Post on 28-Apr-2018
transcript
Macroeconomics: Fluctuations and Growth
Francesco Franco1
1
Nova School of Business and Economics
Fluctuations and Growth, 2011
Francesco Franco Macroeconomics: Fluctuations and Growth 1/37
Outline
1 MotivationObjectives
2 Introduction to MacroeconomicsAggregate DemandAggregate Supply
3 The State Of MacroLessons from the crisis
Francesco Franco Macroeconomics: Fluctuations and Growth 2/37
Course ObjectivesThe scope of macro
This course aims to provide models that can be used to• understand a wide range of macroeconomic behavior and
policy issues,• explain how di�erent countries perform and how performance
changes over time
Francesco Franco Macroeconomics: Fluctuations and Growth 3/37
Course MethodComplementary methods
Figure: Structure of the course
• Empirical examples from Great Recession, EMU, US...• Data handling: IMF, Eurostat, OECD, Federal Reserve, ECB• Complementary readings:
• Daily: FT, WSJ, DE• Weekly: Economist• Books: I will provide a list of 3-4 books.
Francesco Franco Macroeconomics: Fluctuations and Growth 4/37
World TourEurope
Figure: Real GDP growthFrancesco Franco Macroeconomics: Fluctuations and Growth 5/37
World TourEurope
Figure: Growth, unemployment and inflation in the EU
Francesco Franco Macroeconomics: Fluctuations and Growth 6/37
World TourUSA
Figure: Growth, unemployment and inflation in the USA
Francesco Franco Macroeconomics: Fluctuations and Growth 7/37
World TourOil prices
Figure: Oil price dollars per barrel
Francesco Franco Macroeconomics: Fluctuations and Growth 8/37
World TourUSA
Figure: Trade deficit percent of GDP
Francesco Franco Macroeconomics: Fluctuations and Growth 9/37
World TourBrics
Figure: Output growth and inflation
Francesco Franco Macroeconomics: Fluctuations and Growth 10/37
Course ObjectivesModels & Macro questions
• The choice of models is motivated by their usefulness inframing key questions that face macroeconomists.
• How is output and employment determined?• Why does inflation occur and when should we worry about it?• How does government policy a�ect inflation and
unemployment?
Francesco Franco Macroeconomics: Fluctuations and Growth 11/37
Course ObjectivesMacro questions
• Why is unemployment higher in some countries than others?• How do trade, international financial markets and exchange
rates a�ect employment and inflation?• Why are some countries rich and others poor? Why are some
countries catching up to the leaders and others not?
Francesco Franco Macroeconomics: Fluctuations and Growth 12/37
Macroeconomics
DefinitionMacroeconomics studies the general “equilibrium” of the economy,namely the behavior of a number of di�erent kinds of economicactor or agent, such as households, firms, governments, unions,central banks has to be taken into account simultaneously.
