MACROECONOMICS ‘This is a truly outstanding textbook that beautifully marries theory, empirics and policy It has already become the gold standard against which all other texts must be measured.’ Sir Charles Bean, Professor of Economics, London School of Economics and former Deputy Governor, Bank of England This book gives students a thorough understanding of macroeconomics by taking a unified view of the subject, allowing connections to be made between the short, medium and long run • The text recognises that modern central banks set interest rates, not the quantity of money: this gets rid of the LM curve, greatly simplifying the discussion of financial markets • It presents the medium run starting directly from the Phillips curve, thus avoiding the intermediate AS-AD step which undergraduates find difficult to understand Output above potential, or unemployment below the natural rate put upward pressure on inflation The nature of the pressure depends on the formation of expectations, an issue central to current developments • The yield curve now incorporates a risk premium, fluctuations of which have been central to the crisis, especially since quantitative easing policies have shown that monetary policy can affect this premium This title can be supported by MyEconLab, an online homework and tutorial system designed to test and build your understanding MyEconLab provides a personalised MyLab approach with instant feedback to all questions and problems in this title To access MyEconLab, you need to have a course ID from your lecturer, and an access card If you have the course ID but no access card, you can purchase access at www.myeconlab.com Olivier Blanchard studied at the University of Paris, Nanterre, and has taught at the Massachusetts Institute of Technology since 1982 He was chief economist at the International Monetary Fund from 2008 to 2015 He is now a Senior Fellow at the Peterson Institute for International Economics, Washington DC Alessia Amighini is Associate Professor of Economics at Università del Piemonte Orientale, Italy www.pearson-books.com A EUROPEAN PERSPECTIVE THIRD EDITION OLIVIER BLANCHARD ALESSIA AMIGHINI FRANCESCO GIAVAZZI THIRD EDITION BLANCHARD, AMIGHINI AND GIAVAZZI Francesco Giavazzi is Professor of Economics at Bocconi University in Milan, and has been a Visiting Professor at the Massachusetts Institute of Technology for over a decade MACROECONOMICS The book has been re-written almost from scratch after a thorough re-think of how macroeconomics should be taught after the financial crisis Among the new features: Cover image © Deborah Harrison / Getty Images CVR_BLANC_03_85678.indd 27/04/2017 10:32 Macroeconomics F01 Macroeconomics 85678 Contents.indd 30/05/2017 06:59 At Pearson, we have a simple mission: to help people make more of their lives through learning We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide – more than any other private enterprise Every day our work helps learning flourish, and wherever learning flourishes, so people To learn more, please visit us at www.pearson.com/uk F01 Macroeconomics 85678 Contents.indd 30/05/2017 06:59 Macroeconomics A European Perspective 3rd edition Olivier Blanchard, Alessia Amighini and Francesco Giavazzi Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney Dubai • Singapore • Hong Kong • Tokyo • Seoul • Taipei • New Delhi Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan F01 Macroeconomics 85678 Contents.indd 30/05/2017 06:59 PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk Authorised adaptation from Macroeconomics, Global Edition, 7th edition, by Olivier Blanchard, copyright 2017, ISBN 9781292160504 First published 2010 (print) Second edition published 2013 (print and electronic) Third edition published 2017 (print and electronic) © Pearson Education Limited 2010 (print) © Pearson Education Limited 2013, 2017 (print and electronic) The rights of Olivier Blanchard, Alessia Amighini and Francesco Giavazzi to be identified as authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 The print publication is protected by copyright Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly Pearson Education is not responsible for the content of third-party internet sites ISBN: 978-1-292-08567-8 (print) 978-1-292-085753 (PDF) 978-1-292-175942 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Blanchard, Olivier (Olivier J.), author | Amighini, Alessia, author | Giavazzi, Francesco, author Title: Macroeconomics : a European perspective / Olivier Blanchard, Alessia Amighini and Francesco Giavazzi Description: 3rd Edition | New York : Pearson, [2017] | Revised edition of the authors’ Macroeconomics, [2013] | Includes bibliographical references and index Identifiers: LCCN 2017009583| ISBN 9781292085678 (print) | ISBN 9781292085753 (PDF) | ISBN 9781292175942 (ePub) Subjects: LCSH: Macroeconomics–Europe Classification: LCC HB172.5 B574 2017 | DDC 339–dc23 LC record available at https://lccn.loc.gov/2017009583 10 19 18 17 16 15 Cover image © Deborah Harrison/Getty Images Print edition typeset in 9.5/12.5pt Charter ITC Std by SPi Global Print edition printed and bound by L.E.G.O S.p.A., Italy NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION F01 Macroeconomics 85678 Contents.indd 30/05/2017 06:59 Brief Contents List of figures xi List of tables xv List of focus boxes xvii About the authors xviii Preface xix Publisher’s acknowledgements xxii Introduction 1 A tour of the world 2 A tour of the book 20 The Core The short run 45 The goods market 46 Financial markets: I 66 Financial markets: the IS–LM model 85 Financial markets: II 104 The medium run 133 The labour market 134 The Phillips curve, the natural rate of unemployment and inflation 153 Putting all markets together: from the short to the medium run 173 The long run 195 10 The facts of growth 196 11 Saving, capital accumulation and output 213 12 Technological progress and growth 236 13 Technological progress: the short, the medium and the long runs 259 F01 Macroeconomics 85678 Contents.indd Extensions Expectations 281 14 Financial markets and expectations 282 15 Expectations, consumption and investment 309 16 Expectations, output and policy 329 The open economy 345 17 Openness in goods and financial markets 346 18 The goods market in an open economy 365 19 Output, the interest rate and the exchange rate 388 20 Exchange rate regimes 408 Back to policy 435 21 Should policy makers be restrained? 436 22 Fiscal policy: a summing up 453 23 Monetary policy: a summing up 481 Epilogue 507 24 The story of macroeconomics 508 Appendix1 A n introduction to national income and product accounts 522 528 Appendix A maths refresher Appendix An introduction to econometrics 533 Glossary 538 Symbols used in this book 549 Index 551 30/05/2017 06:59 F01 Macroeconomics 85678 Contents.indd 30/05/2017 06:59 Contents List of figures xi List of tables xv List of Focus boxes xvii About the authors xviii Preface xix Publisher’s acknowledgements xxii Introduction 1 Chapter A tour of the world 2 1.1 The crisis 1.2 The United States 1.3 The euro area 1.4 China 1.5 Looking ahead Key terms Questions and problems Further reading Appendix: Where to find the numbers 12 15 16 16 17 18 Chapter A tour of the book 20 2.1 2.2 2.3 2.4 Aggregate output 21 The unemployment rate 26 The inflation rate 30 Output, unemployment and the inflation rate: Okun’s law and the Phillips curve 33 2.5 The short run, the medium run and the long run 35 36 2.6 A tour of the book Summary 37 Key terms 38 Questions and problems 38 Further reading 40 Appendix: The construction of real GDP and chaintype indexes 41 The Core The Short Run 45 Chapter The goods market 46 3.1 The composition of GDP 3.2 The demand for goods F01 Macroeconomics 85678 Contents.indd 47 48 3.3 The determination of equilibrium output 51 3.4 Investment equals saving: an alternative way of thinking about the goods-market equilibrium 58 3.5 Is the government omnipotent? A warning 60 Summary 62 Key terms 62 Questions and problems 63 Chapter Financial markets: I 66 4.1 The demand for money 67 4.2 Determining the interest rate: I 70 4.3 Determining the interest rate: II 74 4.4 The liquidity trap 78 Summary 80 80 Key terms Questions and problems 81 Further reading 82 Appendix: The determination of the interest rate when people hold both currency and deposit accounts 83 Chapter Financial markets: the IS–LM model 85 5.1 The goods market and the IS relation 86 5.2 Financial markets and the LM relation 90 5.3 Putting the IS and the LM relations together 91 5.4 Using a policy mix 94 98 5.5 How does the IS–LM model fit the facts? Summary 100 Key terms 101 Questions and problems 101 Further reading 103 Chapter Financial markets II 104 6.1 Nominal versus real interest rates 105 6.2 Risk and risk premiums 108 6.3 The role of financial intermediaries 110 6.4 Extending the IS–LM 114 6.5 From a housing problem to a financial crisis 116 Summary 124 Key terms 125 Questions and problems 126 Further reading 129 30/05/2017 06:59 viii Contents The Medium Run 133 Chapter The labour market 134 7.1 A tour of the labour market 135 7.2 Movements in unemployment 137 7.3 Wage determination 140 7.4 Price determination 144 7.5 The natural rate of unemployment 144 7.6 Where we go from here 148 Summary 148 Key terms 149 Questions and problems 149 Further reading 151 Appendix: W age- and price-setting relations versus labour supply and labour demand 152 Chapter The Phillips curve, the natural rate of unemployment and inflation 153 8.1 Inflation, expected inflation and unemployment 155 8.2 The Phillips curve and its mutations 156 8.3 The Phillips curve and the natural rate of unemployment 159 8.4 A summary and many warnings 161 Summary 168 Key terms 168 Questions and problems 169 Further reading 171 erivation of the relation between inflation, Appendix: D expected inflation and unemployment 172 Chapter Putting all markets together: from the short to the medium run 173 9.1 The IS–LM–PC model 174 9.2 Dynamics and the medium-run equilibrium 177 9.3 Fiscal consolidation revisited 182 9.4 The effects of an increase in the price of oil 183 9.5 Conclusions 188 Summary 189 Key terms 189 Questions and problems 190 The Long Run 195 Chapter 10 The facts of growth 196 10.1 Measuring the standard of living 197 10.2 Growth in rich countries since 1950 200 10.3 A broader look across time and space 204 10.4 Thinking about growth: a primer 206 Summary 210 F01 Macroeconomics 85678 Contents.indd Key terms Questions and problems Further reading 210 211 212 Chapter 11 Saving, capital accumulation and output 213 11.1 Interactions between output and capital 214 11.2 The implications of alternative saving rates 217 11.3 Getting a sense of magnitudes 224 11.4 Physical versus human capital 229 Summary 232 Key terms 232 Questions and problems 232 Further reading 234 Appendix: The Cobb–Douglas production function and the steady state 235 Chapter 12 Technological progress and growth 236 12.1 Technological progress and the rate of growth 237 12.2 The determinants of technological progress 243 12.3 Institutions, technological progress and growth 247 251 12.4 The facts of growth revisited Summary 253 Key terms 253 Questions and problems 254 Further reading 256 Appendix: Constructing a measure of technological progress 257 Chapter 13 Technological progress: the short, the medium and