MACROECONOMIC THEORY AND POLICY (FE, ESP, S+E)
Lecturer: Yunus Aksoy
Course Aims
Macroeconomics is the part of economics that studies the behaviour of the economic system as a whole. This
course aims to develop a macroeconomic framework, to provide microfoundations for macro relationships, to
emphasize interactions within economies, and to examine some topical issues in policy design.
Course Objectives
By the end of the course students will understand intertemporal budget constraints, determinants of long-run
growth of the economy, sources of business cycles and fluctuations in short run aggregate demand, the demand
for and supply of money, and the role of monetary and fiscal policy. Students are encouraged not merely to learn
theoretical models but to appreciate their relevance in practice, including in the design of economic policy.
Learning Outcomes
By the end of the academic year, you are expected to:
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be able to form your own economic view on current macroeconomic problems;
understand the interrelationships between different macroeconomic policies;
be familiar with macroeconomic data and statistical relationships;
be able to present macroeconomic analysis both verbally and in written form;
be able to construct and write answers to macroeconomic analytical questions;
be able to undertake further study in the different areas of macroeconomics such as international
finance, monetary economics, growth theory, etc.
Organization
During the course, there will be a weekly lecture combined with a class in which students present their solutions
to that week's problem set.
Assessment: Essay (20%), Examination (80%)
In June, there will be a three-hour formal examination based on the overall syllabus, which will count for 80% of
the course unit mark.
As part of this course students are required to undertake a small project on some aspect of applied economics.
The essay assignment tests the ability of students to provide extended written answers to questions dealing with the
major macroeconomic issues. The essay will count for 20% of the total marks for the course, and should be
submitted by 29 April, 2005 by 19:00 o’clock (strict deadline) to Barbara Rye, Room: 716. Topics for the essay
can be found at the end of the syllabus. Further guidance on the project will be given during the course. Note that
for some essay questions data will be necessary. These data will be posted on my website
(http://www.econ.bbk.ac.uk/faculty/aksoy/).
Required reading (course text)
Stephen D. Williamson, Macroeconomics, 2nd edition, Addison Wesley,
Web site for Williamson book http://wps.aw.com/aw_williamson_macroecon_1
Recommended Reading
N. Gregory Mankiw, Macroeconomics, 5th edition, Worth Publishers
Web site for Mankiw book: http://www.worthpublishers.com/mankiw/
Additional handouts and journal articles will also be provided.
Week 1: Introduction and Measurement Issues
Measurement: Measuring GDP; Nominal and Real GDP and Price Indices; Savings, Wealth and Capital;
Labour Market Measurement
Business Cycle Measurement: Stylised Facts; Comovements
*Williamson Ch.’s 1, 2, 3
Week 2: Consumer and Firm Behaviour: The Work-Leisure Decision and Profit
Maximization
The representative consumer; The representative firm
*Williamson Ch. 4
Williamson Mathematical Appendix Ch.4
Week 3: A Closed Economy One Period Macroeconomic Model
Government; Competitive Equilibrium; Optimality; Working with the Model
* Williamson Ch. 5
Williamson Mathematical Appendix Ch.5
Week 4: A Two-Period Model
The Consumption-Savings Decision and Ricardian Equivalence
* Williamson Ch. 8
Williamson Mathematical Appendix Ch.8
Week 5: A Monetary Intertemporal Model
The Neutrality of Money, Long Run Inflation and Money Demand
What is Money?; A Monetary Intertemporal Model; Money Demand & Supply
* Williamson Ch. 10
Williamson Mathematical Appendix Ch.10
Baumol, W., (1952), “The Transactions Demand for Cash: An Inventory Theory
Approach”, Quarterly Journal of Economics, Vol. 66, pp. 545-556.
*Bullard, J. (1999), “Testing Long-Run Neutrality Propositions: Lessons from the
Recent Research”, Federal Reserve Bank of St. Louis Review, November, pp. 57-78.
