ECONOMICS 501
MACROECONOMIC THEORY
Fall 2011
Professor Callahan
105 Kreeger Building
(202) 885-3737
E-mail: colleen@american.edu
Office Hours: Wednesday 3-6, Thursday 4-6, and by appointment
BACKGROUND
Welcome to Economics 501! This is a master’s level course in macroeconomic theory
and policy; it is also open to advanced undergraduates who have the prerequisites,
especially students pursuing a BS in Mathematics and Economics or a combined BA or
BS and MA degree. There are two prerequisites for this course: mathematical economics
(ECON 505) which may be taken concurrently, and undergraduate intermediate
macroeconomics (ECON 301 or its equivalent). If you have any concerns regarding the
appropriateness of your background, please consult the professor.
Over the semester, we will analyze both the long-run and short-run performance of the
economy as a whole along with various theories proposed by economists to help us
explain that performance. Each theory has its strengths and weaknesses, which we will
consider in some detail. The main questions facing economists who study the long-run
are (1) how to explain increases in per capita income that have been sustained for well
over a century in nations like the United States and (2) to understand why some nations
have never been able to achieve rising per capita income except for brief episodes.
For economists who focus on the short-run, the main questions center on the fluctuations
of the economy around its long run growth path. For example, what causes recessions and
accompanying high unemployment? What has made the current recovery especially
weak? How has the challenge of large budget deficits and rising debt levels affected the
global economy? To understand these phenomena, we will examine the role of
consumption, investment, the trade balance, and fragility in the financial sector, along
with monetary and fiscal policy.
The approach taken in this course is to blend rigorous macroeconomic theory with its
practical (and often imperfect) application to problems in the world beyond the
classroom. For example, we will investigate the events precipitating the most recent U.S.
recession, which officially began in December 2007, the policy response, and the effects
of the fiscal austerity programs enacted in 2011.
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LEARNING OBJECTIVES
• Analyze real-world events using mainstream macroeconomic models
• Assess the strengths and weaknesses of macroeconomic models
• Contrast the appropriateness of monetary and fiscal policies, along with policies
to promote growth
• Solve mathematical versions of macroeconomic models and explain results using
intuition
REQUIRED TEXT
Olivier Blanchard, Macroeconomics, 5th Edition (updated), Pearson Prentice Hall, Upper
Saddle River, New Jersey, 2009. ISBN 978-0-13-215986-9.
REQUIRED READINGS
You can access the following articles through the Blackboard site for this class. Please
consult the schedule of topics for the date that each article will be discussed.
1.
National Bureau of Economic Research, “End of the Recession,” July 2010.
(under “external links”)
2.
Charles Steindel, “Chain-weighting: The New Approach to Measuring GDP,”
Current Issues in Economics and Finance, Federal Reserve Bank of New York,
December 1995, pp. 1-6. (under “external links”)
3.
International Monetary Fund, “Update on the World Economic Outlook,” Webcast
with Blanchard, June 2011. (under “content”)
4.
OECD, “Better Life Initiative, Country Notes,” May 2011.
5.
David Romer, “Keynesian Macroeconomics Without the LM Curve,” Journal of
Economic Perspectives, Spring 2000, pp. 149-69. (under “course documents”)
6.
George Akerlof and Robert Shiller, Animal Spirits: How Human Psychology
Drives the Economy and Why It Matters for Global Capitalism, Princeton:
Princeton University Press, 2009, Chapters 1-6. (on e-reserve)
7.
IMF, “Interview with George Akerlof,” 2011.
8.
International Monetary Fund, “The United States, 2011 Article IV Consultation,”
July 2011. (under “content”)
9.
Ben S. Bernanke, Vincent R. Reinhart, and Brian P. Sack, “Monetary Policy
Alternatives at the Zero Bound: An Empirical Assessment,” Brookings Papers on
Economic Activity, read pp.1-24 only. (under “course documents”)
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10.
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Christina Romer, “Lessons from the Great Depression for the Recovery in 2009,”
a speech given at the Brookings Institution, March 2009. (under “external links”)
John Maynard Keynes, “The Slump of 1930.” (under “content”)
12.
Frederic Mishkin, “Is Monetary Policy Effective During Financial Crises?”
American Economic Review, May 2009, pp. 573-577. (under “e-reserves”)
13.
Mishkin, “Over the Cliff: From the Subprime to the Global Financial Crisis,”
Journal of Economic Perspectives, Winter 2011, pp. 49-70. (under “content”)
14.
International Monetary Fund, “Central Banking Lessons From the Crisis,” May
2010, pp. 1-25 only. (under “external links”)
15.
Matthew Shapiro and Joel Slemrod, “Did the 2008 Tax Rebates Stimulate
Spending?” American Economic Review, May 2009, pp. 374-379. (under
reserves”)
“e16.
“Interview with Joel Slemrod,” Federal Reserve Bank of Richmond, 2011. (under
“content”)
17.
Kevin Lansing, “Gauging the Impact of the Great Recession,” Economic Letter,
Federal Reserve Bank of San Francisco, July 2011. (under “content”)
18.