the long runs 259 13.1 Productivity, output and unemployment in the short run 260 13.2 Productivity and the natural rate of unemployment 263 13.3 Technological progress, churning and inequality 267 Summary 274 Key terms 275 Questions and problems 275 Further reading 277 Extensions Expectations 281 Chapter 14 Financial markets and expectations 282 14.1 Expected present discounted values 14.2 Bond prices and bond yields 14.3 The stock market and movements in stock prices 14.4 Risk, bubbles, fads and asset prices 283 287 294 300 30/05/2017 06:59 Summary 304 Key terms 304 Questions and problems 305 Further reading 306 Appendix: D eriving the expected present discounted value using real or nominal interest rates 307 Chapter 15 Expectations, consumption and investment 309 310 15.1 Consumption 15.2 Investment 316 15.3 The volatility of consumption and investment 323 Summary 325 Key terms 325 Questions and problems 325 Appendix: Derivation of the expected present value of profits under static expectations 328 Chapter 16 Expectations, output and policy 329 16.1 Expectations and decisions: taking stock 330 16.2 Monetary policy, expectations and output 333 16.3 Deficit reduction, expectations and output 336 Summary 341 Key terms 342 Questions and problems 342 The Open Economy 345 Chapter 17 Openness in goods and financial markets 346 17.1 Openness in goods markets 348 17.2 Openness in financial markets 354 17.3 Conclusions and a look ahead 361 Summary 361 Key terms 362 Questions and problems 362 Further reading 364 Chapter 18 The goods market in an open economy 365 18.1 The IS relation in the open economy 366 18.2 Equilibrium output and the trade balance 369 18.3 Increases in demand – domestic or foreign 370 18.4 Depreciation, the trade balance and output 376 18.5 Looking at dynamics: the J-curve 380 18.6 Saving, investment and the current account balance 382 Summary 383 Key terms 384 Questions and problems 384 Further reading 386 Appendix: Derivation of the Marshall–Lerner condition 387 F01 Macroeconomics 85678 Contents.indd Contents ix Chapter 19 Output, the interest rate and the exchange rate 388 19.1 Equilibrium in the goods market 389 19.2 Equilibrium in financial markets 390 19.3 Putting goods and financial markets together 394 19.4 The effects of policy in an open economy 395 19.5 Fixed exchange rates 399 Summary 402 Key terms 403 Questions and problems 403 Appendix: Fixed exchange rates, interest rates and capital mobility 405 Chapter 20 Exchange rate regimes 408 20.1 The medium run 409 20.2 Exchange rate crises under fixed exchange rates 412 20.3 Exchange rate movements under flexible exchange rates 416 419 20.4 Choosing between exchange rate regimes Summary 427 427 Key terms Questions and problems 428 431 Further reading Appendix 1: D eriving the IS relation under fixed exchange rates 432 Appendix 2: T he real exchange rate and domestic and foreign real interest rates 432 Back to Policy 435 Chapter 21 Should policy makers be restrained? 436 21.1 Uncertainty and policy 437 21.2 Expectations and policy 440 21.3 Politics and policy 444 Summary 449 Key terms 450 Questions and problems 450 Further reading 452 Chapter 22 Fiscal policy: a summing up 453 22.1 What we have learned 454 22.2 The government budget constraint: deficits, 455 debt, spending and taxes 22.3 Ricardian equivalence, cyclical adjusted deficits and war finance 465 22.4 The dangers of high debt 469 Summary 477 Key terms 477 Questions and problems 478 Further reading 480 30/05/2017 06:59 554 INDEX choice of regime 419–27 and common currency 12 and current account 417 devaluations 350, 351, 399, 400, 411– 12, 413, 419, 471, 540 floating 413, 541 increase in 350, 352, 367, 394 and interest rates 390–2, 394–5, 396, 397, 405–7, 410, 416–17, 417–18 in medium run 409–12, 419 multilateral 354, 544 and openness in financial markets 358–61 overshooting model of 514 in short rune 419 and standard of living 197, 198, 199 and trade balance 378, 380 volatility 418 see also fixed exchange rates; flexible exchange rates; nominal exchange rates; real exchange rates exogenous variables 50, 540 expansionary open market operations 73, 74, 540 expansions 24, 541 expectations adpative 335, 538 anchored 179, 538 and consumption 300, 310–16, 337, 509, 510 deficit reduction and output 336–41 and financial markets 282–308 inflation 106–7, 108, 114, 155–6, 157–8, 166, 172, 179, 186, 410–11, 513 and investment 316–23, 330, 337, 509 and IS relation 330–3 monetary policy and output 333–6 and policy 440–4 price 266 of productivity growth 266 of profit 316–19, 320, 321, 323, 324, 328 see also rational expectations; static expectations expectations hypothesis 290, 540 expectations-augmented Phillips curve see modified Phillips curve expected present discounted values 283–7, 295–7, 541 computing 283–4 constant interest rates 285–6 general formula 284 and nominal or real interest rates 286–7, 307–7 zero interest rates 286 expected present value of profits 316–19, 321, 323, 324 under static expectations 328 exports 48, 348–9, 355, 366, 367, 368–9, 375, 376, 389, 524, 541 see also net exports extension agreements 162, 541 external finance 294, 541 Z06 Macroeconomics 85678.indd 554 face value (of a bond) 288, 540 factor markets, openness in 347 factors of production 144 fads 300, 541 federal deposit insurance 113, 541 federal funds market 77, 541 federal funds rate 6, 77, 79, 95–6, 122, 541 Federal Reserve 541 interest rates 3, 4, 6–7, 77, 95–6 see also federal funds rate; policy rate as lender of last resort 496 liquidity facilities 121 quantitative easing policy 495 Feldstein, Martin 225 fertility of research process 243–5, 541 final goods 21, 541 financial