Posts Tagged: General equilibrium

EC4004 — No Comments
14
Nov 08

Economics for Business Lecture 17

In the last few lectures, we’ve looked at growth theory and the stakes involved in getting the basics wrong. We saw the Solow model’s predictions about sustained capital accumulation (\Delta k/k): keep population growth low, keep savings (s) and therefore investment(I) rather high, and try to curb depreciation on assets. Technical progress and human capital move the economy forward, potentially stimulating convergence of growth rates.

Now we’ll move onto a micro-founded macro model developed in the later chapters of the Barro book. The basic idea is to specify four markets inside the economy: the products market, the bond market, the money market, and the labour market. We’ll build our macroeconomic equilibria from behavioural assumptions about the actors in the model: households and firms. Households are assumed to want to maximise their incomes from all of these markets, subject to a budget constraint. Firms want to maximise profits. Their interactions, along with the usual macroeconomic accounting identities, such as Y=C+I+G, give us the macroeconomic equilibrium, called a general equilibrium.

Click the link below to download slides, handouts, etc.

Click the link below to download papers and interviews about growth, technical progress, and the micro-founded macro model.

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UL — No Comments
11
Sep 08

Notes to Self: Blanchard on the Future of Macroeconomics

Circulation in macroeconomics

Olivier Blanchard of MIT is one of the top macroeconomists in the world. When he write articles like this, it’s worth your time reading what he thinks.

Or, you could read what I think he thinks. Which may save time.

My summary. Macroeconomics is the study of fluctuations. Since the 1970′s there have been three approaches to macro. First, the new-classicals. These guys build models of the macroeconomy where the aggregate properties of the economy come from the decisions made at the household and firm level. All markets are in equilibrium, and the only thing which creates cycles is changes in technology. This approach is associated with Ed Prescott, Robert Lucas, and Thomas Sargent. Second, the new-Keynesians. These guys emphasised the role of market imperfections like asymmetric information in generating cycles. Top chaps in the NK school would be Greg Mankiw and Joseph Stiglitz. Third, the growth theorists. These guys mainly ignored the problem of fluctuations. People like Daron Acemoglu and Charles I. Jones come to mind. 

Blanchard argues that modern macroeconomics has had a sort of convergence from these three schools, where the theory of the new-classicals is augmented with imperfections. The problem with this approach is complexity. Now we need large dynamic stochastic general equilibrium models to make predictions about the economy in the short run, which makes understanding the message behind these models difficult. 

Blanchard sees a more `open source’ future for macroeconomics, where we hack together macro models based on the problem they are built to solve, and estimate them numerically, without worrying about the general equilibrium and social welfare properties of these models.

I’m a bit skeptical about the issue of pluralism in economics (see here), but I think Blanchard’s vision of a broader macroeconomic church, if it came about, would be nice to see if it ever happened. 

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UL — No Comments
28
Aug 08

Pedagogical Approaches to Theories of Endogenous versus Exogenous Money: Pluralism in Action?

Problem-based learning

Here’s the third of the `teaching’ papers series I’ve been writing recently. First, I was interested in exploring problem based learning in advanced monetary economics, then I fiddled about with software to get large classes to interact. In this paper, written for the workshop `Pluralism in economics: rethinking the teaching of economics’, October 18, 2008, City University, London, I spend some time thinking about the relation between differing approaches to teaching macroeconomics. 

Here’s the abstract of the paper:

Pedagogical pluralism is difficult to implement in practice, but when overlaps between competing approaches are considered, the benefits for the students exceed the costs. An example is given contrasting two approaches to the modeling of money in macroeconomics: the stock-flow consistent macroeconomic modeling associated with Godley and Lavoie [1] and Barro’s [2] more mainstream neoclassical dynamic general equilibrium modeling. I argue students can only contrast and compare approaches effectively when thematic overlaps are significantly large to make these comparisons obvious. Only then should a pluralist approach be considered desirable.

The paper is below. 

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