Macroeconomics II
(a.a. 2011/2012)
Fabio C. Bagliano
Laurea magistrale in Economics (classe LM-56, 6 CFU)

http://web.econ.unito.it/bagliano/macroeconomics2_1112.html


Syllabus and references
  
Main topic. The course deals with some key themes of modern macroeconomics, presenting the evolution of business cycle theory from the "neoclassical synthesis" to recent new-Keynesian interpretations. Fundamental economic concepts will be rigorously illustrated with the aid of formalized models, widely used in various fields of macroeconomics.

Readings. The course is not based on a textbook. For most topics, lecture notes will be circulated; moreover, for each topic, a set of readings, mostly drawn from scientific international journals and containing the original versions of the models discussed in the lectures, are suggested.

Background.  Working knowledge of microeconomics and macroeconomics at the level of three-year undergraduate courses is required. The formalized analysis of macroeconomic models requires familiarity with the mathematical and statistical tools acquired in the three-year undergraduate program iin Economics. In particular, extensive use of differential calculus and constrained optimization techniques will be made. 

Sample exams (2010/2011) available here - 

0.  Introductory readings: theories and facts

A quick, purely introductory survey of the main developments in macroeconomics after Keynes is:


Critical assessments of the evolution of macroeconomic theory are provided by: (these papers require some knowledge of the models that will be studied in the course; therefore, the suggestion is to quickly browse through them at the beginning, and come back later for a more thorough reading)


and more recently by


A detailed narrative account of the influence that macroeconomic theories had on economic policy in the USA from 1950 to 2000 can be found in:


The cyclical properties of the main macroeconomic time series for the USA in the 1947-1996 period (the "stylized facts" of the business cycle that a satisfactory theory should account for) are analyzed in:


Information on how the "official" dating of the "expansion" and "recession" stages of the business cycles is determined are available:

For a recent comparison of alternative methods to estimate "trend" and "cyclical" components in aggregate time series, see:

The recent experience of business cycle fluctuations in the Euro area and the US is analyzed and compared in:


An evaluation of the changes in business cycle features in the main industrialized countries from the 1960s up to 2002 is provided by:


A short introductory handout on business cycle analysis is available here - .

An article from The Economist (September 2008) discussing the definition and measurement of "recessions" is available here - .



1.  The "neoclassical synthesis"

Fully developed in the 1950s, the so-called "neoclassical synthesis" has been the basic paradigm for the interpretation of macroeconomic phenomena until the end of the 1960s. Based on the Keynesian model of income determination as interpreted by J.R. Hicks ("Mr. Keynes and the Classics. A suggested interpretation", Econometrica, 1937 - ) and F. Modigliani ("Liquidity preference and the theory of interest and money", Econometrica, 1944 - ), with the addition of simple assumptions on the changes over time of wages and prices suggested by A.W. Phillips ("The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957", Economica,1958- )), the model aimed at integrating the "classical" analysis of the long-run with the "keynesian" theory of short-run fluctuations. 

On the subsequent utilization of the Phillips curve as a "menu" for policy choices:


On the role of the Phillips curve in the US macroeconomic policy (also beyond the 1960s):


2.  The "natural rate of unemployment" and the long-run Phillips curve

The first fundamental critiques of macroeconomic policies based on a permanent trade-off between inflation and unemployment, and the development of the concepts of "natural rate of unemployment" and the "long-run Phillips curve" were put forward by M. Friedman and E. Phelps at the end of the 1960s. A simple formalization of Friedman's view is in the lecture notes (1) .  The original papers are:

More recent empirical assessment of the natural rate idea:

A recent article from The Economist (September 2011) making use of the "natural rate of unemployment" concept in discussing US Federal Reserve's monetary policy goals is available here - .


3.  Rational expectations and "New Classical Macroeconomics"

Lecture notes 2 are available here:

  Nobel prize for Economics 2011 awarded to T.J. Sargent and C.A. Sims for their contributions to empirical macroeconomics: motivation and scientific background
       with a comment on The Economist October 15, 2011 - .

The introduction in macroeconomic models (featuring the natural rate of unemployment) of the assumption of "rational expectations" in the behavior of economic agents had dramatic consequences for the theory of economic policy, usually associated with the "new classical macroeconomics" school of the 1970s and 1980s.  A formalization of the rational expectations hypothesis and a comparison with the (older) assumption of "adaptive" expectations is in the lecture notes 2 (section 1) in the context of a model of "hyperinflation". In the lecture notes 2 (section 2) we study a macroeconomic model making use of rational expectations due to R.E. Lucas, which  is also an example of the wide-ranging "Lucas critique" of traditional macroeconom(etr)ic models used for policy analysis:


The main implications of this model for business cycle theory and the role for macroeconomic stabilization policies are extended by the new classical macro models analyzed in the lecture notes (2, section 3). See in particular:

Hints for the answers to the problem set in lecture notes 2 are available here .

4.  Nominal rigidities, rational expectations and stabilization policies

A stabilization role for macroeconomic (especially monetary) policies can be found even in a rational expectations framework if nominal rigidities are introduced in the wage-setting or price-setting mechanisms, as shown by the models illustrated in the lecture notes 3 .  Original papers:

5.  Dynamic macroeconomic models of real-financial interactions

The rational expectations hypothesis has been widely used also in macroeconomic models (not of the new classical variety) focusing on the interactions between the real and the financial sectors of the economy. In the lecture notes 4  ., two classic examples are presented: a IS-LM model extended to allow for a stock market (Blanchard) and the Dornbusch's "overshooting" nodel of the exchange rate. Original papers:


6.  Real business cycle theory

Building on the fundamental theoretical framework of the new classical macro (therefore viewing business cycles as an equilibrium phenomenon), the emphasis is shifted by real business cycle theorists onto technological shocks as the main source of fluctuations. Basic references:

Slides will be found here  - 

7.  New Keynesian Macroeconomics: macroeconomic implications of imperfections in the goods and labor markets

Recent attempts to rebuild business cycle theory on Keynesian ideas (but with rigorous microeconomic foundations) has produced several models focusing on various market imperfections (imperfect competition, real and nominal rigidities). Some models exploring the macroeconomics consequences of imperfections in the goods and labor markets are presented in the lecture notes (5). Some references on this topic are: