Core Macroeconomics, Hilary Term 2014

Week 8: Theory or practice

This week you can choose between a theoretical topic - New Keynesian microfoundations - and a practical topic - British macro policy reforms.

Theory  Practice


In many ways, the New Keynesians accept the methodological premise of their opponents, namely that macro models should be dynamic and should be built up from microfoundations involving optimising agents with rational, forward-looking expectations. Into such models they introduce nominal (and sometimes real) rigidities to see what behaviour of macro aggregates results. This essay topic asks you to delve into New Keynesian theory in more detail than we have done thus far.


"Contracts are too short and menu costs are too small. Therefore price rigidity is not enough to explain large and prolonged recessions." (From the 2010 finals exam)


Romer, Ch. 6.
In Parts A and B, strike a balance between taking the maths seriously and getting lost in them. Part C is perhaps more difficult, especially the dynamic models in Sections 9-10, for which you should probably just read the "implications" subsection. Section 6.7 in Part B can be skipped.

Ball, L., Mankiw, N.G., and Romer, D., "The New Keynesian Economics and the Output-Inflation Trade-off", Brookings Papers on Economic Activity, 1988. (Reprinted as Ch. 6 in N.G. Mankiw and D. Romer (eds.) New Keynesian Economics, 1991.)

Mankiw, N.G., "Small Menu Costs and Large Business Cycles", Quarterly Journal of Economics, 1985 (also Ch. 1 in the Mankiw and Romer volume).

Mankiw, N.G., and Romer, D., "Introduction" in their edited volume cited above.

Prof. Wren-Lewis' Lectures 4 and 7, and the associated items from his reading list, including:

Symposium on "Keynesian Economics Today", Journal of Economic Perspectives, vol. 7, no. 1 (1993).
Clarida, R., Gali, J., and Gertler, M., "The Science of Monetary Policy: A New Keynesian Perspective", Journal of Economic Literature vol. 37 (1999) - early sections.
Woodford, M., "Revolution and Evolution in Twentieth-Century Macroeconomics", manuscript downloadable from his webpage .


The "practice" topic involves no new theory. Instead, it asks you to do some in depth reading and thinking about economic policy objectives and outcomes. The readings listed below are suggestions to get the research for your essay started.


Compare the supply-side reforms and demand-management policies of Thatcher/Major with those of Blair/Brown. Which were more successful in improving British macroeconomic performance?

Try to use the Carlin & Soskice framework in thinking about your answer. As this is a big topic for a small essay, you may consider narrowing your focus to a manageable subset of issues, for example a disproportionate emphasis on either demand management supply side policies, or perhaps a selection of certain issues that well illustrate the general thrust of policy.


Hopkin, J. and D. Wincott, "New Labour, Economic Reform and the European Social Model", The British Journal of Politics and International Relations, 2006, Vol 8, pp. 50-68.

Carlin, W. and D. Soskice, "German economic performance: disentangling the role of supply-side reforms, macroeconomic policy and coordinated economy institutions," Socio-Economic Review, vol. 7 (2009), pp. 67-99.

Lloyd, C., G. Mason and K. Mayhew (eds.). Low-Wage Work in the UK. New York: Russell Sage Foundation, 2008. Chapters 1 and 2.

Bean, C., and J. Symons, "Ten Years of Mrs. T", NBER Macroeconomics Annual, 1989, vol. 4.

Nickell, S., L. Nunziata, and W. Ochel, "Unemployment in the OECD since the 1960s: What Do We Know?", Economic Journal, vol. 115, no. 1 (January 2005), pp. 1-27.

Crafts, N.F.R. The Conservative government's economic record, an end of term report.London: Institute of Economic Affairs, 1998.

Crafts, N.F.R., "Was the Thatcher experiment worth it? British economic growth in a European context", CEPR Discussion Paper no. 710, 1992.

Card, D. and R. Freeman, "What have two decades of British economic reform delivered?", NBER Working Paper no. 8801, 2002.

Cobham, D.The making of Monetary Policy in the UK, 1975-2000. Wiley, 2002.

Nickell, S., "The Assessment: the Economic Record of the Labour Government since 1997," Oxford Review of Economic Policy, vol. 18 no. 2 (Summer 2002).

Barrell, R., S. Kirby, R. Metz, and M. Weale, "The Labour Government's Economic Record and Economic Prospects," National Institute Economic Review, no. 192 (April 2005).

Bell, D., and D. Blanchflower, "UK Unemployment in the Great Recession," National Institute Economic Review, no. 214 (October 2010).

Elsby, M., and J. Smith, "The Great Recession in the UK Labour Market: A Transatlantic Perspective," National Institute Economic Review, no. 214 (October 2010).

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