Macroeconomics, Eighth Edition
By Olivier Blanchard
Contents:
Preface 13
About the Author 18
THE CORE
Introduction 19
Chapter 1 A Tour of the World 21
1-1 The Crisis 22
1-2 The Euro Area 24
Can European Unemployment Be Reduced? 26 • What Has the Euro Done for Its Members? 27
1-3 The United States 28
Do Policymakers Have the Tools to Handle the Next Recession? 30
How Worrisome Is Low Productivity Growth? 31
1-4 China 32
1-5 Looking Ahead 34
Appendix 1: Where to Find the Numbers 37
Appendix 2: What Do Macroeconomists Do? 37
Chapter 2 A Tour of the Book 39
2-1 Aggregate Output 40
GDP: Production and Income 40 Nominal and Real GDP 42 • GDP: Level versus Growth Rate 44
2-2 The Unemployment Rate 45
Why Do Economists Care about Unemployment? 46
2-3 The Inflation Rate 47 The GDP Deflator 47 • The Consumer Price Index 49 • Why Do Economists
Care about Inflation? 50
2-4 Output, Unemployment, and the
Inflation Rate: Okun’s Law and the
Phillips Curve 51
Okun’s Law 51 • The Phillips Curve 52
2-5 The Short Run, the Medium Run,
and the Long Run 53
2-6 A Tour of the Book 54
The Core 55 • Extensions 55
Back to Policy 55 • Epilogue 56
Appendix: The Construction of Real GDP
and Chain-Type Indexes 60
The Short Run 63
Chapter 3 The Goods Market 65
3-1 The Composition of GDP 66
3-2 The Demand for Goods 67
Consumption (C) 68
Investment (I) 70
Government Spending (G) 70
3-3 The Determination of Equilibrium Output 71
Using Algebra 72 • Using a
Graph 73 • Using Words 75 • How
Long Does It Take for Output to Adjust? 76
3-4 Investment Equals Saving: An
Alternative Way of Thinking about
Goods-Market Equilibrium 78
3-5 Is the Government Omnipotent? A Warning 80
Chapter 4 Financial Markets I 87
4-1 The Demand for Money 88
Deriving the Demand for Money 89
4-2 Determining the Interest Rate: I 91
Money Demand, Money Supply, and the Equilibrium Interest Rate 91 • Monetary Policy and Open Market Operations
93 Choosing Money or Choosing the Interest Rate? 95
4-3 Determining the Interest Rate: II 96
What Banks Do 96 • The Demand for and Supply of Central Bank Money 98 • The Demand for Central
Bank Money 98 • The Federal Funds Market and the Federal Funds Rate 99
4-4 The Liquidity Trap 101
Chapter 5 Goods and Financial Markets: The IS-LM Model 107
5-1 The Goods Market and the IS Relation 108
Investment, Sales, and the
Interest Rate 108 • Determining
Output 109 • Deriving the IS
Curve 111 • Shifts of the IS
Curve 111
5-2 Financial Markets and the LM Relation 112
Real Money, Real Income, and the Interest Rate 112 • Deriving the LM Curve 113
5-3 Putting the IS and LM Relations Together 114
Fiscal Policy 114 • Monetary Policy 116
5-4 Using a Policy Mix 116
5-5 How Does the IS-LM Model Fit the Facts? 120
Chapter 6 Financial Markets II: The Extended IS-LM Model 127
6-1 Nominal versus Real Interest Rates 128
Nominal and Real Interest Rates in the United States since 1978 130 • Nominal and Real Interest
Rates: The Zero Lower Bound and Deflation 131
6-2 Risk and Risk Premia 132
6-3 The Role of Financial Intermediaries 133
The Choice of Leverage 134 • Leverage and Lending 135
6-4 Extending the IS-LM Model 137
Financial Shocks and Policies 139
6-5 From a Housing Problem to a Financial Crisis 140
Housing Prices and Subprime Mortgages 140 • The Role of Financial
Intermediaries 141 • Macroeconomic
Implications 143 • Policy Responses 143 The Medium Run 151
Chapter 7 The Labor Market 153
7-1 A Tour of the Labor Market 154
The Large Flows of Workers 154
7-2 Movements in Unemployment 157
7-3 Wage Determination 159
Bargaining 160 • Efficiency
Wages 160 • Wages, Prices, and
Unemployment 162 • The Expected
Price Level 162 • The Unemployment
Rate 163 • The Other Factors 163
7-4 Price Determination 163
7-5 The Natural Rate of Unemployment 164
