Brief Contents

Preface

xv

PART ONE

INTRODUCTION

Chapter 1 Chapter 2
PART TWO

What Is Macroeconomics?

AL

3 12

Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9

PART THREE

The Wealth of Nations: The Supply Side

TE

ECONOMIC GROWTH AND THE SUPPLY SIDE

RI

The Language of Macroeconomics: The National Income Accounts

37 59 85 104 130 157 185

Capital Accumulation and Economic Growth Endogenous Growth and Convergence Unemployment and the Labour Market Globalization International Trade

Total Factor Productivity, Human Capital and Technology

BUSINESS CYCLES AND ECONOMIC POLICY

Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15

PART FOUR

Business Cycles

PY

Chapter 10

Consumption and Investment

RI

GH

TE

MA

211 250 282 314 344 364

Chapter 16 Chapter 17 Chapter 18

CO

Money and Prices Monetary Policy Fiscal Policy and the Role of Government Stabilization Policy
ASSET MARKETS AND THE FINANCIAL SECTOR

Financial Markets: Equities and Bonds The Banking Sector Sovereign Debt and Default

395 429 451

vii

viii

BRIEF CONTENTS

PART FIVE

EXCHANGE RATES AND GLOBAL CAPITAL MARKETS

Chapter 19 Chapter 20 Chapter 21

Glossary Notes Index

Exchange Rate Determination: The Real Exchange Rate Exchange Rate Determination: Nominal Exchange Rates and Asset Markets Currency Crises and Exchange Rate Systems

475 503 529

559 571 577

Contents

Preface

xv

PART ONE

INTRODUCTION

Chapter 1

What Is Macroeconomics?
1.1 1.2 1.3 1.4 What Is Macroeconomics About? But What about That Denition? The Difference between Macroeconomics and Microeconomics A Crisis for Macroeconomics?

3
3 5 7 8

Chapter 2

The Language of Macroeconomics: The National Income Accounts

2.1 2.2 2.3 2.4 2.5 2.6 What Do Macroeconomists Measure? How Do Macroeconomists Measure Output? Output as Value Added National Income Accounts How Large Are Modern Economies? Total Output and Total Happiness

12
12 13 16 17 23 26

PART TWO

ECONOMIC GROWTH AND THE SUPPLY SIDE

Chapter 3

The Wealth of Nations: The Supply Side

3.1 3.2 3.3 3.4 3.5 3.6 The Importance of Economic Growth The Impact of Long-Run Growth Explaining Cross-Country Income Differences The Production Function and Factor Inputs Growth Accounting Growth Accounting: An Application

37
37 40 46 47 52 54

Chapter 4

Capital Accumulation and Economic Growth

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Capital Accumulation and Output Growth Savings, Investment and Interest Rates Why Poor Countries Catch Up with the Rich The Growing Importance of Total Factor Productivity The End of Growth through Capital Accumulation Why Bother Saving? How Much Should a Country Invest? China: A Big Tiger

59
59 62 64 67 69 72 75 78

ix

CONTENTS

Chapter 5

Total Factor Productivity, Human Capital and Technology

5.1 5.2 5.3 5.4 5.5 The Role of Total Factor Productivity Human Capital Total Factor Productivity The Importance of Technological Progress Scarce Resources and the Production Function

85
85 87 91 98 101

Chapter 6

Endogenous Growth and Convergence

6.1 6.2 6.3 6.4 6.5 6.6 6.7 Endogenous Growth Poverty Traps Convergence or Divergence? Determinants of the Steady State Why Is Africa So Poor? The Curse of Natural Resources Does Aid Work?

104
105 109 111 115 117 124 125

Chapter 7

Unemployment and the Labour Market

7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 Labour Market Data A Long-Run Model of the Labour Market The Natural Rate of Unemployment A Diagrammatic Analysis Determinants of the Natural Rate What Lowers Unemployment? A Flow Approach to the Natural Rate of Unemployment Labour Market Reform

130
130 133 136 137 138 145 147 152

Chapter 8

International Trade
8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 Patterns of World Trade Comparative Advantage: How Countries Benet from Trade The Terms of Trade In What Goods Will Countries Trade? Distributional Impacts of Trade Competitiveness Strategic Trade Theory Political Economy and Vested Interest

157
158 160 165 170 175 177 179 182

Chapter 9

Globalization
9.1 9.2 9.3 9.4 9.5 9.6 Globalization: A Long-Term Perspective The Benets of Trade Liberalization Foreign Direct Investment and Multinationals Immigration Problems of Globalization The WTO and the Future of Trade Liberalization

185
186 191 198 200 203 206

CONTENTS

xi

PART THREE

BUSINESS CYCLES AND ECONOMIC POLICY

Chapter 10

Consumption and Investment

10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 The Importance of Consumption The Basic Keynesian Model of Consumption The Permanent Income Model The Importance of Current Income Revisited The Inuence of Interest Rates The Role of Wealth and Capital Gains Demographic Inuences in the Life-Cycle Model Investment and the Capital Stock The Optimal Stock of Capital Declining Marginal Product of Capital Investment and the Stock Market Cash Flows and Investment The IS Curve

211
211 213 216 223 226 228 230 231 233 235 238 240 241

Chapter 11

Business Cycles
11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 What Is a Business Cycle? Measuring the Business Cycle Characterizing Business Cycles Business Cycles as Aggregate Fluctuations Have Business Cycles Changed? Are Business Cycles Bad? The Frisch-Slutsky Paradigm Aggregate Demand and Aggregate Supply So What Causes Business Cycles?

