Modern Macroeconomics - Its Origins, Development And Current State

Contents
List of figures x
List of tables xiii
Preface xiv
Acknowledgements xvii
1 Understanding modern macroeconomics 1
1.1 Macroeconomic issues and ideas 1
1.2 The role of economic theory and controversy 3
1.3 Objectives, instruments and the role of government 7
1.4 The Great Depression 9
1.5 Keynes and the birth of macroeconomics 13
1.6 The rise and fall of the Keynesian consensus 15
1.7 Theoretical schizophrenia and the neoclassical synthesis 21
1.8 Schools of thought in macroeconomics after Keynes 24
1.9 The new political macroeconomics 29
1.10 The renaissance of economic growth research 32
2Keynes v. the ‘old’ classical model 36
2.1 Introduction 36
2.2 Classical macroeconomics 37
2.3 Employment and output determination 38
2.4 Say’s Law 45
2.5 The quantity theory of money 50
2.6 Keynes’s General Theory 54
2.7 Interpreting the General Theory 57
2.8 Keynes’s main propositions 58
2.9 Keynes’s analysis of the labour market 65
2.10 Keynes’s rejection of Say’s Law 69
2.11 Keynes and the quantity theory of money 69
2.12 Three important interpretations of Keynes 70
2.13 The ‘new’ Keynes scholarship 75
2.14 Causes and consequences of the Great Depression 76
2.15 How to pay for the war 82
2.16 Keynes and international macroeconomics 832.17 Keynes’s legacy and the classical revival 85
Interview with Robert Skidelsky 91
3 The orthodox Keynesian school 101
3.1 Introduction 101
3.2 The orthodox Keynesian school 102
3.3 The IS–LM model for a closed economy 102
3.4 Underemployment equilibrium in the Keynesian model 114
3.5 The IS–LM model for an open economy 123
3.6 The Phillips curve and orthodox Keynesian economics 135
3.7 The central propositions of orthodox Keynesian economics 144
Interview with James Tobin 148
4 The orthodox monetarist school 163
4.1 Introduction 163
4.2 The quantity theory of money approach 165
4.3 The expectations-augmented Phillips curve analysis 174
4.4 The monetary approach to balance of payments theory and
exchange rate determination 187
4.5 The orthodox monetarist school and stabilization policy 192
Interview with Milton Friedman 198
5 The new classical school 219
5.1 Introduction 219
5.2 The influence of Robert E. Lucas Jr 220
5.3 The structure of new classical models 223
5.4 Equilibrium business cycle theory 236
5.5 The policy implications of the new classical approach 242
5.6 An assessment 267
Interview with Robert E. Lucas Jr 272
6 The real business cycle school 294
6.1 Introduction: the demise of new classical macroeconomics
mark I 294
6.2 The transition from monetary to real equilibrium business
cycle theory 295
6.3 Real business cycle theory in historical perspective 297
6.4 Cycles versus random walks 300
6.5 Supply-side shocks 303
6.6 Business cycles: main features and stylized facts 304
6.7 Real business cycle theory 307
6.8 The structure of a real business cycle model 309
vi Modern macroeconomicsContents vii
6.9 Technology shocks 313
6.10 A real business cycle aggregate demand and supply model 315
6.11 Calibrating the model 320
6.12 Real business cycle theory and the neutrality of money 322
6.13 Measuring technology shocks: the Solow residual 325
6.14 Real business cycle theory and the stylized facts 326
6.15 The policy implications of real business cycle theory 330
6.16 Criticisms of real business cycle theory 332
6.17 Great Depressions: a real business cycle view 336
6.18 An assessment 338
Interview with Edward C. Prescott 344
7 The new Keynesian school 357
7.1 The fall and rise of Keynesian economics 357
7.2 A Keynesian resurgence 358
7.3 New Keynesian economics 361
7.4 Core propositions and features of new Keynesian economics 363
7.5 Nominal rigidities 366
7.6 Dornbusch’s overshooting model 376
7.7 Real rigidities 378
7.8 New Keynesian business cycle theory 396
7.9 Hysteresis and the NAIRU 401
7.10 New Keynesian economics and the stylized facts 408
7.11 Policy implications 409
