Macroeconomic Theory

437 Pages·2017·3.85 MB·English

by  Volker Böhm

Springer Texts in Business and Economics
Volker Böhm
Macroeconomic
Theory
Springer Texts in Business and Economics
More information about this series at http://www.springer.com/series/10099
Volker Böhm
Macroeconomic Theory
Volke rB öhm
Faculty of Business Administration and Economics
Bielefeld University
Bielefeld, Germany
ISSN 2192-4333 ISSN 2192-4341 (electronic)
Springer Texts in Business and Economics
ISBN 978-3-319-60148-9 ISBN 978-3-319-60149-6 (eBook)
DOI 10.1007/978-3-319-60149-6

Library of Congress Control Number: 2017954931

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“Thecompositionofthisbookhasbeenfortheauthoralongstruggleofescape,andsomust
thereadingofitbeformostreadersiftheauthor’sassaultuponthemistobesuccessful,–a
struggleofescapefromthehabitualmodesofthoughtandexpression.Theideaswhichare
hereexpressedsolaboriouslyareextremelysimpleandshouldbeobvious.Thedifficulty
lies,notinthenewideas,butinescapingfromtheoldones,whichramify,forthosebrought
upasmostofushavebeen,intoeverycornerofourminds.”
JohnMaynardKeynes ‘TheGeneralTheoryofEmployment,Interest,andMoney’
December13,1935
Preface
The main chapters of this book developed out of the core material of a graduate
courseinMacroeconomicTheorywhichwasgivenatBielefeldUniversityoversev-
eral years. At first the objective was to present the microeconomic foundations of
macroeconomic analysis for an economy in the short run deriving prices, wages,
output,andemploymentforamonetaryeconomywithintheframeworkoftempo-
rarygeneralequilibriumtheoryemphasizingKeynesianfeaturesandcontrastingthe
results under disequilibrium with those of Classical Macroeconomics. As new re-
sults resolving dynamic issues were obtained for both the disequilibrium as well
as for the equilibrium modeling, comparisons between the two approaches were
possible within the same general model. Emphasis of the course material shifted
graduallyfromonlyacomparativestaticsanalysistoajointpresentationofastatic
andadynamicanalysissidebyside.Intheendasynthesiswasobtainedofextend-
ingthetraditionalintertemporalsequentialmodelingtoafulldynamicanalysisfor
theequilibriumandthedisequilibriumdescriptionoftemporaryallocations.Thisal-
lowsananalysisofmacroeconomicissueswithandwithoutnoise,inparticularthe
consequencesofstationaryfiscalpoliciesonallocations,onthequantityofmoney,
aswellasonthestabilityoftheevolutionoftheeconomy.
The book offers a unified general equilibrium approach starting from the com-
petitivetemporaryequilibriummodelinthespiritofHicks,Keynes,andothers.The
material contrasts and compares the two main competing approaches in macroe-
conomics within the same intertemporal structure of a closed monetary economy:
the one postulating full price flexibility to guarantee equilibrium in all markets at
alltimesunderperfectforesightorrationalexpectations,versustheso-calleddise-
quilibriumapproachwheretradingoccursatnon-market-clearingpricesandwages
while these adjust sluggishly from period to period in response to market disequi-
libriumsignals.Insummary,thebookpresentsasynthesisofequilibriumanddis-
equilibrium analysis within a prototype monetary macroeconomic model unifying
thefeaturesoftemporaryequilibriumandKeynesianmodels.Towardtheendlimits
oftimeandspaceimposedtheexclusionofmaterialextendingthemodeltoinclude
inventoryandgovernmentdebt.Theavailabledraftsectionswhichwerepartlypre-
vii
viii Preface
sented in class still have to be completed and brought to a level of presentation
comparabletothecurrentone.
A book with material of this scope is the outcome of several attempts initiated
over many years without a systematic planning at the beginning. However, as the
first ideas developed more than twenty years ago it became clear that I was led to
write and circulate my own notes rather than following the presentation of chap-
tersfrommacroeconomictextbooksorfrompublishedarticles.Theirspecificityof-
tendidnotfulfillmycriteriatoteachmacroeconomicsfromaunifyingperspective
whileusingknowntoolsfrommicroeconomics,generalequilibriumtheory,anddy-
namicanalysistoobtainthedisequilibriumextensionforaunifyingmacroeconomic
theory.
Many colleagues, coworkers, and former students have contributed to the com-
pletion through remarks and suggestions to successive drafts. I am particularly
gratefultoCostasAzariadis,ThorstenPampel,GeorgeVachadze, andGerdWein-
richwho have read versions of chapters at thelater stages and helped tomake the
finalpresentationmorereadable,containingfewerimprecisions,minimizingmisun-
derstandings,andhopefullyavoidingerrors.Whileteachingthematerialnotonlyin
Bielefeld but also at international departments the contact with advanced students
has been one of the major sources to understand the need for intuitive presenta-
tions of material when using new methods. Among the many students who have
beeninvolvedinthepresentationsofthecoursematerialIamespeciallyindebtedto
OliverClaaswhoaccompaniedmyteachingofthematerialduringseveralrounds,
tutoring,designingexercisesandsolutions,aswellassubstitutinginclassoccasion-
ally. Our research on labor market models with bargaining has led to joint results
whichareincludedpartlyinthebook.Hisdissertationpointsatnewandchalleng-
ingfindingstoresolveissuesinlaboreconomicswithinthemacroeconomiccontext.
OvermanyyearsOliverhasaccompaniedthedevelopmentofthemanuscriptwith