250
250 252 255 257 261 262 265 271 278

Chapter 12

Money and Prices

12.1 12.2 12.3 12.4 12.5 12.6 12.7 Rising Prices Measuring Ination The Costs of Ination and the Dangers of Deation The Nature of Money The Money Supply How Banks Make Money: The Money Multiplier Seignorage and the Ination Tax: How Governments Make Money from Money 12.8 Hyperination 12.9 Monetarism and the Quantity Theory of Money

282
283 287 289 296 299 301 303 305 306

Chapter 13

Monetary Policy
13.1 The Inuence of Central Banks 13.2 Monetary Policy and the LM Curve 13.3 What Does Monetary Policy Target?

314
314 317 322

xii

CONTENTS

13.4 13.5 13.6 13.7 13.8 13.9 13.10

What Intermediate Target Should Central Banks Use? Money Supply Targeting Exchange Rate Targets Ination Targeting The Operational Instruments of Monetary Policy Controlling the Money Supply or Interest Rates? How Monetary Policy Affects the Economy: The Transmission Mechanism 13.11 Monetary Policy in Practice 13.12 Quantitative Easing

323 324 328 328 330 332 334 336 339

Chapter 14

Fiscal Policy and the Role of Government

14.1 Government Spending 14.2 The Rationale for Governments Role and the Failure of the Invisible Hand 14.3 Taxation and Distortions 14.4 Decits and Taxes 14.5 Optimal Budget Decits

344
344 348 351 357 360

Chapter 15

Stabilization Policy
15.1 15.2 15.3 15.4 15.5 15.6 15.7 Output Fluctuations and the Tools of Macroeconomic Policy General Arguments against Stabilization Policy The Ination Output Trade-off The Phillips Curve and Shifting Expectations Policy Credibility: The Good News about Shifting Expectations Time Inconsistency Rules versus Discretion

364
364 368 373 378 380 383 387

PART FOUR

ASSET MARKETS AND THE FINANCIAL SECTOR

Chapter 16

Financial Markets: Equities and Bonds

16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 16.11 16.12 16.13 The Financial Sector: An Overview Debt and Equity International Comparisons of Equity Markets The Determination of Stock Prices On the Unpredictability of Share Prices Risk, Equity Prices and Excess Return Are Stock Prices Forecastable? Speculation or Fundamentals? Bubbles What is a Bond? Prices, Yields and Interest Rates Ination and the Bond Market Government Policy and the Yield Curve

395
395 398 398 402 404 406 408 410 411 412 414 419 420

CONTENTS

xiii

Chapter 17

The Banking Sector

17.1 17.2 17.3 17.4 The Role of Banks Problems in Banking Markets Banking Crises Credit Crunches

429
429 434 442 446

Chapter 18

Sovereign Debt and Default

18.1 18.2 18.3 18.4 18.5 18.6 18.7 Sovereign Debt and Decits Decits and the Business Cycle Long-Run Sustainability The Intertemporal Budget Constraint Sovereign Default Credit Risk and Credit Agencies Debt Forgiveness

451
451 453 456 459 461 465 469

PART FIVE

EXCHANGE RATES AND GLOBAL CAPITAL MARKETS

Chapter 19

Exchange Rate Determination: The Real Exchange Rate

19.1 19.2 19.3 19.4 19.5 19.6 Types of Exchange Rate Law of One Price Purchasing Power Parity The Balance of Payments Which Countries Are Rich and Which Are Poor? Current and Capital Accounts and the Real Exchange Rate

475
476 478 483 488 492 493

Chapter 20

Exchange Rate Determination: Nominal Exchange Rates and Asset Markets

20.1 20.2 20.3 20.4 20.5 20.6 20.7 20.8 20.9 20.10 The Importance of Asset Markets Covered Interest Parity Uncovered Interest Parity Pinning Down the Exchange Rate with UIP The Role of Expectations Does UIP Hold? Introducing Risk-Averse Investors What Are Exchange Rate Markets Really Like? Global Capital Markets A Home Bias Puzzle

503
503 505 507 509 512 515 516 518 520 524

Chapter 21

Currency Crises and Exchange Rate Systems

21.1 21.2 21.3 21.4 21.5 Currency Crises First-Generation Models Second-Generation Models and the ERM Crisis Twin Crises: Banking and Currency Foreign Exchange Rate Intervention

529
529 531 532 535 538

xiv

CONTENTS

21.6 21.7 21.8 21.9 21.10 21.11 Glossary Notes Index

Sovereign Wealth Funds The Role of the IMF Capital Account Liberalization Exchange Rate Regimes Currency Boards Currency Unions

540 541 544 547 553 554 559 571 577