Macroeconomic Theory

Spring 2011

Jeffrey Parker, Reed College

Course Outline and Reading List

For the most part, only required readings are shown here. However, many sections of the Mankiw text are only for background. If you understand the Romer chapter adequately, you don't need to read Mankiw.

The Mankiw 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. Modern Theories of the Short-Run Economy
5. Microfoundations of Investment
6. Unemployment
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 aggregate supply and demand as an interpretive device for understanding macroeconomic theory.

A. Introduction to Macroeconomics (January 31 and February 2)

• Coursebook, Chapter 1.
• Mankiw, N. Gregory, "The Macroeconomist as Scientist and Engineer," Journal of Economic Perspectives 20(4), October 2006, 29-46.
• Mankiw, N. Gregory, Macroeconomics, 5th ed., (New York: Worth Publishers, 2003), Chapters 1 through 3. (Should read as a basic intro to macroeconomics.)

B. The Basic AS/AD Model (Only briefly discussed in class on February 2)

• Coursebook, Chapter 2.

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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 (February 3 - 11)

• Coursebook, Chapter 3.
• Mankiw, Chapters 7 and 8. (This reading is for background only; read it if you have trouble with the Romer chapter.)
• Romer, David, Advanced Macroeconomics, 3d ed. (New York: McGraw-Hill, 2006), Chapter 1.

B. Optimal Consumer Behavior and Growth Theory (February 14 - 25)

• Coursebook, Chapter 4, and parts of Chapter 16 and perhaps 18 as useful to support the material from Romer's Chapters 7 and 11.
• Romer, Chapter 2, Sections 7.1-7.4, and Sections 11.1-11.3.

C. Modern Growth Theory (February 28 - March 4)

• Coursebook, Chapter 5.
• Romer, Chapter 3.

D. Empirical Evidence on Economic Growth (March 7)

• Coursebook, Chapter 6.
• Additional papers may be assigned.

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3. Business Cycles

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

A. Real-Business-Cycle Theory (March 9 - 10)

• Mankiw, Section 19.1. (Background only.)
• 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 7.
• Romer, Chapter 4.
• Plosser, Charles I., "Understanding Real Business Cycles," Journal of Economic Perspectives 3:3, Summer 1989, 51-77. Reprinted in Snowdon and Vane, A Macroeconomics Reader, pp. 396-424. (A survey of real-business-cycle theory from one of its primary exponents. Includes some empirical support for the hypothesis.) 
• 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.)

B. Money, Inflation, Growth, and Business Cycles (March 11 - 14)

• Coursebook, Chapter 8.
• *Walsh, Carl E., Monetary Theory and Policy, 2nd ed., MIT Press, 2003, Chapters 2 and 3. (An optional reading for those wanting more depth on monetary growth models.)

Midterm Exam: Take-home questions due March 16; In-class questions March 18

C. Keynesian Business Cycle Theory: The IS/LM Model and Aggregate Demand and Supply (March 16 - 31)

• Coursebook, Chapter 9.
• Mankiw, Chapters 9 through 12. (You may want to read these, because the Romer chapter provides very little information about the IS/LM model.) 
• Romer, Chapter 5.
• Friedman, Milton, "The Role of Monetary Policy," American Economic Review, 58(1), March 1968, 1-17.

4. Modern 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. Imperfect-Information Models with Market-Clearing (April 1 - 4)

• 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 10.
• Romer, Chapter 6, Part A. 

• Coursebook, Chapter 11.
• Romer, Chapter 6, Part B. 
• Mankiw, Section 19-2. (Background only.)
• 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.) 

C. Models with Sticky Prices (April 11 - 15)

• Coursebook, Chapter 12.
• Romer, Chapter 6, Part C. 
• Golosov, Mikhail, and Robert E. Lucas, Jr., "Menu Costs and Phillips Curves," Journal of Political Economy 115(2), April 2007, 171-199. (We'll talk about this model if we have time. It is an interesting combination of the sticky-price and Caplin-Spulber models that are in Romer's Chapter 6. The formal analysis is very difficult, but the intuition and the simulations should be understandable.)

D. Empirical Evidence on Business Cycles (Class presentations by students on April 28)

• Coursebook, Chapter 13.

• Hamilton, James D., "Oil and the Macroeconomy since World War II," Journal of Political Economy 91:2, April 1983, 228-248. (A somewhat technical econometric study of the effects of oil-supply changes on the U.S. macroeconomy. Evidence that supply shocks are very important.)
• Barsky, Robert B., and Lutz Kilian, "Oil and the Macroeconomy since the 1970s," Journal of Economic Perspectives 18:4, Fall 2004, 115-134. (An update.) 
• Shapiro, Matthew D., "Macroeconomic Implications of Variation in the Workweek of Capital," Brookings Papers on Economic Activity 1996:2, 79-119. (Empirical work using evidence on the workweek of capital and labor to distinguish between changes in utilization and changes in productivity as an explanation for the cyclical behavior of output per measured unit of input.) 
• Camerer, Colin, Linda Babcock, George Loewenstein, and Richard Thaler, "Labor Supply of New York City Cabdrivers: One Day at a Time," Quarterly Journal of Economics 112:2, May 1997, 407-41. (Evidence about static vs. dynamic labor supply decisions of NYC cabbies. Do they substitute intertemporally?) 
• Romer, Christina D., "Changes in Business Cycles: Evidence and Explanations," Journal of Economic Perspectives 13(2), Spring 1999, 23-44. (An analysis of how and whether the magnitude of business cycles in the United States has changed over time.) 
• Gali, Jordi, "How Well Does the IS-LM Model Fit Postwar U.S. Data?" Quarterly Journal of Economics 107(2), May 1992, 709-738. 