crisis 3–5, 115–24, 392, 518 and consumer and business confidence 119 and consumption 57 financial intermediaries role in 117–19 and GDP growth 25 and housing prices and subprime mortgages 3, 4, 116–17, 120 and industrial production 121 macroeconomic implications 119 policy responses Europe 122–4 US 121–2 and world trade 120 financial intermediaries 75, 110–12, 541 financial investment 68, 541 financial markets 66–84 demand for money 67–70 equilibrium 90, 91, 92, 390–2, 395 and expectations 282–308 interest rate determination 70–8 liquidity trap 78–9 and LM relation 90–1 see also financial crisis; IS–LM model; openness in financial markets financial policy, and financial crisis 121–2, 123 financial shocks and policies 114–15 financial stability, and monetary policy 496–9 financial wealth 68, 310, 541 fine-tuning 439, 440, 541 Finland 465 fire sale prices 112, 541 fiscal austerity 475, 541 fiscal consolidation (contraction) 92, 97, 98, 182–3, 377–8, 475, 541 and output 336–41 in short and medium run 182, 188, 336 fiscal dominance of monetary policy 473, 541 fiscal expansion 92, 94, 95, 398– 9, 417–18, 541 fiscal multipliers 340–1, 541 fiscal policy 51, 60, 92–3, 99, 453–80, 541 common 422 and financial crisis 122, 124 and financial shocks 115 and fixed exchange rates 400–1 and government budget constraint see government budget constraint and high debt 469–75 multipliers 373–4 in open economy 373–5, 396–7 review of learning 454–5 versus monetary policy 511 see also fiscal consolidation (contraction); fiscal expansion; government spending; tax fiscal rules, Euro area 447–9 fiscal stimulus 375–6 Fischer, Stanley 514–15, 516 fixed exchange rates 350–1, 399–401, 408, 409, 419, 424–7, 541 and capital mobility 405–7 crawling pegs 400, 539 and devaluation 411–12 and European Monetary System (EMS) 400, 401–2, 414–16 exchange rate crises under 402, 412– 16 and fiscal policy 400–1 hard peg 424–5, 442, 542 and interest rates 405–7 IS relation under 410, 432 and monetary policy 400 pegs 399, 401, 545 revaluations 350, 351, 399, 400, 546 fixed investment 47, 541 flexible exchange rates 399, 408, 409, 410, 413, 419, 421 exchange rate movements under 416–18, 514 flexible inflation targeting 485, 541 floating exchange rates 413, 541 flows 68, 216, 541 force of compounding 202–3, 541 Ford, Henry 141–2 foreign direct investment 498, 541 foreign exchange 354, 541 foreign exchange markets 354–5, 405, 406–7 foreign exchange reserves 405, 407, 541 four tigers 205, 541 France budget deficit 447 debt-to-GDP ratio 462, 465 inflation rate 402 interest rates 402 output per person 200, 202, 203 output per worker 251 post-war capital accumulation and growth 220 tax structure 462 technological progress 251 unemployment rate 10, 163 Frank, Barney 375–6 30/05/2017 12:57 INDEX 555 Friedman, Milton 159–60, 161, 310, 439, 440, 510, 511, 512 full-employment deficit 467, 541 fully funded social security system 225–6, 541 fundamental value 301, 302, 541 G20 541 and fiscal stimulus (2009) 375–6 Gali, Jordi 518 game theory 440, 441, 446, 513–14, 541 game(s) 440, 541 between policy makers 445–6 between policy makers and voters 444–5 GDP (gross domestic product) 356, 357, 522, 542 in 2000 prices see real GDP adjusted for inflation see real GDP at current prices see nominal GDP composition of 47–8 in constant euros see real GDP energy intensity of 187–8 growth 24–6, 31, 541 nominal 23, 24, 30, 544 production and income 21–2 ratio of exports to 348, 349 rule of 70 13 in terms of goods see real GDP see also aggregate output; real GDP GDP deflator 30–1, 107, 352, 541 geometric series 55, 542 German Socio-Economic Panel Survey 29 Germany budget deficit 447 debt-to-GDP ratio 461, 464, 465 export ratio 349 hyperinflation 461, 474–5 inflation rate 402 interest rates 401–2, 414, 415 nominal interest rates 360 output per person 200, 203 output per worker 251 reunification 401–2, 414 saving rate 213 tax 461 technological progress 251 unemployment rate 10, 163 Gertler, Mark 517 globalisation 12, 164, 348 GNP (gross national product) 21, 356, 357, 522, 542 gold standard 412, 542 golden-rule level of capital 223, 542 Goldin, Claudia 271 goods market 46–65 composition of GDP 47–8 demand for goods 48–51 equilibrium 86, 87–8, 89, 91, 92, 98, 350, 369–70, 389–90, 395, 540 determination of 92–3 investment and saving 58–9 output 51–6, 389–90 Z06 Macroeconomics 85678.indd 555 and tax increases 92 and IS relation 86–9 see also goods market in an open economy; openness in goods markets goods market in an open economy 365–87 depreciation, the trade balance and output 376–80 dynamics 380–1 equilibrium output and the trade balance 369–70 IS relation 366–9 output and increases in demand 370–5 saving, investment and the current account balance 382–3 government, omnipotence of 60 government bonds 109, 288, 471, 472, 491, 542 government budget constraint 455–65, 542 and output stabilisation and the cyclically adjusted deficit 467–8 Ricardian equivalence and 465–7 wars and 468–9 government debt see debt government purchases 524, 542 government spending 47, 51, 52, 55, 58, 60, 86, 89, 92, 260, 366, 389, 455, 457, 459 caps 448–9 decrease, and output 336–41, 378 and fiscal expansion 95 and fixed exchange rates 401 increase, and output 60, 370–1, 396–7 and IS curve 89 and LM curve 90 government transfers 47, 455, 525 see also transfers to persons Great Depression 166–7, 180–2, 509, 511, 518, 519 Great Moderation period 481, 542 Greece 359, 423, 424 bond spreads 472 budget deficit 447 current account deficit 379, 422 debt crisis 10, 453, 473, 475 debt-to-GDP ratio 464, 465, 470 hyperinflation 474 imports, exports and GDP since 2000 379, 380 unemployment rate 