7.12 Keynesian economics without the LM curve 423
7.13 Criticisms of new Keynesian economics 428
7.14 An assessment of new Keynesian economics 431
Interview with N. Gregory Mankiw 433
8 The Post Keynesian school 451
Paul Davidson
8.1 Introduction 451
8.2 The significance of the principle of effective demand 453
8.3 Taxonomy 454
8.4 Keynes’s taxonomic attack on Say’s Law 455
8.5 Can relative price changes induce D2 to fill the gap? 457
8.6 Investment spending, liquidity, and the non-neutrality of
money axiom 459
8.7 What type of an economic system is ‘irrational’ enough to use
money contracts? 461
8.8 Information, decisions and uncertainty 463
8.9 Classifying decision-making environments 4648.10 Keynesian uncertainty, money and explicit money contracts 468
8.11 Conclusions 472
9 The Austrian school 474
Roger W. Garrison
9.1 The Mengerian vision 474
9.2 The intertemporal structure of capital 475
9.3 Saving and economic growth 479
9.4 The saving–investment nexus 482
9.5 The market for loanable funds 489
9.6 Full employment and the production possibilities frontier 492
9.7 The capital-based macroeconomic framework 496
9.8 Saving-induced capital restructuring 498
9.9 Keynes’s paradox of thrift revisited 501
9.10 The Austrian theory of the business cycle 503
9.11 A Keynesian downturn in the Austrian framework 509
9.12 Inflation and deflation in the Austrian theory 513
9.13 Policy and reform 515
10 The new political macroeconomics 517
10.1 Introduction: political distortions and macroeconomic
performance 517
10.2 Political influences on policy choice 518
10.3 The role of government 521
10.4 Politicians and stabilization policy 523
10.5 Alternative approaches to the ‘political business cycle’: an
overview 525
10.6 The Nordhaus opportunistic model 526
10.7 The Hibbs partisan model 532
10.8 The decline and renaissance of opportunistic and partisan
models 535
10.9 Rational political business cycles 537
10.10 Rational partisan theory 538
10.11 Opportunistic and partisan behaviour: a synthesis 545
10.12 Politics, time inconsistency, credibility and reputation 546
10.13 Policy implications of politico-economic models: an
independent central bank? 549
10.14 The political economy of debt and deficits 554
10.15 Political and economic instability: are they related? 555
10.16 The political economy of economic growth 556
10.17 Political barriers to economic growth 562
10.18 The size of nations 564
viii Modern macroeconomicsContents ix
10.19 Conclusion 565
Interview with Alberto Alesina 567
11 The renaissance of economic growth research 579
11.1 Introduction 579
11.2 The ‘Great Divergence’ 580
11.3 In praise of economic history 584
11.4 Back to the long run 585
11.5 Why is economic growth so important? 589
11.6 Modern economic growth in historical perspective 593
11.7 The stylized facts of growth 595
11.8 Proximate v. fundamental sources of growth 596
11.9 The Harrod–Domar model 598
11.10 The Solow neoclassical growth model 602
11.11 Accounting for the sources of economic growth 612
11.12 The convergence debate 614
11.13 Beyond the Solow model 622
11.14 Endogenous growth: constant returns to capital accumulation 625
11.15 Endogenous growth: the economics of ideas 627
11.16 An augmented Solow model: a neoclassical revival? 632
11.17 Focusing on the fundamental causes of growth 633
11.18 Institutions and economic growth 635
11.19 Trade and economic growth 647
11.20 Geography and growth 652
11.21 Growth in history: in search of a unified theory 654
11.22 The ideal conditions for growth and development:
rediscovering old truths 657
Interview with Robert M. Solow 660
Interview with Paul M. Romer 673
12 Conclusions and reflections 695
12.1 Introduction 695
12.2 Twentieth-century developments in macroeconomics:
evolution or revolution? 696
12.3 Is there a consensus on key macroeconomic issues? 703
Bibliography 708
Author index 791
Subject index 803


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