325_Lecture16_March30

325_Lecture16_March30 - A BRIEF HISTORY OF MACROECONOMICS...

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1 AB RIEF H ISTORY OF M ACROECONOMICS M ARCH 30, 2011 March 30, 2011 2 B UILDING B LOCKS OF M ODERN M ACRO T HEORY Macro Fundamentals ± Intertemporal consumption-leisure framework is the foundation of modern macroeconomic analysis ± Referred to as Dynamic General Equilibrium (DGE) Theory ± Both Real Business Cycle (RBC) theory and New Keynesian (NK) theory (the two dominant current schools of macroeconomic thinking) ± Power of DGE approach demonstrated by RBC theorists in early 1980’s – idea of DGE theory has been adopted by nearly all other macro camps ± Even though important ideological differences between NK Theory and RBC Theory ± DGE methodology has been universally adopted ± Three seminal phases of the history of macroeconomic thought/practice ± Measuring macroeconomic activity (1930’s – 1950) ± Keynesian-inspired macroeconometric models (1950 – 1970’s) ± DGE methodology (1980’s – today)
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2 March 30, 2011 3 T HE P HASES OF M ACROECONOMICS The Evolution of Macroeconomics ± Three seminal phases of the history of macroeconomic thought/practice ± Phase I: Measuring macroeconomic activity (1930’s – 1950) ± Phase II: Keynesian-inspired macroeconometric models (1950 – 1970’s) ± Phase III: Dynamic General Equilibrium (DGE) methodology (1980’s – today) March 30, 2011 4 T HE B IRTH OF M ACROECONOMICS The Evolution of Macroeconomics: Phase I ± “Macroeconomics” born as a field during and because of the Great Depression ± Idea that government could/should regulate the periodic ups and downs of the economy rose to prominence ± John Maynard Keynes, The General Theory of Employment, Interest, and Money (1936) ± Basic tenet: various “rigidities” in many markets lead to “disequilibria” that can last a long time
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3 March 30, 2011 5 T HE B IRTH OF M ACROECONOMICS The Evolution of Macroeconomics: Phase I labor real wage w* DS some shock occurs What if w* doesn’t decrease? “Sticky wages” March 30, 2011 6 T HE B IRTH OF M ACROECONOMICS ± “Macroeconomics” born as a field during and because of the Great Depression ± Idea that government could/should regulate the periodic ups and downs of the economy rose to prominence ± John Maynard Keynes, The General Theory of Employment, Interest, and Money (1936) ± Basic tenet: various “rigidities” in many markets lead to “disequilibria” that can last a long time ± Burns and Mitchell, Measuring Business Cycles (1946) ± First systematic accounting of the co-movement of various aggregates ± i.e., GDP, consumption, employment, inflation, unemployment rate, etc…
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4 March 30, 2011 7 L ONG- R UN G ROWTH VS. B USINESS C YCLES Macro Fundamentals ± Decompose time series into trends and cycles ± Two clear patterns ± Long-run growth ± Frequent and sometimes big short-run fluctuations around long-run trend time Actual GDP (or virtually any real economic series…) Long-run trend of GDP -- a linear trend very simple; but can also construct (more nuanced) nonlinear trends (statistics and econometrics) March 30, 2011 8 L ONG- R UN G ROWTH VS.
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_Lecture16_March30 - A BRIEF HISTORY OF MACROECONOMICS...

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