10 Greenspan, Alan 95, 98 Griliches, Zvi 244 gross domestic product see GDP gross national product (GNP) 21, 356, 357, 522, 542 gross private domestic fixed investment 524, 542 growth 196–212, 510, 542 across countries 204–6 across two millennia 204 in advanced and emerging economies since 2005 346 aggregate production function 206–7 and capital accumulation China 252–3 rich countries since 1985 251–3 and debt ratios 463, 464 endogenous 231 and institutions 247–9, 517 returns to scale and returns to factors 207 in rich countries since 1950 200–4 sources of 208–9 and standard of living 197–200 see also output growth; technological progress and growth haircuts 472, 542 Hall, Robert 514 Hansen, Alvin 85, 510 happiness and income 200–2 and unemployment 29–30 hard peg 424–5, 442, 542 Harmonised Index of Consumer Prices (HICP) 31–2 Harsanyi, John 440 healthcare, United States (US) 476 hedonic pricing 26, 542 Heston, Alan 198, 199 Hicks, John 85, 510 high debt, dangers of 469–75, 519 debt default 472–3 money finance 473–5 vicious cycles 469–72 high-powered money see central bank money hires 135, 542 Holmström, Bengt 518–19 Hong Kong 205, 498 hostage takings and negotiations 440–1 housing prices 3, 4, 116–17, 120, 302–3, 496–7, 518 and loan-to-value (LTV) ratio 497, 498–9 housing wealth 310, 542 Howitt, peter 517 human capital 229–32, 244, 542 human wealth 310, 315, 330 Hungary hyperinflation 474, 475 mortgages 497 hyperinflation 446, 461, 474–5, 490, 493, 542 hysteresis 165 Iceland 31 export ratio 349 identification problem 537, 542 identities 48, 51 imitation, and growth 246, 247 immigration, United Kingdom (UK) 12 import compression 379, 542 imports 48, 60, 348–9, 355, 366, 367–8, 369, 375, 376, 377, 389, 524, 542 and real exchange rates 367 incarceration rate 165 income 68, 542 30/05/2017 12:57 556 INDEX aggregate 22–3 capital or profit 22 current, and consumption 313–14, 315– 16, 331, 332 and demand 53, 54, 55 distribution of 201 and happiness 200–2 inequality 272–4 labour 22, 523 and life satisfaction 202 nominal 68–9, 70 personal 524, 545 real 90 see also disposable income independent variables 535, 542 index number 30, 542 indexed bonds 289, 542 India 15 indirect taxes 523, 542 inequality 7, 12 income 272–4 and technological progress 269–74 wage 269–72, 274 inflation 30, 105, 115, 542 benefits of money illusion 493 option of negative real interest rates 493–4 seignorage 492–3 costs of 490–2 inflation variability 491 money illusion 491, 492 shoe-leather costs 490 tax distortions 490–1 hyperinflation 446, 461, 474–5, 490, 493, 542 and money growth 483–4 negative see deflation and oil prices 185, 186 pure 32 and tax 32, 490–1 and wages 166–7 inflation accounting 456 inflation rate 30–5, 542 and central bank independence 442, 443 China 13 euro area expected 106–7, 108, 114, 155–6, 157– 8, 166, 172, 179, 186, 410–11, 513 foreign 411 high, and Phillips curve 165–6 and interest rates 105, 106–7 OECD 489, 490 optimal 489–94 and output 174, 175, 177–81, 182 and unemployment 34–5, 153–72, 174, 441–2, 443, 446, 485, 511 United States see under United States inflation targeting 481, 485, 494, 518, 542 flexible 485, 541 and interest rate rule 481, 485–6 Sweden 487–9 inflation-adjusted deficit 455, 456, 525, 542 Z06 Macroeconomics 85678.indd 556 innovation and growth 246, 247 and income inequality 273 insolvency 111, 112, 542 institutions and growth 247–9, 517 and technological progress 247–9 instrumental variable methods 537, 542 instruments 537, 542 intercept 532, 542 interest parity condition (uncovered interest parity) 358–9, 360, 390–2, 394, 409, 410, 432–3, 548 interest rate rule 481, 485–6, 518, 542 interest rates 4, 437–8, 509 constant 285–6 and deficit reduction 336 determination of 70–8 ECB 77–8 equilibrium 70–2, 92 and equilibrium output 88, 89 and euro 12 and exchange rates 390–2, 394–5, 396, 397, 405–7, 410, 416–17, 417–18 Germany 401–2, 414, 415 and inflation 105, 106–7 and investment 86, 88, 93, 99, 174, 316, 319–20, 389, 394 long-term 287, 543 and monetary expansion 95 and money demand 67–8, 69–70, 71, 72, 78, 83–4, 90, 90–1 and money supply 70–4, 79, 90–1 n-year 291 and nominal income 68–9, 70 and openness in financial markets 358–61 and output 92, 93, 94, 99–100, 174, 177–81, 182–3, 332, 333–5, 394–5, 396, 397, 483, 519 and price level 99–100 real money, real income and 90–1 short-term 287, 546 term structure of 287 US see under Federal Reserve; United States zero 286 zero lower bound 7, 78, 79, 95, 108, 115, 122, 179, 180, 183, 293, 397, 481, 486, 493, 495, 548 see also nominal interest rates; policy rate; real interest rates intermediate goods 21, 349, 542 internal finance 294, 542 International Monetary Fund (IMF) 19, 542 Internet 164, 165 investment 47, 50–1, 51, 68, 86, 366, 389, 510, 542 and capital accumulation 216 China 14, 15 and current account balance 382–3 and deficit reduction 98, 336 and depreciation 383 and expectations 316–23, 330, 337, 509 financial 68, 541 foreign direct 498, 541 and interest rates 86, 88, 93, 99, 174, 316, 319–20, 331, 389, 394 inventory 47, 48, 51, 86, 524, 542 non-residential 47, 524, 544 and output (production) 86, 174, 215– 16, 217–18, 323, 331 and profit 316–23 profitability versus cash flow 321–2 and real exchange rate 366 residential 47, 524, 546 and sales 86, 99, 324 and saving equilibrium 58–9 and stock prices 318 United States see under United States volatility of 323–5 investment per effective worker 240 investment per worker 217, 218, 221, 239 Ireland 422, 423, 424 budget deficit reduction 338–9 debt-to-GDP ratio 464, 465, 470 deposit insurance 113 unemployment rate 10, 163 IS curve 88–9, 91, 92, 93, 94, 97, 122, 177, 185, 261, 332, 333, 337, 510, 511, 543 IS relation 59, 86–9, 91, 109, 114, 510, 543 and expectations 330–3 under fixed exchange rates 410, 432 IS relation in the open economy 394 demand for domestic goods 366 determinants of C, I and G 366 determinants of exports 367 determinants of imports 367 IS–LM model 85–103, 109, 114–15, 337, 389, 510 financial markets and the LM relation 90–1 fiscal policy 92–3, 99, 122 goods market and the IS relation 86– 89 monetary policy 93, 99–100 monetary–fiscal policy mix 94–8 in the open economy 394–7 and short run 99, 100 stock markets and 298–9 IS–LM–PC model 174–5, 182, 185 Italy 123, 402 bond spreads 471 budget deficit 447 debt-to-GDP ratio 464, 465 and EMS 402, 414 output per person 200, 203 output per worker 251 technological progress 251 unemployment rate 10, 11, 163 30/05/2017 12:57 INDEX 557 J-curve 380–1, 543 Japan 15, 123, 519 collective bargaining 140 deflation 30 export ratio 349 growth rate 203, 205 output per person 200, 202, 203 output per worker 251 saving rate 213 technological progress 251 unemployment and output 177 Jorgenson, Dale 510 junior securities 118, 543 junk bonds 288, 543 Kahneman, Daniel 201–2 Katz, Larry F 271 Keynes, John Maynard 58, 59, 78, 85, 335, 411, 412, 509, 510 Keynesians 511 Khitatrakun, Surachai 314 Klein, Lawrence 510 Kravis, Irving 198 Krugman, Paul 220, 272 Kuwait, GDP, GNP and net income (1989–94) 357 Kuznets, Simon 21 Kydland, Finn 441, 513 labour 144, 206, 207 effective 237, 238, 241, 243, 540 labour demand 152 labour in efficiency units 237, 543 labour force 27, 135, 175, 214 flows in and out of 136, 137 participation rate 28, 135, 214, 545 Labour Force Survey (LFS) 27, 135, 543 labour hoarding 177, 262, 543 labour income 22, 523 labour market 134–52 flows of workers 135–7 imperfections 516–17 movements in unemployment 137–40 price determination 144 rigidities 162, 543 sclerotic 135 wage determination 140–3 labour mobility European Union (EU) 420, 421–2 United States (US) 420, 422 labour productivity 144, 543 see also productivity labour supply 152 Lamont, Owen 321 Latin America 15 see also Argentina; Brazil; Uruguay; Venezuela layoffs 136, 138, 268–9, 543 Lehman Brothers 3, 57, 119 lender of last resort 496, 543 Lerner, Abba 377 Z06 Macroeconomics 85678.indd 557 leverage/leverage ratio 110–11, 117–18, 119, 481, 497, 519, 543 life cycle theory of consumption 310, 543 life (of a bond) 289, 543 life satisfaction, and income 202 linear relation 49, 530, 543 liquidity 112, 518–19, 543 liquidity facilities 121, 543 liquidity preference 509, 543 liquidity provision 113, 496, 518, 543 liquidity trap 78–9, 108, 481, 494, 543 Lithuania, currency board 427 LM curve 90–1, 92, 93, 94, 97, 333, 510, 543 LM relation 90–1, 114, 394 loan-to-value (LTV) ratio 497, 498–9, 543 logarithmic scale 196, 543 long run 35–6, 188, 543 saving rate and consumption 223, 229 saving rate and output 219, 220, 221, 222, 227, 229, 230 long-term interest rates 287, 543 Lucas critique 513, 543 Lucas, Robert 231, 335, 336, 512, 517 M1 543 M1 growth, and inflation 483, 484 Maastricht Treaty 423, 447, 543 macroeconometric models 510 macroprudential tools 496–8, 519, 543 Malthus, Thomas 204 Malthusian trap 204, 543 management practices, and technological progress 246, 247 Mankiw, N Gregory 516 marginal cost of production 144 marginal propensity to consume see propensity to consume mark-up 144, 145, 147, 160, 164, 172, 184, 543 market economy 250 Marshall, A 377 Marshall–Lerner condition 377, 380, 387, 389, 543 maturity of a bond 109, 287, 289, 543 Mavrodi, Sergei 302 medium run 35, 148, 543 equilibrium 177–81, 183, 410–11 exchange rates 409–12, 419 fiscal consolidation in 182, 188, 336 inflation target 485 productivity growth and output and unemployment in 263–7 Menem, Carlos 425 menu costs 516, 543 Mexico 347, 377 mid-cycle deficit see cyclically adjusted deficit minimum wages 143, 162 MMM pyramid 302 models of endogenous growth 231, 543 modified Phillips curve 159, 543 Modigliani, Franco 310, 439, 440, 510 monetarism, monetarists 511, 543 monetary base 82, 405, 406, 495, 511 monetary contraction 93, 398–9, 417–18, 543 monetary expansion 93, 94, 95, 98, 298, 333–5, 409, 543 monetary policy 72–4, 93–4, 481–505 and budget deficit reduction 340 conventional 494, 539 dynamics of adjustment 99–100 and euro 12 expectations and output 333–5 and financial crisis 122, 123–4 and financial shocks 115 and financial stability 496–9 fiscal dominance of 473, 541 and fixed exchange rates 400 inflation targeting 481, 485–9, 494 money targeting 483–4 in open economy 395–6 quantitative easing 493, 495 review of learning 482–3 unconventional 122, 123, 494–6, 547 versus fiscal policy 511 see also monetary contraction; monetary expansion; monetary–fiscal policy mix monetary tightening see monetary contraction monetary–fiscal policy mix 94–8, 543 money 67, 68 and output 511 see also central bank money; currency; deposit accounts; money demand; money finance; money growth; money supply money demand 67–72, 74, 76–7, 484, 509, 510 and interest rates 67–8, 69–70, 71, 72, 78, 83–4, 90–1 and nominal income 68–9, 70, 90 real 90 money finance 473–5, 543 money growth, and inflation 483–4 money illusion 491, 492, 493, 494, 543 money market funds 67–8, 543 money supply 76–7, 83, 84, 484 and interest rates 70–4, 79, 90–1 and nominal income 71–2 money targeting 483–4 Mortensen, Dale 141 mortgage lenders 116, 544 mortgage-based securities (MBS) 3, 118, 544 mortgages loan-to-value (LTV) ratio 497, 498–9, 543 subprime 3, 116–17, 547 underwater 116, 548 30/05/2017 12:57 558 INDEX MPS model 510, 513 multilateral exchange rates 354, 544 multiplicative uncertainty 439 multiplier(s) 52–3, 54–5, 