Advanced Macroeconomics

Filipe Campante is Bloomberg Distinguished Associate Professor of International Economics at Johns Hopkins University and a Research Associate at the National Bureau of Economic Research. His work focuses on political economy and economic development and has been published in leading academic journals such as the American Economic Review and the Quarterly Journal of Economics. He was previously Associate Professor of Public Policy at the Harvard Kennedy School, where he taught macroeconomics for many years. Born and raised in Rio de Janeiro, Brazil, he holds a PhD in Economics from Harvard University.Federico Sturzenegger is Full Professor at Universidad de San Andrés, Visiting Professor at Harvard’s Kennedy School and Honoris Causa Professor at HEC Paris. His work focuses on macroeconomics and international finance and has been published in leading academic journals such as the American Economic Review and the Journal of Economic Literature. He was previously President of Banco Ciudad, a representative in Argentina’s National Congress and Governor of the Central Bank of Argentina. Born and raised in Argentina, he holds a PhD in Economics from MIT.Andrés Velasco is Professor of Public Policy and Dean of the School of Public Policy at the London School of Economics. He is also a Research Fellow of CEPR and an Associate Fellow at Chatham House, the Royal Institute of International Affairs. Earlier he held professorial roles at the Harvard Kennedy School, Columbia University and New York University. He served as Minister of Finance of Chile between 2006 and 2010. In 2017 to 2018 he was a member of the G20 Eminent Persons Group on Global Financial Governance. He holds a BA and an MA from Yale University and a PhD in economics from Columbia University. ORCID https://orcid.org/0000-0003-0441-5062

• List of FiguresList of TablesPrefaceAcknowledgmentsAbout the AuthorsChapter 1 IntroductionGrowth TheoryChapter 2 Growth theory preliminaries2.1 Why do we care about growth2.2 The Kaldor facts2.3 The Solow modelThe neoclassical production functionThe law of motion of capitalFinding a balanced growth pathTransitional dynamicsPolicy experimentsDynamic inefficiencyAbsolute and conditional convergence2.4 Can the model account for income differentials2.5 The Solow model with exogenous technological change2.6 What have we learnedNotes and ReferencesChapter 3 The neoclassical growth model3.1 The Ramsey problemThe consumer’s problemThe resource constraintSolution to consumer’s problemThe balanced growth path and the Euler equationA digression on inequality Is Thomas Piketty rightTransitional dynamicsThe effects of shocks3.2 The equivalence with the decentralised equilibriumIntegrating the budget constraintBack to our problem3.3 Do we have growth after all3.4 What have we learnedNotes and ReferencesChapter 4 An application The small open economy4.1 Some basic macroeconomic identities4.2 The Ramsey problem for a small open economyA useful transformationSolution to consumer’s problemSolving for the stock of domestic capitalThe steady state consumption and current accountThe inexistence of transitional dynamicsProductivity shocks and the current accountSovereign wealth funds4.3 What have we learned4.4 What nextNotes and ReferencesChapter 5 Endogenous growth models I Escaping diminishing returns5.1 The curse of diminishing returns5.2 Introducing human capitalLaws of motionBalanced growth pathStill looking for endogenous growth5.3 The AK modelSolution to household’s problemAt long last a balanced growth path with growthClosing the model The TVC and the consumption functionThe permanent effect of transitory shocksIn sum5.4 Knowledge as a factor of productionLearning by doingAdam Smith benefits to specialisation5.5 Increasing returns and poverty trapsPoverty trap in the Solow modelPolicy options to overcome poverty trapsDo poverty traps exist in practice5.6 What have we learned5.7 What nextNotes and ReferencesChapter 6 Endogenous growth models II Technological change6.1 Modelling innovation as product specialisation6.2 Modelling innovation in quality ladders6.3 Policy implicationsDistance to the technological frontier and innovationCompetition and innovationScale effects6.4 The future of growth6.5 What have we learned6.6 What nextNotes and ReferencesChapter 7 Proximate and fundamental causes of growth7.1 The proximate causes of economic growthGrowth accountingUsing calibration to explain income differencesGrowth regressionsExplaining cross country income differences againSumming up7.2 The fundamental causes of economic growthLuckGeographyCultureInstitutions7.3 What have we learned7.4 What nextNotes and ReferencesOverlapping Generations ModelsChapter 8 Overlapping generations models8.1 The Samuelson-Diamond modelThe decentralised equilibriumGoods and factor market equilibriumThe dynamics of the capital stockA workable example8.2 OptimalityThe steady state marginal product of capitalWhy is there dynamic inefficiencyAre actual economies dynamically inefficientWhy is this important8.3 Overlapping generations in continuous timeThe closed economyA simple extensionRevisiting the current account in the open economy8.4 What have we learnedNotes and ReferencesChapter 9 An application Pension systems and transitions9.1 Fully funded and pay