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Updated A.Y. 2016-2017

Academic Year 2016-2017


Prof. Alessandro Piergallini
Email: alessandro.piergallini@uniroma2.it
Office Hours: by appointment


This course is concerned with macroeconomic theory and policy. We study the links between key macroeconomic variables such as output, unemployment, inflation, public debt and deficits, money supply, interest rates, exchange rates, asset prices, oil prices. We focus on the implications for business cycles and the design of fiscal, monetary, and exchange-rate policies.

We examine the topics from two perspectives:

1. Real-world issues and case studies using historical and contemporary data, with special reference to the current macroeconomic and financial crisis;

2. Analytical concepts and frameworks that enable us to deal with the interactions between goods, labor and assets markets.


At the end of the course, the students will be able to

1. analyze and discuss the connection between the main macroeconomic variables;

2. explain what are the main determinants of business cycle fluctuations;

3. examine how fiscal and monetary policies can affect real macroeconomic activity through their interaction with goods, labor, and assets markets;

4. evaluate theories on the basis of the empirical evidence;

5. use both theory and evidence to investigate the actual financial, economic, and debt crisis;

6. analyze and critically discuss actual problems that governments, central banks, and international institutions have to face;

7. investigate policies and strategies can macroeconomic policy makers adopt to solve economic and financial problems, and evaluate their strengths and weaknesses.


The course is divided into 10 topics. The scheme of the lectures is as follows:

1. Introduction to Macroeconomics
1.1 Introduction to the course.
1.2 Macroeconomic issues.
1.3 Real GDP, unemployment, inflation, asset prices, debt and deficits, interest rates, exchange rates, oil prices: An international comparison.
1.4 Empirical regularities.
1.5 The language of Macroeconomics.
1.6 Macroeconomic models: agents and markets.
1.7 Macroeconomic equilibria.
1.8 Budget constraints and the Walras law.
1.9 Flexible prices and the law of demand and supply.
1.10 Fixed prices and the effective demand principle.
1.11 Voluntary and involuntary unemployment.
1.12 Short run and long run.
1.13 Macroeconomic Schools.

2. Consumption and Economic Fluctuations
2.1 Aggregate expenditure and effective demand.
2.2 Stylized facts on consumption and investment.
2.3 The consumption function.
2.4 Microfoundations of the consumption function.
2.5 Consumption smoothing.
2.6 The Income-Expenditure (YE) model with households and firms.
2.7 The dynamic version of the YE model.
2.8 The Keynesian multiplier.
2.9 The YE model with production-lags.

3. Fiscal Policy
3.1 The YE model with households, firms, and the public sector.
3.2 Budgetary policies.
3.3 Fiscal deficits.
3.4 Fiscal deficits and the business cycle.
3.5 Cyclical deficits and structural deficits.
3.6 Fiscal policy and public debt dynamics.
3.7 Debt crises.
3.8 The case of balanced-budget policy rules.

4. Monetary Policy
4.1 Theories of investment.
4.2 The investment function.
4.3 Microfoundations of the investment function.
4.4 Investment volatility.
4.5 The YE model with endogenous investment: The IS schedule.
4.6 Comparative statics and comparative dynamics of the IS schedule.
4.7 Money and financial assets.
4.8 Monetary base and money supply.
4.9 Central Bank instruments.
4.10 Stylized facts on money demand.
4.11 Microfoundations of the money demand function.
4.12 The money demand function.
4.13 The LM schedule.
4.14 Comparative statics and comparative dynamics of the LM schedule.

5. Interactions between fiscal and monetary policy
5.1 The IS-LM model.
5.2 The dynamic version of the IS-LM model.
5.3 Fiscal policy.
5.4 Monetary policy.
5.5 Interactions between monetary and fiscal policies.
5.6 The zero-lower-bound problem.
5.7 Escaping liquidity traps: Fiscal stimulus vs. unconventional monetary policy.
5.8 Quantitative easing.

6. Exchange Rate Regimes and Macroeconomic Policies
6.1 Open economies.
6.2 The balance of payments.
6.3 Nominal and real exchange rates: definition and stylized facts.
6.4 Exchange-rate regimes.
6.5 The historical evolution of exchange-rate systems.
6.6 Globalization and the bipolar view.
6.7 Uncovered interest rate parity and purchasing power parity theories.
6.8 The IS-LM model with households, firms, the public sector, and the foreign
sector: Mundell-Fleming setups.
6.9 Implications for monetary, fiscal and exchange-rate policies.

7. Macroeconomic Policies and the Price Level
7.1 The IS-LM model with endogenous prices: The AD schedule.
7.2 The Keynes effect and the Pigou effect.
7.3 The AS schedule. Perfect vs. imperfect competition.
7.4 The AD-AS model.
7.5 Microfoundations of labour demand and labour supply.
7.6 Involuntary unemployment.
7.7 The AD-AS model in the long run.
7.8 Macroeconomic policies and full employment.
7.9 Income distribution.

8. Inflation
8.1 The AD-AS model in logarithmic terms.
8.2 Inflation theories.
8.3 Inflation costs.
8.4 The Phillips curve.
8.5 Preferences of the policy maker for the unemployment-inflation trade-off.
8.6 The optimal inflation rate.
8.7 Policy implications.
8.8 The AD-AS model with sticky wages.
8.9 Keynesians vs. Neoclassicals.
8.10 The pure Neoclassical AD-AS model.
8.11 Money neutrality.
8.12 Productivity shocks and real business cycles.
8.13 Stylized facts.

9. Expectations
9.1 Expectations.
9.2 Expectations and the Phillips curve: The Phelps-Friedman critique.
9.3 The Adaptive Expectations Hypothesis.
9.4 The AD-AS framework with adaptive expectations: The Monetarist model.
9.5 Implications of learning for inflation and business cycles.
9.6 The Rational Expectations Hypothesis.
9.7 The AD-AS framework with rational expectations: The Lucas model.
9.8 The policy ineffectiveness proposition.
9.9 The Lucas critique.

10. Optimal Policy: Discretion vs. Commitment
10.1 Expectations and Keynesian macroeconomics: The New Keynesian AS schedule.
10.2 Stabilization policies.
10.3 Time inconsistency.
10.4 Inflation bias.
10.5 Discretion vs. Commitment.
10.6 The disinflation issue.
10.7 Reputation, delegation, and independence of monetary policy.
10.8 The effects of unpredictable shocks: Discretion vs. Commitment revised.


Core Readings

1. The central learning resource is given by the Lecture Notes, which are available in the Section Materials. Students must accompany their study with the textbook Macroeconomics, Understanding the Global Economy (third edition, 2012) by David Miles, Andrew Scott and Francis Breedon. This is a widely used MBA macroeconomics textbook, which shows and explains several remarkable links between standard macroeconomic theories and historical as well as contemporary data.

2. Students might want to reinforce their study further with the textbook Macroeconomics (twelfth edition, 2013) by Rudiger Dornbusch, Stanley Fischer and Richard Startz. This is an extensively used intermediate level macroeconomics textbook, which adopts a traditional approach to the subject.

3. Students are also provided with some academic articles and policy reports, which are available in the same Section. Students are expected to study them as an essential part of the Course although they will find that some academic articles adopt more advanced techniques and display a greater level of conceptual difficulty than the Lecture Notes. That is the nature of academic articles. Students are however expected to understand and critically interpret their key points and arguments.

Topic 1

[1.1] Lecture Notes, pp. 1-26.

[1.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Chs 1, 2.

[1.3] S. Basu and A. M. Taylor (1999), Business Cycles in International Historical Perspective, Journal of Economic Perspectives 13, pp. 45-68.

[1.4] A. Shleifer (2009), The Age of Milton Friedman, Journal of Economic Literature 47, pp. 123-135.

[1.5] C. M. Reinhart and K. S. Rogoff (2008), Is the 2007 US Sub-Prime Financial Crisis So Different? An International Historical Comparison, American Economic Review 98, pp. 339-344.

[1.6] F. S. Mishkin (2011), Over the Cliff: From the Subprime to the Global Financial Crisis, Journal of Economic Perspectives 25, pp. 49-70.

Topic 2

[2.1] Lecture Notes, pp. 27-52.

