Core Macroeconomics, Hilary Term 2013

**Week 1:** Economic Growth

Growth theory is fascinating, but not easy. What makes it challenging is that the models are dynamic, meaning explicitly describing how variables change over time. This makes it technically more difficult than a comparative static model like IS-LM.

Concentrate first on learning well the basic Solow model with technical progress. (The model without technical progress cannot explain sustained growth and is taught only for its usefulness in building up to the model with technical change.) Without losing track of the important policy-relevant points (e.g. the savings rate does not affect the rate of growth in the long-run), do make an effort to understand the maths. Once you are comfortable with the Solow model, then turn to endogenous growth and the empirical evidence on growth.

Readings

Start with whatever textbook you liked best in introductory macro. Mankiw,
Burda & Wyplosz, De Long, Blanchard, and Jones all have good chapters on growth. The model
they introduce really is the same model as in the more advanced books. The difference
is simply the level of detail and range of issues covered. Also, these books use
discrete time rather than continuous, but for our purposes this is not significant.

I would then proceed to the lecture notes, which can be downloaded from the usual site.

The relevant chapters of Carlin & Soskice are 13-14, but I cannot recommend this as your
starting point. I find these chapters a difficult read. (Also, there are a handful of errors,
for example in Fig. 14.1. I believe you can download an errata corrige sheet for the book
from the publisher.)

A book you probably did not encounter last year is *Economic Growth* by David Weil.
Really it is a mix of development economics and growth. It does not offer a compact
treatment of the issues we are interested in, which are spread across several different chapters.
But it is full of interesting data, facts, and discussions of issues such as population growth.

Consider in particular:

Jones, Charles. *Introduction to Economic Growth*. New York; London : W.W. Norton, 2002 (2nd ed.).
Jones is a short, very readable book. Chapters 1-3 give a quick introduction, the Solow
model, human capital, and some empirics. Later chapters cover endogenous growth.
Jones has a good chapter on endogenous growth, some of which is understandable, in the
*Handbook of Economic Growth*, vol. 1B, Ch. 16 "Growth and Ideas". You should have
online access via the library's website.

For more advanced texts, in addition to Carlin & Soskice you could consider a range of
advanced macro and specialist growth theory texts.

One possibility is

Romer, David. *Advanced Macroeconomics*, Chs. 1-3.

Romer is good, but in parts technically difficult, esp. Ch. 2. So I would start with something
else and then consult Romer in search of a different perspective, or different empirical examples.

There are growth theory texts by Barro & Sala-i-Martin, Aghion & Howitt, and Acemoglu.
These are all good, but I'm not sure they offer a better treatment of the issues you need
to understand at this point, and their insights are less accessible.

Here are two suggestions for literature on growth theory and evidence:

Temple, J. "The New Growth Evidence," *Journal of Economic Literature*, vol. 37, no. 1
(March 1999), pp. 112-56.

Crafts, Nick, "'Post-neoclassical Endogenous Growth Theory': What Are its Policy Implications?",
*Oxford Review of Economic Policy*, vol. 12 (1996), no. 2 pp. 30-47.

There is also useful material on the empirics of economic growth in the
*Handbook of Economic Growth* vol. 1A.

Assignment

The following topics are drawn from the Department's suggested questions, and
are typical of the sort of shorter essays you could expect on Part A of the exam.
If you are the first student in your group by alphabetical order (see the course
home page to check), please prepare written answers to numbers 1, 3, and 5.
The second student should answer nos. 2, 4, and 6. The third should answer nos. 2, 3, and 7.

1. Explain the Golden Rule in a Solow-Swan model with exogenous savings.
Does the concept of a Golden Rule still apply if savings are endogenous?
Is it more realistic to assume exogenous or endogenous savings?

2. An economy is at steady state in the Solow-Swan model.
Discuss the short and long run implications of i) a rise in population growth, and
ii) a decrease in the rate at which capital depreciates.

3. Using the Solow-Swan model, explain how taxation might affect steady state outcomes.
Can taxation affect growth rates?

4. Explain why scale effects are important in endogenous growth models.

5. Compare and contrast Paul Romer's and Charles Jones' R&D growth models.

6. The Solow-Swan model, and most endogenous growth models, are closed economy models.
How, if at all, can they help us understand a global world?

7. What are the main mechanisms at work in open economy endogenous growth models?