Francesco Franco Macroeconomics: Fluctuations and Growth 13/37
MacroconomicsThe tools of macro
Two broad kinds of models:• one is an integrated model for analyzing the
output-unemployment-inflation-exchange rate nexus and thebusiness cycles,
• the other is used for analyzing economic growth
Francesco Franco Macroeconomics: Fluctuations and Growth 14/37
FluctuationsShocks
Figure: CPI Inflation
Francesco Franco Macroeconomics: Fluctuations and Growth 15/37
FluctuationsShocks
Figure: Real GDP growth
Francesco Franco Macroeconomics: Fluctuations and Growth 16/37
Aggregate Demand
• Consumption demand• Investment demand• Demand stemming from the government• External demand: Net Exports
Francesco Franco Macroeconomics: Fluctuations and Growth 17/37
Aggregate Demand
• Short Run: the period during which output and employmentcan change but before prices and wages respond fully to thechanges in output and employment
Francesco Franco Macroeconomics: Fluctuations and Growth 18/37
GrowthShocks
Figure: Real GDP per capitaFrancesco Franco Macroeconomics: Fluctuations and Growth 19/37
Aggregate Supply
• The factors of production, which are ‘labour’ and ‘capital’ andare supplied by workers and firms
• The technology through which the inputs of labour andcapital are transformed into output
• The way in which the incomes (wages and profits) thatworkers and firms receive are determined
Francesco Franco Macroeconomics: Fluctuations and Growth 20/37
Aggregate Supply
• The medium run: the period during which wages and pricescan respond to changes in output and employment
• Central role of supply especially labour market for technologyis given
• The long run: the period during which technology changes
Francesco Franco Macroeconomics: Fluctuations and Growth 21/37
Open Economy
Figure: Current Accounts
Francesco Franco Macroeconomics: Fluctuations and Growth 22/37
Methodology
• What kind of assumptions about how individuals behave mustbe made in order to generate the aggregate equations
• One set of macroeconomists will argue that a macro modelhas to be the exact aggregation of the correspondingmicroeconomy
• A second set of macroeconomists think that this commitmentis too high analytically and too narrow substantially
Francesco Franco Macroeconomics: Fluctuations and Growth 23/37
Methodology
• Models are necessary: there is nothing as useless as a map ofscale 1:1
• Mathematics: e�cient scrutiny for logical errors• “Enough real issues not to play mind games”
Francesco Franco Macroeconomics: Fluctuations and Growth 24/37
Course ObjectivesThe state of macro
The inability to predict the crisis lead to the Economist cover
Figure: The Economist, July 2009
Francesco Franco Macroeconomics: Fluctuations and Growth 25/37
Lessons from the crisis
• Where we aware that the economy had set on anunsustainable path?
• Business Cycle was dead (the great moderation).• Were economists lacking the tools?
Francesco Franco Macroeconomics: Fluctuations and Growth 26/37
Lessons from the crisisHousing
Figure: Real estateFrancesco Franco Macroeconomics: Fluctuations and Growth 27/37
Lessons from the crisisInterest rates
Figure: Us Short Term Interest ratesFrancesco Franco Macroeconomics: Fluctuations and Growth 28/37
Lessons from the crisisSurpluses
Figure: SurplusesFrancesco Franco Macroeconomics: Fluctuations and Growth 29/37
Lessons from the crisisSurpluses
Figure: EU surpluses
Francesco Franco Macroeconomics: Fluctuations and Growth 30/37
Lessons from the crisisShadow Banking
Figure: Deregulation of the Financial SystemFrancesco Franco Macroeconomics: Fluctuations and Growth 31/37
Lessons from the crisisLeverage of the financial sector
Figure: Debt over GDP, source: Federal Reserve.
Francesco Franco Macroeconomics: Fluctuations and Growth 32/37
It is the Finance “stupid”Leverage of the non financial sector
Figure: Debt over GDP, source: Federal Reserve.
Francesco Franco Macroeconomics: Fluctuations and Growth 33/37
Lessons from the crisisAutomatic Recovery
Figure: AS-AD
Francesco Franco Macroeconomics: Fluctuations and Growth 34/37
Lessons from the crisisRecovery
Figure: Trade Balance after financial crisis
Francesco Franco Macroeconomics: Fluctuations and Growth 35/37
Summary
• Macroeconomics is concerned with studying Business Cyclesand Growth.
• Models are the necessary map to find your way.• Mathematics allows a good consistency check.
• Outlook• We have to lay down a paradigm, building block by block our
model.• We will introduce extensions at the cost of other
simplifications to study interesting questions (EMU).
Francesco Franco Macroeconomics: Fluctuations and Growth 36/37
Readings I
Olivier Blanchard, Alessia Aminghini and Francesco GiavazziMacroeconomics, a European Perspective.
Prentice Hall, 2010, chapters 1.
Francesco Franco Macroeconomics: Fluctuations and Growth 37/37