*Blinder, A., (1998), Central Banking in Theory and Practice, Cambridge: The
MIT Press, chapters 1-2.
Laidler, D., (1969), “The definition of money: theoretical and empirical problems”,
Journal of Money, Credit and Banking, 1, 508-525.
*McCandless G., W. Weber (1995) Some Monetary Facts, Federal Reserve Bank of
Minneapolis Quarterly Review, Vol. 19, No. 3, pp. 2–11
*Mishkin, F. (1995), “Symposium on the Monetary Transmission Mechanism,”
Journal of Economic Perspectives 9, no. 4, 3-10.
Week 6: Keynesian Business Cycle Theory
Aggregate Demand and Aggregate Supply
*Mankiw Ch. 9
*Williamson Ch. 12
Week 7: Keynesian Business Cycle Theory
IS & LM Curves and Policy Analysis
* Mankiw Ch.’s 10, 11
* Williamson Ch. 12
Week 8: Keynesian Business Cycle Theory
Competing Explanations for Aggregate Supply
The Sticky Wage Model
The Sticky Price Model
Imperfect Information Model
* Mankiw Ch. 13
* Williamson Ch. 12
Week 9: Inflation, the Phillips Curve and the Central Bank Commitment
Inflation-Unemployment Trade Off; The Phillips Curve; The Friedman-Lucas Model Money Surprise
Model
* Williamson Ch. 17
Williamson Mathematical Appendix Ch.17
*Barro, R., and D. Gordon (1983) “A Positive Theory of Monetary Policy in a
Natural Rate Model”, The Journal of Political Economy, 91, pp. 589
-610.
*Blinder, A., (1998), Central Banking in Theory and Practice, Cambridge: The
MIT Press, chapter 3.
Cukierman A, Miller, G. and B. Neyapti (2002) “Central Bank reform, liberalization
in transition economies-an international perspective”, Journal of Monetary Economics, pp.237-264
*Hayo, B. and C. Hefeker (2002), Reconsidering Central Bank Independence,
European Journal of Political Economy 18, pp. 653-674.
Week 10: Market-clearing Models of the Business Cycle
The Friedman-Lucas Money Surprise Model;
The Real Business Cycle Model
* Williamson Ch. 11
Easter Essay: should be submitted by 29 April, 2005 by 19:00 o’clock (strict deadline) to Barbara Rye, Room:
716. (See assessment)
Write an essay on ONE of the following topics:
1.
Keynesian Business Cycle Theory: Explain the basics of the AD/AS model. Discuss how monetary and
fiscal policies can be used to respond to demand and supply shocks within this model.
2.
Alternative Business Cycle Theories: Calculate and plot the yearly percentage changes in consumption,
price level, money supply series against the annual percentage rates of change in real GDP for the
period 1980-2000 in the UK, the US and Germany. Are these variables procyclical, countercyclical or
acyclical? Are these variables positively or negatively correlated? Discuss carefully which business cycle
theories are consistent with these relationships.
3.
Phillips Curve: Calculate the annual percentage change in the CPI index and graph this in scatter plots
against the unemployment rate for the 1950s, 1960s, 1970s, 1980s, and 1990s in the UK, the US and
Germany. For which decades do you observe a Phillips Curve relationship? Discuss reasons as to why
the Phillips Curve relationship may have changed during these periods.
4.
A Two Period Model: Calculate and plot the ratio of consumption to GDP in the UK, the US and Germany
for the period 1980-2000. Discuss the principles of consumption that help to explain the data process.
Please note the following:
The essay should not exceed 1500 words.
In writing this essay, you should show evidence of reading beyond the lecture notes and basic textbooks. If you
can cite other evidence or articles, so much the better. The essay MUST include a bibliography. Note that for some
essay questions data will be necessary. These data will be posted in (http://www.econ.bbk.ac.uk/faculty/aksoy/) in
Excel format.
The deadline for the essay is 29 April, 2005 by 19:00 o’clock (strict deadline) to Barbara Rye, Room: 716.