Macroeconomic Analysis (Economics 302, section 01) Wesleyan University, Spring 2011 Professor: Bill Craighead E-mail: [email protected]
Office: PAC 330 Office hours: Tuesday and Thursday, 3:30 – 5:00 pm; and by appointment Course meets Tuesday and Thursday, 10:30 – 11:50 am in PAC 125 Macroeconomics examines the behavior of aggregate economic variables including national output, the price level, and the unemployment rate. The central topics of macroeconomics are (i) the growth (or lack thereof) of output and income over time and (ii) the fluctuations in economic activity known as “business cycles.” Macroeconomics is a relatively young and constantly changing field. Schools of thought within the field differ on methodological approaches and policy prescriptions. This course will not present a set of fixed conclusions about how the economy works. Instead, the focus will be on understanding the key ideas and models that have driven the progress of macroeconomic theory. The prerequisites for this course are introductory economics and calculus. Familiarity with basic microeconomic concepts such as utility and profit maximization will be assumed. The lectures, problem sets and exams will make use of algebra and some calculus (i.e., derivatives). The primary source of readings will be N. Gregory Mankiw’s text, Macroeconomics (Worth Publishers, 7th edition). Substantial portions of The Elusive Quest for Growth by William Easterly (MIT Press) and How the Economy Works by Roger Farmer (Oxford) will also be assigned. Other readings will be available through moodle or library reserve. Mankiw’s book is very well-written, and it will be an excellent complement to the lectures. The lectures will not follow the book closely, however, so the readings will be a poor substitute for class attendance (and attentiveness). Approximately 5-8 problem sets will be assigned during the semester. Students may work together, but must turn in the assignments individually. Late assignments will not be accepted and no extensions will be granted. Each student’s lowest problem set grade will be dropped from the final grade calculation. Grades will be calculated as a weighted average, based on the problem sets (10%), two in-class midterm exams (25% each) and a comprehensive final exam (40%). Dates for the midterm exams will be announced in class. Midterm exams will not be given late; in the event of a serious illness, family emergency or university-sponsored travel, students may ask, in advance, for permission to take exams early or to have weight added to the final exam grade in place of the midterm. In the event of a perceived mistake in grading, a written explanation should be attached to the exam and submitted within 5 business days after the exams are returned to the class. The final exam is scheduled for Friday, December 16 at 9:00 am. The use of computers, mobile phones, etc. – including for text-messaging – in class is not permitted. The syllabus and course outline are subject to modifications, which will be announced in class.
Macroeconomic Analysis (Econ 302) Professor: Bill Craighead Wesleyan University, Fall 2011 Course outline and reading list “Mankiw” refers to N. Gregory Mankiw, Macroeconomics, 7h edition (Worth, 2009) “Easterly” refers to William Easterly, The Elusive Quest for Growth (MIT Press, 2002) “Farmer” refers to Roger E.A. Farmer, How the Economy Works (Oxford, 2010) Readings marked (o) are optional I.
Introduction a. Overview of Macroeconomics Mankiw, ch. 1 J. Madrick, “The Congressional Budget Office’s Updated Forecasting Methods Don’t Help the White House’s Argument For Tax Cuts,” New York Times, April 17, 2003 b. Macroeconomic Data Mankiw, ch. 2, 4.4 D. Leonhardt, “Life Is Better; It Is Not Better. Which Is It?” New York Times, September 20, 2006 B. Appelbaum, “On Economy, Raw Data Gets a Grain of Salt,” New York Times, August 16, 2011 c. Mathematical Tools Mathematical Primer for Intermediate Macroeconomics d. Neoclassical Theory of Distribution Mankiw, ch. 3.1, 3.2
Economic Growth a. Growth Accounting Mankiw, appendix to ch. 8 J. M. Keynes, “Economic Possibilities for Our Grandchildren,” 1930, Reprinted in Essays in Persuasion (Norton, 1963) R. Frank, “The More We Make, The Better We Want,” New York Times, Sept. 28, 2008 P. David, “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox,” American Economic Review, May 1990 b. Solow Growth Model Mankiw, ch. 7, 8.1-8.3 Easterly, ch. 3 c. Convergence (o) W. J. Baumol, “Productivity Growth, Convergence and Welfare: What the Long-Run Data Show,” American Economic Review, Dec. 1986 (o) J. B. DeLong, “Productivity Growth, Convergence and Welfare: Comment,” American Economic Review, Dec. 1988 (o) L. Pritchett, “Divergence, Big Time,” Journal of Economic Perspectives, Summer 1997 d. Human Capital Easterly, ch. 4 (o) R. Barro, “Economic Growth in a Cross Section of Countries,” Quarterly Journal of Economics, May 1991
