Macroeconomics (Advanced Level)

2020/2021

Academic Year

ENG

Instruction in English

5

ECTS credits

Delivered at:

HSE Banking Institute

Course type:

Compulsory course

When:

1 year, 1, 2 module

Instructor

Veselov, Dmitry A.

Course Syllabus

Abstract

The course focuses on selected topics, which are central to modern macroeconomics, like the short-run economic fluctuations, fiscal and monetary policies, macroeconomics of financial markets, and open macroeconomics. Distance educational process is organized via synchronized interaction (what is shown in your class schedule) in Zoom https://zoom.us/.

Learning Objectives

• The objectives of the course are: • to provide students with the knowledge of core concepts and models of economics, • to develop students' ability to apply economic models to the analysis of specific economic cases • to provide students with the knowledge of methodological tools and their applications to the analysis of general problems in economics and social sciences

Expected Learning Outcomes

• Course gives opportunities to students to apply macroeconomic analysis using both graphical and algebraic techniques to the study of contemporary and historical economic cases, to put their research and professional interests into a broader political and macroeconomic context, to communicate their ideas using modern internationally recognized professional language of economists.

Course Contents

• Basic macroeconomic problems and concepts. Macroeconomic variables
  Macroeconomics and its central issues: inflation, unemployment, economic growth, stabilization policy. The problem of aggregation. Aggregate output, gross domestic product, final good, intermediate good, value added. Nominal GDP and real GDP. GDP growth, expansions, recessions, stagnation. Labor force, employment, unemployment and unemployment rate, discouraged workers, participation rate. Underground economy. Price level, inflation, inflation rate, deflation, GDP deflator, index number, consumer price index (CPI), cost of living. Real vs. nominal variables. Interest rates. Main macroeconomic variables. National accounting identities. The legacy of macroeconomic issues. Historical cross-country dynamics of main economic variables.
• Goods market equilibrium. The role of the government in regulating business cycles.
  The Great Depression and the birth of Macroeconomics. Keynes’s General Theory. Objectives, instruments and the role of the government. The goods market and Keynesian Cross in the closed economy. Characterization of the equilibrium and the mechanism of adjustment. Autonomous aggregate expenditures, the economy wide marginal propensity to spend and the multiplier. Goods market equilibrium and the multiplier in the open economy. Derivation of the IS curve. Shifts in the IS curve. The effects of government spending and taxation on output. Government spending multiplier and tax multiplier. Balanced budget multiplier for different mechanisms of adjustment. Fiscal policy rules and the government budget constraint.
• Introduction to macroeconomics of financial markets
  Functions of Money: a Numeraire, Means of Exchange and Store of Value. The role of financial markets in macroeconomic dynamics. Demand for Liquid Assets. Liquidity Preference Approach. Central Bank, Commercial Banks and Supply of Liquid Assets. Money Base, Public Cash, Reserves, Deposits. Money Creation process. Money multiplier, deposit multiplier and loans multiplier. Upward sloping money supply. The transactions demand (Baumol-Tobin model). The speculative theory of money demand: demand for money as a safe asset. The modern quantity theory of money. The monetary base and the money supply. The money multiplier model. Control of the central bank over the money supply. Liquid Assets Market Equilibrium. Derivation of the LM curve. Slope of the LM schedule. Excess demand and Excess supply. Monetary Policy and Shifting in the LM schedule. Liquidity trap and zero lower bound. Fundamental value of assets. Expectations and dynamics of asset prices. Rational bubbles. Monetary policy and possibilities of asset price bubbles creation and bursting.
• Fiscal and monetary policies in the IS-LM model
  Notion of general equilibrium in a macroeconomics context. Algebra and geometry of general equilibrium, IS-LM framework. Macroeconomic policies and output determination. Classical and Keynesian views. Expansionary and contractionary fiscal policy: tax financing, internal debt financing, borrowing from the central bank. Expansionary and contractionary monetary policy, policy mix. Strategic interaction between fiscal and monetary authorities. War of attrition in IS-LM framework.
• Labour market, wage and price determination. Unemployment
  Noninstitutionalized civilian population, labor force; out of the labor force, participation rate, unemployment rate, separations, hires, quits, layoffs, duration of unemployment, discouraged workers, non-employment rate, collective bargaining, reservation wage, bargaining power. Efficiency wage theories, unemployment insurance, production function, labor productivity, markup, wage-setting relation, price-setting relation. Natural rate of unemployment, structural rate of unemployment, natural level of employment, natural level of output. The types and causes of unemployment: frictional, structural and classical (or real wage) unemployment. Hysteresis.
• AD – AS model. Inflation, expectations and Phillipse curve
  Aggregate supply (AS) relation. The medium run AS curve and the long run AS curve. Explanations of the upward sloping medium run aggregate supply curve. Sticky wages (Keynesian) model. Classical workers’ misperception model, new Keynesian sticky price model, new classical imperfect information model of medium run AS. Expectations and the medium run AS. The aggregate demand curve. Explanations of the slope. Equilibrium in aggregate supply- aggregate demand model. Monetary and fiscal policy in the long run and in the medium run. Supply shocks, neutrality of money, stagflation, output fluctuations, business cycles, propagation mechanism. Phillips curve, wage-price spiral, nominal rigidities, staggering of wage decisions. Modified, or expectations-augmented, or accelerationist Phillips curve. Nonaccelerating inflation rate of unemployment (NAIRU), wage indexation. Okun’s law, normal growth rate, labor hoarding, adjusted nominal money growth, disinflation, sacrifice ratio, seignorage. Rational, myopic, adaptive expectations, perfect foresight. Lucas critique and credibility. Theoretical foundation of inflation targeting policies, the time-inconsistency problem and the debate between precommitment and discretion in the context of monetary policy. The implications of the main rules designed by macroeconomists for the conduct of monetary policy. Time inconsistency problem and its solutions: constitutional rules, reputation, delegation to an independent authority with different preferences/incentives (independent central banker).
• Open economy macroeconomics: BOP, CIP, UIP, LOOP. IS-LM-BP model
  Balance of payments: current account, capital account and foreign reserves. Real and nominal exchange rate. Exchange rate determination and the money sector. Foreign exchange market, foreign currency reserves. Appreciation and depreciation of the exchange rate. Exchange rate regimes: fixed and flexible. Determinants of the trade balance and the Marshall–Lerner condition, the national income identity in an open economy. Uncovered and covered interest parity condition in the financial market, the law of one price. General equilibrium in an open economy and macroeconomic policies. Capital mobility vs. capital controls. Mundell-Fleming model. Determinants of the BP line, the BP slope under alternative assumptions about international capital mobility. Monetary and fiscal policies under fixed and flexible exchange rates with perfect, imperfect capital movements and no capital mobility. Impossible trinity.

Assessment Elements

• Current participation and activity
• Mid-term exam
• Final exam

Interim Assessment

• Interim assessment (2 module)
  0.15 * Current participation and activity + 0.6 * Final exam + 0.25 * Mid-term exam

Bibliography

Recommended Core Bibliography

• Macroeconomics, Blanchard, O., 2017

Recommended Additional Bibliography

• Macroeconomics, Mankiw, N. G., 2010