Macroeconomic Theory: A Dynamic General Equilibrium Approach

808 Pages·2012·13.27 MB·English

by  Michael Wickens

Macroeconomic Theory
Macroeconomic Theory
A Dynamic General Equilibrium Approach
Second Edition
Michael Wickens
Princeton University Press
Princeton and Oxford
Copyright © 2008, 2011 by Princeton University Press
Published by Princeton University Press,
41 William Street, Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press,
6 Oxford Street, Woodstock, Oxfordshire OX20 1TW3
All Rights Reserved
Library of Congress Cataloging-in-Publication Data
Wickens, Mike.
Macroeconomic theory : a dynamic general equilibrium
approach /Michael Wickens. – 2nd ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-691-15286-8 (alk. paper)
1. Macroeconomics. I. Title.
HB172.5.W53 2012
339– 2011044804
dc23
British Library Cataloguing-in-Publication Data is available
This book has been composed in Lucida
Typeset by T&T Productions Ltd, London
Printed on acid-free paper
press.princeton.edu
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Preface
1 Introduction
1.1 Dynamic General Equilibrium versus Traditional Macroeconomics
1.2 Traditional Macroeconomics
1.3 Dynamic General Equilibrium Macroeconomics
1.4 The Structure of This Book
2 The Centralized Economy
2.1 Introduction
2.2 The Basic Dynamic General Equilibrium Closed Economy
2.3 Golden Rule Solution
2.3.1 The Steady State
2.3.2 The Dynamics of the Golden Rule
2.4 Optimal Solution
2.4.1 Derivation of the Fundamental Euler Equation
2.4.2 Interpretation of the Euler Equation
2.4.3 The Intertemporal Production Possibility Frontier
2.4.4 Graphical Representation of the Solution
2.4.5 Static Equilibrium Solution
2.4.6 Dynamics of the Optimal Solution
2.4.7 Algebraic Analysis of the Saddlepath Dynamics
2.5 Real-Business-Cycle Dynamics
2.5.1 The Business Cycle
2.5.2 Permanent Technology Shocks
2.5.3 Temporary Technology Shocks
2.5.4 The Stability and Dynamics of the Golden Rule Revisited
2.6 Labor in the Basic Model
2.7 Investment
2.7.1 q-Theory
2.7.2 Time to Build
2.8 Conclusions
3 Economic Growth
3.1 Introduction
3.2 Modeling Economic Growth
3.3 The Solow–Swan Model of Growth
3.3.1 Theory
3.3.2 Growth and Economic Development
3.3.3 Balanced Growth
3.4 The Theory of Optimal Growth
3.4.1 Theory
3.4.2 Additional Remarks on Optimal Growth
3.5 Endogenous Growth
3.5.1 The AK Model of Endogenous Growth
3.5.2 Human Capital Models of Endogenous Growth
3.6 Conclusions
4 The Decentralized Economy
4.1 Introduction
4.2 Consumption
4.2.1 The Consumption Decision
4.2.2 The Intertemporal Budget Constraint
4.2.3 Interpreting the Euler Equation
4.2.4 The Consumption Function
4.2.5 Permanent and Temporary Shocks
4.3 Savings
4.4 Life-Cycle Theory
4.4.1 Implications of Life-Cycle Theory
4.4.2 Model of Perpetual Youth
4.5 Nondurable and Durable Consumption
4.6 Labor Supply
4.7 Firms
4.7.1 Labor Demand without Adjustment Costs
4.7.2 Labor Demand with Adjustment Costs
4.8 General Equilibrium in a Decentralized Economy
4.8.1 Consolidating the Household and Firm Budget Constraints
4.8.2 The Labor Market
4.8.3 The Goods Market
4.9 Comparison with the Centralized Model
4.10 Conclusions
5 Government: Expenditures and Public Finances
5.1 Introduction
5.2 The Government Budget Constraint
5.2.1 The Nominal Government Budget Constraint
5.2.2 The Real Government Budget Constraint
5.2.3 An Alternative Representation of the GBC
5.3 Financing Government Expenditures
5.3.1 Tax Finance
5.3.2 Bond Finance
5.3.3 Intertemporal Fiscal Policy
5.3.4 The Ricardian Equivalence Theorem
5.4 The Sustainability of the Fiscal Stance
5.4.1 Case 1: [(1 + π)(1 + γ)]/(1 + R) > 1 (Stable Case)
5.4.2 Case 2: 0 < [(1 + π)(1 + γ)]/(1 + R) < 1 (Unstable Case)
5.4.3 Fiscal Rules
5.5 The Stability and Growth Pact
5.6 The Fiscal Theory of the Price Level
5.7 Optimizing Public Finances
5.7.1 Optimal Government Expenditures
5.7.2 Optimal Tax Rates
5.7.3 The Optimal Level of Debt
5.8 Conclusions
