Advanced Macroeconomics An Easy Guide Table of Contents

Short Contents Contents List of Figures List of Tables Preface About the Authors Chapter Introduction Growth Theory Chapter Growth theory preliminaries Chapter The neoclassical growth model Chapter An application The small open economy Chapter Endogenous growth models I Escaping diminishing returns Chapter Endogenous growth models II Technological change Chapter Proximate and fundamental causes of growth Overlapping Generations Models Chapter Overlapping generations models Chapter An application Pension systems and transitions Chapter 10 growth theory Consumption and Investment Chapter 11 Consumption Chapter 12 Consumption under uncertainty and macro Chapter 13 Investment Short Term Fluctuations Chapter 14 Real business cycles Chapter 15 ( New ) theories of A primer Chapter 16 Unemployment xvi 23 41 51 69 87 113 115 135 147 159 161 171 189 203 205 219 243

vi SHORT CONTENTS Monetary and Fiscal Policy 259 Chapter 17 Fiscal policy Public debt and the effectiveness of policy 261 Chapter 18 Fiscal policy II The of policy 279 Chapter 19 Monetary policy An introduction 295 Chapter 20 Rules Discretion 315 Chapter 21 Recent debates in monetary policy 323 Chapter 22 New developments in monetary and policy 345 Appendix A Very brief mathematical appendix 363 Appendix Simulating an model 371 Appendix Simulating a model 381 Index 387

Contents List of Figures xvi List of Tables Preface About the Authors Chapter Introduction Growth Theory Chapter Growth theory preliminaries do we care about growth ?

The facts 10 The model 10 The ( neoclassical ) production function 11 The law of motion of capital 12 Finding a balanced growth path 13 Transitional dynamics 14 Policy experiments 15 Dynamic inefficiency 16 Absolute and conditional convergence 17 Can the model account for income differentials ?

17 The model with exogenous technological change 19 have we learned ?

20 Notes and References 21 Chapter The neoclassical growth model 23 The Ramsey problem 23 The consumers problem 24 The resource constraint 25 Solution to consumer problem 25 The balanced growth path and the equation 26 A digression on inequality Is right ?

29 Transitional dynamics 31 The effects of shocks 34 viii CONTENTS The equivalence with the equilibrium 35 Integrating the budget constraint 37 Back to our problem 37 Do we have growth after all ?

38 have we learned ?

38 Notes and References 39 Chapter An application The small open economy 41 Some basic identities 41 The Ramsey problem for a small open economy 42 A useful transformation 43 Solution to consumers problem 44 Solving for the stock of domestic capital 44 The steady state consumption and current account 45 The inexistence of transitional dynamics 45 Productivity shocks and the current account 46 Sovereign wealth funds 47 have we learned ?

47 next ?

48 Notes and References 48 Chapter Endogenous growth models I Escaping diminishing returns 51 The curse returns 51 Introducing human capital 51 Laws of motion 52 Balanced growth path 53 Still looking for endogenous growth 53 The AK model 54 Solution to households problem 55 At long last , a balanced growth path with growth 56 Closing the model The and the consumption function 57 The permanent effect of transitory shocks 57 In sum 58 Knowledge as a factor 60 Learning by doing 61 Adam Smith to specialisation 62 Increasing returns and poverty traps 63 Poverty trap in the model 63 Policy options to overcome poverty traps 65 Do poverty traps exist in practice ?

65 have we learned ?

66 next ?

66 Notes and References 66 CONTENTS ix Chapter Endogenous growth models II Technological change 69 Modelling innovation as product specialisation 70 Modelling innovation in quality ladders 73 Policy implications 75 Distance to the technological frontier and innovation 76 Competition and innovation 77 Scale effects 80 The future of growth 81 What have we learned ?

82 What next ?

83 Notes and References 83 Chapter Proximate and fundamental causes of growth 87 The proximate causes of economic growth 87 Growth accounting 88 Using calibration to explain income differences 89 Growth 91 Explaining income differences , again 94 Summing up 98 The fundamental causes of economic growth 98 Luck 99 Geography 99 Culture 103 Institutions 104 What have we learned ?

107 What next ?

108 Notes and References 109 Overlapping Generations Models 113 Chapter Overlapping generations models 115 The model 115 The decentralized equilibrium 116 Goods and factor market equilibrium 118 The dynamics of the capital stock 118 A workable example 120 122 The marginal product of capital 122 Why is there dynamic ?

