Economics 154b - Yale University

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Yale University

Economics 122a.
Intermediate
Macroeconomics

William D. Nordhaus

Fall
2012


Class is held at Dunham Lab 220, 11:35


12:50 MW occasional F

(?)


Revision as of:
July 19
,
2012









Reading List and Course Schedule


(The number in parenthesis is class number, from 1 to 25)



I. Foundations of Macroeconomic Analysis




(1)

A.
Introduction



Charles
Jones
,
Macroeconomics,

Chapter 1

(“Jones 1”)


(
1, 2
)

B.
Elements of Production Theory


Jones 4



(3) C.
National
Income Accounting and Other Major Concepts



Jones

2
and box
, pp. 201
-
202.


An important topic is “index
-
numbers theory,” which analyzes how prices and
quantities are aggregated into price and quantity indexes.


For an example relating to computers, look
at “
Computer_output”

on readings.



II. Economic Growth


(4) A.
Growth Basics




Jones 3




(5, 6) B. T
he Solow Model





Jones
5




This is the standard tre
atment in all of macroeconomics and one of the central ideas that
needs to be
mastered.



Wed, Sept 12:
Problem set 1 is available




(7)

B
.
Technological Change and Growth Through Ideas



Jones 6



Wed, Sept 1
9:

Problem set 1 handed in at the beginning of class.





Problem set 2 is available



(7)

C.
The Classical Business Cycle and the RBC Model


This approach is widely used
but very controversial
in modern macro
,

but Jones
virtually ignores it. His coverage is in the box on p. 352
-
353. For a more complete
treatment,
click here
.


For a more complete treatment,
see "
Real Business Cycles
" online at
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3570

.



III. Major Sectors o
f the Macroeconomy


(8, 9)

A.
Consumption


Jones

15


Readings: The issue of fiscal policy in recessions is central. A good review is
Alan
Auerbach and
William
Gale, “Activist Fiscal Policy,” 2010.



Wed, Sept 26:

Problem set
2

handed in at the beginning of class.






Problem set
3

is available



(10)

B.
Investment


Jones


1
6



Housing has been the elephant in the china shop in the current business cycle. It
is an excellent example of the major determinants of investment. For a good
summary of the evidence, see Frederic S. Mishkin,” Housing and the Monetary
Transmission Mechanism
,”
Federal Reserve Bank of Kansas City Conference,
click
here , pp. 359
-
381 only.



(11
)

C.
Labor markets and u
nemployment



Jones 7



Wed, Sept 1
9:

Problem set
3

handed in at the beginning of class.








A major controversy today is whether the rise in

unemployment is "cyclical" or
structural." There is an


interesting section in the latest CBO report. You will be
interested in the analysis and conclusions. In
Dropbox (CBO_Sept2011)
, pp. 42
-

45,
section on Labor Markets.


The modern theory of labor ma
rkets has been revolutionized in recent years with
"search theory." This was recognized in the 2010 Nobel prize in Economics for
Diamond, Mortensen, and Pissarides. The following is the description of the field by the
Nobel committee, and it captures the r
ecent research. It is technical, and you do not
need to master the detail, but you need to understand the basics.
See

nobel_2010_labor
.”

You read section 1 and the first part of section 3 (pp. 11
-
20 bottom)
and skim the re
st.


(12
)

D.
Inflation and Deflat
ion

(“too hot and too cold”)



Jones

8


This includes introductory material on classical monetary explanations (the quantity
theory). We will return to a more satisfactory theory (Phillips curves) later.


Hyperinflation:
For some background, read
“Hyperinflations.”


For a deeper study, see
Stanley Fischer, Ratna Sahay, Carlos A. Végh, “Modern Hyper
-

And High Inflations,”
Journal of Economic Literature
, September 2002, click here.


Deflation:

James Bullard, “Seven Faces of the Peril,” Federal Reser
ve St. Louis. This
discusses the issue of the liquidity trap in the United States today, click here.


[Note: Midterm is class on Oct. 10 and covers the material through Inflation.]




II. Business Cycles and Short
-
Run Macroeconomics



(
13
)

A.
Intr
o
duction





Jones

9


(
14, 15
) B.
Money and Central Banking




Jones, pp.

322


327.


Most macro texts today deal with commercial banks (like Bank of America) but
omit the “shadow banking system” like Goldman or AIG. This is a major topic
for those interested
in finance and financial macroeconomics.


You can get the flavor of the shadow banking system in a paper by Yale profs
Gary Gorton and Andrew Metrick, “Regulating the Shadow Banking System,”
Brookings Papers,
2010, read
“Gorton_Metrick_BPEA


in readings. Y
ou should
read pp. 261
-
283. Also, read the appendix pp. 290
-
292 for the terminology.


