Macroeconomic Theory and Macroeconomic Pedagogy

356 Pages·2009·3.096 MB·English

by  Giuseppe Fontana, Mark Setterfield (eds.)

Macroeconomic Theory and Macroeconomic Pedagogy

Macroeconomic Theory and
Macroeconomic Pedagogy
Editedby
Giuseppe Fontana
UniversityofLeeds,UK,andUniversityofSannio,Italy
and
Mark Setterfield
TrinityCollege,Hartford,USA
Selectionandeditorialcontent©GiuseppeFontanaandMarkSetterfield2009
Foreword©CarlE.Walsh2009
Individualchapters©contributors2009
Softcover reprint of the hardcover 1st edition 2009 978-0-230-20203-0
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Contents
ListofFigures vii
ListofAppendices x
NotesontheContributors xi
ForewordbyCarlE.Walsh xix
MacroeconomicTheoryandMacroeconomicPedagogy:
AnIntroduction 1
GiuseppeFontanaandMarkSetterfield
PartI The3-EquationNewConsensus
MacroeconomicModel
1 TeachingIntermediateMacroeconomicsusing
the3-EquationModel 13
WendyCarlinandDavidSoskice
2 BringingUndergraduateMacroeconomicsTeachingUptoDate 36
SimonWren-Lewis
3 MonetaryPolicyAnalysis:AnUndergraduateToolkit 55
JagjitS.Chadha
4 RescuingtheLM Curve(andtheMoneyMarket)in
aModernMacroCourse 76
RobertoTamborini
5 TheNewConsensusinMacroeconomics:ACriticalAppraisal 100
PhilipArestis
6 ComplexityandMacroPedagogy:TheComplexityVision
asaBridgebetweenGraduateandUndergraduateMacro 118
DavidColanderandCaseyRothschild
PartII AnEndogenous-MoneyTheoryAmendmentof
theNewConsensusMacroeconomicModel
7 TeachingMacroeconomicsWhentheEndogeneityof
MoneyisTakenSeriously 131
MalcolmSawyer
v
vi Contents
8 ASimple(andTeachable)MacroeconomicModel
withEndogenousMoney 144
GiuseppeFontanaandMarkSetterfield
9 MoneyandBankinginaRealisticMacroModel 169
PeterHowells
PartIII FinancialFragility,LiquidityPreference,
UnemploymentHysteresisand
OtherAmendments
10 TamingtheNewConsensus:Hysteresisand
SomeOtherPostKeynesianAmendments 191
MarcLavoie
11 MinskyMeetWicksell:UsingtheWicksellianModel
toUnderstandtheTwenty-FirstCenturyBusinessCycle 214
CharlesL.WeiseandRobertJ.Barbera
12 MacroeconomicsMeetsHymanP.Minsky:
TheFinancialTheoryofInvestment 234
L.RandallWrayandEricTymoigne
PartIV TheRealInterestRate,IncomeDistribution,
andAlternativeViewsofStabilizationPolicies
13 TeachingtheNewConsensusModelof
‘ModernMonetaryEconomics’from
aCriticalPerspective:PedagogicalIssues 255
JohnSmithin
14 APostKeynesianAlternativetotheNewConsensus
Model 273
EckhardHeinandEngelbertStockhammer
15 TheCentralBankeras‘RegulatorofConflict’:
A‘Reversed’ReadingoftheSolowand
NewConsensusModels 295
EmilianoBrancaccio
16 Institutions,ExpectationsandAggregateDemand 309
JesusFerreiroandFelipeSerrano
Author/NameIndex 323
SubjectIndex 326
List of Figures
1.1 ThelagstructureintheC–S3-equationmodel 15
1.2 ISandPCcurves 18
1.3 Howthecentralbankdecidesontheinterestrate 19
1.4 Responseofthecentralbanktoapositive
supply-sideshock,ariseinequilibriumoutput 22
1.5 Combinedcreditcrisisandoilpriceshock:
lowerequilibriumoutput 24
1.6 Combinedcreditcrisisandoilpriceshock:
unchangedequilibriumoutput 26
1.7 Themonetarypolicyresponsetoapermanent
ISshock:theroleoftheslopeoftheIScurve 28
1.8 Inflationshock:theeffectof(a)greaterinflation
aversionofthecentralbankand
(b)steeperPhillipscurve 29
1.9 Doublelagstructureinthe3-equationmodel 31
1.10 Centralbanklossfunctions:utilitydeclineswith
distancefromthe‘blisspoint’ 34
2.1 Usingthetwo-periodmodeltogetanIScurve 42
2.2 Forward-andbackward-lookingPhillipscurves 44
2.3 Atime-linerepresentationofUIP 47
