INSEAD Library

Includes index

Digitized

Macroeconomics Contents Preface ix Acknowledgements xv Walk-through tour xvi Website xviii Part I Defining the macroeconomy 1 1 Macroeconomics and the circular flow of income 3 1.1 1.2 1.3 1.3 Introduction 4 The circular flow of income 4 National income accounting and the circular flow of income 7 Macroeconomic modelling and the circular flow of income 14 Part II The real macroeconomy 17 2 Consumption 19 2.1 2.2 2.2 2.3 2.4 Introduction 20 Theories of consumption behaviour 21 The Keynesian consumption function 21 The permanent income and life cycle hypotheses 29 Explaining consumption patterns 41 3 Investment 62 3.1 Introduction 63 3.2 Theories of fixed business investment 64 3.2.1 Optimal capital stock model 65 3.2.2 Tobin's q 77 3.3 Inventory investment 81 3.4 Residential investment 84 3.5 Credit rationing and investment 86 4 Government spending, taxation and debt 94 4.1 4.2 4.3 4.4 4.5 Introduction 95 Deficits and debts 95 Fiscal policy and national income 98 Keynesian cross model 98 The Ricardian model: fiscal policy with forward-looking consumers 103 Part III Money 115 5 The money market 117 5.1 5.2 5.3 5.4 5.5 Introduction 118 What is money? 118 Monetary aggregates 119 The bond market 120 Determining the interest rate 121 5.5.1 The demand for money 121 5.5.2 Money supply 128 5.5.3 Equilibrium in the money market 134 5.6 The term structure of interest rates: yield curves 137 5.7 Monetary policy: money supply or interest rate? 138 6 Financial markets 141 6.1 Introduction 142 6.2 Efficient markets: asset pricing models 142 6.2.1 Expected dividend model 143 6.2.2 Uncertainty and the capital asset pricing model 148 6.3 Portfolio selection: Tobin model 150 6.4 Financial market volatility: efficient and inefficient markets 155 6.5 Bubbles and crashes in financial markets 164 Part IV Models of the economy 175 7 The IS-LM model 177 7.1 7.2 7.3 7.4 7.5 Introduction 178 The IS curve: equilibrium in the goods market 178 The LM curve: equilibrium in the money market 194 General equilibrium: the IS-LM model 206 Comparative statics 209 7.5.1 Fiscal policy 210 7.5.2 Monetary policy 216 7.6 What policy do we use? Keynesians versus classicists 220 7.7 The neoclassical IS-LM model 222 8 The AD-AS model 232 8.1 Introduction 233 8.2 The aggregate demand schedule 233 8.3 The aggregate supply schedule 235 8.3.1 Long-run aggregate supply 235 8.3.2 Short-run aggregate supply 247 8.4 Equilibrium in the AD-AS model 255 8.5 Comparative statics 256 8.5.1 Aggregate demand shocks 258 8.5.2 Aggregate supply shocks 262 8.6 Hysteresis and the medium run 264 Part V Short-run fluctuations and stabilization 269 9 Business cycles and stabilization policy 271 9.1 9.2 9.3 9.4 Introduction 272 Economic cycles 272 Real business cycles 275 New Keynesian theories of fluctuations 285 9.4.1 Wage rigidities 287 9.4.2 Price rigidities 298 9.5 Stabilization policies 300 10 Unemployment, inflation and monetary policy 304 10.1 10.2 10.3 10.4 10.5 10.6 Introduction 305 The Phillips curve: the unemployment-inflation trade-off 305 Theories of unemployment 308 The costs and benefits of unemployment and inflation 313 Policy choices: preferences between unemployment and inflation 316 Expectations augmented Phillips curve 322 10.6.1 Long-run Phillips curve 323 10.6.2 Processes of expectations formation 324 10.6.3 Supply shocks 326 10.6.4 Hysteresis 328 10.7 Monetary policy 332 10.7.1 Monetary policy and inflation 333 10.7.2 The time inconsistency problem and central bank independence 337 10.7.3 Seigniorage and hyper-inflation 343 Part VI The open economy 351 11 The balance of payments and exchange rates 353 11.1 11.2 11.3 11.4 Introduction 354 The balance of payments 358 Exchange rates 360 Theories of exchange rate determination 365 11.4.1 PPP: purchasing power parity 367 11.4.2 UIP: uncovered interest parity 374 11.4.3 Dornbusch model of exchange rate overshooting 384 11.5 Interaction of exchange rates and the balance of payments 386 12 IS-LM-BP model 401 12.1 Introduction 402 12.2 Constructing the IS-LM-BP model 403 12.2.1 The open economy IS curve (the ISXM schedule) 403 12.2.2 The BP curve 406 12.2.3 The open economy LM curve 413 12.2.4 Exchange rate regimes 417 12.2.5 Equilibrium in the IS-LM-BP model 417 12.3 Comparative statics 418 12.4 Mundell-Fleming model 431 13 Aggregate demand and aggregate supply in the open economy 437 13.1 Introduction 438 13.2 The AD-CCE-BT (Salter-Swan) model 438 13.2.1 Competitiveness and the trade balance 438 13.2.2 Aggreegate demand and competitiveness 440 13.2.3 The NAIRU and long-run aggregate supply in the open economy 443 13.2.4 The trade balance and the sustainable level of output 450 13.2.5 Equilibrium in the Salter-Swan model 451 13.3 Achieving a target level of output 452 Part VII International financial architecture 461 14 Exchange rate regimes and international policy coordination 463 14.1 14.2 14.3 14.4 Introduction 464 The choice of exchange rate regime 464 International policy coordination 479 Optimal currency areas 489 14.4.1 Is Europe an optimal currency area? 492 14.4.2 Should the UK join the euro? 500 15 International financial markets and currency crises 506 15.1 Introduction 507 15.2 The internationalization of financial markets 507 15.3 Currency crises 512 15.3.1 First generation models 515 15.3.2 Second generation models: ERM, 1992; Mexico, 1994-1995 515 15.3.3 Third generation models: Asian crisis, 1997-1998 524 15.4 Preventing currency crises 536 Part VIII Economic growth in the long run 545 16 Models of long-run growth 547 16.1 Introduction 548 16.2 The neoclassical model of growth 548 16.2.1 The Solow model 548 16.2.2 Solow model with technology 553 16.2.3 Long-run growth in the Solow model 556 16.2.4 The convergence hypothesis 557 16.3 Growth models with human capital 561 16.4 Endogenous growth theories 563 16.4.1 The AK model 564 16.4.2 The Romer model 565 16.4.3 Evidence of growth 566 16.4.4 Evaluation of endogenous growth theories 569 Appendix 573 Index 577