37
Macroeconomics: Fluctuations and Growth Francesco Franco 1 1 Nova School of Business and Economics Fluctuations and Growth, 2011 Francesco Franco Macroeconomics: Fluctuations and Growth 1/37

Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Embed Size (px)

Citation preview

Page 1: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Macroeconomics: Fluctuations and Growth

Francesco Franco1

1

Nova School of Business and Economics

Fluctuations and Growth, 2011

Francesco Franco Macroeconomics: Fluctuations and Growth 1/37

Page 2: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Outline

1 MotivationObjectives

2 Introduction to MacroeconomicsAggregate DemandAggregate Supply

3 The State Of MacroLessons from the crisis

Francesco Franco Macroeconomics: Fluctuations and Growth 2/37

Page 3: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Course ObjectivesThe scope of macro

This course aims to provide models that can be used to• understand a wide range of macroeconomic behavior and

policy issues,• explain how di�erent countries perform and how performance

changes over time

Francesco Franco Macroeconomics: Fluctuations and Growth 3/37

Page 4: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Course MethodComplementary methods

Figure: Structure of the course

• Empirical examples from Great Recession, EMU, US...• Data handling: IMF, Eurostat, OECD, Federal Reserve, ECB• Complementary readings:

• Daily: FT, WSJ, DE• Weekly: Economist• Books: I will provide a list of 3-4 books.

Francesco Franco Macroeconomics: Fluctuations and Growth 4/37

Page 5: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

World TourEurope

Figure: Real GDP growthFrancesco Franco Macroeconomics: Fluctuations and Growth 5/37

Page 6: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

World TourEurope

Figure: Growth, unemployment and inflation in the EU

Francesco Franco Macroeconomics: Fluctuations and Growth 6/37

Page 7: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

World TourUSA

Figure: Growth, unemployment and inflation in the USA

Francesco Franco Macroeconomics: Fluctuations and Growth 7/37

Page 8: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

World TourOil prices

Figure: Oil price dollars per barrel

Francesco Franco Macroeconomics: Fluctuations and Growth 8/37

Page 9: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

World TourUSA

Figure: Trade deficit percent of GDP

Francesco Franco Macroeconomics: Fluctuations and Growth 9/37

Page 10: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

World TourBrics

Figure: Output growth and inflation

Francesco Franco Macroeconomics: Fluctuations and Growth 10/37

Page 11: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Course ObjectivesModels & Macro questions

• The choice of models is motivated by their usefulness inframing key questions that face macroeconomists.

• How is output and employment determined?• Why does inflation occur and when should we worry about it?• How does government policy a�ect inflation and

unemployment?

Francesco Franco Macroeconomics: Fluctuations and Growth 11/37

Page 12: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Course ObjectivesMacro questions

• Why is unemployment higher in some countries than others?• How do trade, international financial markets and exchange

rates a�ect employment and inflation?• Why are some countries rich and others poor? Why are some

countries catching up to the leaders and others not?

Francesco Franco Macroeconomics: Fluctuations and Growth 12/37

Page 13: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Macroeconomics

DefinitionMacroeconomics studies the general “equilibrium” of the economy,namely the behavior of a number of di�erent kinds of economicactor or agent, such as households, firms, governments, unions,central banks has to be taken into account simultaneously.

Francesco Franco Macroeconomics: Fluctuations and Growth 13/37

Page 14: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

MacroconomicsThe tools of macro

Two broad kinds of models:• one is an integrated model for analyzing the

output-unemployment-inflation-exchange rate nexus and thebusiness cycles,

• the other is used for analyzing economic growth

Francesco Franco Macroeconomics: Fluctuations and Growth 14/37

Page 15: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

FluctuationsShocks

Figure: CPI Inflation

Francesco Franco Macroeconomics: Fluctuations and Growth 15/37

Page 16: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

FluctuationsShocks

Figure: Real GDP growth

Francesco Franco Macroeconomics: Fluctuations and Growth 16/37

Page 17: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Aggregate Demand

• Consumption demand• Investment demand• Demand stemming from the government• External demand: Net Exports

Francesco Franco Macroeconomics: Fluctuations and Growth 17/37

Page 18: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Aggregate Demand

• Short Run: the period during which output and employmentcan change but before prices and wages respond fully to thechanges in output and employment

