Advanced Macroeconomics: An Easy Guide

420 Pages·2021·20.301 MB·English

by  Filipe Campante, Federico Sturzenegger, Andrés Velasco

ADVANCED MACRO-ECONOMICS A
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an easy guide
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Filipe Campante Johns Hopkins University “A tour de force. Presenting modern macro theory
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Federico Sturzenegger Universidad de San Andrés rigorously but simply, and showing why it helps
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Andrés Velasco London School of Economics understand complex macroeconomic events and
macroeconomic policies.” D
Macroeconomic concepts and theories are among the Olivier Blanchard (Peterson Institute for Economics,

most valuable for policymakers. Yet up to now, there Chief Economist at the IMF 2008–15) M
has been a wide gap between undergraduate courses
and the professional level at which macroeconomic “This terrifically useful text fills the considerable gap A
policy is practiced. In addition, PhD-level textbooks between standard intermediate macroeconomics texts
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rarely address the needs of a policy audience. So and the more technical text aimed at PhD economics
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advanced macroeconomics has not been easily courses. The authors cover the core models of modern
accessible to current and aspiring practitioners. macroeconomics with clarity and elegance, filling in O
details that PhD texts too often leave out… Advanced
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This rigorous yet accessible book fills that gap. It was undergraduates, public policy students and indeed E
born as a Master’s course that each of the authors many economics PhD students will find it a pleasure to
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taught for many years at Harvard’s Kennedy School read, and a valuable long-term resource.”
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of Government. And it draws on the authors’ own Kenneth Rogoff (Harvard University, Chief Economist at
extensive practical experience as macroeconomic the IMF 2001–3) N
policymakers. It introduces the tools of dynamic
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optimization in the context of economic growth, and “This is an excellent and highly rigorous yet accessible
then applies them to policy questions ranging from guide to fundamental macroeconomic frameworks that M ADVANCED MACRO-
pensions, consumption, investment and finance, to the underpin research and policy making in the world. The
most recent developments in fiscal and monetary policy. content reflects the unique perspective of authors who I
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have worked at the highest levels of both government
Written with a light touch, yet thoroughly explaining and academia. This makes the book essential reading S
ECONOMICS
current theory and its application to policymaking, for serious practitioners, students, and researchers.”
Advanced Macroeconomics: An Easy Guide is an Gita Gopinath (Harvard University, and Chief Economist
invaluable resource for graduate students, advanced at the IMF since 2019)
undergraduate students, and practitioners. S
“The words Advanced and Easy rarely belong together, VturCa
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but this book gets as close as possible. It covers laenp
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fancy and creative innovations necessary to anyone e
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interested in keeping up with both the policy and the
academic worlds.”
Filipe Campante, Federico Sturzenegger and Andrés Velasco
Arminio Fraga (former president, Central Bank of Brazil)
Advanced Macroeconomics
An Easy Guide
Filipe Campante, Federico Sturzenegger,
Andrés Velasco
Johns Hopkins University,
Universidad de San Andrés,
London School of Economics
2021
Publishedby
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Short Contents
Contents vii
ListofFigures xvi
ListofTables xix
Preface xx
Acknowledgments xxii
AbouttheAuthors xxiii
Chapter1 Introduction 1
GrowthTheory 5
Chapter2 Growththeorypreliminaries 7
Chapter3 Theneoclassicalgrowthmodel 23
Chapter4 Anapplication:Thesmallopeneconomy 41
Chapter5 EndogenousgrowthmodelsI:Escapingdiminishingreturns 51
