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Macroeconomics:: Konstantin Styrin

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21 views12 pages

Macroeconomics:: Konstantin Styrin

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Un Ow
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Macroeconomics:

Introduction

Konstantin Styrin

Gaidar Foundation – NES Summer School

13 July 2015
Motivation: Why study macroeconomics?

• Explaining things. E.g., why does recovery from the Great Recession
of 2007-2009 remain so slow?
• Forecasting what will happen if something changes. E.g., how will
QE and fiscal expansion in Japan, if started, affect the economy and
markets?
• Talk a lot about policies – fiscal, monetary, trade, macro-prudential,
etc. Why? Believe that the world is imperfect (sticky prices of final
goods, imperfect information in financial markets) so that the
“invisible hand” does not work properly. Hence, there is a room for
government interventions.
• An important task of the discipline: inform the government on what
interventions/policies are better/worse under certain circumstances.
That’s why need to do conditional forecasts/scenarios (what
happens if . . . ).
Growth vs. business cycle

• Look at the time path of the US (or any other country’s) GDP for a
long period. Observed/actual GDP fluctuates around a long-term
trend.
• Growth theory studies what stands behind the long-term trend.
Typical questions:
• Why some countries grow faster than others on average?
• Why do many countries in the world remain poor?
• What can/cannot the government do to stimulate long-term
growth?
• Business cycle macro studies what gives rise to fluctuations.
Typical questions:
• Should the government intervene to stabilize the business
cycle?
• What would be the best (optimal policy) way to do that?
• Can think about these and other issues either in the closed or open
economy context.
Bird’s-eye view of NES macro sequence

Macro I, II undergraduate macro: mainly simple ad hoc models, i.e.


not derived from first principles/microfoundations
Macro III basic modeling tools (neoclassical growth model, OLG);
elements of growth and money
Macro IV micro foundations of consumption and investment; asset
pricing; role of financial market imperfections; bubbles (if
time allows)
Macro V business cycles: Real Business Cycles, New Keynesian
view, role of market imperfections
Macro VI monetary and fiscal policy (to stabilize business cycle)
Preview of this mini-course

• Will work out microfoundations and make sense of two aggregate


demand components, C and I .
• Why important? Agents’ decision rules depend on their
expectations and anticipated policies. One cannot therefore trust ad
hoc/reduced-form specifications (e.g. Keynesian consumption
function) when looking for the best among alternative policies.
• Use empirical data and methods to test theories.
• Stabilization policy: How should a fiscal stimulus be designed?
• Growth-enhancing policies: How to encourage people to save more?
Consumption

• The biggest component of aggregate demand, about 2/3 of GDP in


developed countries. Important to understand consumption from
the perspective of design of stabilization policies. E.g., are people
likely to spend their fiscal stimulus check money or save it?
• Consumption and saving decisions are two side of the same coin.
How to force people to save more for retirement? Important from
the perspective of growth as savings are translated into the supply
of loanable funds that finance investment.
• Dominant paradigm: PIH/life-cycle theory interpreted more broadly
(compared with Friedman/Modigliani).
• People do their best by trying to smooth the marginal utility of
consumption over the life-cycle. The cross effect of leisure might be
important.
Consumption

• Binding liquidity constraints in present/future.


• Durable goods and habit formation.
• Behavioral perspective: time inconsistency caused by hyperbolic
discounting leads to overspending.
Investment

• Most volatile GDP component.


• Optimal amount of capital is determined by the equality of its
marginal product and the real cost of capital.
• If capital is at a suboptimal level then the market value of the last
installed unit of capital (equals the discounted flow of future output
produced by it) exceeds its replacement cost. The firm will keep
investing until the two get equal. Q-theory of investment.
• In data observe lumpy rather than gradual investment at the firm
level. Does lumpiness make a difference?
Investment

• In a perfect (frictionless) world, all investment projects with


non-negative NPV will get funding. The firm’s capital structure is
irrelevant (Modigliani – Miller). In the data we observe quite the
opposite: cash flow from a firm’s operations is the best predictor of
its investment.
• Asymmetric information between borrowers and lenders creates
financial frictions. Consequences for business cycles? Policy
implications?
Asset pricing

• How are asset prices determined in equilibrium? Which


characteristics of assets make them attractive for investors?
• Consumption capital asset pricing model (CCAPM): people want to
hold those risky assets that provide hedge against the risk of their
consumption growth in the future.
• Do asset prices convey/aggregate useful information (recall
Q-theory) or are they just a source of noise and confusion? Efficient
market hypothesis vs. irrational exuberance/beauty contests.
• Bubbles: rational vs. speculative. Bubbles as an instrument of
storage. Bubbles as a source of liquidity. Belief disagreement and
bubbles.
Labor markets and unemployment

• Why does unemployment exist? Why does wage rate not adjust to
clear the labor market?
• How could low elasticity of labor supply at the micro level (workers)
be reconciled with high pro-cyclicality of aggregate labor input?
• How do alternative social insurance and or tax policies affect the
equilibrium rate of unemployment?
Reading List:
Required textbooks and materials:
1 Romer, David, Advanced Macroeconomics, McGraw-Hill/Irwin, 4th
ed., 2011
2 Blanchard, Oliver J. & Fischer, Stanley, Lectures on
Macroeconomics, The MIT Press, 1989
Additional materials:
1 Ljungqvist, Lars & Sargent, Thomas J., Recursive Macroeconomic
Theory, The MIT Press, 2nd ed., 2004
2 Attanasio, Orazio P., Consumption, in J.B. Taylor & M. Woodford
(eds.), Handbook of Macroeconomics, Elsevier Science, 1999
3 Caballero, Ricardo J., Aggregate Investment, in J.B. Taylor & M.
Woodford (eds.), Handbook of Macroeconomics, Elsevier Science,
1999
4 Campbell, John Y., Asset Prices, Consumption and the Business
Cycle, in J.B. Taylor & M. Woodford (eds.), Handbook of
Macroeconomics, Elsevier Science, 1999

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