88, 332, 370, 509, 544 fiscal 373–4 Mundell, Robert 419, 420 Mundell–Fleming model 388, 397, 544 n-year interest rate 291, 544 narrow banking 113, 544 Nash, John 440 national accounts see national income and product accounts (NIPA) National Bureau of Economic Research (NBER) 95 national income 523, 544 national income and product accounts (NIPA) 21, 510, 522–6, 544 income side compensation of employees 523, 539 consumption of fixed capital 523 corporate profits and business transfers 523, 539 gross domestic product (GDP) 522 gross national product (GNP) 522 indirect taxes 523 national income 523, 544 net interest 523, 544 net national product (NNP) 523 payments of factor income to the rest of the world 522, 545 personal disposable income 524 personal income 524, 545 proprietors’ income 523, 545 receipts of factor income from the rest of the world 522, 546 rental income of persons 523, 546 product side change in business inventories 524– 5, 539 durable goods 524 equipment and software 524 exports 524 government purchases 524, 542 gross private domestic fixed investment 524 imports 524 net exports 524 non-durable goods 524 non-residential investment 524 personal consumption expenditure 524 residential investment 524 services 524 structures 524, 547 natural level of employment 152, 175, 336 natural level of output 148, 178, 179, 185, 513, 514, 519 natural rate of interest 178, 544 natural rate of unemployment 144–7, 148, 152, 336, 441, 442, 467, 485, 486, 513, 544 Z06 Macroeconomics 85678.indd 558 and oil prices 184–6 and Phillips curve 159–60 and productivity 263–7 variations across countries 161–4 variations over time 164 neoclassical synthesis 509–12, 544 net capital flows 356, 544 net exports 48, 372, 389, 524, 544 and output 369, 370, 377, 396 and real depreciation 377–8 net interest 523, 544 net national product (NNP) 523, 544 net transfers received 382, 544 Netherlands 371 debt-to-GDP ratio 465 export ratio 349 output per person 200 output per worker 251 technological progress 251 unemployment benefits 163 unemployment rate 163 neutral rate of interest see natural rate of interest new classicals 417, 515–16, 544 new growth theory 517, 518, 544 new Keynesian models 518, 519 new Keynesians 516–17, 517, 518, 544 New Zealand 463 Nikkei Index 294, 301 nominal appreciation 350 nominal depreciation 350, 376 nominal exchange rates 350–1, 352, 353, 389, 409, 410, 411, 417, 421, 544 nominal GDP 23, 24, 30, 31, 544 nominal income and money demand 68–9, 70, 90 and money supply 71–2 nominal interest rates 105–7, 108, 114, 115, 330, 358, 390, 410, 417, 486, 491, 514, 544 Germany 360 Great Depression 181 and present values 283, 284, 286–7, 307–8 UK 107–8, 360 nominal rigidities 516, 518, 544 nominal wages 142–3, 144, 145, 155, 165 non-accelerating inflation rate of unemployment (NAIRU) 160, 544 non-durable goods 524, 544 non-human wealth 310, 315, 330, 544 non-residential investment 47, 524, 544 North American Free Trade Agreement (NAFTA) 347, 544 North Korea 248–9, 250 not in the labour force 28, 544 OECD see Organisation for Economic Cooperation and Development official deficit 525, 544 oil prices, effects of increases 183–8 1970s and 2000s compared 186–7 and energy intensity of GDP 187–8 inflation 185, 186 natural rate of unemployment 184–6 output 185 Okun, Arthur 33 Okun coefficient 177, 544 Okun’s law 33–4, 175, 176–7, 544 OPEC see Organization of the Petroleum Exporting Countries open economy 48 fiscal multipliers in 373–4 fiscal policy in 373–5, 396–7 IS–LM model in 394–7 monetary policy in 395–6 see also goods market in an open economy; IS relation in the open economy open market operations 72, 73–4, 79, 406–7, 544 openness in factor markets 347, 544 openness in financial markets 347, 361, 544 balance of payments 355–6 domestic and foreign assets, choice between 356–8 interest rates and exchange rates 358–60 openness in goods markets 346–7, 348– 54, 354–60, 361, 544 exports and imports 348–9 multilateral exchange rates 354 nominal exchange rates 350–1, 352, 353 real exchange rates 350, 351–3 see also goods market in a open economy optimal control 440, 513, 544 optimal control theory 440, 544 optimal currency area 544 Europe as 420–2 US as 419–20 ordinary least squares (OLS) 534, 545 Organisation for Economic Cooperation and Development (OECD) 18–19, 545 education 229 inflation rates 489, 490 output per person 203–4, 205 ratios of exports to GDP (2014) 349 Organisation of the Petroleum Exporting Countries (OPEC) 183–4, 545 out of the labour force 135, 136, 545 output and budget deficit reduction 336–41 and capital accumulation 215–16 and demand 51–6, 87–8, 174, 367, 368, 370–5, 389, 410, 509, 511, 513 and depreciation 376–8, 381 and employment 144, 148 and exports 369, 370, 377, 396 and financial shocks 115 30/05/2017 12:57 INDEX 559 and fiscal consolidation 336–41 and fiscal and monetary changes 94, 99–100 fluctuations 188, 545 foreign 371–2 and government spending 60, 336–41, 370–1, 378, 396–7 and inflation rate 174, 175, 177–81, 182 and interest rates 92, 93, 94, 99– 100, 174, 177–81, 182–3, 331, 332, 333– 5, 394–5, 396, 397, 483, 519 interest rates and exchange rates, joint movements of 389–90, 394–5 and investment 86, 174, 215–16, 217– 18, 323, 331 and money 511 natural level of 148, 178, 179, 185, 513, 514, 519 and oil prices 185 potential 175, 178, 185, 411, 467, 485, 516, 545 and productivity growth 260–2 and profit 323 stabilisation 467–8 see also aggregate output; equilibrium output; output gap; output growth; output per person; output per worker; production output gap 175, 178, 545 Sweden 487 output growth 35 before elections 444, 445 China 12, 13, 14, 35–6, 205, 250 EU15 33 