2.4 UIPininterestrate,exchangeratespace 47
3.1 Interestratesandinflationtargets 63
3.2 Two-quadrantdiagram–demandshock 64
3.3 Two-quadrantdiagram–supplyshock 65
3.4 Inflationexpectationaccommodated 66
3.5 Thezeroboundproblem 67
3.6 Thefour-quadrantdiagram 69
4.1 TheADandAS‘gapfunctions’ 86
4.2 Simulationof1%exogenousfallinaggregatedemand 87
4.3 Simulationof1%temporaryincreasein
themoneygrowthrate 88
4.4 Simulationof1%exogenousfallinaggregatedemand 90
4.5 Pathofthemoneygrowthrateaftera1%fall
inaggregatedemandundertheTaylorrule 92
4.6 (a)Simulationof−1%interest-rategapunder
theTaylorrule;(b)pathofthemoneygrowthrate 93
7.1 Simplifiedbalancesheetofabank 134
8.1 Theendogenousmoneysupplyprocess 147
vii
viii ListofFigures
8.2 Aconventional(downward-sloping)
aggregatedemandschedule 151
8.3 Theaggregateproductionfunction 152
8.4 Theaggregatesupplyschedule 153
8.5 Thegoodsmarket 153
8.6 Equilibriumoutputandemployment 154
8.7 Thelabourmarket 155
8.8 Thestructureofourendogenousmoneymodel 156
8.9 (a)The2007–2008creditcrunchandtheendogenous
moneysupplyprocess;(b)theeffectsof
the2007–2008creditcrunchonequilibriumoutput
andemployment;(c)theeffectsofthe2007–2008
creditcrunchinthelabourmarket 158
8.10 (a)Theclassicalviewandthe(stabilizing)effectsof
wageflexibilityinthegoodsmarket;(b)theclassical
viewofequilibriumoutputandemployment;
(c)theclassicalviewandtheeffectsofwage
flexibilityinthelabourmarket 162
8.11 (a)TheKeynesianviewandthe(destabilizing)effects
ofwageflexibilityinthegoodsmarket;
(b)theKeynesianviewofequilibriumoutputand
employment;(c)theKeynesianviewand
theeffectsofwageflexibilityinthelabourmarket 164
9.1 Respondingtoaninflationshock 174
9.2 IntroducingtheIScurve 175
9.3 Themonetarysector 178
9.4 ThemonetarysectorandIS–PC–MR 180
9.5 Respondingtoinflation 181
9.6 Thecreditcrunch 183
10.1 Thebasicfour-quadrantNewConsensusmodel 195
10.2 ThePUP:theflatPhillipscurvesegment 198
10.3 TheNewConsensusmodelamendedwithaflat
Phillipscurvesegment 198
10.4 Impactofreducingtheinflationtargetin
thenewconsensusmodelamendedwith
anendogenousnaturalrateofgrowth 204
10.5 Hysteresisingrowthrates:acontinuumofequilibria 206
10.6 Threeviewsofthelong-runimpactofrestrictive
monetarypolicies 207
10.7 Thefour-quadrantNewConsensusmodelupgraded
withliquiditypreference 209
11.1 The1990stechnologyboomandbust 217
11.2 The2000shousingboomandbust 217
ListofFigures ix
11.3 Creditspreads(BAAcorporatebondrateminus
10-yearTreasuryrate),1960–2008 219
11.4 TheWicksellian(TS–IS–AS)model 221
11.5 Theeffectofariskpremiumshock(increaseinη ) 222
t
11.6 Theeffectofanaturalinterestrateshock
(increaseinz ) 223
t
11.7 AMinskyanboom 224
11.8 AMinskyanbust 224
11.9 Estimatednaturalrate,1997–2008 226
11.10 Riskpremium,1997–2008 227
11.11 FederalfundsrateandTaylorrulewithand
withoutresponsetoriskpremiumshock,2003–2008 228
12.1 Determinationofthelevelofinvestment 238
13.1 Theeffectsofademandexpansion 261
13.2 Alowerinflationtarget 262
13.3 Ademandexpansioninthealternative
monetarymodel 267
13.4 Alowerinflationtargetinthealternative
monetarymodel 267
14.1 Conflictingclaims,inflationanddistribution 277
14.2 TheNAIRU:anon-attractor 280
14.3 Aninflationtargetingcentralbankstabilizing
theNAIRU 282
14.4 Labourmarketpersistencemechanismsand
theNAIRU 284
14.5 Endogenouswageandprofitaspirationsand
theNAIRU 285
14.6 Lowinvestment,slowcapitalstockgrowthand
theNAIRU 286
14.7 Persistentchangeinthe‘exante’realrateof
interestandtheNAIRU 287
14.8 ResultofthePostKeynesianmacroeconomicpolicymix 289