Department of Economics
EC2032
Macroeconomics & Finance
MODULE INFORMATION
Academic Year: 2009-10 Lectures: 18
Year: 2 Classes: 5
Credits: 15 Private Study: 87.5
Semester: 2 Total Hours: 112.5
MODULE LECTURERS
Lecturer: Dr Sara Lemos Room: AK 209
Telephone: (252)2480 Email:
Office Hours: To be Announced
MODULE AIMS
Main Purpose:
The main purpose of this module is to develop a deeper understanding of modern macroeconomic analysis and policymaking with emphasis to the commercial environment. This in turn will develop the ability to analyse critically the implications of international macroeconomic issues for business and financial decision-making.
Intended Learning Outcomes:
On completion of this module students should be able to:
¨ Explain the main determinants of money demand and money supply.
¨ Explain the determination of the nominal and real interest rates.
¨ Explain the operation of UK monetary policy, its main transmission mechanisms, and its implications for commercial activities.
¨ Explain the theories of inflation.
¨ Describe the main costs, to individual businesses and to the whole economy, associated with various forms of inflation.
¨ Describe the output-inflation trade-off and explain the role of inflationary expectations and different policy options in determining the speed and costs of adjustment.
¨ Explain the concept of time inconsistency and to demonstrate how policy credibility may provide a solution.
¨ Discuss the theoretical issues and empirical evidence concerning central banks independence and the associated economic outcomes to business and society.
¨ Describe the main linkages between financial markets, the business environment and international macroeconomic activity.
¨ Explain the main causes and consequences of stock market crashes.
¨ Discuss the role of financial development in promoting international economic growth.
¨ Explain the main determinants of business investment.
¨ Discuss the impact of macroeconomic policy on investment decisions.
¨ Discuss the impact of aggregate investment on the business cycle.
¨ Describe the link between budget deficits and government debt over time.
¨ Explain how the behaviour of consumers affects the impact of government debt on the economy.
¨ Discuss the main macroeconomic policy issues regarding budget deficits and the level of government debt and their importance to business.
Special Features:
Students will be encouraged to present answers to exercises on the problem sheets in classes, using both oral and visual methods of communication. Skill in independent thinking is enhanced by the consideration of articles that extend the scope of the lectures.
MODULE DELIVERY
Lectures:
To be Announced
Classes/Seminars:
Students will be allocated to classes, which take place fortnightly. Details on groups, times and locations will posted on the 2nd year notice board in the Economics Reception, on the 3rd floor of the Ken Edwards Building at the beginning of Semester 2. It is the student’s responsibility to ensure that they are attending the correct class. Attendance is compulsory and a register will be kept. It is also compulsory to the exercises prior to the tutorial.
ASSESSMENT
Students will have a one and a half-hour examination at the end of Semester 2. The examination paper will consist of two sections with three essay questions in each. Students must attempt one essay question from each section (equally weighted). A mock exam paper is attached. Past exam papers are available at the web-site (http://www.le.ac.uk/economics/teach/ec2032/ec2032.html).
Even though this exam counts for 100% of the total mark for the module, students’ learning process will be observed throughout the course, and in particular in the tutorials.
READING LIST
Core Reading:
The core reading list (below) refers to five textbooks, in order of preference, of which the first (Mankiw, 5th edition) is the one that was recommended for purchase in semester 1. However, no single textbook covers all the core material. Lecture Handouts will, from time to time, be given out in lectures and made available on the Module web-site over the course of the semester (http://www.le.ac.uk/economics/teach/ec2032/ec2032.html). Revision Notes will be made available, on the module website, at the completion of each topic. Students may save to disk or print off the various documents (in Acrobat .pdf format).
The lectures and core reading together constitute only an introduction to the subject; they are a foundation for private study and not a comprehensive summary of the material. Students are expected to undertake additional reading and study, using the supplementary reading list and useful general references below as starting points. However, these lists are not exhaustive. Students are encouraged to browse the library’s economics book and journal collections. Revising solely from lecture notes and textbooks is not sufficient preparation for the examination. Examiners require some evidence of independent thought and reading. However, the examination questions will be general enough for candidates to be able to write good answers from a wide variety of sources, and it is never essential to have read one particular book or paper. Class tutors will provide guidance on revision and examination techniques towards the end of the semester.
NGM Mankiw, N.G. (2002), Macroeconomics, Fifth Edition, Worth Publishers.
(see also the accompanying website http://bcs.worthpublishers.com/mankiw5/)
OBL Blanchard, O. (2003), Macroeconomics, Third International Edition, Prentice Hall.
(see also the accompanying website http://www.prenhall.com/blanchard)
DFS Dornbusch, R., Fisher, S. and Startz, R. (2001), Macroeconomics, Eighth International Edition, McGraw-Hill.
(see also the accompanying website http://www.mhhe.com/economics/dornbusch/)
DEL DeLong, J. B. (2002), Macroeconomics, McGraw-Hill.
(see also the accompanying website http://www.mhhe.com/economics/delong)
HVP Heidra, B.J. and van der Ploeg, F. (2002), Foundations of Modern Macroeconomics, Oxford University Press – more advanced and mathematical!
For an upto date guide to UK economic data, institutions and policy see Sawyer, M. (ed), The UK Economy, 15th edition, Oxford University Press.
See the module contents (below) for the suggested core reading for each section of the course.
Supplementary/Alternative Reading:
Supplementary reading lists for each section can be found in the module contents (below). The most rapid access to many of the journal articles listed is via their electronic version, although many will also be available in the Short Loan collection. To access the electronic version type in the name of the journal in the main library search facility. Click on PERIODICAL TITLE. When the journal page appears “Electronic access” will appear as one of the listed categories on the left-hand side, if available. Clicking on the highlighted text (the hyperlink) should take you to the journal web-site (or its publishers) from where you should be able to locate the article(s) of interest and read them on-line or print them off. Another source of articles online is at http://www.jstor.org/. In addition the following general references may be useful:
The National Institute Economic Review is in the library at PER 330 N2200. It is an excellent and authoritative regular guide to the general macroeconomic situation and prospects of the UK.
The Bank of England Quarterly Bulletin and Inflation Report is in the library at PER 330 B1200. Most recent issues contain discussion and research on issues raised in the lectures. The address for the Bank of England site on the internet is http://www.bankofengland.co.uk This will allow you to see the minutes from the monthly meetings of The Bank of England’s Monetary Policy Committee as well as other useful information and details of their working paper series. The Treasury’s internet address is http://www.hm-treasury.gov.uk
The OECD’s internet address is http://www.oecd.org
(The Organisation for Economic Co-operation and Development is a group of 29 industrialised countries, and its website provides a good source for comparative economic data.)
The World Bank’s internet address is http://www.worldbank.org
This is also a good source of comparative data.
Useful information relating to fiscal issues can be obtained from the Institute of Fiscal Studies whose address is http://www.ifs.org.uk/
Useful information relating to the European Union can be found at http://europan.eu.int/index-en.htm (The European Union’s server) and http://www.cec.org.uk (The European Commission’s Representation in the United Kingdom).
For more information on internet resources for Economics students see http://www.le.ac.uk/economics/info/useful.html
CALCULATOR
All students are expected to have their own non-programmable calculator that may be used in examinations. Currently this must be a Casio FX82 or FX83.
WHERE TO GO FOR HELP
In the first instance, students should see their Class tutors about any academic problems concerning the course. The Lecturer may subsequently be consulted about other module matters.
Personal problems affecting performance in the module should be brought to the attention of the student’s personal tutor as soon after they arise as possible.
MODULE CONTENTS
An asterisk (*) indicates supplementary reading papers that recommended to be read first. If an article is available in the Short Loan collection its X number is given in square brackets. In Topic 1 the relevant subsection is given in curly brackets.
1. Money and monetary policy (3 lectures)
1.1 The role of money
1.2 Money demand: theories and evidence
1.3 The components of money supply
1.4 The instruments of monetary policy
1.5 Money, prices and inflation (the Quantity theory of money)
1.6 Real and nominal interest rates (the Fisher effect)
NGM chs. 4.1 – 4.5, 18
DEL chs. 8.1-8.3
DFS chs. 15, 16, 18.3
OBL chs. 4, 14, 25.2, 25.3
HVP ch. 12
Supplementary Reading:
*M.J. Artis and M.K. Lewis (1991), Money in Britain, chs. 3 – 7.
*S. Dale and A. Haldane (1995), “Interest rates and the channels of monetary transmission: some sectoral evidence”, European Economic Review, vol. 39, no. 9, pp. 1611-1626. [X 20817]
*H. Dixon (1997) (ed.) “Controversy: Microfoundations and the demand for money”, Economic Journal, vol. 107, no. 443, July 1997, pp. 1169-1223. [X 20856]
D. Laidler (1993), The demand for money, 4th edition, [332.1 LAI].
Handbook of Monetary Economics, 1990, [332.1 HAN], pp. 299-356 – the chapter by Goldfeld and Sickel on “The demand for money”. [X 21812]
H.R. Vane and J.L . Thompson (1993), An Introduction to Macroeconomic Policy, 4th edition, chs. 3, 12.
2. inflation (3 lectures)
2.1 Measuring inflation: the RPI and its limitations
2.2 The costs of moderate inflation: anticipated and unanticipated
2.3 Hyperinflation: causes, consequences and cures
2.4 Phillips curve analysis: the inflation-unemployment trade-off
2.5 Inflationary expectations and the costs of reducing inflation
2.6 The optimal inflation rate and policy: gradualism versus cold turkey
NGM chs. 2.2, 4.6, 4.7, 13.2, Epilogue p.524
DEL chs. 2.4, 8.4, 12
DFS chs. 2.5, 6.2, 6.3, 7.2, 7.6-7.8, 18.4, 18.5
OBL chs. 2 (pp. 29-34), 8, 9, 23.3, 23.4, 25.1
Supplementary Reading:
M. Artis (1989), “Wage inflation” in Greenaway, D. (ed.) (1989), Current Issues in Macroeconomics, ch.5, pp. 91-109.
*Artis and Lewis (op. cit.) ch. 3.
R. Barro (1996), “Inflation and Growth”, Federal Reserve Bank of St. Louis Review [PER 330 F2920]
Bruno and Easterly (1996), “Inflation and Growth: in search of a stable relationship”, Federal Reserve Bank of St. Louis Review [PER 330 F2920]
L. Blow and I. Crawford (1999a), Cost-of –living indices and revealed preference, London: Institute for Fiscal Studies.
L. Blow and I. Crawford (1999b), “A non-parametric bound on substitution bias in the UK RPI”, Institute for Fiscal Studies working paper series no. 99/15, May, the full text cab be found at http://www.ifs.org.uk/research/workingpapers/wp9915.pdf
*R. Bootle (1981), “How important is it to defeat inflation? – the evidence”, The Three Banks Review, December. [X 08264]
*C. Briault (1995), “The costs of inflation”, Bank of England Quarterly Bulletin, Feb. [X 18013]
*J. Chadha, A. Haldane and N. Janssen (1998), “Shoe-leather costs reconsidered”, Economic Journal, vol. 108, no. 447, pp. 363-382. [X 20807]
R.W. Click (1998), “Seigniorage in a cross-section of countries”, Journal of Money, Credit and Banking, May, vol. 30, pp.154-171. [X 20816]
*R. Di Tella, R.J. MacCulloch and A.J. Oswald (2001), “Preferences over Inflation and Unemployment: evidence from surveys of happiness”, American Economic Review, vol. 91, no. 1, pp. 335- 341. [X 21876
*K. Dowd (1995), “The damage inflation does”, Economic Review, November. [X 17164]
P. Ferri (2000), “Wage dynamics and the Phillips curve”, ch. 5 in Backhouse, R.E. and Salanti, A. (eds.), Macroeconomics and the Real World volume 2: Keynesian Economics, Unemployment and Policy, Oxford. [330.104 MAC]
*S. Fisher, R. Sahay and C.A. Vegh (2002), “Modern Hyper- and High Inflations”, Journal of Economic Literature, vol. XL, no. 3, pp. 837-880.
