Download ECON 6080-001 Applied Macroeconomic Theory

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Economics 6080
Applied Macroeconomic Theory
Fall 1993 - Robert McNown
Text : R . E. Hall and J . B.
edition) W.W. Norton .
Taylor,
Macroeconomics,
1993
(fourth
Supplemental Readings: Articles listed below are available through
Campus Copies in Norlin Library (Packet #16).
Topics and Readings:
I . Overview of macroeconomic perspectives
interest .
Hall and Taylor, Chapters 1 - 3.
and
variables
of
II . Model of long run equilibrium.
Hall and Taylor, Chapters 4-5.
III. Short run fluctuations, aggregate demand, and the ISLM model.
Hall and Taylor, Chapters 6-11.
Midterm Examination
IV. The open economy and models with government policy .
Hall and Taylor, Chapters 12-14, 18-19.
R.J. Barro, "The Ricardian Approach to Budget Deficits, "
Journal of Economic Perspectives vol. 3 (Spring 1989) 37-54 .
V. Critique of ISLM and alternative perspectives .
R . G. King, "Will the New Keynesian Macroeconomics Resurrect
the IS-LM Model?" Journal of Economic Perspectives vol. 7 (Winter
1993) 67-82.
c. I. Plosser, "Understanding Real Business Cycles," Journal of
Economic Perspectives vol . 3 (Summer 1989) 51-78.
N. G.
Mankiw,
"Real Business Cycles :
A New Keynesian
Perspective,"
Journal of Economic Perspectives vol. 3 (Summer
1989) 79-90 .
VI. Dynamic Macroeconomics.
Hall and Taylor, Chapters 15-17 .
A. Chiang, Fundamental Methods of Mathematical Economics 1984
(third edition), McGraw Hill, Chapters 16-17 .
Final Examination
Course Content
During
the
1950s
and
1960s
the
Keynesian
view
of
macroeconomics dominated the economics profession and policy
circles. Weaknesses in the Keynesian model became apparent with the
coexistence of high unemployment and price inflation during the
1970s and the failure of Keynesian based econometric models to
predict
macroeconomic
fluctuations
during
this
period .
Simultaneously, the Keynesian model was criticized for an
inadequate treatment of expectations and weak microeconomic
foundations.
This critique has led to the development of
alternative "new classical" and real business cycle models by some
economists, while others have tried to shore up the Keynesian
approach by incorporating rational expectations and firmer
microeconomic foundations.
Given the unsettled state of macroeconomics today , one goal of
this course is to present a balanced perspectiv e of the comp eting
schools of macroeconomic thought . A second goal is to develop the
tools of macroeconomic analysis that are essential to understanding
more advanced courses in macroeconomics and for policy analysis .
The applied component of the course relies on the computer
simulation program (MacroSolve) that accompanies the text by Hall
and Taylor. Al though the models embodied in MacroSol ve cannot
capture the full complexity of an economy, exercises with these
models provide some understanding of how computer simulation models
are used to analyze policy alternatives .
Throughout the course you will be required to analyze
macroeconomic data and run simulations as suggested by the text . In
addition, you will present as a larger term project of your own
design, which could also be based on a simulation exercise . This
project should focus on a particular issue of policy or
macroeconomic principles. Ideas for this exercise might come from
the reading assignments or the popular press . Examples that would
be amenable to simulation· analysis include ( i) · the effects of
exchange rate regime on fiscal or monetary policy effectiveness,
(ii) how the formation of i nflationary expectations affects the
adjustment of the economy to its long run equilibrium, (iii) the
analysis of supply-side shocks on the time path of prices, interest
rates, and unemployment . In addition to performing the simulations
that illustrate your problem, you must present a theoretical
(mathematical and/or v erbal) explanation of the economic events
shown in the simulation . If you can connect your simulation to
recent or historical events in the U. S . or other economies, this
would certainly enhance the quality of your project. As you begin
to work with MacroSolve and learn of its capabilities and
limitations, you will gain a better idea of the possibilities for
this project. You are invited to submit a proposal for the project
or to discuss your idea at any time . The project will be due on the
last day of our class, with a 20 % penalty for late submissions.
Your grade in the course will be based on a midterm exam and
final e x am and the simulation projects . Each componen t will count
equally towards the final grade .
MacroSolve Exercise I
Productivity Change in the U.S.
A. Introduction to MacroSolve.
Read the Appendix : Introduction to MacroSolve and experiment
with the features of this program. Take note of the variables that
are available in the database . To become familiar with data
manipulation, plotting and printing with MacroSolve, work exercise
2 on page 65 of the text. You will first need to CREATE the
requested ratios, then do the analysis in parts a and busing these
ratios. (You will notice that any variable you create will be lost
when you terminate your MacroSolve session. Therefore you will want
to complete your use of any created series during that session.)
What is the advantage of working with these ratios to GDP, rather
than performing the analysis with the original data? Submit the
graphs requested in part b, together with your answers to the
specific questions in part b.
B. Solow's computation of technological change.
In the article cited in Section 4. 4 of the text, Solow
presented estimates of the rate of change in U.S. productivity
using equation (4-7). All variables in this equation except
technology (A) are measurable and available in MacroSolve.
Technology (or its rate of change) is then computed as a
"residual." Submit relevant computer output with your answers to
the questions below.
CREATE the percentage changes of the two inputs. After you
select the CREATE command from the DATA menu, Fl will give you
explicit instructions and examples for creating new series. Your
equation for creating the rate of change in capital stock, for
example, should look like
CAPGR = (CAPITAL - CAPITAL[-1))/(CAPITAL[-l)*O.Ol)
The indicated parentheses and brackets must be used as shown, but
the program will give a friendly reminder if you make a mistake.
Next
residual,
TECHCH
=
compute
the
rate
of
growth
in
productivity
as
the
%GDP - 0.7*EMPGR - 0.3*CAPGR
where EMPGR and CAPGR are the names given to the input rates of
change. Tabulate and plot TECHCH, and get a printout of this graph.
In the real business cycle literature, TECHCH is sometimes
called the "Solow residuals," and this series is central to the
analysis of business fluctuations and growth. Your assignment is to
perform some critical, independent analysis of the Solow residuals
as a foundation for real business cycle analysis.
First, consider the plausibility of the signs and magnitudes
of these year-to-year changes in productivity . Does your computed
series match your prior beliefs about annual variations in
productivity? Support y our reasoning with particular observations
of your computed TECHCH series .
Second, consider the relation between economic fluctuations
and the Solow residuals . The basic tenet of the real business cycle
school is that productivity shocks cause business cycles. Examine
the relation between TECHCH and some business cycle measures, such
as the rate of unemployment or the GNP gap. Look at these relations
graphically and examine the correlations between your series (F2
option in the PLOT menu) . Experiment with lagging one series behind
the other as an indication of the direction of causation (do
productivity shocks precede business fluctuations?) . Other than the
real business cycle interpretation of the relation between TECHCH
and economic fluctuations, what other explanations could be
advanced for the observ ed relations? Based on your investigations
of the data, which explanation do your prefer? Explain, citing your
evidence.