(o) N. G. Mankiw, D. Romer and P. Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics, May 1992 e. Endogenous Growth Mankiw, ch. 8.4 (o) P. Romer, “The Origins of Endogenous Growth,” Journal of Economic Perspectives, Winter 1994 f. Institutions and Growth Easterly, ch. 11, 12 M. Olson, “Big Bills Left on the Sidewalk,” Journal of Economic Perspectives, Spring 1996 The Economist, “Order in the Jungle,” Mar. 13, 2008 (o) R. Hall, and C. Jones, “Why Do Some Countries Produce So Much More Output Per Worker Than Others?” Quarterly Journal of Economics, February 1999
Economic Fluctuations a. Classical Economics and the Great Depression J. M. Keynes, The General Theory, ch. 2, 3.3 Farmer, ch. 2 b. “Textbook” Keynesian Model Mankiw, ch. 9, 10, 11 N.G. Mankiw, Macroeconomics (6th ed), appendix to ch. 11 Farmer, ch. 3 M. Friedman, “John Maynard Keynes,” Federal Reserve Bank of Richmond Economic Quarterly, Spring 1997 c. The Phillips Curve and the Natural Rate Hypothesis Mankiw, ch. 13.2 Farmer, ch. 4 (o) M. Friedman, “The Role of Monetary Policy,” American Economic Review, March 1968 (o) L. Ball and N. G. Mankiw, “The NAIRU in Theory and Practice,” Journal of Economic Perspectives, Fall 2002 (o) P. Krugman, “Who Was Milton Friedman?” New York Review of Books, Feb. 15, 2007 d. Rethinking the Consumption Function i. Permanent Income Hypothesis Mankiw, ch. 17.1-17.4 ii. Random Walk Hypothesis Mankiw, ch. 17.5 iii. Ricardian Equivalence Mankiw, ch. 16.4 e. Expectations and the Lucas Critique Nobel Prize Announcement for Robert Lucas (1995) B. McCallum, “The Significance of Rational Expectations Theory,” Challenge, Jan.-Feb. 1980 K. B. Athreya, “In Praise of Theory,” Federal Reserve Bank of Richmond Region Focus, Spring 2007 Farmer, ch. 5
Real Business Cycle Theory C. I. Plosser, “Understanding Real Business Cycles,” Journal of Economic Perspectives, Summer 1989 N. G. Mankiw, “Real Business Cycles: A New Keynesian Perspective,” Journal of Economic Perspective, Summer 1989
g. New Keynesian Macroeconomics (o) Mankiw, ch. 14 (o) The Economist, “Sticky Situations,” Nov. 11, 2006 (o) D. Romer, “The New Keynesian Synthesis,” Journal of Economic Perspectives, Winter 1993 IV.
Open-Economy Macroeconomics a. Introduction to the Open Economy Mankiw, ch. 5.1, 5.3 J. Fallows, “The $1.4 Trillion Question,” Atlantic Monthly, January/February 2008 (o) B. Bernanke, "The Global Saving Glut and the U.S. Current Account Deficit," Lecture, April 14, 2005 b. Mundell-Fleming Model Mankiw, ch. 12
Monetary Policy a. Money Supply Mankiw, ch. 19.1 J. B. DeLong, “Republic of the Central Banker,” The American Prospect, Oct. 27, 2008 b. Rules vs. Discretion (Time Consistency) Mankiw ch. 15 (including appendix) C. I. Plossser, “Credibility and Commitment,” Speech, March 6, 2007 Nobel Prize Information for Finn Kydland and Edward Prescott (2004) The Economist, “Level Worship,” Oct. 28, 2010 The Economist, “Changing Target,” Aug. 27, 2011
Depression Economics and the Recession of 2008-09 a. “Animal Spirits” P. Krugman, The Return of Depression Economics and the Crisis of 2008 (Norton, 2009), ch. 7 J. Cassidy, “The Minsky Moment,” The New Yorker, Feb. 4, 2008 (o) J. M. Keynes, The General Theory, ch. 12, 22 (o) R. Skidelsky, “Ideas and the World,” The Economist, Nov. 23, 2000 b. Banking Crises and the Lender of Last Resort P. Krugman, The Return of Depression Economics and the Crisis of 2008 (Norton, 2009), ch. 8 (o) J. Cassidy, “Anatomy of a Meltdown,” The New Yorker, Dec. 1, 2008 (o) J. Surowiecki, “Balancing Banks,” The New Yorker, April 6, 2009 c. Deflation, Liquidity Traps and the Zero Lower Bound B. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” Speech, Nov. 21, 2002 The Economist, “Out of Keynes’ Shadow,” Feb. 12, 2009
d. Assessing the Policy Response A. Blinder and M. Zandi, “How the Great Recession Was Brought to an End,” Moody’s Economy.com, July 27, 2010 M. Wolf, “Obama Was too Cautious in Fearful Times,” Financial Times, Aug. 31, 2010 C. Romer, “The Lessons of 1937,” The Economist, June 18, 2009 (o) J. B. Taylor, “Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis,” Federal Reserve Bank of St. Louis Review May/June 2010 VII.
Conclusion N. G. Mankiw, “The Macroeconomist as Scientist and Engineer,” Journal of Economic Perspectives, Fall 2006 (o) P. Krugman, “How Did Economists Get it So Wrong?” New York Times Magazine, Sept. 13, 2009 (o) N. Kocherlakota, “Modern Macroeconomic Models as Tools for Economic Policy,” The Region, May 2010