Macroeconomic Policy Analysis

Course Director: Lars Ljungqvist

Topics

This course will deal with contemporary problems in macroeconomic policy. Drawing upon cutting-edge research in macroeconomic theory, we will discuss (1) welfare states and European unemployment, (2) reforming social security, (3) monetary and fiscal causes of inflation, (4) credibility and macroeconomic policy, and (5) optimal taxation of labor and capital.

We will study explanations to the outbreak of persistently higher European unemployment since the 1980s, and confront the puzzling fact that the welfare states of Europe had much lower unemployment rates than the United States in the 1950s until the early 1970s.

Social security it is a ticking time bomb that is financially unsustainable in many countries with aging populations such as the United States, Germany and Japan. Besides the solvency issue, we will study how the common practice of financing social security on a pay-as-you-go basis inflicts large efficiency losses on an economy and how the system can be reformed.

Fiscal policy in a wider meaning has implications for what constitutes feasible monetary policies. We will study classic principles for coordinating monetary and fiscal policies, and use dramatic historical episodes of hyperinflations to shed light on monetary and fiscal dilemmas facing many developing countries today.

Credibility and reputation are two related concepts that are of great importance in macroeconomic policy making. The theory will help us to understand the policy options facing the Federal Reserve Open Market Committee (FOMC) in the United States and the European Central Bank (ECB) as well as the adverse dynamics that have lead to countries such as Argentina into currency and debt crises.

Taxation is a contentious political issue. Using modern macroeconomic theory we will study what constitutes an optimal tax policy.

Attendance is obligatory

Classroom interaction is vital for the learning experience in this course, so attendance is obligatory. Advance notification is required when family or professional reasons necessitate an absence.

The course is highly interactive and all course participants are expected to actively participate in classroom discussions.

Philosophy of the course

The philosophy of the course is to gain an understanding of central results in modern macroeconomics, and to acquire the insight and skills needed to apply that logical way of reasoning to important macroeconomic issues, not only to those discussed in the course.

The course material is challenging but relies primarily on clear logical reasoning supported by graphical and mathematical analysis. We will also engage in role playing in the models.

The course readings contain some academic articles but you are not supposed to digest all the algebra.

Student voices on course evaluation Spring 2022

• The course offers students a very comprehensive view of macroeconomic problems and teaches us how to tackle problems step by step.
• I think the course has made me think more structured about the topics. By using the models we have gone through rather than just human intuition I feel like I could confidently enter into a discussion about potential policies concerning unemployment, social security and taxation.
• I finally understand how economic models are used in practice and have slightly more confidence in questioning the actions of people making economic/political decisions. The knowledge can be applied to any other subject – from the financial perspective, it allows me to better understand the economic policy impact on financial markets and from an accounting perspective the economic event effect on corporate decision making.
• To summarize the [course] contributed to my set of skills in such a way as to improve my ability to think in a structured way about complex problems.
• I unintentionally became better at understanding the world as it is through the attempts to explain it.

Video presentation of the course (9 minutes)

Course administrators: Kathrine.Abelson@hhs.se, Nicola.Donohoe@hhs.se

• The primary objective is to study important policy issues in macroeconomics such as unemployment, social insurance, inflation and taxation. To do so, we need tools for our analyses.
• Thus, the secondary objective is to learn macroeconomic theory as taught at the PhD level but with fewer equations. Models are simplified to convey key economic forces at work.

An intermediate course in macroeconomics and/or microeconomics is required, or its equivalent. Course participants are expected to be well-versed in households' utility maximization and firms' profit maximization. Some knowledge in game theory is also useful.

The course packet contains the readings below marked by [*]. Items marked by [D] can be downloaded from the library web site.

Introduction

[D] Friedman, Milton (1968). The Role of Monetary Policy. American Economic Review 58(1): 1-17.

The welfare states and European unemployment

[D] Layard, Richard, Stephen Nickell and Richard Jackman (1991 or 2005). Unemployment: Macroeconomic Performance and the Labour Market. Oxford, U.K.: Oxford University Press

• Extract from chapter 1, p. 1-21, 60-76

To extract these pages from the eBook, download chapter 1 "Overview". Please note that there are bold page numbers in parentheses inserted into the text of the eBook, which show the location of the original printed pages (as referred to above).

