Download ECON 6080-001 Applied Macroeconomic Theory

Economics 6080
Applied Macroeconomic Theory
Fall 1994
Robert McNown
Office : Economics 203
Office Hours: Monday 9-11
Thursday 10-12
Text : R.E . Hall and J . B.
edition) W.W. Norton .
Supplemental Readings:
Norlin Library .
Taylor,
Macroeconomics,
1993
(fourth
Articles listed below are on reserve in
Topics and Readings:
I. Overview of macroeconomic perspectives and variable definitions .
Hall and Taylor, Chapters 1-3.
II. Models of long run equilibrium and growth.
Hall and Taylor, Chapters 4-5 .
P . M. Romer, "The Origins of Endogenous Growth," Journal of
Economic Perspectives, vol . 8 (Winter 1994) 3-22.
III. Short run fluctuations, aggregate demand, and the !SLM model .
Hall and Taylor, Chapters 6-11 . t
Midterm Examination - Wednesday, October 19 .
IV. The open economy model .
Hall and Taylor, Chapters 12, 19 .
V. Fiscal and monetary policy .
Hall and Taylor, Chapters 13, 14, 18.
R . J . Barro, " The Ricardi an Approach to Budget Deficits,"
Journal of Economic Perspectives vol. 3 (Spring 1989) 37-54.
VI . 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 .
Final Examination - Wednesday, December 14, 7 : 30 - 10:30.
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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 perspective of the competing
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. MacroSolve contains historical macroeconomic data for
the United States, as well as a collection of simulation models
based on artifical economies of varying degrees of complexity.
Although the models embodied in MacroSolve 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 outlined by the
text. Your first computer assignment is given on the final pages of
this syllabus.
In addition, you will complete a term project of your own
design. This project should focus on a particular issue of policy
or macroeconomic principles. The most common form of this project
is a critical literature survey, in which you would summarize and
critically evaluate three or four articles covering a particular
topic. Ideas for this exercise might come from the reading
assignments or the popular press. Papers cited by Hall and Taylor
or in the supplemental readings might give initial directions for
your research. Examples of topics that led to successful projects
last year include "Alternative Perspectives on Budgetary Deficits,"
"Contributions of Infrastructure Investment to Economic Growth,"
"Money Supply Announcement Effects on Interest Rates," and "Real
Business Cycle Theory: Empirical Evidence."
You should prepare a project proposal, as described on the
following page. The completed project will be due on the last day
of our class (Wednesday, December 7), with a 20% penalty for late
submissions.
Your grade in the course will be based on a midterm exam and
final exam, the MacroSolve assignments, and the term project. Each
component will count equally (25%) towards the final grade.
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Project Proposals
Due Wednesday, October 26
The purposes of the proposal are to help you define your topic
and to secure some understanding between us about the nature of
your project. The more precise you are in your proposal and the
more detail you give me, the more helpful I can be in the design of
your project. This does not have to be very long - approximately
one typewritten page - but you should try to cover the following
points.
1. Give a statement of the general purpose of your project. What
question(s) will you address?
2. Describe your methods of analysis. Will this be a literature
survey? Will you be doing some computer analysis, such as
MacroSolve or econometric estimation? How will the analysis lead
you to address the questions in 1?
3. Give a tentative list of references and/or data sources.
For ideas for a topic, I suggest you peruse the later chapters
in our text or some of the supplemental readings. There you will
find a variety of topics and some key citations. In addition to
these sources, the Brookings Papers on Economic Activity, and the
Macroeconomics Annual, published each' year by the National Bureau
of Economic Research, may offer some further ideas.
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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 p lot 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
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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 your 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 ~xplanations could be
advanced for the observed relations? Based on your investigations
of the data, which explanation do your prefer? Explain, citing your
evidence.
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