N. Gregory Mankiw, David Romer, and David Weil, “A Contribution to the
Empirics of Economic Growth,” Quarterly Journal of Economics, May 1992, pp.
407-437. (under “course documents”)
19.
Ben Bernanke, “Monetary Policy and the Housing Bubble,” January 2010. (under
“external links”)
20.
Congressional Budget Office, “Monthly Budget Review,” Aug.
2011. (under “content”)
21.
Congressional Budget Office, “Historical Budget Data,” (under “content”)
22.
Alan Blinder and Mark Zandi, “How the Great Recession Was Brought to an
End,” July 2010. (under “external links”)
23.
Olivier Blanchard et al, “Rethinking Macro Policy,” IMF Staff Position Note,
Feb. 2, 2010. (under “external links”)
24.
FOMC, “Statement,” 2010, 2011 (under “content”)
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25.
Menzie David Chinn, “Evidence on Financial Globalization and Crises: Global
Imbalances,” working paper, University of Wisconsin, 2011. (under “content”)
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EVALUATION
There will be a midterm and a final exam, along with problem sets that are excellent
preparation for the exams. On occasion, you will be asked to present a summary of the
assigned readings. There will also be a required research paper.
The problem sets will be checked for effort and completeness but will not be given letter
grades. Satisfactory completion of the problem sets will count for a portion of the final
grade. You must write your own answers to the problem sets though you may discuss (not
copy) possible answers with your fellow students.
Detailed requirements for the research paper will be distributed later in the semester.
IMPORTANT DATES
October 31
December 5
December 12
Throughout semester
Midterm
Research paper due
Final exam
Problem sets
30%
20%
40%
10%
Policy on the use of electronic devices
While in class, the use electronic devices is prohibited.
Academic integrity
AU’s academic integrity code is in effect at all times. No plagarism, no submission of
work that is not your own, no violations of any kind.
No make-up exams will be administered. Please arrange your schedule to meet all of
the deadlines in the course. If you miss the midterm for an approved (in advance) reason,
the final exam will count for a greater part of your overall grade.
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SCHEDULE OF TOPICS
FALL 2011
August 29
Introduction and macroeconomic overview
Measurement of macroeconomic variables
Readings: Blanchard, chapters 1 and 2 and
Steindel, “Chain-weighting”
NBER, “End of the Recession”
September 5
LABOR DAY (NO CLASS)
THE ECONOMY IN THE SHORT RUN
September 12
Equilibrium in the goods market
Equilibrium in financial markets
Readings: Blanchard, chapters 3 and 4;
IMF, “World Economic Outlook”
OECD, “Better Life” (read any 5
summaries)
September 19
Goods markets and financial markets together: The
IS-LM model
Readings: Blanchard, ch. 5
D. Romer, “Keynesian Macroeconomics”
Akerlof and Shiller, chapters 1-4
FOMC, “Statement”
September 26
Explaining the Great Depression
Central bank policy tools
Readings: Blanchard, chapters 22 and 25
(pp. 547-551);
Keynes, “Slump of 1930”
C. Romer, “Lessons”
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Bernanke, Reinhart, and Sack, “Monetary policy”
(pp. 1-24 only)
THE ECONOMY IN THE MEDIUM RUN
October 3
The Labor Market
The aggregate supply and aggregate demand model
Readings: Blanchard, chapters 6 and 7
IMF, Interview with G. Akerlof
Akerlof and Shiller, chapters 5 and 6
October 10
Policy analysis in the aggregate supply and aggregate
demand model
Fiscal austerity
Readings: Blanchard, ch. 7 (cont’d)
IMF, “The United States”
Mishkin, “Is monetary policy effective”
Shapiro and Slemrod, “Did the 2008 tax rebates”
CBO, “Monthly Budget”
CBO, “Historical Budget”
Richmond Fed, “Interview with J. Slemrod”
October 17
The natural rate of unemployment and the Phillips Curve
Readings: Blanchard, chapters 8 and 9;
October 24
Constraints on policymakers
The Global Crisis
Readings: Blanchard, chapters 25 (pp.526-547), 26 and 28
San Francisco Fed., “Gauging the Impact”
Blinder and Zandi, “How the Great Recession”
Mishkin, “Over the Cliff”
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October 31
MIDTERM
LONG RUN GROWTH
November 7
The Neoclassical (Solow) Growth model
Readings: Blanchard, chapters 10 and 11
November 14
The Solow model expanded: Technological progress and
growth
Readings: Blanchard, chapter 12
Mankiw, Romer, and Weil, “A Contribution”
OPEN ECONOMY MACROECONOMICS
November 21
The Open Economy I
Exchange rates
Goods market equilibrium
Readings: Blanchard, chapters 18 and 19
November 28
The Open Economy II
Global asset markets
Exchange rate regimes
Readings: Blanchard, chapters 20 and 21
Chinn, “Evidence on Financial Globalization”
December 5
Wrap-up
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Readings: Blanchard, chapter 27
Bernanke, “Monetary Policy and the Housing
Bubble”
Blanchard et al, “Rethinking Macro Policy”
IMF, “Central Banking Lessons”
December 12
FINAL EXAM 5:30-8:00
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