questions,criticalremarks,andaninvaluablesupportintheuseofLATEXsuggesting
software for figures, diagrams, and numerical results, and for programming sup-
portwithΛACRODYN.Hans-WalterLorenzintroducedmetotheextendedgraphical
worldofpstrickswithinLATEXprovidinggraphicaladditionstodescribequalitative
propertiesgeometricallywhichoftenrequirelongverbalexplanations.Iwasprivi-
legedtocompletemyendeavor duringthelastfiveyearsinaprosperingscientific
environment withstudentresearchers,programmers,andcolleagues. Iamgrateful
forthesupportbytheDepartmentofBusinessAdministrationandEconomics,the
Center for Mathematical Economics (IMW), and the Research Center for Mathe-
maticalModelling(RCM2)atBielefeldUniversityprovidinggenerousassistancein
my continued struggle uphill to reach a level of completion for the results which
nowmakeupthemainmessageofthebook.
Bielefeld,July10,2017 VolkerBöhm
Contents
1 Introduction................................................... 1
1.1 AUnifiedApproachinMacroeconomicModeling ............... 2
1.2 ClosedMonetarySystemswithIntertemporalConsistency ........ 3
1.3 TemporaryDisequilibriumversusEquilibrium .................. 4
1.4 RecursiveIntertemporalEconomiesasDynamicalSystems ....... 6
1.5 ThePrincipleFeaturesoftheBook............................ 10
2 MicroeconomicFoundations..................................... 13
2.1 TheBasicIntertemporalModelwithMoney .................... 13
2.2 IntertemporalDecisionsofConsumers......................... 14
2.2.1 TheGeometryoftheBudgetSetandofDemand.......... 15
2.2.2 TheIntertemporalUtilityIndex:AnAlternativeApproach.. 21
2.2.3 FormationofPriceExpectations........................ 22
2.3 TemporaryEquilibriuminaMonetaryEconomy ................ 26
2.3.1 TemporaryEquilibriumwithConsistentExpectations...... 29
2.3.2 FailureofExistenceofConsistentMonetaryEquilibria .... 31
2.3.3 OntheValidityoftheNeoclassicalHypothesis ........... 32
3 ModelsofMonetaryEquilibrium ................................ 35
3.1 MarketsandAgents ........................................ 35
3.2 CompetitiveTemporaryEquilibrium........................... 40
3.2.1 IncomeConsistentAggregateCommodityDemand........ 42
3.2.2 PricesandWages,OutputandEmployment .............. 45
3.2.3 CompetitiveTemporaryEquilibrium .................... 47
3.2.4 PropertiesofthePriceLawandtheWageLaw............ 48
3.2.5 AggregateSupplyandAggregateDemand ............... 50
3.2.6 PricesandWages:ATwo-StepGeometricAnalysis ....... 57
3.2.7 IsoelasticFunctions:AnExample ...................... 60
3.2.8 OnRigiditiesandNonexistenceofEquilibria............. 62
3.2.9 ConcludingtheCompetitiveCase ...................... 77
3.3 NoncompetitiveCommodityPricing........................... 79
ix
x Contents
3.3.1 MonopolisticPriceSetting:TheNewKeynesianApproach . 79
3.3.2 OligopolisticPriceSetting............................. 88
3.3.3 HeterogeneityandProductDifferentiation ............... 91
3.4 NoncompetitiveWageDetermination.......................... 94
3.4.1 MonopsonisticWageSettingbyProducers ............... 95
3.4.2 MonopolisticWageSettingbyaLaborUnion ............ 98
3.4.3 ReappraisalofNoncompetitiveWageModels ............104
3.5 EfficientBargainingintheLaborMarket .......................105
3.5.1 EfficientBargainingofWagesandEmployment...........105
3.5.2 TemporaryEquilibriumwithEfficientBargaining .........117
3.5.3 ComparingBargainingandCompetition .................125
3.5.4 InefficientRedistributionunderEfficientBargaining .......128
3.5.5 TheSecond-BestNatureofEfficientBargaining ..........131
3.6 Prices,Wages,andPayoffs:TheIsoelasticCaseRevisited.........132
3.6.1 TheRoleofUnionPower .............................136
3.6.2 UnionPowerandWages ..............................138
3.6.3 ComparingLaborMarketScenarios.....................142
3.7 WageRigiditiesandUnemployment...........................150
3.7.1 SourcesofRigidities .................................150
3.7.2 UnemploymentduetoUnemploymentCompensation......153
3.7.3 TheEfficiency-WageModel ...........................160
3.7.4 OnEndogenousRigiditiesandUnemployment ...........173
4 DynamicsofMonetaryEquilibriumModels.......................175
4.1 DynamicsofMoney,Prices,andExpectations ..................175
4.1.1 DynamicsofMoneyBalances .........................176
4.1.2 DynamicsofExpectations.............................177
4.1.3 PerfectForesight.....................................181
4.1.4 MoneyBalancesandPricesunderPerfectForesight .......185
4.1.5 StationaryMonetaryStates ............................186
4.1.6 Money:AConstantVeilforStationaryEconomies? .......190
4.2 BalancedPathsofInflationandDeflation.......................192
4.2.1 DynamicsofRealBalancesunderPerfectForesight .......193
4.2.2 DynamicswithAdaptiveExpectations ..................204
4.3 DynamicswithRandomProductivity ..........................216
4.3.1 DynamicsofMoneyBalances .........................221
4.3.2 RationalExpectations ................................221
4.3.3 DynamicsofExpectedRealMoneyBalances.............225
4.4 StochasticBalancedPaths ...................................227
4.4.1 TheRealEconomyalongBalancedPaths ................232
4.4.2 NumericalResults:StationarityandStability .............235
4.4.3 ConvergenceandStabilityofStochasticBalancedPaths....246
4.4.4 TheDynamicsofRationalExpectationsEquilibria:
AnAppraisal........................................250
4.5 DynamicswithRandomAggregateDemand ....................252