Core Macroeconomics, Hilary Term 2013
Week 2: Intertemporal macroeconomics - consumption
A significant fraction of our tutorial discussion this week will continue to focus on growth theory - in particular human capital, endogenous growth, or convergence. There is no new material to prepare but please do go back and review the readings and lecture notes you have on these topics, or consider doing some new reading.
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). You are already familiar with most of the issues from your work last year in intro macro, so now you are looking to deepen that understanding. 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). We will also omit real business cycle models this week, though we may come back to them in Week 3.
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, J., "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).
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
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.