Core Macroeconomics, Hilary Term 2012

Week 2: Intertemporal macroeconomics

An intertemporal approach to macroeconomics means careful modeling of forward-looking, optimising decisions by agents who trade off costs and benefits in different time periods. So it is a method rather than a topic. Our focus will be on consumption and related issues of fiscal policy (e.g. Ricardian equivalence), and to a lesser extent real business cycle models. Examples of intertemporal modeling that we will not address are investment and the full Ramsey model of economic growth with optimising households (hence endogenous savings).

Readings

Consider having a look at Burda & Wyplosz, Macroeconomics: a European Text , (5th ed.) Chs. 7-8. This is a first-year level text, but the treatment is good with a consistently intertemporal perspective on several different issues.

Carlin & Soskice, Ch. 7, should be your basic reference on consumption.

Romer, Advanced Macroeconomics, (3rd ed.) Ch. 7 is also good.

Muellbauer, J. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy , vol. 10 no. 2 (1994) pp. 1-41. (Also reprinted in Readings in Macroeconomics, Tim Jenkinson ed., OUP, 2nd ed. 2000.)

Muellbauer, John, "Housing, Credit, and Consumer Expenditure," Proceedings of a Federal Reserve Bank of Kansas City symposium, 2007. Also now a 2008 CEPR working paper. You should be able to download one of these versions.

There are three good short articles in a Journal of Economic Perspectives symposium on consumption, Spring 2001 issue (vol. 15, no. 2).

On real business cycles, start with the lecture notes and then look at the following.

Romer, Advanced Macroeconomics, (3rd ed.), Ch. 4, Sections 1-5.

Mullineaux, A. and D. Dickinson, "Equilibrium Business Cycles: Theory and Evidence", Journal of Economic Surveys, vol. 6 no. 4, (December 1992).

Consider the relevant chapter(s) of Stephen Williamson, Macroeconomics (Pearson/Addison-Wesley, 1ed. 2002). This is an undergraduate textbook at about the same level of difficulty as the books you used in prelims macro, e.g. Mankiw. It lays out a full intertemporal, optimising, market-clearing RBC model without calculus and with lots of diagrams. I have scanned Ch. 7 of the first edition (the book is now in its 4th ed.), which you can download here.

Assignment

The first student by alphabetical order in a group should write an essay on Question 1 below, the second on Question 2, the third on her/his choice. The questions are drawn from the Department's suggested topics. You should also be prepared to discuss real business cycle models and Ricardian Equivalence in tutorial.

1. "To call modern consumption theory a theory of 'consumption smoothing' is a misnomer: it implies much more variability in the consumption data than more traditional theories." Discuss.
2. Using the inter-temporal consumption model, discuss why interest rate reductions succeed in raising consumption growth in some instances, but not in others.