Wed, Oct 17:

Problem set
4

is available



(
15
)

C.
Panics


One of the most important phenomena in financial markets is “panics.”
These are examples of an important phenomenon in which there are
multiple equilibria, tipping points, and strange behavior. These used to
occur in the U.S. banking system and now occur i
n investment banking
firms (Bear, Lehman), insurance companies (AIG), and even financially
stressed countries (Iceland, Greece, …). You should understand how the
mechanism works.

For a classical description of panics and the central bank response by
Walte
r Bagehot,
Lombard Street,
Chapters 1, 2, and 13 at
http://www.econlib.org/library/Bagehot/bagLom.html

.


For a description of the modern Diamond
-
Dybvig theory of panics, see

a
description

in
Diamond_Dybvig_3e.pdf









For an application of panic theory to the 2007
-
2008 crisis, see
Calomiris,
“The Subprime Turmoil,” in

Calomiris, Subprime.



(
1
6, 17
)

D
.
IS and MP: The Short
-
run Model




Jones 11, 12



Wed,
Oct 31:

Problem set
4

handed in at the beginning of class.





Problem set
5

is available



(1
8
)

E
.
The Great Depression


This is a huge subject and one that is particularly relevant in today's world.

Readings:


The leading economic historian on the subject is Barry Eichengreen.
Make sure
you read chapter 1 of “G
olden Fetters.”



Also, see Eichengreen’s

Understanding the Great Depression
.”


Wed,
Nov 7:

Problem set
5

handed in at the beginning of class.




Problem set
6

is available


(19)

Friday
November 9:


F. A special class will discuss economic policy.



(
20
)

G
.
The Complete Model




Jones

13


(21
)

F. The Great Recession




Jones
10,
14






Barry Eichengreen, “Origins and Responses to the
Crisis,”2008, click here



Douglas W. Diamond and Raghuram G. Rajan, “The Credit Crisis: Conjectures about
Causes and Remedies,” AER Papers, 2009, click here.




A severe critic of the Fed is John B. Taylor

of Taylor rule fame:

“Getting Back on Track:
Macr
oeconomic: Policy Lessons from the Financial Crisis,” Bulletin of Reserve Bank of St.
Louis, 2010, click here.



Wed,
Nov 14:

Problem set
6
handed in at the beginning of class.





Problem set
7

is available



============ THANKSGIVING BREAK
================





(
22, 23
)


F.
Open Economy Basics



Jones

Chapter 18,
19





Balance of payments:
Read a short update on how we

measure the balance of
payments in

Details Balance Of Payments.”


The Euro Crisis:
For a short history of the founding of the Euro, click here. the
Wikipedia entry is excellent,
see http://en.wikipedia.org/wiki/History_of_the_euro
.



For Nouriel Roubini's interesting and very pessimistic analysis of the options, see
"
Roubini_EZ"

in
Dropbox or at
http://www.economonitor.com/nouriel/2011/11/09/eurozone
-
crisis
-
well
-
at
-
least
-
we
-
have
-
options/
.


Why crises like Greece (2010), Italy

(2011), Argentina (2002), Mexico (1994), are
very unstable like bank
panics discussed above:
see the following reading from
David Romer,
click here
, or in Dropbox
,
"Romer_DebtCrisis."



Wed,
Nov 28:

Problem set
7

handed in at the beginning of class.




Problem set
8

is available


VII. The Challenge of Rising Goverment Debt



(24,
25)


Jones 17


A

overview of the issues comes from a panel of the National Academy of Science,
America's Fiscal Future,
click here
. You should read Chapters 1
-

3 to get the basic
picture. A key issue is "Why is this a crisis?" and you should read carefully the section
"C
onsequences of Inaction" starting on p. 27. Also make sure you are clear about Box on
p. 12. And read about the arithmetic of the debt on pp. 52
-
54.

There is lots of current excitement about the deficit and debt. Look at the website for the
National Commis
sion on Fiscal Responsibility and Reform at
http://www.fiscalcommission.gov/. You should also read the Co
-
Chairs' proposal,
click here.


VII. The
Grand Challenges of Macroeconomics


(25)

Jones 20



Wed,
Dec 5
:

Problem set
8

handed in at the beginning of class.


====================


OTHER

PAPER:
The paper is due on
Monday

of Reading Period (December
10
). Hardcopy only to 28
Hillhouse Avenue in box outside my office on second floor, Room 205.


FINAL EXAMINATION: