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ECON 20020 Macroeconomics 1

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.

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ECON 20020 Macroeconomics 1

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  1. ECON 20020Macroeconomics 1

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

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

  4. Reading Material • Notes will be posted on Blog (see below) • Main Text: • Robert J Gordon, Macroeconomics, Pearson International 11thedn; • 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

  5. 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

  6. 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

  7. My Blog • Old version of course in on blackboard • No longer updated • New material posted on my blog • Vincenthogan.ie • What’s the difference?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!

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

  9. 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

  10. 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%

  11. 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

  12. 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)

  13. 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

  14. 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

  15. 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

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

  17. Our Focus: Economic Cycles • Fluctuations in economic activity: GDP in Booms and Recessions Real GDP Actual Boom Trend Recession 0 Time

  18. 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

  19. CYCLES AND UNEMPLOYMENT Unemployment tends to fall in booms and rise in recessions Real GDP Actual Trend 0 Time U % Unemployment Rate (U%) Time 0

  20. CYCLES AND INFLATION Inflation often falls in recessions and accelerates in booms Real GDP Actual Trend 0 Time + Inflation Rate (%)  0 Time _

  21. 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

  22. 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).

  23. 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.

  24. 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

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