T. Jenkinson (1996), Readings in Macroeconomics, chs. 8, 9
*B.R. Moulton (1996), “Bias in the Consumer Price Index – what is the evidence”, Journal of Economic Perspectives, vol. 10, pp.159-177. [X 20788]
L.B. Thomas Jr. (1999), “Survey measures of expected U.S. inflation”, Journal of Economic Perspectives, vol. 13, pp.125-144. [X 20787]
Vane and Thompson (op. cit.) ch. 8.
3. stabilisation policy (3 lectures)
3.1 The need for macroeconomic stabilisation policy
3.2 The time inconsistency of discretionary policy
3.3 The time inconsistency of optimal policy rules
3.4 Achieving policy credibility: independent central banks
3.5 Central bank independence and inflation rates: the evidence
NGM ch. 14, Epilogue p.523
DEL ch. 13, 16.2, 16.3
DFS ch. 8
OBL ch. 17.2, 24
HVP ch. 10
Supplementary Reading:
*A. Alesina and L.H. Summers (1993), “Central bank independence and macroeconomic performance: some comparative evidence”, Journal of Money Credit and Banking, May, pp. 151-162. [X 17802]
A.S. Blinder (1998), Central Banking in Theory and Practice, Cambridge: MIT Press (332.3 BLI).
*A.S. Blinder (2000), “Central-bank credibility: Why do we care? How do we build it?”, American Economic Review, vol. 90, no. 5, pp. 1421-1431. [X 22474]
A. S. Blinder et al.(2001), How Do Central Banks Talk?, Geneva: International Center for Money and Banking Studies and London: Centre for Economic Performance.
*B.S. Bernanke and F.S. Mishkin (1997), “Inflation targeting: a new framework for monetary policy?”, Journal of Economic Perspectives, vol. 11, pp.97-116. [X 20789]
M. Burda and C. Wyplosz (1997), Macroeconomics: a European text, 2nd edition, ch. 16.
*R. Clarida, J. Gali and M. Gertler (1999), “The science of monetary policy: a New Keynesian perspective”, Journal of Economic Literature, vol. 37, pp. 1661-1707. [X 20819]
D. Cobham (1997), “The post-ERM framework for monetary policy in the UK: bounded credibility”, Economic Journal, vol. 107, pp.1128-1141. [X 20808]
*Greenaway, D. (1994) (ed.), “Policy Forum: The banking system and monetary control”, Economic Journal, vol. 104, no. 427, November 1994, pp. 1422-1459.
* Greenaway, D. (1998) (ed.), “Policy Forum: The new monetary framework in the UK”, Economic Journal, vol. 108, no. 451, November 1998, pp. 1781-1825.
*V. Grilli, D. Maschiandro and G. Tabellini (1991), “Political and monetary institutions and public financial policies in industrial economies”, Economic Policy, vol. 13, pp. 341-392.
[X 20837]
F.E. Kydland and E.C. Prescott (1977), “Rules rather than discretion: the inconsistency of optimal plans”, Journal of Political Economy, vol. 85, pp. 473-493. [X 20846]
P. Lawler (2000), “Centralised wage setting, inflation contracts, and the optimal choice of central banker”, Economic Journal, vol. 110, no. 463, pp. 559-575. [X 20812]