Topics in Macroeconomics. (Macro Models with Micro Foundations). Lecture 1.
Ctirad Slav´ık email:
Topics in Macroeconomics (Macro Models with Micro Foundations) Lecture 1
Ctirad Slav´ık email:
[email protected] website (syllabus, lecture notes etc.): http://www.wiwi.uni-frankfurt.de/professoren/slavik/teach.html
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Introduction
Instructor Syllabus This lecture
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This lecture
What is macroeconomics? GDP, economic growth, business cycles. Macroeconomic models with micro foundations. Readings: Williamson, ch. 1. and ch. 3.
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What is macroeconomics?
Models built to explain, understand macroeconomic phenomena. What are the macroeconomic phenomena? Why are we trying to understand them?
Approach in this course is to build macroeconomic models from microeconomic principles. Why do we need microeconomic principles?
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Macroeconomic Phenomena
Gross Domestic Product (GDP), (most important) measure of economic activity: the quantity of goods and services produced within a country’s borders over a particular period of time.
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GDP time series Source: NIPA, Table 7.1, http://www.bea.gov/national/nipaweb/
US GDP per capita in 2005 dollars
50
40
30
20
10
0 1920
1940
1960
1980
2000
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Macroeconomic Phenomena
The most important features: long run trend, fluctuations around the trend - business cycles.
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Questions
What causes growth? Are there limits to growth? Should/can the government increase growth? What causes the business cycles? Should/can the government intervene to smooth the cycles?
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GDP time series
US GDP per capita in 2005 dollars
50
40 Great Recession The Great Moderation
30
Productivity Slowdown
20 WW2
10 Great Depression
0 1920
1940
1960
1980
2000
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Macroeconomic Phenomena Other interesting features: no growth before 1800 (not in the picture), the depth of the Great Depression and WW2 expansion, slowdown in the 70’s, steady growth in the 80’s, 90’s and 00’s (the Great Moderation), the Great Recession of 2008. We are interested in other variables as well, like ... ? Ultimately, we are interested in ... ?
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Log transformation Why do we take logs? To get rid of units: Differences in logs approximately equal to percentage differences and percentage differences are unitless. Define percentage difference: gt = log yt − log yt−1 = log
yt yt−1
yt −yt−1 yt−1
= log(1 + gt ) ∼ gt
Use 1st order Taylor approximation for the last part: f (x) ∼ f (x0 ) + f 0 (x0 )(x − x0 ) Use f (x) = log(1 + x), x0 = 0: log(1 + x) ∼
log 1 +
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GDP in logs
US GDP per capita in 2005 dollars in logs
11 10.5 10 9.5 9 8.5 8 1920
1940
1960
1980
2000
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Brief recap
We have a set of facts. We want to understand it. We want to see what the government can/should do. How do we do this? What’s the problem?
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Macroeconomic Models
Macroeconomists cannot run experiments, model as an artificial device needed to understand the behavior of macro quantities, can run experiments within a model, can analyze the role of government.
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Macroeconomic Models
Specifically: A macroeconomic model captures the essential features of the world needed to analyze a particular macroeconomic problem. Macroeconomic models should be simple (Occam’s razor), but they need not be completely realistic.
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Macroeconomic Models
Basic structure of a macromodel: agents (consumers and firms), set of goods, consumers preferences, the production technology, resources available.
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Macroeconomic Models
Add 2 assumptions: agents optimize (consumers maximize utility, firms maximize profits), allocations determined as an equilibrium outcome. Competitive equilibrium. Discuss.
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Microfoundations
Why do we need this structure? Why do we need microfoundations? Lucas Critique (IS-LM example). Welfare analysis.
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Summary
What is macroeconomics? GDP, economic growth, business cycles. Macroeconomic models with micro foundations. Readings: Williamson, ch. 1.
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Next Time
Trend-cycle decomposition, HP filter. Business cycle measurement. Readings: Williamson, ch. 3. We skip ch. 2 and seasonal adjustment.
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