ECON 20020 Macroeconomics 1

Lecturer Vincent Hogan D205 JHN Office Hours: Tuesday 11–12 and by appointment

Objective This course will build on ECON 10020 many similar themes but more rigorous treatment More Case studies

Reading Material Any Macro book will do. Notes will be posted on Blog (see below) Main Text: Robert J Gordon, Macroeconomics, Pearson International 11th edn; Any Macro book will do. e.g. Mankiw, Blanchard etc Some “pop economics” books are also very useful When Markets Collide: Investment Strategies for the Age of Global Economic Change by Mohamed El-Erian 

Available on Amazon or audible The Return of Depression Economics and the Crisis of 2008 by Paul Krugman Irrational Exuberance - by Robert J. Shiller Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert J. Shiller Available on Amazon or audible

Websites There are a couple of useful blogs www.irisheconomy.ie (hi quality debate) http://delong.typepad.com/ The following web sites are useful for data: http:/www.cso.ie http:/www.finance.gov.ie http:/www.centralbank.ie http:/www.ecb.org Online access via the UCD library to OECD and IMF databases

My Blog Old version of course in on blackboard No longer updated New material posted on my blog Vincenthogan.ie What’s the difference? Same basic material Change presentation Not sure yet!

Tutorials Start in week 3 Problem sets from next week Solutions online via blog Old fashioned tutorials TBA NOT for Grade

Outline To be amended as necessary Topic 1. A Review of some basics Topic 2. Not a clue Topic 3. TBA Topic 4. ? Topic 5. Who knows Topic 6. Anybody’s guess

Assessment The main Exam in May will be worth 70% There will be a mid-term assessment (MCQ) in Feb which will count for 30%

The Point of Macro Macroeconomics is about understanding the behaviour of economic aggregates: total (national) output, employment, the general price level, etc Micro is about understanding the behaviour of individual entities The two are related (or ought to be) but the process of aggregation has the potential to make things very complicated Macro is basically a series of short cuts that allow us cut through the complication of aggregation

The Point of Macro This is one reason why macro can be controversial Plenty of room to disagree on the appropriateness of short cuts in any model There should not be disagreement because any Model should be “As simple as it needs to be – but no simpler” Empirically validated i.e. it really does explain the world (the scientific method)

Implication for the Course We will start with simple models and add to them as we need to understand more phenomena I will present empirical justification of each model i.e. show that it works under what circumstances

Ideology and Macro Macro much more than macro is influenced by ideology This is even true in the profession This should not happen if the scientific method is applied Although more difficult in economics than natural science I will point out ideological issues as we go See the current crisis

The Big Questions Three important Questions: How do we ensure High Employment / Low Unemployment ? How do we generate Price Stability / Low Inflation? How do we Growth the economy? Our concern is with the first two: the last is more a long-run matter and is left to Macro II

A Word on Growth Really Important question Why and how are some countries richer than others? Example of Zambia vs Korea Ireland vs Everybody pre Celtic Tiger

Our Focus: Economic Cycles Fluctuations in economic activity: GDP in Booms and Recessions Real GDP Actual Boom Trend Recession Time

Why Care? Economic Cycles may seem trivial in comparison to growth so why bother with them? Two reasons: Recessions may be short run phenomena but can cause a lot of pain if you are in them Misunderstanding cycles could lead to wrong policies that undermine long term growth

CYCLES AND UNEMPLOYMENT Unemployment tends to fall in booms and rise in recessions Real GDP Actual Trend Time U % Unemployment Rate (U%) Time

CYCLES AND INFLATION Inflation often falls in recessions and accelerates in booms Real GDP Actual Trend Time + Inflation Rate (%)  Time _

Cyclical Misery Over the cycle unemployment and inflation can cause plenty of human misery Misery index is the sum of the two Aside: later we will look at whether moderate unemployment and inflation are really costly As you know from first year A recession will tend to increase U and lower  A boom will tend to decrease U and raise  There would seem to be a trade-off between U and  While this may be true in the short-run, it may not be so in the long-run Investigating the nature of this trade-off an whether we can take advantage of it is a huge question we will spend a lot of time on it

STABILISATION – “NATURAL” GDP, etc. If cycle causes problems then we should stabilise the economy to be close to Trend GDP R J Gordon calls this “Natural” GDP Broadly this corresponds to a level of GDP where output and employment are such that inflation is stable. The corresponding “natural” rate of Unemployment is a concept we shall meet later. It depends on structural features of the labour market: labour mobility, wage flexibility, levels of unemployment benefits, etc. The Natural Unemployment rate is not fixed: it can be influenced by policy (and history).

STABILIZATION: TARGETS AND INSTRUMENTS A useful framework is to think in terms of (a) policy targets or objectives (b) policy instruments. A coherent policy must have at least as many targets as instruments. Think of dart boards and darts Our targets in the short/medium term are (i) Full-employment GDP (“natural” GDP) (ii) price stability, or low inflation Our instruments are Fiscal Policy Monetary Policy There will be trade-offs between the targets There will also be important questions about which policy one assigns to which target.

Example: The Current Crisis Talk of targets and instruments may sound abstract but is relevant to current situation and not understood by Merkozy Four targets: Control deficits Re-capitalise banks Provide Liquidity to markets Boost employment One Instrument allowed: Fiscal policy Others not allowed: Monetary policy