The Wage-Setting Relation 164 • The
Price-Setting Relation 165 • Equilibrium
Real Wages and Unemployment 166
7-6 Where We Go from Here 167
Appendix: Wage- and Price-Setting
Relations versus Labor Supply and Labor Demand 172
Chapter 8 The Phillips Curve, the Natural Rate of Unemployment, and Inflation 173
8-1 Inflation, Expected Inflation, and Unemployment 174
8-2 The Phillips Curve and Its Mutations 176
The Original Phillips Curve 176 • The
De-anchoring of Expectations 176 • The
Re-anchoring of Expectations 179
8-3 The Phillips Curve and the Natural Rate of Unemployment 180
8-4 A Summary and Many Warnings 182
Variations in the Natural Rate over Time 183 • Variations in the Natural Unemployment Rate across Countries 183 •
High Inflation and the Phillips Curve 184 • Deflation and the Phillips Curve 187
Appendix: Derivation of the Relation Between Inflation, Expected Inflation, and Unemployment 193
Chapter 9 From the Short to the Medium Run: The IS-LM-PC Model 195
9-1 The IS-LM-PC Model 196
9-2 From the Short to the Medium Run 199
9-3 Complications and How Things Can Go Wrong 201
The Zero Lower Bound and Deflation Spirals 202
9-4 Fiscal Consolidation Revisited 203
9-5 The Effects of an Increase in the Price of Oil 207
Effects on the Natural Rate of Unemployment 208
9-6 Conclusions 210
The Short Run versus the Medium Run 212 • Shocks and Propagation Mechanisms 212
The Long Run 217
Chapter 10 The Facts of Growth 219
10-1 Measuring the Standard of Living 220
10-2 Growth in Rich Countries since 1950 223
The Large Increase in the Standard
of Living since 1950 225 • The
Convergence of Output per Person 226
10-3 A Broader Look across Time and Space 227
Looking across Two Millennia 227
Looking across Countries 227
10-4 Thinking about Growth: A Primer 230
The Aggregate Production
Function 230 • Returns to Scale and
Returns to Factors 231 • Output per
Worker and Capital per Worker 231
The Sources of Growth 232
Chapter 11 Saving, Capital Accumulation, and Output 237
11-1 Interactions between Output and Capital 238
The Effects of Capital on Output 238
The Effects of Output on Capital
Accumulation 239 • Output
and Investment 239 • Investment and
Capital Accumulation 240
11-2 The Implications of Alternative Saving Rates 241
Dynamics of Capital and Output 241
The Saving Rate and Output 243
The Saving Rate and Consumption 246
11-3 Getting a Sense of Magnitudes 248
The Effects of the Saving Rate on Steady-
State Output 250 • The Dynamic
Effects of an Increase in the Saving
Rate 251 • The US Saving Rate and the Golden Rule 253
11-4 Physical versus Human Capital 254
Extending the Production Function 254
Human Capital, Physical Capital, and
Output 255 • Endogenous Growth 256
Appendix: The Cobb-Douglas Production
Function and the Steady State 259
Chapter 12 Technological Progress and Growth 261
12-1 Technological Progress and the Rate of Growth 262
Technological Progress and the Production Function 262 • Interactions
between Output and Capital 264 Dynamics of Capital and
Output 266 • Back to the Effects of the Saving Rate 267
12-2 The Determinants of Technological Progress 268
The Fertility of the Research Process 269
The Appropriability of Research Results 270 • Innovation versus Imitation 272
12-3 Institutions, Technological Progress, and Growth 273
Appendix: How to Measure Technological
Progress, and the Application to China 280
Chapter 13 The Challenges of Growth 283
13-1 The Future of Technological Progress 284
13-2 Robots and Unemployment 285
13-3 Growth, Churn, and Inequality 287
The Increase in Wage Inequality 289
The Causes of Increased Wage Inequality 290 • Inequality and the Top 1% 291 • Growth and Inequality 292
13-4 Climate Change and Global Warming 295
EXTENSIONS
Expectations 303
Chapter 14 Financial Markets and Expectations 305