6 Fiscal Policy: Further Issues
6.1 Introduction
6.2 Time-Consistent and Time-Inconsistent Fiscal Policy
6.2.1 Lump-Sum Taxation
6.2.2 Taxes on Labor and Capital
6.2.3 Conclusions
6.3 The Overlapping-Generations Model
6.3.1 Introduction
6.3.2 The Basic Overlapping-Generations Model
6.3.3 Short-Run Dynamics and Long-Run Equilibrium
6.3.4 Comparison with the Representative-Agent Model
6.3.5 Fiscal Policy in the OLG Model: Pensions
6.3.6 Conclusions
7 The Open Economy
7.1 Introduction
7.2 The Optimal Solution for the Open Economy
7.2.1 The Open Economy’s Resource Constraint
7.2.2 The Optimal Solution
7.2.3 Interpretation of the Solution
7.2.4 Long-Run Equilibrium
7.2.5 Shocks to the Current Account
7.3 Traded and Nontraded Goods
7.3.1 The Long-Run Solution
7.4 The Terms of Trade and the Real Exchange Rate
7.4.1 The Law of One Price
7.4.2 Purchasing Power Parity
7.4.3 Some Stylized Facts about the Terms of Trade and the Real
Exchange Rate
7.5 Imperfect Substitutability of Tradeables
7.5.1 Pricing-to-Market, Local-Currency Pricing, and Producer-
Currency Pricing
7.5.2 Imperfect Substitutability of Tradeables and Nontradeables
7.6 Current-Account Sustainability
7.6.1 Balance of Payments Sustainability
7.6.2 The Intertemporal Approach to the Current Account
7.7 Conclusions
8 The Monetary Economy
8.1 Introduction
8.2 A Brief History of Money and Its Role
8.3 The Nominal Household Budget Constraint
8.4 The Cash-in-Advance Model of Money Demand
8.5 Money in the Utility Function
8.6 Money as an Intermediate Good or the Shopping-Time Model
8.7 Transactions Costs
8.8 Cash and Credit Purchases
8.9 Some Empirical Evidence
8.10 Hyperinflation and Cagan’s Money-Demand Model
8.11 The Optimal Rate of Inflation
8.11.1 The Friedman Rule
8.11.2 The General Equilibrium Solution
8.12 The Super-Neutrality of Money
8.13 Conclusions
9 Imperfectly Flexible Prices
9.1 Introduction
9.2 Some Stylized “Facts” about Prices and Wages
9.3 Price Setting under Imperfect Competition
9.3.1 Theory of Pricing in Imperfect Competition
9.3.2 Price Determination in the Macroeconomy with Imperfect
Competition
9.3.3 Pricing with Intermediate Goods
9.3.4 Pricing in the Open Economy: Local and Producer-Currency
Pricing
9.4 Price Stickiness
9.4.1 Taylor Model of Overlapping Contracts
9.4.2 The Calvo Model of Staggered Price Adjustment
9.4.3 Optimal Dynamic Adjustment
9.4.4 Price Level Dynamics
9.5 The New Keynesian Phillips Curve
9.5.1 The New Keynesian Phillips Curve in an Open Economy
9.6 Conclusions
10 Unemployment
10.1 Introduction
10.2 Some Labor Market Data
10.3 Search Theory and Unemployment
10.3.1 The Employment Matching Function
10.3.2 Labor Demand
10.3.3 Labor Supply
10.3.4 Wage Bargaining
10.3.5 Comment
10.4 Efficiency-Wage Theory
10.4.1 Comment
10.5 Wage Stickiness and Unemployment
10.5.1 Labor Demand
10.5.2 Labor Supply
10.5.3 The Equilibrium Solution
10.5.4 Wage Determination
10.5.5 Unemployment
10.5.6 Comment
10.6 Unemployment and the Effectiveness of Fiscal and Monetary Policy
10.7 Conclusions
11 Asset Pricing and Macroeconomics
11.1 Introduction
11.2 Expected Utility and Risk
11.2.1 Risk Aversion
11.2.2 Risk Premium
11.3 Insurance Premium
11.4 No-Arbitrage and Market Efficiency
11.4.1 Arbitrage and No-Arbitrage
11.4.2 Market Efficiency
11.5 Asset Pricing and Contingent Claims
11.5.1 A Contingent Claim
11.5.2 The Price of an Asset
11.5.3 The Stochastic Discount-Factor Approach to Asset Pricing
11.5.4 Asset Returns
11.5.5 Risk-Free Return
11.5.6 The No-Arbitrage Relation
11.5.7 Risk-Neutral Valuation
11.6 General Equilibrium Asset Pricing
11.6.1 Using Contingent-Claims Analysis
11.6.2 Asset Pricing Using the Consumption-Based Capital-Asset-
Pricing Model (C-CAPM)
11.7 Asset Allocation
11.7.1 The Capital-Asset-Pricing Model (CAPM)
11.7.2 Asset Substitutability and No-Arbitrage
11.8 Consumption under Uncertainty
11.9 Complete Markets
11.9.1 Risk Sharing and Complete Markets
11.9.2 Market Incompleteness