Lecture 1 Macroeconomic Theory History of

Lecture 1 Macroeconomic Theory & History of Macroeconomic Thought

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought 1. Macroeconomics & its Major Problems 2. Macroeconomics Schools of Thought 2. 1. Macroeconomics with microeconomics backgrounds 2. 2. Macroeconomics as background of microeconomics 2. 3. Orthodox macroeconomics 2. 4. New tendencies of macroeconomics

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Failures in the Market – провали ринку Politically Induced Incentives – політичні стимули Economic Bubbles – економічні бульбашки Human Capital – людський капітал

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Macroeconomics (from Greek prefix " μακρός " meaning "large" + "economics") is a branch of economics that deals with the performance, structure, behavior and decision-making of the entire economy, be that a national, regional, or the global economy.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought The term "macroeconomics" stems from a similar usage of the term "macrosystem" by the Norwegian economist Ragnar Frisch in 1933. Modern macroeconomics can be said to have began with John Maynard Keynes and the publication of his book "The General Theory of Employment, Interest and Money" in 1936.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought The major macroeconomic problems are: • Economic growth, economic cycles: What is growth? What factors can affect economic growth? • Unemployment: Who are the unemployed? Is the unemployment rate positive or negative factor for the economy? How to deal with unemployment? • Inflation: What is inflation? What type of inflation is useful and what type is harmful? • Money, interest rate: What is the role of money in macroeconomics? • Balance of trade: How do export and import change exchange rate? • Budget: How does the state regulate their income and expenses?

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Key Macroeconomics Schools of Thought

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Neoclassical Synthesis A key characteristic of the Neoclassical model is that it is static. Economists use Static Comparative method because it is easy to deal with. In static Comparative Method is just one exogenous variable. In addition, in order to do a Static Comparative analysis economists use the mathematical method showed by Hicks (1937) which is called the IS – ML model. These models need to have a stable equilibrium in order to make sense in comparative analysis. To assure that this equilibrium is stable, the model ought to satisfy the principle of correspondence’s prove, Samuelson (1947).

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Monetarist School The most relevant fellers are Milton Friedman and Edmund Phelps. The Monetarist School uses ideas from Quantity Theory in order to explain why the use of discretion policy, either fiscal or monetary, can bring unexpected change to the main macroeconomic variables. Monetarist also thought of growing monetary supply as a quantitative target. The specific issues that the Monetarist worked are theory of demand of money (Theory of Permanent Income) and then the Curve of Phillips under Rational Expectations.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought The New Classical These economists taught how to use Rational Expectations concepts, first established by Munth (1961). Some of the most relevant economist who have worked on this field are John Munth, Robert Lucas. The principal point to highlight in Rational Expectations theory is that economics agents must use properly the information which is broadcast by the media and governments. New Classsicals dealt with information as a set which includes both past and future information. New Classical Economists used an econometric model of aggregate demand, where monetary shocks have a short rather than long run effect. Lucas (1973) is one of the most relevant writing about this topic.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Real Business When economists realised that recessions had taken more time than the model had estimated, they started using other tools to explain it. A 1982 paper by Finn Kydland Edward Prescott introduced Real Business Cycle Theory, the final wave of new classical economics. Kydland Prescott built parsimonious models that explained business cycles with changes in technology and productivity and how these shocks altered the desire of people to work. Some of the most important economists who work on this branch are Joseph Stiglitz, Robert Gordon, Robert Schiller.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought The New Keynesian economists work on issues such as coordination problems, welfare implications under economic cycles, relevance of monetary and fiscal policies in recovering from deep cycles and supply and demand shocks. One way they work on these issues is through the use of microeconomic theory. In addition, New Keynesians have also developed models which are performed under general equilibrium and market imperfections. Finally New Keynesians have paid attention to failures in the market. The most famous New Keynesian economist is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) Joseph Stiglitz.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Post Keynesians A feature of post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment. A loose grouping of Post Keynesians can made by splitting them into two groups: "European, " including Richard Kahn, Nicholas Kaldor, Michal Kalecki and "American, " including Hyman Minsky, George Shackle, Sidney Weintraub, and Paul Davidson. Minsky's theories tells about the macroeconomic dangers of speculative bubbles in asset prices. The financial crisis of 2007 -2010 has brought mainstream attention to Minsky's work.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought Austrian economics is generally focused on microeconomics, but Friedrich Hayek combined the capital theory of Carl Menger and Ludwig von Mises's theory of money and credit to create the Austrian business cycle theory. The theory views business cycles as the consequence of excessive growth in bank credit, reinforced by ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings. The financial crisis of 2007 -2010 has resulted in a revival of interest in the Austrian business cycle theory.

Lecture 1: Macroeconomic Theory & History of Macroeconomic Thought New political macroeconomics The new political macroeconomics have focused more on the effect of politically induced incentives on the inherent amount of inflation in the economic system. Major New political macroeconomics economist is Alberto Alesina. The renaissance of economic growth Growth theory advanced again with theories of economist Paul Romer in the late 1980 s and early 1990 s. Other important new growth theorists include Robert E. Lucas (he received the Nobel Memorial Prize in Economic Sciences in 1995) and Robert J. Barro. This model incorporated a new concept of human capital, the skills and knowledge that make workers productive.

That's all folks, see you on seminar.