14-1 Expected Present Discounted Values 306
Computing Expected Present
Discounted Values 306 • A General
Formula 307 • Using Present Values:
Examples 308 • Constant Interest
Rates 308 • Constant Interest Rates
and Payments 308 • Constant Interest
Rates and Payments Forever 309 • Zero
Interest Rates 309 • Nominal versus Real
Interest Rates and Present Values 309
14-2 Bond Prices and Bond Yields 310
Bond Prices as Present Values 312
Arbitrage and Bond Prices 313 • From
Bond Prices to Bond Yields 314
Reintroducing Risk 315 • Interpreting the Yield Curve 316
14-3 The Stock Market and Movements in Stock Prices 317
Stock Prices as Present Values 318 • The
Stock Market and Economic Activity 320
A Monetary Expansion and the Stock
Market 321 • An Increase in Consumer
Spending and the Stock Market 322
14-4 Risk, Bubbles, Fads, and Asset Prices 323
Stock Prices and Risk 324 • Asset
Prices, Fundamentals, and Bubbles 324
Appendix: Deriving the Expected Present
Discounted Value Using Real or Nominal
Interest Rates 330
Chapter 15 Expectations, Consumption, and Investment 331
15-1 Consumption 332
The Very Foresighted Consumer 332
An Example 333 • Toward a More
Realistic Description 334 • Putting
Things Together: Current Income,
Expectations, and Consumption 337
15-2 Investment 338 Investment and Expectations
of Profit 339 • Depreciation 339
The Present Value of Expected
Profits 339 • The Investment Decision 340 A Convenient Special
Case 342 • Current versus Expected
Profit 342 • Profit and Sales 344
15-3 The Volatility of Consumption and Investment 346
Appendix: Derivation of the Expected Present Value of Profits under Static Expectations 351
Chapter 16 Expectations, Output, and Policy 353
16-1 Expectations and Decisions: Taking Stock 354
Expectations, Consumption, and Investment Decisions 354 • Expectations and the IS Relation 354
16-2 Monetary Policy, Expectations, and Output 357
Monetary Policy Revisited 357
16-3 Deficit Reduction, Expectations, and Output 360
The Role of Expectations about the Future 361 • Back to the Current Period 361
The Open Economy 371
Chapter 17 Openness in Goods and Financial Markets 373
17-1 Openness in Goods Markets 374
Exports and Imports 374 • The Choice
between Domestic Goods and Foreign
Goods 376 • Nominal Exchange
Rates 376 • From Nominal to Real
Exchange Rates 377 • From Bilateral to
Multilateral Exchange Rates 381
17-2 Openness in Financial Markets 382 The Balance of Payments 383 • The
Choice between Domestic and Foreign Assets 385 • Interest Rates and Exchange Rates 387
17-3 Conclusions and a Look Ahead 389
Chapter 18 The Goods Market in an Open Economy 393
18-1 The IS Relation in the Open Economy 394
The Demand for Domestic Goods 394 • The Determinants of C, I, and G 394 • The Determinants of
Imports 395 • The Determinants of Exports 395 • Putting the Components Together 395
18-2 Equilibrium Output and the Trade Balance 397
18-3 Increases in Demand—Domestic or Foreign 398
Increases in Domestic Demand 398
Increases in Foreign Demand 400
Fiscal Policy Revisited 401
18-4 Depreciation, the Trade Balance, and Output 403
Depreciation and the Trade Balance: the Marshall-Lerner Condition 404 • The
Effects of a Real Depreciation 404 Combining Exchange Rate and Fiscal Policies 405
18-5 Saving, Investment, and the Current Account Balance 408
Appendix: Derivation of the Marshall-Lerner Condition 413
Chapter 19 Output, the Interest Rate, and the Exchange Rate 415
19-1 Equilibrium in the Goods Market 416
19-2 Equilibrium in Financial Markets 417
Domestic Bonds versus Foreign Bonds 417
19-3 Putting Goods and Financial Markets Together 420
19-4 The Effects of Policy in an Open Economy 422
The Effects of Monetary Policy in an Open
Economy 422 • The Effects of Fiscal