Francesco Franco Macroeconomics: Fluctuations and Growth 18/37

Page 19: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

GrowthShocks

Figure: Real GDP per capitaFrancesco Franco Macroeconomics: Fluctuations and Growth 19/37

Page 20: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Aggregate Supply

• The factors of production, which are ‘labour’ and ‘capital’ andare supplied by workers and firms

• The technology through which the inputs of labour andcapital are transformed into output

• The way in which the incomes (wages and profits) thatworkers and firms receive are determined

Francesco Franco Macroeconomics: Fluctuations and Growth 20/37

Page 21: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Aggregate Supply

• The medium run: the period during which wages and pricescan respond to changes in output and employment

• Central role of supply especially labour market for technologyis given

• The long run: the period during which technology changes

Francesco Franco Macroeconomics: Fluctuations and Growth 21/37

Page 22: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Open Economy

Figure: Current Accounts

Francesco Franco Macroeconomics: Fluctuations and Growth 22/37

Page 23: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Methodology

• What kind of assumptions about how individuals behave mustbe made in order to generate the aggregate equations

• One set of macroeconomists will argue that a macro modelhas to be the exact aggregation of the correspondingmicroeconomy

• A second set of macroeconomists think that this commitmentis too high analytically and too narrow substantially

Francesco Franco Macroeconomics: Fluctuations and Growth 23/37

Page 24: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Methodology

• Models are necessary: there is nothing as useless as a map ofscale 1:1

• Mathematics: e�cient scrutiny for logical errors• “Enough real issues not to play mind games”

Francesco Franco Macroeconomics: Fluctuations and Growth 24/37

Page 25: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Course ObjectivesThe state of macro

The inability to predict the crisis lead to the Economist cover

Figure: The Economist, July 2009

Francesco Franco Macroeconomics: Fluctuations and Growth 25/37

Page 26: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisis

• Where we aware that the economy had set on anunsustainable path?

• Business Cycle was dead (the great moderation).• Were economists lacking the tools?

Francesco Franco Macroeconomics: Fluctuations and Growth 26/37

Page 27: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisHousing

Figure: Real estateFrancesco Franco Macroeconomics: Fluctuations and Growth 27/37

Page 28: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisInterest rates

Figure: Us Short Term Interest ratesFrancesco Franco Macroeconomics: Fluctuations and Growth 28/37

Page 29: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisSurpluses

Figure: SurplusesFrancesco Franco Macroeconomics: Fluctuations and Growth 29/37

Page 30: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisSurpluses

Figure: EU surpluses

Francesco Franco Macroeconomics: Fluctuations and Growth 30/37

Page 31: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisShadow Banking

Figure: Deregulation of the Financial SystemFrancesco Franco Macroeconomics: Fluctuations and Growth 31/37

Page 32: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisLeverage of the financial sector

Figure: Debt over GDP, source: Federal Reserve.

Francesco Franco Macroeconomics: Fluctuations and Growth 32/37

Page 33: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

It is the Finance “stupid”Leverage of the non financial sector

Figure: Debt over GDP, source: Federal Reserve.

Francesco Franco Macroeconomics: Fluctuations and Growth 33/37

Page 34: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisAutomatic Recovery

Figure: AS-AD

Francesco Franco Macroeconomics: Fluctuations and Growth 34/37

Page 35: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Lessons from the crisisRecovery

Figure: Trade Balance after financial crisis

Francesco Franco Macroeconomics: Fluctuations and Growth 35/37

Page 36: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Summary

• Macroeconomics is concerned with studying Business Cyclesand Growth.

• Models are the necessary map to find your way.• Mathematics allows a good consistency check.

• Outlook• We have to lay down a paradigm, building block by block our

model.• We will introduce extensions at the cost of other

simplifications to study interesting questions (EMU).

Francesco Franco Macroeconomics: Fluctuations and Growth 36/37

Page 37: Macroeconomics: Fluctuations and Growthdocentes.fe.unl.pt/~frafra/Site/course__Fluctuations_and_Growth... · Macroeconomics: Fluctuations and Growth ... Macroeconomics studies the

Readings I

Olivier Blanchard, Alessia Aminghini and Francesco GiavazziMacroeconomics, a European Perspective.

Prentice Hall, 2010, chapters 1.

Francesco Franco Macroeconomics: Fluctuations and Growth 37/37