123 Are actual economies dynamically ?

124 Why is this important ?

124 Overlapping generations in continuous time The closed economy A simple extension Revisiting the current account in the open economy have we learned ?

Notes and References Chapter An application Pension systems and transitions funded and systems Fully funded pension system pension system How do pensions affect the capital stock ?

Pensions and welfare Moving out ofa system Financing the transition with taxes on the young Financing the transition by issuing debt Discussion Do people save enough ?

have we learned ?

next ?

Notes and References Chapter 10 growth theory From to growth The regime Sustained economic growth A theory A simple model of the demographic transition Investing in human capital The dynamics of technology , education and population The full picture have we learned ?

next ?

Notes and References Consumption and Investment Chapter 11 Consumption Consumption without uncertainty The consumers problem Solving for the time and level of consumption CONTENTS 144 147 47 149 150 51 152 153 155 55 57 57 157 159 161 161 162 162 CONTENTS Chapter 12 Consumption under uncertainty and macro The permanent income hypothesis The case of constant labour income The effects of labour income The hypothesis Notes and References Consumption with uncertainty The random walk hypothesis Testing the random walk hypothesis The value function Precautionary savings New frontiers in consumption theory Present bias and The Equity premium puzzle What next ?

Notes and References Chapter 13 Investment Net present value and the option value critique The adjustment cost model Firm problem The dynamics of investment The role of Investment in the open economy The consumers problem Bringing in the Initial steady state The surprising effects of productivity shocks What next ?

Notes and References Short Term Fluctuations Chapter 14 Real business cycles The basic model The importance of labour supply The indivisible labour solution xi 164 165 169 171 173 173 174 176 179 183 184 187 189 190 192 194 195 197 198 199 199 200 201 201 203 205 206 207 209

Chapter 15 ( New ) theories of A primer model at work Calibration An example Does it work ?

Assessing the contribution What have we learned ?

What next ?

Notes and References 101 Classical version of the model The version of the model An interpretation The Fed From to of incomplete nominal adjustment The Lucas island model The model with perfect information Lucas supply curve Imperfect competition and nominal and real New models The canonical New model A Taylor rule in the canonical New model Back to discrete time What have we learned ?

What next ?

Notes and References Chapter 16 Unemployment Theories of unemployment A model ofjob search Introducing labour turnover model Nash bargaining Unemployment over the cycle wages Wages and effort The model models of unemployment Unemployment and migration What next ?

Notes and References CONTENTS 211 211 212 215 217 218 218 219 220 221 222 222 223 224 225 225 227 229 230 231 234 237 240 240 240 243 243 244 246 247 248 250 250 251 255 256 257 257 CONTENTS xiii Monetary and Fiscal Policy 259 Chapter 17 Fiscal policy Public debt and the effectiveness of policy 261 The government budget constraint 262 equivalence 263 The effects of debt tax 264 to equivalence 265 Effects of changes in government spending 265 The initial steady state 266 Permanent increase in government spending 266 Temporary increase in spending 266 Fiscal policy in a world 268 The current ( empirical ) debate Fiscal stimulus and adjustment 270 What have we learned ?

271 What next ?

273 Appendix 273 Debt sustainability 273 A framework 273 Measurement issues 274 The role of 275 Asset sales 276 Contingent liabilities 276 The balance sheet approach 277 Notes and References 278 Chapter 18 Fiscal policy II The of policy 279 Tax smoothing 280 The government objective function 280 Solving the governments problem 281 The time of tax distortions 281 The level of tax distortions 282 The steady state 282 Changes in government expenditures 283 policy 284 Smoothing government spending 285 Summing up 286 Other of policy 286 The political economy approach 287 Fiscal rules and institutions 288 Optimal taxation of capital in the 289 What have we learned ?

291 What next ?

292 Notes and References 292 xiv Chapter 19 Monetary policy An introduction The conundrum of money Introducing money into the model The model Finding the rate of The optimal rate of Multiple equilibria in the model Currency substitution The relation between and monetary policy The curve The and dynamics Unpleasant monetary arithmetic Pleasant monetary arithmetic The costs of The model and competition Taking stock Notes and References Chapter 20 Rules Discretion A basic framework Time inconsistency A brief history of monetary policy The emergence of targeting A rigid rule Which regime is better ?

