "Business Cycle Fluctuations in U.S. Macroeconomic Time Series," in Handbook of Macroeconomics, Volume 1A, edited by J. B. Taylor and M. Woodford (Amsterdam: Elsevier Science, 1999), 3-65. (An excellent statistical description of U.S. business cycles. Paper is not as long as it looks because there are many pages of pictures.) 
  • Coursebook, Chapter 6.
  • Romer, Chapter 5.
  • Mankiw, N. Gregory, "Real Business Cycles: A New Keynesian Perspective," Journal of Economic Perspectives 3, Summer 1989, 79-99. Reprinted in Snowdon and Vane, A Macroeconomics Reader, pp. 425-36. (A prominent new Keynesian presents the argument against the "real" interpretation of business cycles.)
  • Keane, Michael, and Richard Rogerson, "Micro and Macro Labor Supply Elasticities: A Reassessment of Conventional Wisdom," Journal of Economic Literature 50(2), June 2012, 464-476. (Is aggregate labor supply really as inelastic as most economists think?)

B. Money, Inflation, Growth, and Business Cycles

  • Coursebook, Chapter 7.
  • Burda and Wyplosz, Chapter 6.
  • Walsh, Carl E., Monetary Theory and Policy, 2nd ed., MIT Press, 2003, Chapters 2 and 3. (An optional reading for those wanting more analytical depth on monetary growth models.)

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4. Theories of the Short-Run Economy

Microfoundations of aggregate supply. Why should real output and employment respond to purely nominal changes in aggregate demand? Theories of short-run imperfections. Imperfect information as a mechanism for supply effects. Rigidity of prices. Coordination failures. Empirical evidence.

A. Old and New Keynesian Economics: Imperfect Competition, Rigidities and Coordination Failures

  • Coursebook, Chapter 8, Chapter 9, and Chapter 10.
  • Romer, Chapter 6, Parts A and B, through Section 6.8.
  • Cooper, Russell, and Andrew John, "Coordinating Coordination Failures in Keynesian Models," Quarterly Journal of Economics 103:3, August 1988, 441-463. Reprinted in N. Gregory Mankiw and David Romer (eds.), New Keynesian Economics (Cambridge, MA: MIT Press, 1991), Volume 2, pp. 3-24. (This paper is the basis of Romer's Section 6.7. Read the first couple of sections.)
  • Ball, Laurence, and David Romer, "Real Rigidities and the Non-Neutrality of Money," Review of Economic Studies 57:2, April 1990, 183-203. Reprinted in N. Gregory Mankiw and David Romer (eds.), New Keynesian Economics (Cambridge, MA: MIT Press, 1991), Volume 1, pp. 59-86. (Optional reading: This paper is the basis of Romer's Section 6.6.)

B. Imperfect-Information Models with Market-Clearing

  • Lucas, Robert E., Jr., and Thomas J. Sargent, "After Keynesian Macroeconomics," in After the Phillips Curve: Persistence of High Inflation and High Unemployment, Boston: Federal Reserve Bank of Boston, 1979.
  • Coursebook, Chapter 11.
  • Romer, Chapter 6, Section 6.9. 
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C. Dynamic New Keynesian Models

  • Coursebook, Chapter 12.
  • Romer, Chapter 7.

D. Empirical Evidence on Business Cycles

  • Coursebook, Chapter 13.
  • Garin, Julio, Michael J. Pries, and Eric R. Sims. "The Relative Importance of Aggregate and Sectoral Shocks and the Changing Nature of Economic Fluctuations." American Economic Journal: Macroeconomics 10:1, January 2018, 119-48.
  • A selection of papers to be announced.
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E. Empirical Evidence on Aggregate Supply Models

  • Coursebook, Chapter 13.
  • Romer, Chapter 6, empirical parts of sections 6.3 and 6.10.
  • A selection of papers to be announced.
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5.  Unemployment

Examination of theories about the "natural" or equilibrium rate of unemployment. Evidence about changes in the natural rate and differences across countries. Economic policies that affect natural unemployment.

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6.  Microfoundations of Investment Behavior

Dynamic production problem of the firm. Theory of the demand for capital. Costly adjustment and the optimal flow of investment. Tobin's q and the relationship between investment spending and asset prices. Financing of investment and the effects of capital-market imperfections.

  • Coursebook, Chapter 15.
  • Burda and Wyplosz, Section 8.3. (Background only.)
  • Romer, Chapter 9, selected sections to be announced.
  • Dixit, Avinash K., and Robert S. Pindyck, Investment under Uncertainty, (Princeton, N.J.: Princeton University Press, 1994), Chapters 1 and 2.
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7. Macroeconomic Policy (unlikely that we'll have time to get to this)

Inflation and monetary policy. Seigniorage and the fiscal impact of inflation. Theories about why countries pursue inflationary policies. Stabilization policy: pros and cons. Government budget constraints, deficits, and debt. Ricardian equivalence. Theories of government budget behavior.

A. Monetary Policy and Inflation

  • Coursebook, Chapter 17.
  • Burda and Wyplosz, Chapters 9 and 16. (Background only.)
  • Romer, Chapter 11.
  • Bernanke, Ben S., and Mark Gertler, "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives 9:4, Fall 1995, 27-48. 
  • Romer, Christina D., and David H. Romer, "What Ends Recessions?" NBER Macroeconomics Annual 9, 1994, 13-79. (A controversial analysis that suggests that countercyclical monetary policy has been the primary cause of economic stabilization in the postwar United States. Be sure to read Cochrane's comments for some important criticisms of this approach.)

B. Fiscal Policy

  • Coursebook, Chapter 18.
  • Burda and Wyplosz, Chapter 17. (Background only.)
  • Romer, Chapter 12.
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