Evolution of Macroeconomic Theory and Policy
By Kamran Dadkhah

Publisher:Springer
Number Of Pages:269
Publication Date:2009-08-03
ISBN-10 / ASIN:3540770070
ISBN-13 / EAN:9783540770077

Product Description:

The Great Depression of the 1930s gave birth to a branch of economics that in 1933 Ragnar Frisch christened macroeconomics. Over the decades that followed up to the present, the interactions of economic events, economic policy, and macroeconomic theory have created a fascinating story integral to the life and politics of national economies around the world. This book recounts that story. It brings together three strands of activities and trends: the economic events of the twentieth and twenty-first centuries that defined the economic problems facing the nation, policymakers, and economists; the responses of economists who brought the accumulated knowledge of the profession to bear on these problems; and the successes and failures of these policies as they reshaped the economic landscape and defined new sets of problems to be analyzed by macroeconomic theory. This highly readable book presents an unconventional perspective on macroeconomics – the interplay of theory and policy in a historical context.
Contents
1 The Great Depression and Mr. Keynes . . . . . . . . . . . . . . . . 1
The Crash of 1929 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TheGreatDepression . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Depression Around the World . . . . . . . . . . . . . . . . . . . . . . 6
FDRand theNewDeal . . . . . . . . . . . . . . . . . . . . . . . . . 6
“WeMustAct andActQuickly” . . . . . . . . . . . . . . . . . . . . 9
TheNewDealPolicies . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Irving Fisher’s Theory of Debt-Deflation . . . . . . . . . . . . . . . . 13
Money and theGreatDepression . . . . . . . . . . . . . . . . . . . . 15
The Keynesian Vision of the Economy . . . . . . . . . . . . . . . . . 15
John Hicks and the IS-LM Model . . . . . . . . . . . . . . . . . . . . 20
Keynes and FDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Fundamental Question . . . . . . . . . . . . . . . . . . . . . . . 23
Paternalistic Economic Policy . . . . . . . . . . . . . . . . . . . . . . 25
2 The Post-War Economic Order . . . . . . . . . . . . . . . . . . . . 29
TheG.I.Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The Employment Act of 1946 . . . . . . . . . . . . . . . . . . . . . . 31
The Council of Economic Advisers . . . . . . . . . . . . . . . . . . . 33
TheBirthof theWelfareState . . . . . . . . . . . . . . . . . . . . . . 34
The Bretton Woods Agreement . . . . . . . . . . . . . . . . . . . . . 37
The International Monetary Fund (IMF) . . . . . . . . . . . . . . . . 38
The Bank for Reconstruction and Development (the World Bank) . . . 39
General Agreement on Tariffs and Trade (GATT) . . . . . . . . . . . . 40
TheMarshallPlan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ThePointFour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
TheBraveNewPostWarWorld . . . . . . . . . . . . . . . . . . . . . 44
3 Laying the Foundations of Keynesian Economics . . . . . . . . . . 45
Aggregate Supply and Aggregate Demand . . . . . . . . . . . . . . . 46
National Income Accounting . . . . . . . . . . . . . . . . . . . . . . 51
The Rise of Econometrics . . . . . . . . . . . . . . . . . . . . . . . . 53
Simultaneity and Identification . . . . . . . . . . . . . . . . . . . . . 55
Errors inVariables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ix
x Contents
Adaptive Expectations Model . . . . . . . . . . . . . . . . . . . . . . 58
Partial Adjustment Model . . . . . . . . . . . . . . . . . . . . . . . . 61
Discounting and Present Value . . . . . . . . . . . . . . . . . . . . . 61
The Consumption Function . . . . . . . . . . . . . . . . . . . . . . . 62
Permanent Income Hypothesis . . . . . . . . . . . . . . . . . . . . . 65
Cross Section Estimate of Propensity to Consume . . . . . . . . . . . 68
Life Cycle Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . 69
The Investment Function . . . . . . . . . . . . . . . . . . . . . . . . . 71
Tobin’s q . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Demand forMoney . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
The Growth Model of Harrod and Domar . . . . . . . . . . . . . . . 76
Solow’s Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Solow Residual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
The Golden Age of Macroeconomics . . . . . . . . . . . . . . . . . . 83
4 Keynesian Economics in Action . . . . . . . . . . . . . . . . . . . . 85
Okun’s Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
The Phillips Curve . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Stagflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
TheNaturalRate ofUnemployment . . . . . . . . . . . . . . . . . 95
Rational Expectations . . . . . . . . . . . . . . . . . . . . . . . . . 96
The Augmented Phillips Curve . . . . . . . . . . . . . . . . . . . . 98
Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 100
5 Macroeconomics of an Open Economy . . . . . . . . . . . . . . . . 103
Equilibrium in an Open Economy . . . . . . . . . . . . . . . . . . . . 108
Fixed Exchange Rates with Capital and Foreign
Exchange Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Monetary and Fiscal Policies Under Capital Mobility . . . . . . . . . 110
Monetary Policy Under Fixed Exchange Rates . . . . . . . . . . . . . 111
Fiscal Policy Under Fixed Exchange Rates . . . . . . . . . . . . . . . 113
Monetary Policy Under Flexible Exchange Rates . . . . . . . . . . . 114
Fiscal Policy Under Flexible Exchange Rates . . . . . . . . . . . . . 115
The Preeminence of Monetary Policy in the 21st Century . . . . . . . 116
6 The Collapse of Post-War International Economic Order . . . . . . 117
A New Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . 117
TheAftermath . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
The End of Bretton Woods . . . . . . . . . . . . . . . . . . . . . . . 123
Milton Friedman and Flexible Exchange Rates . . . . . . . . . . . . . 125
The Oil Shocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
OPEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
The Sources of Oil Shocks . . . . . . . . . . . . . . . . . . . . . . . . 128
7 The New Classical Revolt Against Activist Economic Policy . . . . 131
Microfoundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Coordination Mechanism . . . . . . . . . . . . . . . . . . . . . . . . 133
Empirical Validity of the Keynesian Model . . . . . . . . . . . . . . . 135
The Identification Problem . . . . . . . . . . . . . . . . . . . . . . . 135
The New Classical Criticism of Keynesian Policies . . . . . . . . . . 136
Policy Ineffectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . 136
The Lucas Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
TimeSeriesAnalysis . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Stationary Series and ARIMA Models . . . . . . . . . . . . . . . . . 142
Wold’s Theorem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Spurious Regression . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
Causality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
VARModeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Deterministic vs. Stochastic Trend . . . . . . . . . . . . . . . . . . . 148
Cointegration andErrorCorrection . . . . . . . . . . . . . . . . . . 150