The argument for targeting In sum Notes and References Chapter 21 Recent debates in monetary policy The liquidity trap and the zero lower bound Reserves and the central bank balance sheet Introducing the financial sector A model of quantitative easing of monetary policy shocks Policy implications and extensions Quantitative easing Money and banking Credit easing Appendix Notes and References CONTENTS 295 295 296 298 299 300 301 302 303 304 304 305 305 308 309 312 313 313 315 315 315 317 319 319 320 320 321 321 323 324 328 328 330 334 337 337 339 340 341 342

CONTENTS Chapter 22 New developments in monetary and policy 345 Secular stagnation 346 The theory of the price level 349 Interest rate policy in the 350 Rational asset bubbles 352 The basic model 354 Government debt as a bubble 356 Implications for , and monetary policy 358 Appendix I 359 Appendix 360 Appendix 360 Notes and References 361 Appendix A Very brief mathematical appendix 363 Dynamic in continuous time 363 Dynamic in discrete time 365 differential equations 367 Integrating factors 367 and dynamics 368 Notes 369 Appendix Simulating an model 371 Appendix Simulating a model 381 Index 387

List of Figures The evolution ofthe world per capita over the years Dog per capita of selected countries ( sog per capita of selected countries ( Dynamics in the model 13 Dynamics in the model again 14 The of an increase in the savings rate 15 consumption 16 Dynamics of capital 28 Dynamics of consumption 28 Steady state 29 rates , from ( 2019 ) 31 The phase diagram 33 Divergent trajectories 34 A permanent increase in the discount rate 35 A transitory increase in the discount rate 35 Endogenous growth 54 Transitory increase in discount rate 58 Comparison with model 59 . real and extrapolated trends 59 Multiple equilibria in the model 64 Entry effects , from et al . 2009 ) 79 Productivity differences , from ( 2012 ) 90 Distance from the equator and income , from ( 2012 ) 100 Reversal urbanization , from ( 2012 ) 101 Reversal . density , from ( 2012 ) 102 Border between Bolivia ( left ) and Brazil 105 The Korean Peninsula at night 106 Weak , despotic and inclusive states , from and Robinson ( 2017 ) 108 Time structure of overlapping generations model 116 The capital stock 119

LIST OF FIGURES Convergence to the steady state Fall in the discount rate Capital accumulation in the continuous time model Capital accumulation with retirement The current account in the continuous time model Introduction of social security The evolution of regional income per capita over the years The differential timing of the across regions Regional growth of per capita ( green line ) and population ( red line ) The differential timing of the demographic transition across regions Dynamics of the model with constant income Saving when income is high The hypothesis Precautionary savings Equity premium puzzle , from and ( 1999 ) Adjustment costs The dynamics of investment The adjustment of investment The effect on the current account The Hansen labour supply The US . output The cycle in the US . The correlation of output and hours in the Hansen model Trajectories of macro variables in response to The classical model The model The model with an exogenous interest rate model Welfare effects of imperfect competition Indeterminacy in the model Active interest rule in the model A reduction in the natural rate Equilibrium employment in the search model 21 22 30 31 32 39 48 49 50 51 56 65 67 69 77 85 93 96 97 200 210 213 213 215 217 221 222 223 224 230 235 236 237 249

LIST OF FIGURES model 254 A decrease in labor demand 254 The distortion created by the insider 256 A expansion in the model 262 Response to a transitory increase in government spending 267 Net worth Argentina Chile , from and ( 2007 ) 277 Response to an increase in government spending 284 The model 299 An anticipated increase in the money growth 300 Multiple equilibria in the model 302 The dynamics of and 306 Unpleasant arithmetic 307 Recent ( and exchange rate regimes ) 310 growth during 311 advanced economies ( blue line ) and emerging markets ( red line ) 318 Monetary policy in the 326 Effects of a disruption of credit supply 329 Assets held by FED , BOE and 330 A model of central bank reserves 334 Reducing the rate on reserves 334 Increasing money growth 335 The dynamics of the interest rate spread 336 A temporary decline in the rate on reserves 337 Shift in the model 348 Solutions of the bubble paths 353 Bubbles in the model 356 Government debt as a bubble 358

List of Tables Estimates of the basic model Estimates of the augmented model The data for the US . cycle , from Prescott ( 1986 ) The Variables in the Prescott model , from Prescott ( 1986 ) Estimating the multiplier for the 2009 US . stimulus Required primary surpluses 96 97 214 214 272 275