Textbook

Along with Julio Garin
(Claremont-McKenna College) and Robert
Lester (Colby College), I have written
a textbook designed to be used in an intermediate
macroeconomics or master level course in macroeconomics. You
can download the latest version of the manuscript HERE. If you are an instructor,
you are more than welcome to use the book as a resource for
your class (provided you give the proper credit and direct
students to the latest version of the book, which will be
posted here).

The current version of the text makes a number of additions and improvements over previous versions. There are a number of smaller issues that have been fixed, including notational confusion, typos, and broken links/references. We are grateful to previous users for pointing these out. Typos and points of confusion inevitably remain.

We welcome any feedback you might have on the textbook. If you have comments or suggestions, please email any of us: Julio Garin, Robert Lester, Eric Sims

The current version of the text makes a number of additions and improvements over previous versions. There are a number of smaller issues that have been fixed, including notational confusion, typos, and broken links/references. We are grateful to previous users for pointing these out. Typos and points of confusion inevitably remain.

The major substantive changes are:

(1) In the long run/growth section,
we have added a new chapter on overlapping generations (OLG)
models. This is Chapter 8 in the new version. We relate OLG
models back to the Solow model but can use them to address a
number of other issues, including integenerational
inefficiencies. Because it is based on optimization rather
than a constant saving rate as in the Solow model, the OLG
model provides a nice bridge to the rest of the text.

(2) We have an improved treatment
of search, matching, and unemployment (Chapter 16).

(3) We have included an appendix
chapter on what we call the neoclassical model with an
upward-sloping Y^{s} curve. In our baseline
treatment, we (implicitly) assume GHH preferences so that
there is no intertemporal dimension to labor supply and the
Y^{s} curve is vertical. This simplifies the
analysis and allows us to get to more interesting questions
quicker. But the version with the upward-sloping Y^{s}
curve is nevertheless interesting and is close to what
Williamson calls the real intertemporal model. This is now
covered in Appendix C.

(4) We have included an Appendix,
Appendix E, with an "MP" formulation of monetary policy
rather than using the more traditional LM curve.

(5) We have a completed section on
money, credit, banking, and finance (Part 6). This includes
five chapters:

- Chapter 30: basics of banking. Talks about asymmetric information and the role of financial intermediation, assets, liabilities, credit risk, liquidity risk, and summarizes developments in the banking sector in the last decades, including the rise of the so-called "shadow banking" sector.
- Chapter 31: money creation process. This is fairly boilerplate but talks about the relationship between the monetary base, the money supply, and the money multiplier in depth.
- Chapter 32: liquidity transformation and bank runs. This chapter considers a simple version of a Diamond-Dybvig model to talk about the beneficial aspect of liquidity transformation and the susceptibility of financial intermediaries to runs.
- Chapter 33: bond pricing. Chapters 33 and 34 (stock pricing) use a Lucas tree framework in which assets are in fixed supply and endowments are exogenous to explore asset pricing and related issues. Chapter 33 focuses on bond pricing, including the risk and term structure of interest rates. Topics like yield curves, the expectations hypothesis, and the liquidity premium are discussed. We also use the model to compare and contrast conventional vs. unconventional monetary policy and to discuss why "quantitative easing works in practice but not in theory" (Bernanke).
- Chapter 34: stock market. We talk about the equity premium and devote significant attention to (rational) bubbles. We discuss how one might detect bubbles (ex-post) and whether central banks ought to try to prick bubbles.
- Chapter 35: financial factors in a macro model. Here we argue that a straightforward way to model financial factors is to include an exogenous credit spread into the cost of funds facing a firm's investment decision. We can think about crisis periods as periods in which this spread increases, reducing the demand for investment and aggregate demand more generally. We also explore a version of the model with a Bernanke, Gertler, and Gilchrist style financial accelerator wherein the credit spread depends on the level of economic activity. We discuss how the financial accelerator affects both the shape of the AD curve as well as how the AD curve shifts in response to shocks.
- Chapter 36: financial crises and the Great Recession. We give a broad historical overview of both the Great Depression and the Great Recession. We emphasize the fundamental similarity in that both featured "runs" (one on deposits, the other on short term funding / repo / commercial paper). We provide some specifics on the Great Recession, largely following the work of Gary Gorton. We then use the version of the IS-LM-AD-AS model with financial frictions (Chapter 35) to model the Great Recession, including the effects of the ZLB and unconventional policy actions.

(6) The statistics appendix has
been completed, including a better discussion of probability
and expectations, with a particular focus on covariance and
the relationship between the expected value of a product and
the product of expected values (which is particularly
relevant for the asset pricing chapters).

We welcome any feedback you might have on the textbook. If you have comments or suggestions, please email any of us: Julio Garin, Robert Lester, Eric Sims