EC6012 Lecture 1 Introduction

EC6012 International Monetary Economics Lecture 1



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Mathematics in Macroeconomics

Mathematical formalism is only useful when

1. it tests internal consistency between different propositions within a theory (e.g. the proposition that different markets clear simultaneously);

2. it clarifies what ‘drives’ the restuls (e.g, given the minimal assumptions under which it will be true that more exports can be achieved at the cost of a worsening distribution of income), and;

3. It provides a solid base for empirical analysis.

Important characteristics of structuralist models

1. differences in behaviour of different income groups matter

2. differences in available technologies in different sectors or countries matter.

3. structuralist models are based on the social relations between broad groups of economic actors

Intellectual Foundations

Keynes Kalecki,  Ricardo, Marx

=> Fundamental assumption: the economy’s institutions and social groups play causal roles in determining overall behaviour of the economy.

Theoretical Foundations

Richard Stone

Wynne Godley

Lance Taylor

Accounting Relationships between macroeconomic fundamentals

Problems

>Politics

Market-balance relationships constrain economic actors in important ways.

All the models you will see in this course are constructed directly from aggregates like household consumption, business investment, etc.

Stocks v Flows

flows (GDP is the sum of payments to labour, payments for ’surplus’ (profits) and payments for indirect taxes)

stocks (cumulative flow: the country’s net foreign asset position is the sum over time of its current account surpluses.)

All the models you’ll see in this class will be stock-flow consistent.

Causality

Structural Macreconomics Problems

1. Inequality and Poverty

Keynes, John Maynard KeynesThe General Theory of Employment, Interest and Money,  Chapters 6  & 7 (link to full text)

(Write a 1 page summary of each of these chapters as an exercise)

2. Inflation and Macro Stability

G. Calvo, L. Leiderman and C. Reinhart, Inflows of capital to developing countries in the 1990s, Journal of Economic Perspectives 10, n. 2 (1996),

Knut Wicksell, 1906, The Influence of the Rate of Interest on Prices,

3. Policy Instability

Prospects and Policies for the U.S. Economy. Why Net Exports Must Now Be the Motor for U.S. Growth  Wynne Godley, Alex Izurieta and Gennaro Zezza,

Methodology

1. Present a series of models, starting very simply, and gradually including all the real-world complications.

2. Write down a system of equations and accounting identities, attribute initial values to all stocks and all flows and to behavioural parameters

3. We’ll use stylised facts for most of these.

4. Then use numerical simulation to check the accounting and find the steady state of the economy

5. finally, we shock the system with varying assumptions to check robustness.

=> This gives us an ‘informed intuition‘ about the real world.