Welcome to Senior Freshman Intermediate Economics 1999-2000!

This section of the course provides an overview of macroeconomic analysis. It is an intermediate economic analysis course. The material covered in Junior Freshman Economics is the starting point of this year's work so you are urged to revise introductory principles as we proceed.

Macroeconomics is a controversial subject. There are disagreements among economists about the sources of economic growth, the causes of unemployment, the effectiveness of fiscal policy and the role of monetary variables. Do not expect to find a single 'right' answer to current macroeconomic problems. However, there are also large areas of agreement on fundamental concepts that, if properly grasped, will help you to make up your own mind on contemporary controversies.

This course aims to provide you with an understanding of a) the basic tools of macroeconomic analysis (aggregate supply curves, aggregate demand determination and the Keynesian ISLM model), (b) the main propositions of the different schools of thought from Classical to Keynesian to New Classical and the new Economic consensus) and (c) the features of an effective macroeconomic policy.

COURSE TEXTS

There are two main textbooks for this course:

Economics for Business is recommended especially for students interested in economics/business options. It gives a 'broad brush' overview of the material covered in this course and will also complement several parts of Professor O'Hagan's SF Economy of Ireland course. Blanchard's book is longer and more specialised than McAleese. It covers the ISLM section of the course.

Shaw, McCrostie and Greenaway MACROECONOMICS: THEORY AND PRACTICE IN THE UK Blackwell 1997 (SMG) is a fine textbook, excellent on historical perspective, but its references to the literature is rather dated. It is recommended especially for those wishing to advance beyond the standard texts.

COURSE OUTLINE (parentheses refer to reading - see below)

1. The New Economic Policy Consensus (DMcA ch 1)

What is the macroeconomic problem?

Trend growth and instability around trend (booms and recessions)

The New Policy Consensus - competition, openness and macro-stability

Implications of the New Policy Consensus for macroeconomic policy

2. Economic Growth (DMcA ch 2: OB ch 22)

Trends in economic growth: convergence or divergence among rich and poor.

Growth theories and total factor productivity

Potential vs actual GNP growth

Economic policy and economic growth – lessons from East Asia (DMcA Box 2.5)

3. The Classical Model - Emphasis on Supply

Derivation of aggregate supply curve (DMcA ch 11.1-11.3)

'Classical' unemployment and labour market rigidities (DMcA chs 10.1, 14)

Classical remedies for unemployment (DMcA ch 14, OECD)

(Handout: 'The Consequences of Labour Market Flexibility' ZEI Bonn Feb 1999)

4. Money, Interest Rates and Inflation in the Classical Model

Closing the classical model - Aggregate Demand and the Quantity Theory of Money (DMcA chs 11.4, 12)

Interest Rates: nominal vs real, term structure, equilibrium interest rates in a closed economy (DMcA ch 13.1 - 13.3)

Causes and consequences of inflation (DMcA ch 12; OB ch 21)

Problems of deflation – Japan in the 1990s (DMcA Box 12.1)

5. The Keynesian ISLM Framework - Importance of Aggregate Demand

Derivation of the IS curve (OB chs 3,4; SMG ch 10)

Determinants of Investment (DMcA ch 10.2; OB ch 8)

Theory of Aggregate Consumption (OB ch 8)

What causes the IS to shift? Outline of fiscal policy (DMcA ch 15.1)

6. Money and the LM curve

Money demand, money supply and the LM curve (OB ch 5 and 6.2; SMG chs 10, 11) How monetary policy works: objectives, targets and instruments (DMcA ch 13.3-13.4)

Handout: 'The Stability-oriented monetary policy of the Eurosystem' ECB Jan 99

7. Macroeconomic Policy

Fiscal policy: nature and effectiveness (DMcA ch 15; OB ch 6)

Government borrowing, public sector debt and limitations of Keynesian approach (DMcA ch 15; OB ch 29)

Monetary Policy: active vs. passive policy, rules vs. discretion (DMcA ch 13.5)

Monetary policy, inflation and exchange rates - case study of Argentina and EMU (DMcA Box 12.4 and ch 21.4)

8. Business Fluctuations and Forecasting

Booms and recessions - their causes and consequences (DMcA ch 16.1-16.3)

Forecasting economic trends and fluctuations (DMcA ch 16.4)

How to stabilise the global economic system: review of policy options (extracts from IMF World Economic Outlook - to be circulated)

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Lectures during Trinity term

9. Balance of Payments and Exchange Rates

International transactions, balance of payments and exchange rates (DMcA ch 19)

How exchange rates are determined (DMcA ch 20)

10. Exchange Rate Regimes: Fixed versus flexible (DMcA ch 21)

Interaction between fiscal and monetary policy and the exchange rate - the ISLMBP model EMU

Exchange rate regimes and competitiveness

The search for exchange rate stability

11. Conclusions and Review

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FURTHER READING

There are many good macroeconomic textbooks that you might consult. Mankiw Macroeconomics (Worth Publishers, 3rd edition, 1997) is compact and readable. An up to date selection of readings is provided in B. Snowdon and H. Vane A Macroeconomics Reader Routledge (1997). Also see A Modern Guide to Macroeconomics Edward Elgar (1998) by Snowdon, Vane and Wynarezgh. Burda and Wyplosz Macroeconomics: a European Text (1997) has a welcome emphasis on the open economy, with useful case studies of European economic problems. A concise, historically minded account of the development of macroeconomics is provided by Sawyer, Macroeconomic Theory: Keynesian and new-Walrasian Models, Harvester Wheatsheaf 1989. 'Chronic Unemployment in the Euro Area' (IMF World Economic Outlook May 1999) provides an up-to-date assessment of recent research on this subject.

For a useful overview of the course, Chrystal and Price Controversies in Macroeconomics (third edition 1994) is recommended. Klamer, The New Classical Macroeconomics (1984) is an enjoyable 'read'. It contains a record of interviews with leading contemporary macro-theorists of Keynesian and Classical persuasion, but it is by now rather dated. Those who would like to consult more advanced literature should read Attfield, Demery and Duck, Rational Expectations in Economics: An Introduction to Theory and Evidence, Basil Blackwell, (2nd edition 1991) and Turner Modern Macroeconomic Analysis McGraw Hill (1993).

Two recent sources on monetary policy are David Archer 'New Zealand approach to rules and discretion in monetary policy' Journal of Monetary Economics 39 (1997) and, in the same issue, Otmar Issing 'Monetary targeting in Germany'. These two authors are senior central bank officials and give an insider's view of how monetary policy is formulated.

FURTHER INFORMATION

DMcA August 1999