E. Empirical Evidence on Aggregate Supply Models (Class presentations by students on April 28)

• Coursebook, Chapter 13.
• Romer, Chapter 6, empirical parts of sections 6.3 and 6.10.

• Barro, Robert J., "Unanticipated Money Growth and Unemployment in the United States," American Economic Review 67(2), March 1977, 101-115, and Robert J. Barro, "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy 86(4), August 1978, 549-580. (The first empirical tests of the policy-ineffectiveness proposition.)
• Mishkin, Frederic, "Does Anticipated Policy Matter? An Econometric Investigation," Journal of Political Economy 90(1), February 1982, 22-51. (Evidence contradicting Barro's studies.) 
• Lucas, Robert E., Jr., "Some International Evidences on Output-Inflation Tradeoffs," American Economic Review 63(3), June 1973, 326-334. (Lucas's first empirical test of one implication of imperfect information model.)
• Ball, Laurence, N. Gregory Mankiw, and David Romer, "The New Keynesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity 1988 (1):1-65. (A follow-up to Lucas's test examining whether the evidence favors a new Keynesian or neoclassical interpretation.)
• Carlton, Dennis W., "The Rigidity of Prices," American Economic Review 76:4, September 1986, 637-658. Reprinted in Mankiw & Romer, New Keynesian Economics, Volume 1, 111-145. (An examination of some data on individual transaction prices.) 
• Kashyap, Anil K., "Sticky Prices: New Evidence from Retail Catalogs," Quarterly Journal of Economics 110:1, February 1995, 245-274. (Using retail catalog prices to examine the frequency of price changes.) 
• Blinder, Alan S., "On Sticky Prices: Academic Theories Meet the Real World," in N. Gregory Mankiw, ed., Monetary Policy (Chicago: University of Chicago Press, 1994), 117-150. (An interesting current study of price stickiness. Presents some information about which of the potential explanations of price stickiness seem to be most important.) 
• Levy, Daniel, Mark Bergen, Shantanu Dutta, and Robert Venable, "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Quarterly Journal of Economics 112:3, August 1997, 791-825. (Some further evidence on the relevance of menu costs.) 
• Bils, Mark, and Peter Klenow, "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy 112(5), October 2004, 947-985. (Looks at price stickiness in unpublished, firm-level CPI data.) 
• Hobijn, Bart, Federico Ravenna, and Andrea Tambalotti, "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," Quarterly Journal of Economics, 121(3), August 2006, 1103-31. (Available through Reed Library Web site, but no stable URL available.)
• Leith, Campbell, and Jim Malley, "A Sectoral Analysis of Price-Setting Behavior in U.S. Manufacturing Industries," Review of Economics and Statistics, 89(2), May 2007, 335-342. (Available through Reed Library Web site, but no stable URL available.)
• Dhyne, Emmanuel, et al., "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, 20(2), Spring 2006, 171-192. 
• Klenow, Peter J., and Oleksiy Kryvtsov, "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?" National Bureau of Economic Research Working Paper #11043, January 2005.
• Campbell, Carl M., III and Kunal S. Kamlani, "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," Quarterly Journal of Economics 112(3), 1997, 759-789.
• Cooper, Russell, and John Haltiwanger, "Evidence on Macroeconomic Complementarities," Review of Economics and Statistics 78:1, February 1996, 78-93. (Summary of some empirical evidence on the complementarities that underlie the coordination failure models.)
• Mankiw, N. Gregory, Ricardo Reis, and Justin Wolfers, "Disagreement about Inflation Expectations," NBER Macroeconomics Annual 18, 2003, 209-248. (Some empirical evidence on the sticky information model.)
• Davis, Michael C., and James D. Hamilton, "Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices," Journal of Money, Credit and Banking 36(1), February 2004, 17-37. (This is a difficult paper, testing a formal model of menu-cost price stickiness.)

5. Microfoundations of Investment Behavior (April 21 - 27)

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.
• Mankiw, Chapter 17. (Background only.)
• Romer, Chapter 8.
• Dixit, Avinash K., and Robert S. Pindyck, Investment under Uncertainty, Princeton, N.J.: Princeton University Press, 1994, Chapters 1 and 2.

6. Unemployment (April 29 - May 6)

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.

• Coursebook, Chapter 14.
• Mankiw, Chapter 5. (Read as needed. Good introduction to a few main theories.)
• Blanchard, Olivier, and Lawrence F. Katz, "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives 11:1, Winter 1997, 51-72. 
• Ritter, Joseph A., and Lowell J. Taylor, "Economic Models of Employee Motivation," Federal Reserve Bank of St. Louis Review 79:5, September/October 1997, 3-21. (Introduction to one of the main ways that labor markets differ from "standard" supply-demand markets---motivation of workers. Introduces concepts used in efficiency-wage and Shapiro-Stiglitz models.)
• Romer, Chapter 9.
• Siebert, Horst, "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives 11:3, Summer 1997, 37-54.
• Nickell, Stephen, "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives 11:3, Summer 1997, 55-74.

7. Macroeconomic Policy

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.
• Mankiw, Chapters 14, 18. (Background only.)
• Romer, Chapter 10.
• 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.
• Mankiw, Chapter 15. (Background only.)
• Romer, Chapter 11.