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.
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
included a chapter on models on monopolistic competition
and their uses in macroeconomics (Chapter 16).
(2) We have an improved treatment of
search, matching, and unemployment (Chapter 17).
(3) We have included an appendix
chapter on what we call the neoclassical model with an
upward-sloping Ys curve. In our baseline
treatment, we (implicitly) assume GHH preferences so that
there is no intertemporal dimension to labor supply and the
Ys curve is vertical. This simplifies the
analysis and allows us to get to more interesting questions
quicker. But the version with the upward-sloping Ys
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
- Chapter 31: 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 32: 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 33: 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 34: 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 35: 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 36: 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 37: 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.
As of Summer 2020, we have a type solutions manual for end of
chapter problems. If you are an instructor and would like the
manual, please email any (or all) of the three of us.