[2.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Ch 10 (up to 10.7).

[2.3] M. Browning and T. F. Crossley (2001), The Lyfe-Cycle Model of Consumption and Saving, Journal of Economic Perspectives 15, pp. 3-22.

[2.4] J. M. Poterba (2000), Stock Market Wealth and Consumption, Journal of Economic Perspectives 14, pp. 99-118.

Topic 3

[3.1] Lecture Notes, pp. 53-64.

[3.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Chs 14, 18.

[3.3] J. Stiglitz (2008), The Triumphant Return of John Maynard Keynes, Project Syndicate, December.

[3.4] J. Stiglitz (2010), Principles and Guidelines for Deficit Reduction, The Roosevelt Institute, Working Paper 6, December.

[3.5] N. G. Mankiw (2010), Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009, Federal Reserve Bank of St. Louis Review, May/June, pp. 177-183.

[3.6] European Central Bank (2010), The Effectiveness of Euro Area Fiscal Policies, ECB Monthly Bulletin, July, pp. 67-83.

[3.7] P. R. Lane (2012), The European Sovereign Debt Crisis, Journal of Economic Perspectives 26, pp. 49-68.

[3.8] F. M. Martin and C. J. Waller (2012), Sovereign Debt: A Modern Greek Tragedy, Federal Reserve Bank of St. Louis Review, September/October, pp. 321-340.

[3.9] European Central Bank (2014), The Determinants of Euro Area Sovereign Bond Yield Spreads During the Crisis, ECB Monthly Bulletin, May, pp. 67-83.

Topic 4

[4.1] Lecture Notes, pp. 65-99.

[4.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Chs 10 (from 10.8 on), 13 (up to 13.2).

[4.3] C. Crowe and E. E. Meade (2007), The Evolution of Central Bank Governance around the World, Journal of Economic Perspectives 21, pp. 69-90.

[4.4] A. S. Blinder (2010), How Central Should the Central Bank Be?, Journal of Economic Literature 48, pp. 123-133.

[4.5] B. S. Bernanke (2013), A Century of US Central Banking: Goals, Frameworks, Accountability, Journal of Economic Perspectives 27, pp. 3-16.

[4.6] R. Reis (2013), Central Bank Design, Journal of Economic Perspectives 27, pp. 17-44.

Topic 5

[5.1] Lecture Notes, pp. 100-106.

[5.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Ch 13 (from 13.3 on).

[5.3] J. von Hagen (2009), The Monetary Mechanics of the Crisis, Policy Contributions 335, Bruegel.

[5.4] D. C. Wheelock (2010), Lessons Learned? Comparing the Federal Reserve's Responses to the Crises of 1929-1933 and 2007-2009, Federal Reserve Bank of St. Louis Review, March/April, pp. 89-107.

[5.5] G. Gorton and A. Metrick (2012), Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide, Journal of Economic Literature 50, pp. 128-50.

[5.6] B. S. Bernanke and A. S. Blinder (1988), Credit, Money, and Aggregate Demand, American Economic Review 78(2), pp. 435-439.

[5.7] B. S. Bernanke and M. Gertler (1995), Inside the Black Box: The Credit Channel of Monetary Policy Transmission, Journal of Economics Perspectives 9, pp. 27-48.

Topic 6

[6.1] Lecture Notes, pp. 107-141.

[6.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Chs 19, 21.

[6.3] IMF (2004), Classification of Exchange Rate Arrangements and Monetary Policy Frameworks. http://www.imf.org/external/np/mfd/er/2004/eng/0604.htm

[6.4] S. Fischer (2001), Exchange Rate Regimes: Is the Bipolar View Correct? Journal of Economic Perspectives 15, pp. 3-24.

[6.5] B. Laurence and E. G. de la Piedra (1998), Coordination of Monetary and Fiscal Policies, IMF Working Paper 98/25.

[6.6] European Central Bank (2012), The Monetary and Fiscal Policy Interactions in a Monetary Union, ECB Monthly Bulletin, July, pp. 51-64.

[6.7] R. Beetsma and M. Giuliodori (2010), The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research, Journal of Economic Literature 48, pp. 603-641.