Chapter6 EndogenousgrowthmodelsII:Technologicalchange 69
Chapter7 Proximateandfundamentalcausesofgrowth 87
OverlappingGenerationsModels 113
Chapter8 Overlappinggenerationsmodels 115
Chapter9 Anapplication:Pensionsystemsandtransitions 135
Chapter10 Unifiedgrowththeory 147
ConsumptionandInvestment 159
Chapter11 Consumption 161
Chapter12 Consumptionunderuncertaintyandmacrofinance 171
Chapter13 Investment 189
ShortTermFluctuations 203
Chapter14 Realbusinesscycles 205
Chapter15 (New)Keynesiantheoriesoffluctuations:Aprimer 219
Chapter16 Unemployment 243
vi SHORTCONTENTS
MonetaryandFiscalPolicy 259
Chapter17 FiscalpolicyI:Publicdebtandtheeffectivenessoffiscalpolicy 261
Chapter18 FiscalpolicyII:Thelong-rundeterminantsoffiscalpolicy 279
Chapter19 Monetarypolicy:Anintroduction 295
Chapter20 RulesvsDiscretion 315
Chapter21 Recentdebatesinmonetarypolicy 323
Chapter22 Newdevelopmentsinmonetaryandfiscalpolicy 345
AppendixA Verybriefmathematicalappendix 363
AppendixB SimulatinganRBCmodel 371
AppendixC SimulatingaDSGEmodel 381
Index 387
Contents
ListofFigures xvi
ListofTables xix
Preface xx
Acknowledgments xxii
AbouttheAuthors xxiii
Chapter1 Introduction 1
GrowthTheory 5
Chapter2 Growththeorypreliminaries 7
2.1 Whydowecareaboutgrowth? 7
2.2 TheKaldorfacts 10
2.3 TheSolowmodel 10
The(neoclassical)productionfunction 11
Thelawofmotionofcapital 12
Findingabalancedgrowthpath 13
Transitionaldynamics 14
Policyexperiments 15
Dynamicinefficiency 16
Absoluteandconditionalconvergence 17
2.4 Canthemodelaccountforincomedifferentials? 17
2.5 TheSolowmodelwithexogenoustechnologicalchange 19
2.6 Whathavewelearned? 20
NotesandReferences 21
Chapter3 Theneoclassicalgrowthmodel 23
3.1 TheRamseyproblem 23
Theconsumer’sproblem 24
Theresourceconstraint 25
Solutiontoconsumer’sproblem 25
ThebalancedgrowthpathandtheEulerequation 26
Adigressiononinequality:IsPikettyright? 29
Transitionaldynamics 31
Theeffectsofshocks 34
viii CONTENTS
3.2 Theequivalencewiththedecentralisedequilibrium 35
Integratingthebudgetconstraint 37
Backtoourproblem 37
3.3 Dowehavegrowthafterall? 38
3.4 Whathavewelearned? 38
NotesandReferences 39
Chapter4 Anapplication:Thesmallopeneconomy 41
4.1 Somebasicmacroeconomicidentities 41
4.2 TheRamseyproblemforasmallopeneconomy 42
Ausefultransformation 43
Solutiontoconsumer’sproblem 44
Solvingforthestockofdomesticcapital 44
Thesteadystateconsumptionandcurrentaccount 45
Theinexistenceoftransitionaldynamics 45
Productivityshocksandthecurrentaccount 46
Sovereignwealthfunds 47
4.3 Whathavewelearned? 47
4.4 Whatnext? 48
NotesandReferences 48
Chapter5 EndogenousgrowthmodelsI:Escapingdiminishingreturns 51
5.1 Thecurseofdiminishingreturns 51
5.2 Introducinghumancapital 51
Lawsofmotion 52
Balancedgrowthpath 53
Stilllookingforendogenousgrowth 53
5.3 TheAKmodel 54
Solutiontohousehold’sproblem 55
Atlonglast,abalancedgrowthpathwithgrowth 56
Closingthemodel:TheTVCandtheconsumptionfunction 57
Thepermanenteffectoftransitoryshocks 57
Insum 58
5.4 Knowledgeasafactorofproduction 60
Learningbydoing 61
AdamSmith’sbenefitstospecialisation 62
5.5 Increasingreturnsandpovertytraps 63
PovertytrapintheSolowmodel 63
Policyoptionstoovercomepovertytraps 65
Dopovertytrapsexistinpractice? 65
5.6 Whathavewelearned? 66
5.7 Whatnext? 66
NotesandReferences 66
CONTENTS ix
Chapter6 EndogenousgrowthmodelsII:Technologicalchange 69
6.1 Modellinginnovationasproductspecialisation 70
6.2 Modellinginnovationinqualityladders 73
6.3 Policyimplications 75
Distancetothetechnologicalfrontierandinnovation 76
Competitionandinnovation 77
Scaleeffects 80
6.4 Thefutureofgrowth 81
6.5 Whathavewelearned? 82
6.6 Whatnext? 83
NotesandReferences 83
Chapter7 Proximateandfundamentalcausesofgrowth 87
7.1 Theproximatecausesofeconomicgrowth 87
Growthaccounting 88
Usingcalibrationtoexplainincomedifferences 89
Growthregressions 91
Explainingcross-countryincomedifferences,again 94
Summingup 98
7.2 Thefundamentalcausesofeconomicgrowth 98
Luck 99
Geography 99
Culture 103
Institutions 104
7.3 Whathavewelearned? 107
7.4 Whatnext? 108
NotesandReferences 109
OverlappingGenerationsModels 113
Chapter8 Overlappinggenerationsmodels 115
8.1 TheSamuelson-Diamondmodel 115
Thedecentralizedequilibrium 116
Goodsandfactormarketequilibrium 118
Thedynamicsofthecapitalstock 118
Aworkableexample 120
8.2 Optimality 122
Thesteady-statemarginalproductofcapital 122
Whyistheredynamicinefficiency? 123
Areactualeconomiesdynamicallyinefficient? 124
Whyisthisimportant? 124