Macroeconomics: an Introduction

[Pages:519]Macroeconomics: an Introduction

Jesu?s Fern?andez-Villaverde University of Pennsylvania

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The Scope of Macroeconomics

? Microeconomics: Object of interest is a single (or small number of) household or firm.

? Macroeconomics: Object of interest is the entire economy. We care mostly about: 1. Growth. 2. Fluctuations.

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Relation between Macro and Micro

? Micro and Macro are consistent applications of standard neoclassical theory.

? Unifying theme, EQUILIBRIUM APPROACH: 1. Agents optimize given preferences and technology. 2. Agents' actions are compatible with each other.

? This requires: 1. Explicit about assumptions. 2. Models as abstractions.

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What are the Requirements of Theory? ? Well articulated models with sharp predictions. ? Good theory cannot be vague: predictions must be falsifiable. ? Internal Consistency. ? Models as measurement tools. All this is Scientific Discipline.

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Why should we care about Macroeconomics? ? Self Interest: macroeconomic aggregates affect our daily life. ? Cultural Literacy: understanding our world. ? Common Welfare: Essential for policymakers to do good policy. ? Civic Responsibility: Essential for us to understand our politicians.

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A Brief Overview of the History of Macroeconomics I

? Classics (Smith, Ricardo, Marx) did not have a sharp distinction between micro and macro.

? Beginning of the XX century: Wicksell, Pigou.

? J.M. Keynes, The General Theory of Employment, Interest, and Money (1936).

? 1945-1970, heyday of Neoclassical Synthesis: Samuelson, Solow, Klein.

? Monetary versus Fiscal Policy: Friedman, Tobin.

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A Brief Overview of the History of Macroeconomics II ? 1972, Rational Expectations Revolution: Lucas, Prescott, Sargent. ? 1982, Real Business Cycles: Kydland and Prescott. ? 1990's, Rich dynamic equilibrium models. ? Future?

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Why do Macroeconomist Disagree? ? Most research macroeconomist agree on a wide set of issues. ? There is wide agreement on growth theory. ? There is less agreement on business cycle theory. ? Normative issues. ? Are economist ideologically biased? Caplan (2002).

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