Topic 7

[7.1] Lecture Notes, pp. 142-173.

[7.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Ch 7.

[7.3] D. Romer (2000), Keynesian Macroeconomics without the LM Curve, Journal of Economic Perspectives 14, pp. 149-169.

[7.4] O. J. Blanchard (2008), The Crisis: Basic Mechanisms, and Appropriate Policies, Massachusetts Institute of Technology - Working Paper 09-01.

[7.5] M. Woodford (2010), Financial Intermediation and Macroeconomic Analysis, Journal of Economic Perspectives 24, pp. 21-44.

[7.6] C. Dustmann, B. Fitzenberger, U. Schönberg and A. Spitz-Oener (2014), From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy, Journal of Economic Perspectives, pp. 167-188.

Topic 8

[8.1] Lecture Notes, pp. 174-199.

[8.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Chs 11, 12, 15 (up to 15.3).

[8.3] European Central Bank (2010), The ECB's Response to the Financial Crisis, ECB Monthly Bulletin, October, pp. 59-74.

[8.4] B. S. Bernanke (2012), Monetary Policy since the Onset of the Crisis, Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, U.S..

[8.5 ] J. L. Yellen (2014), Labor Market Dynamics and Monetary Policy, Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, U.S..

[8.6] L. E. Ohanian (2010), The Economic Crisis from A Neoclassical Perspective, Journal of Economic Perspective 24, 45-66.

[8.7] J. Cochrane (2012), Austerity or Stimulus: What We Need is Growth, IGM/Bloomberg Business Class Series, March 21.

Topic 9

[9.1] Lecture Notes, pp. 200-219.

[9.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Ch 15 (15.4, 15.5).

[9.3] M. Friedman (1968), The Role of Monetary Policy, American Economic Review 58, pp. 1-17.

[9.4] J. Cochrane (2009), Are We All Keynesian Now?, University of Chicago.

[9.5] J. Cochrane (2014), The Failure of Macroeconomics, Wall Street Journal, July 2.

[9.6] R. J. Gordon (2011), The History of the Phillips Curve: Consensus and Bifurcation, Economica 78, Special Issue: A. W. H. Phillips 50th Anniversary Symposium, pp. 10-50.

[9.7] S. Contessi, P. De Pace and L. Li (2014), An International Perspective on the Recent Behavior of Inflation, Federal Reserve Bank of St. Louis Review 3, pp. 267-294.

Topic 10

[10.1] Lecture Notes, pp. 220-230.

[10.2] D. Miles, A. Scott and F. Breedon (2012), Macroeconomics, Understanding the Global Economy, Ch 15 (15.6, 15.7).

[10.3] J. Gali' and M. Gertler (2007), Macroeconomic Modeling for Monetary Policy Evaluation, Journal of Economic Perspectives 21, pp. 25-45.

[10.4] M. Woodford (2007), The Case for Forecast Targeting as a Monetary Policy Strategy, Journal of Economic Perspectives 21, pp. 3-24.

[10.5] S. Fischer (1990), Rules Versus Discretion in Monetary Policy, in B. M. Friedman and F. H. Hahn (Ed.), Handbook of Monetary Economics, Amsterdam: North-Holland.

[10.6] M. Goodfriend (2007), How the World Achieved Consensus on Monetary Policy, Journal of Economic Perspectives, 21, pp. 47-68.

[10.7] A. W. Lo (2012), Reading about the Financial Crisis: A Twenty-One-Book Review, Journal of Economic Literature 50, pp. 151-78.

Optional Readings

Here below there is some useful reference for optional readings. These readings are not essential and not required for the final examination. Students might want to read some of them in order to strength their background or investigate a particular topic further.

1. Mathematical tools needed to undertake the Course can be found in

- A.C. Chiang, Fundamental Methods of Mathematical Economics, McGraw-Hill, 2005.
- M. Rosser, Basic Mathematics for Economists, Routledge, 2003.