as you go systemsFully funded pension systemPay as you go pension systemHow do pensions affect the capital stockPensions and welfare9.2 Moving out of a pay as you go systemFinancing the transition with taxes on the youngFinancing the transition by issuing debtDiscussionDo people save enough9.3 What have we learned9.4 What nextNotes and ReferencesChapter 10 Unified growth theory10.1 From Thomas Malthus to growthThe post Malthusian regimeSustained economic growth10.2 A unified theoryA simple model of the demographic transitionInvesting in human capitalThe dynamics of technology education and population10.3 The full picture10.4 What have we learned10.5 What nextNotes and ReferencesConsumption and InvestmentChapter 11 Consumption11.1 Consumption without uncertaintyThe consumer’s problemSolving for the time profile and level of consumption11.2 The permanent income hypothesisThe case of constant labour incomeThe effects of non constant labour income11.3 The life cycle hypothesisNotes and ReferencesChapter 12 Consumption under uncertainty and macro finance12.1 Consumption with uncertaintyThe random walk hypothesisTesting the random walk hypothesisThe value functionPrecautionary savings12.2 New frontiers in consumption theoryPresent bias12.3 Macroeconomics and financeThe consumption CAPMEquity premium puzzle12.4 What nextNotes and ReferencesChapter 13 Investment13.1 Net present value and the WACCPindyck’s option value critique13.2 The adjustment cost modelFirm’s problemTobin’s qThe dynamics of investmentThe role of chi13.3 Investment in the open economyThe consumer’s problemBringing in the firmInitial steady stateThe surprising effects of productivity shocks13.4 What nextNotes and ReferencesShort Term FluctuationsChapter 14 Real business cycles14.1 The basic RBC modelThe importance of labour supplyThe indivisible labour solution14.2 RBC model at workCalibration An exampleDoes it work14.3 Assessing the RBC contribution14.4 What have we learned14.5 What nextNotes and ReferencesChapter 15 New Keynesian theories of fluctuations A primer15.1 Keynesianism IS LMClassical version of the IS LM modelThe Keynesian version of the IS LM modelAn interpretation The FedFrom IS LM to AS AD15.2 Microfoundations of incomplete nominal adjustmentThe Lucas island modelThe model with perfect informationLucas supply curve15.3 Imperfect competition and nominal and real rigidities15.4 New Keynesian DSGE modelsThe canonical New Keynesian modelA Taylor rule in the canonical New Keynesian modelBack to discrete time15.5 What have we learned15.6 What nextNotes and ReferencesChapter 16 Unemployment16.1 Theories of unemployment16.2 A model of job searchIntroducing labour turnover16.3 Diamond Mortensen Pissarides modelNash bargainingUnemployment over the cycle16.4 Efficiency wagesWages and effort The Shapiro Stiglitz model16.5 Insider outsider models of unemploymentUnemployment and rural urban migration16.6 What nextNotes and ReferencesMonetary and Fiscal PolicyChapter 17 Fiscal policy I Public debt and the effectiveness of fiscal policy17.1 The government budget constraint17.2 Ricardian equivalenceThe effects of debt vs tax financingCaveats to Ricardian equivalence17.3 Effects of changes in government spendingThe initial steady statePermanent increase in government spendingTemporary increase in spending17.4 Fiscal policy in a Keynesian worldThe current empirical debate Fiscal stimulus and fiscal adjustment17.5 What have we learned17.6 What next17.7 AppendixDebt sustainabilityA simplified framework17.8 Measurement issuesThe role of inflationAsset salesContingent liabilitiesThe balance sheet approachNotes and ReferencesChapter 18 Fiscal policy II The long run determinants of fiscal policy18.1 Tax smoothingThe government objective functionSolving the government’s problemThe time profile of tax distortionsThe level of tax distortionsThe steady stateChanges in government expendituresCountercyclical fiscal policySmoothing government spendingSumming up18.2 Other determinants of fiscal policyThe political economy approachFiscal rules and institutions18.3 Optimal taxation of capital in the NGM18.4 What have we learned18.5 What nextNotes and ReferencesChapter 19 Monetary policy An introduction19.1 The conundrum of moneyIntroducing money into the model19.2 The Sidrauski modelFinding the rate of inflationThe optimal rate of inflationMultiple equilibria in the Sidrauski modelCurrency substitutionSuperneutrality19.3 The relation between fiscal and monetary policyThe inflation tax Laffer curveThe inflation tax and inflation dynamicsUnpleasant monetary arithmeticPleasant monetary arithmetic19.4 The costs of inflationThe Tommasi model Inflation and competitionTaking stockNotes and ReferencesChapter 20 Rules vs Discretion20.1 A basic frameworkTime inconsistencyA brief history of monetary policy20.2 The emergence of inflation targetingA rigid inflation ruleWhich regime is betterThe argument for inflation targetingIn sumNotes and ReferencesChapter 21 Recent debates in monetary policy21.1 The liquidity trap and the zero lower bound21.2 Reserves and the central bank balance sheetIntroducing the financial sectorA model of quantitative easingEffects of monetary policy shocks21.3 Policy implications and extensionsQuantitative easingMoney and bankingCredit easing21.4 AppendixNotes and References