1、Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-1CHAPTER 17The Future of MacroeconomicsCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-2Questions What might the future of macroeconomics bring?How might the macroeconomics taught two decades from now be di
2、fferent from the macroeconomics taught today?What have been the principal changes in the way macroeconomics is taught over the past twenty years?Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-3Questions What additional changes took place twenty years before that-from roughly
3、1960 to roughly 1980?What direction will macroeconomics take if the real business cycle research program is successful?What direction will macroeconomics take if the new Keynesian research program proves successful?Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-4Questions How
4、 will economists understand the foundations behind the power of monetary policy?Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-5The Past of Macroeconomics A 1936 book by John Maynard Keynes shifted economic research and macroeconomic thought into new and different directionst
5、he role of expectations of future profits in determining investmentthe volatility of expectations of profitsthe power of the government to affect the economy through policythe multiplier processCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-6The Past of Macroeconomics After W
6、orld War II,more macroeconomic theory was developedthe IS-LM model was createdthe relationship between interest rates and the money supply was investigatedthe difference between the behavior of the macroeconomy in the flexible-price long run and the fixed-price short run was clarifiedCopyright 2002
7、by The McGraw-Hill Companies,Inc.All rights reserved.17-7The Past of Macroeconomics But macroeconomics theory in 1960 was still incompleteno discussion of the relationship between production and inflationno detailed model of expectationsthe short run was seen as lasting for decadesfiscal policy was
8、emphasized,while the role of monetary policy was downplayedestimates of the multiplier were much higher than we believe now to be correctCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-8The Past of Macroeconomics Between 1960 and 1980,two powerful critiques of the conventional
9、 wisdom of macroeconomics occurredthe first was by Milton Friedman the standard models overestimated the governments ability to control the economy the standard models overestimated the power of fiscal policy and underestimated the power of monetary policy the money supply tells us most of what we n
10、eed to know about how policy is working there is a natural rate of unemploymentCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-9The Past of Macroeconomicsthe second was by Robert Lucas Keynesian economics fails to think through the importance of expectations systematic changes
11、 in economic policy would change the parameters of the consumption and investment functions as well as the location of the Phillips curveCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-10The Past of Macroeconomics The late 1980s and 1990s were a time of idea generation and exp
12、lorationmacroeconomists explored and tested a large number of different ideas and modelsthe mainstream policy-analytic position of macroeconomists did not shift muchCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-11The Future of Macroeconomics:Real Business Cycles?Keynesian an
13、d monetarist economists believe that there are two key elements to understanding business cyclesthe determinants of aggregate demandthe division of changes in nominal aggregate demand into changes in production and changes in pricesCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.
14、17-12The Future of Macroeconomics:Real Business Cycles?Real business cycle economists believe that changes in nominal aggregate demand affect output and employment only slightly and have the most impact on prices Real business cycle theory begins with the assumption that the same theory that determi
15、nes what happens in the long run should be applied to fluctuations in the short runCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-13The Future of Macroeconomics:Real Business Cycles?While real business cycle economists believe that prices can be rigid,they believe that this s
16、luggishness of prices is not very relevantthey assume that it is a reasonable first-approximation to suppose that the money supply and the level of potential output determine the price levelthe level of potential output is more-or-less equal to actual real GDPCopyright 2002 by The McGraw-Hill Compan
17、ies,Inc.All rights reserved.17-14The Future of Macroeconomics:Real Business Cycles?Real business cycle economists believe in the classical dichotomyreal variables effectively determine the values of real quantities like real GDP even in the short runnominal variables determine the values of nominal
18、quantities like the price levelCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-15The Future of Macroeconomics:Real Business Cycles?Real business cycle theory assumes that the level of output will vary with shocks to the economyadverse cost shocks lead to a recession as individ
19、uals should spend less time working because it is not profitablefavorable cost shocks lead to a boom period because it is advantageous to produce as much as possibleCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-16Problems of Real Business Cycle Theory Unemploymentreal busine
20、ss cycle theory assumes that the total hours worked at any moment is largely determined by how many hours it makes sense for people to workbut when work hours fall,it is not because people have chosen to work shorter shifts and avoid overtime it is because they have become unemployedCopyright 2002 b