Policy in an Open Economy 423
19-5 Fixed Exchange Rates 427
Pegs, Crawling Pegs, Bands, the
EMS, and the Euro 427 • Monetary
Policy When the Exchange Rate Is
Fixed 428 • Fiscal Policy When the
Exchange Rate Is Fixed 429
Appendix: Fixed Exchange Rates, Interest Rates, and Capital Mobility 434
Chapter 20 Exchange Rate Regimes 437
20-1 The Medium Run 438
The IS Relation under Fixed
Exchange Rates 439 • Equilibrium
in the Short and the Medium
Run 439 • The Case for and against a Devaluation 440
20-2 Exchange Rate Crises under Fixed Exchange Rates 442
20-3 Exchange Rate Movements under Flexible Exchange Rates 445
Exchange Rates and the Current
Account 446 • Exchange Rates
and Current and Future Interest
Rates 447 • Exchange Rate Volatility 447
20-4 Choosing between Exchange Rate Regimes 448
Common Currency Areas 449 • Hard Pegs, Currency Boards, and Dollarization 451
Appendix 1: Deriving the IS Relation under Fixed Exchange Rates 457
Appendix 2: The Real Exchange Rate and Domestic and Foreign Real Interest Rates 457
Back to Policy 459
Chapter 21 Should Policymakers Be Restrained? 461
21-1 Uncertainty and Policy 462
How Much Do Macroeconomists
Actually Know? 462 • Should
Uncertainty Lead Policymakers to
Do Less? 464 • Uncertainty and
Restraints on Policymakers 464
21-2 Expectations and Policy 465
Hostage Takings and Negotiations
466 • Inflation and Unemployment
Revisited 466 • Establishing
Credibility 467 • Time Consistency and
Restraints on Policymakers 469
21-3 Politics and Policy 469 Games between Policymakers and
Voters 470 • Games between Policymakers
471 • Politics and Fiscal Restraints 472
Chapter 22 Fiscal Policy: A Summing Up 479
22-1 What We Have Learned 480
22-2 The Government Budget
Constraint: Deficits, Debt,
Spending, and Taxes 481
The Arithmetic of Deficits and
Debt 481 • Current versus Future
Taxes 483 • Full Repayment in
Year 2 483 • Full Repayment in
Year t 484 • Debt Stabilization
in Year 2 485 • The Evolution of the
Debt-to-GDP Ratio 486
22-3 Ricardian Equivalence, Cyclical Adjusted Deficits, and War Finance 488
Ricardian Equivalence 488 • Deficits,
Output Stabilization, and the Cyclically
Adjusted Deficit 489 • Wars and Deficits 490
22-4 The Dangers of High Debt 492 High Debt, Default Risk, and Vicious Cycles 492
Debt Default 494 • Money Finance 494
22-5 The Challenges Facing US Fiscal Policy Today 497
Chapter 23 Monetary Policy: A Summing Up 503
23-1 What We Have Learned 504
23-2 From Money Targeting to Inflation Targeting 505
Money Targeting 505 • Inflation Targeting
507 • The Interest Rate Rule 508
23-3 The Optimal Inflation Rate 509
The Costs of Inflation 509 • The
Benefits of Inflation 512 • The
Optimal Inflation Rate: The State of the Debate 513
23-4 Unconventional Monetary Policy 514
Monetary Policy since the End of the Liquidity Trap 515
23-5 Monetary Policy and Financial Stability 516
Liquidity Provision and Lender of Last Resort 517 • Macroprudential Tools 517
Chapter 24 Epilogue: The Story of Macroeconomics 525
24-1 Keynes and the Great Depression 526
24-2 The Neoclassical Synthesis 526
Progress on All Fronts 527 • Keynesians versus Monetarists 528
24-3 The Rational Expectations Critique 529
The Three Implications of Rational
Expectations 530 • The Integration of
Rational Expectations 531
24-4 Developments in Macroeconomics up to the 2009 Crisis 532
New Classical Economics and Real
Business Cycle Theory 533 • New
Keynesian Economics 533 • New
Growth Theory 534 • Toward an Integration 535
24-5 First Lessons for Macroeconomics after the Crisis 536
Appendix 1 An Introduction to the National Income and Product
Accounts A-1
Appendix 2 A Math Refresher A-7
Appendix 3 An Introduction to
Econometrics A-12
Glossary G-1
Index I-1
Credits C-1
Symbols Used in This Book S-1