2. For Intermediate Macroeconomics books using analytical frameworks that are comparable to those adopted in our Course, it is suggested:

- A. Abel, B. Bernanke and D. Croushore, Macroeconomics, Prentice Hall, 2016.
- O. J. Blanchard and D. R. Johnson, Macroeconomics, Prentice Hall, 2016.
- R. Dornbusch, S. Fischer and R. Startz, Macroeconomics, McGraw-Hill, 2013.
- R. T. Froyen, Macroeconomics: Theories and Policies, Prentice Hall, 2013.
- R. J. Gordon, Macroeconomics, Prentice Hall, 2014.
- S. D. D. Williamson, Macroeconomics, Prentice Hall, 2015.

3. Students are also provided with the following optional academic articles they can choose to read.

- F. Modigliani and S. L. Cao (2004), The Chinese Saving Puzzle and the Life-Cycle Hypothesis, Journal of Economic Literature 42, pp. 145-170.
- O. P. Attanasio and G. Weber (2010), Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy, Journal of Economic Literature 48, pp. 693-751.
- European Central Bank (2010), Euro Area Fiscal Policies and the Crisis, ECB Occasional Working Paper Series 109.
- European Central Bank (2011), Ensuring Fiscal Sustainability in the Euro Area, ECB Monthly Bulletin, April, pp. 61-77.
- European Central Bank (2014), Fiscal Multipliers and the Timing of Consolidation, ECB Monthly Bulletin, April, pp. 75-89.
- S. Contessi (2012), An Application of Conventional Sovereign Debt Sustainability Analysis to the Current Debt Crises, Federal Reserve Bank of St. Louis Review, May/June, pp. 197-220.
- J. Cochrane (2012), Inflation and Debt, National Affairs 9, pp. 56-78.
- C. Nickel, P. Rother and L. Zimmermann (2010), Major Public Debt Reductions: Lessons from the Past, Lessons for the Future, ECB Working Paper Series 1341.
- M. Feldstein (2010), What Powers for the Federal Reserve?, Journal of Economic Literature 48, pp. 134-145.
- P. Mizen (2008), The Credit Crunch of 2007-2008: A Discussion of the Background, Market Reactions, and Policy Responses, Federal Reserve Bank of St. Louis Review, September/October, pp. 531-567.
- S. Cecchetti (2009), Crisis and Responses: The Federal Reserve in the Early Stages of the Financial Crisis, Journal of Economic Perspectives 23, pp. 51-75.
- M. K. Brunnermeier (2009), Deciphering the Liquidity and Credit Crunch 2007-2008, Journal of Economic Perspectives 23, pp. 77-100.
- J. B. Taylor (2010), Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis, Federal Reserve Bank of St. Louis Review, May/June, pp. 165-176.
- J. B. Taylor (2007), Housing and Monetary Policy, in Housing, Housing Finance, and Monetary Policy, proceedings of FRB of Kansas City Symposium, Jackson Hole, WY, U.S., September.
- J. Cochrane (2009), Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?, University of Chicago.
- J. Cochrane (2011), Last Chance to Save the Euro, Wall Street Journal, September 29.
- A. Haldane and D. Quah (1999), UK Phillips Curves and Monetary Policy, Journal of Monetary Economics 44, pp. 259-278.
- N. G. Mankiw, R. Reis, J. Wolfers (2003), Disagreement about Inflation Expectations, in M. Gertler and K. Rogoff (ed.), NBER Macroeconomics Annual 2003, pp. 209-270.

4. For an advanced study of macroeconomic theory, it is finally suggested:

- F. C. Bagliano and G. Bertola, Models for Dynamic Macroeconomics, Oxford University Press, 2004.
- O. J. Blanchard and S. Fischer, Lectures on Macroeconomics, MIT Press, 1989.
- B. S. Heijdra and F. van der Ploeg, The Foundations of Modern Macroeconomics, Oxford University Press, 2002.
- D. Romer, Advanced Macroeconomics, McGraw-Hill, 2011.
- M. Wikens, Macroeconomic Theory: A Dynamic General Equilibrium Approach, Princeton University Press, 2012.


The exam is written. You are given 4 questions (2 theoretical questions and 2 exercises) to answer. The examination must be completed in two hours. I give equal weight to each question; therefore, you are advised to distribute your time approximately equally over the four questions. I wish to see evidence of your ability to understand theoretical principles and of your ability to critically discuss their application.