21、y The McGraw-Hill Companies,Inc.All rights reserved.17-17Problems of Real Business Cycle Theory Technology and Real Business Cyclesaccording to real business cycle theory,production fluctuates because of the changing value of output and the changing productivity of the economy more is produced when
22、technology rises recessions occur when cost increases make it inefficient to run factories at near capacitycritics claim that cost increases like the 1973 oil price shock are the exception rather than the ruleCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-18Problems of Real B
23、usiness Cycle Theory Money and Business Cyclesreal business cycle theorists tend to argue that monetary policy has little impact on production and employment fluctuations in the money stock and real interest rates are more reactions to changes already taking placethe Federal Reserve believes that it
24、 affects the level of interest rates and that its decisions cause changes in production and employmentCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-19The Future of Macroeconomics:New Keynesian Economics Since the 1930s,mainstream macroeconomics has attributed the sluggishnes
25、s of aggregate supply to stickiness in wages and prices Therefore,fluctuations in nominal aggregate demand cause fluctuations in output and employmentCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-20The Future of Macroeconomics:New Keynesian Economics Where does this stickine
26、ss and slow adjustment of wages and prices come from?menu costs it is costly for businesses to change pricesstaggered prices and coordination failures a firms best choice for its price may depend on the prices that other firms are charging this means that wages and prices may exhibit inertiaCopyrigh
27、t 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-21Debts and Deficits:Ricardian Equivalence If the government runs a budget deficit,it will make up the deficit by borrowing money now and implicitly committing to raise taxes to repay the debt at some time in the futureCopyright 2002 by
28、The McGraw-Hill Companies,Inc.All rights reserved.17-22Debts and Deficits:Ricardian Equivalence Economist Robert Barro argues that consumers will see the budget deficit as an increase in future taxes and cut back on consumptionwhat matters for the determination of consumption spending this year is n
29、ot what taxes are levied on you this year,but what all the changes in government policy tell you about stream of taxes this year and in the futureCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-23Debts and Deficits:Ricardian Equivalence Many economists believe that Ricardian e
30、quivalence does not hold for a number of reasons myopialiquidity constraintspeople are differentCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-24Consumption and Saving In the early 1900s,the marginal propensity to consume was highpeople were liquidity constrained The financia
31、l system in the past 50 years has become much more flexibleeconomic theory would predict that the marginal propensity to consume would decline and the multiplier process would be more or less irrelevant to aggregate demandCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-25Consu
32、mption and Saving But,consumption falls significantly when the economy goes into recession Why?one possibility is that consumers are both impatient and risk averseanother possible explanation is that current income is a good proxy for permanent incomeanother suggestion is for economists to focus on
33、what psychologists have to say about how humans reasonCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-26Does Monetary Policy Have a Long-Run Future?Economists have tended to assume that monetary policy is powerful and that the reasons for its power are uninteresting The future
34、 evolution of the financial system may undermine the sources of influence that monetary policy today possessesCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-27Does Monetary Policy Have a Long-Run Future?Forecasting the future of monetary policy will require a deeper knowledge
35、 and better models of the sources of central bank power than macroeconomists currently possessCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-28Chapter Summary Modern macroeconomics has its origin in the“Keynesian”theories of the Great Depression and post-WWII era Modern macro
36、economics was reforged by the monetarists under Milton Friedman in the 1960s and 1970s,and by the rational expectations economists led by Robert Lucas in the 1970s and 1980sCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-29Chapter Summary Perhaps the focus on aggregate demand
37、will turn out in the long run to have been a false roadperhaps a better theory of the macroeconomy can be built up out of the theory of real business cycles in the Schumpeterian traditionCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-30Chapter Summary Perhaps the future of ma
38、croeconomics lies in a more detailed investigation of aggregate supplyperhaps uncovering the reason why prices are sticky will lead to the next wave of progress in macroeconomicsCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-31Chapter Summary The entire conventional analysis
39、of debts and deficits is under challenge by Robert Barro,who argues that individuals are far-sighted and closely linked,and that they take action to neutralize the effects of many government policies The conventional analysis of consumption-the permanent income hypothesis-is also under challenge by
40、more psychological approachesCopyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.17-32Chapter Summary The other possible interesting direction in which macroeconomics might evolve involves the future of monetary policyhow will the coming of the“new economy”and the changing institutional framework of transactions and settlements affect the power of monetary policy?