[D] Ljungqvist, Lars and Thomas J. Sargent (2008). Two Questions about European Unemployment. Econometrica 76(1):1-29.

[*] Snowdon, Brian and Howard R. Vane (1999). Conversations with Leading Economists. Cheltenham, U.K.: Edward Elgar.

• James Tobin, p. 91, 103-104
• Milton Friedman, p.124, 139
• Robert E. Lucas, Jr., p. 145, 157-158
• John B. Taylor, p. 193, 202
• Olivier Blanchard, p. 229, 235-237
• Franco Modigliani, p. 241, 255-256
• Robert M. Solow, p. 270, 288

** Reforming social security**

[D] Council of Economic Advisors (1997). Economic Report of the President. Washington, D.C.: United States Government Printing Office

• Chapter 3, Economic Challenges of an Aging Population (p. 93-137)

[*] Auerbach, Alan J. and Laurence J. Kotlikoff (1998). Macroeconomics: An Integrated Approach. Second edition. Cambridge, MA: MIT Press.

• Extract from chapter 2, p. 29-46
• Extract from chapter 3, p. 53-66, 73-75
• Extract from chapter 6, p. 146, 151-160

[D] Kotlikoff, Laurence J., Kent Smetters and Jan Walliser (1999). Privatizing Social Security in the United States – Comparing the Options. Review of Economic Dynamics 2(3): 532-574.

[D] Storesletten, Kjetil (2000). Sustaining Fiscal Policy through Immigration. Journal of Political Economy 108(2): 300-323.

Monetary and fiscal causes of inflation

[*] Barro, Robert J. (1998). Macroeconomics. Fifth edition. Cambridge, MA: MIT Press.

• Extract from chapter 7, p. 237-263
• Extract from chapter 8, p. 269-298

[*] Sargent, Thomas J. (1993). Rational Expectations and Inflation. Second edition. New York: HarperCollins College Publishers.

• Chapter 3 The Ends of Four Big Inflations, (p. 43-115)
• “An open letter to the Brazilian Finance Minister”, (p. 251-255)

[D] Keynes, John Maynard (2010). Essays in Persuasion, Palgrave Macmillan.

• “An open letter to the French Minister of Finance”, (p. 76-82)

Financial crises and government bailouts

The following three articles from the Federal Reserve Bank of Minneapolis Quarterly Review can be downloaded 

[D] Diamond, Douglas W. and Philip H. Dybvig (2000). “Bank Runs, Deposit Insurance, and Liquidity.” Federal Reserve Bank of Minneapolis Quarterly Review 24(1): 14-23.

[D] Kareken, John H. (1990). “Deposit Insurance Reform; or, Deregulation Is the Cart, Not the Horse.” Federal Reserve Bank of Minneapolis Quarterly Review 14(1): 3-11.

[D] Boyd, John H. and Mark Gertler (1994). “The Role of Large Banks in the Recent U.S. Banking Crisis.” Federal Reserve Bank of Minneapolis Quarterly Review 18(1): 2-21.

Taxation of labor and capital

[D] Prescott, Edward C. (2002). Prosperity and Depression. American Economic Review 92(2): 1-15.

[D] Ljungqvist, Lars and Thomas J. Sargent (2011). “A Labor Supply Elasticity Accord?” American Economic Review 101(3): 487-491.

[D] Atkeson, Andrew, V.V. Chari and Patrick J. Kehoe (1999). Taxing Capital Income: A Bad Idea. Federal Reserve Bank of Minneapolis Quarterly Review 23(3): 3-17.

The final grade is based on the highest of two alternative calculations:

1. group problem sets (10%), mid-course exam (30%) and final exam (60%);
2. group problem sets (10%) and final exam (90%).

Both the mid-course exam and the final exam are compulsory. A student may under exceptional circumstances be excused from taking the mid-course exam. Classroom participation will be used to separate those on the borderline between grade levels.

Find the course schedule in TimeEdit

Have you been granted educational support because of a documented disability? If so, please contact the course director as soon as possible so that adequate accommodations can be made.

Contact specialneeds@hhs.se if you have questions about being granted educational support or need a copy of your educational support certificate.

For more information, visit the Specific Educational Needs page on the Student Hub (login required).