euro area France, post-war 220 per person 200, 203, 204–6, 251 per worker 221, 222, 227–8, 251, 252 Soviet Union 220 and unemployment 33–4, 175, 176–7 US 4, 5, 6, 181, 203, 228, 445, 446 world economy (2000–2015) 3, 4–5 see also growth output per effective worker 238, 239–42 saving rate and 242–3 steady-state level of 242, 243 output per person 197–8, 199, 200, 202, 215, 545 across countries 204–6 across two millennia 204 convergence of 203–4, 205 growth rate 200, 203, 204–6, 251 in rich countries since 200–4 output per worker 200, 238, 239, 241, 242 capital and 207–9, 214–19, 220, 221, 223–4, 226, 230, 231, 260 growth rate 221, 222, 227–8, 251, 252 human capital and 229–32 level of 227, 228 Z06 Macroeconomics 85678.indd 559 saving rate and 219–22, 223, 226–7, 227–8, 229 steady-state, and saving rate 226–7 technological progress and 222, 237 see also productivity panel data sets 311, 545 Panel Study of Income Dynamics (PSID) 310, 311 paradox of saving 59, 61, 545 parameters 49, 545 participation rate 28, 135, 214, 545 patents 245, 246, 274, 545 pay-as-you-go social security system 225, 545 PAYGO rule 449, 545 payments of factor income to the rest of the world 522, 545 pegs (fixed exchange rates) 399, 401, 545 Penn World Tables project 198–9 pension systems 225–6 permanent income theory of consumption 31, 545 Perry, Rick 436 personal disposable income 523 personal income 523, 545 Phelps, Edmund 147, 159–60, 161, 511 Phillips, A W 34, 153, 156 Phillips curve 34–5, 153, 156–9, 175, 178, 179, 185, 410, 411, 441–2, 485, 510, 511, 545 and deflation 166–7 and high inflation 165–6 and natural rate of unemployment 159– 60 and rational expectations 513 see also IS–LM–PC model Piketty, Thomas 273 Pissarides, Christopher 141, 516–17 players 440, 545 Poincaré, Raymond 462 Poland 10 GDP growth 25, 26 hyperinflation 474 policy and expectations 440–4 establishing credibility 442–3 hostage takings and negotiations example 440–1 inflation and unemployment example 441–2 and politics 444–50 role of 512 time inconsistency issues 441, 442, 443, 444 and uncertainty 437–40 policy coordination 375, 545 policy makers games between 445–6 restraints on 439–40, 444 and voters, games between 444–5 policy mix see monetary–fiscal policy policy rate 109, 114, 115, 116, 174, 177–8, 179–81, 183, 185, 260–1, 298, 331– 2, 333, 334, 394, 396, 397, 418, 439, 442, 481, 485–6, 494, 496, 545 euro area 124, 340 Federal Reserve 122, 293 political business cycle 444, 445, 545 politics and fiscal restraints 447–9 and policy 444–50 population growth 204, 214, 240, 241, 242 population in working age 135 Portugal 423, 424 budget deficit 447 current account deficit 379, 422 debt-to-GDP ratio 464, 465, 470 wages and inflation 167 potential output 175, 178, 185, 411, 467, 485, 516, 545 Poterba, James 314 Prescott, Edward 441, 513, 515–16 present discounted value see expected present discounted values present value see expected present discounted values price determination 144, 145, 514–15, 516 price expectations 266 price indexes see consumer price index (CPI); GDP deflator price level 30, 99–100, 107, 545 expected 142–3, 155 and wages 142–3, 145, 155 price–setting relation 145, 146, 147, 152, 162, 184, 263–4, 266, 545 prices reference or base year 23, 41, 42 relative 23, 32 see also bond prices; housing prices primary deficit 457, 459, 545 primary surplus 457, 459–60, 475, 525, 545 private saving 58–9, 61, 98, 183, 215–16, 225, 382, 383, 466, 545 private sector involvement 472, 545 private spending see aggregate private spending Prodi, Romano 447 producer price index (PPI) 31 production 21–2 marginal cost of 144 see also output production function 144, 148, 226, 230, 237–8, 545 aggregate 206–7, 214 see also Cobb–Douglas production function productivity growth 516 30/05/2017 12:57 560 INDEX China 14 and demand 260–1 expectations of 266 and natural rate of unemployment 263– and output and unemployment in the short run 260–2, 266 United States (US) 7, 265–6 profit expectations of 316–19, 320, 321, 323, 324, 328 and investment 316–23 and output 323 and sales 322–3 profit income 22 profit maximisation 518 profitability 321–2, 545 propagation mechanisms 188–9, 545 propensity to consume 49, 52, 53, 55, 545 propensity to save 59, 545 property rights 247–8 proprietors’ income 523, 545 public debt see debt public saving 58–9, 61, 98, 223, 225, 382, 383, 466, 545 purchasing power 198, 545 purchasing power parity (PPP) 13, 198– 9, 545 pure inflation 32 QE1, QE2 and QE3 495, 545 quantitative easing 493, 546 quits 136, 546 quotas 346 random walk 297, 546 of consumption 514, 546 rating agencies 109, 118, 288, 546 rational expectations 335–6, 337, 512– 15, 518, 546 implications of 514 integration of 514–15 and Phillips curve 513 rational speculative bubbles 301, 546 raw materials 144 Reagan, Ronald 398 real appreciation 352, 367, 546 real business cycle (RBC) models 515, 546 real business cycle theory 515–16, 518 real depreciation 352, 376–7, 380–1, 409, 410 real effective exchange rate (REER) 354 real exchange rates 350, 351–3, 354, 366, 367, 389, 409–10, 411, 421 and imports 367 and real interest rates 417, 432–3 Spain 422 real GDP 23–4, 30, 546 chain-type indexes 41–2 construction of 41–2 per person 24, 546 Z06 Macroeconomics 85678.indd 560 rate of growth 24–6, 31 and technological progress 26 real GDP in chain-linked volumes 23 real income 90 real interest rates 105–7, 108, 114, 115, 174, 330, 389, 390, 486, 491 and debt ratios 363, 463 ex ante 107 ex post 107 Great Depression 181 and investment 316, 319–20, 331 negative 493–4 and output 174, 177–81, 182–3, 331, 332 and present values 286–7, 307–8 and real exchange rates 417, 432–3 UK 107–8 real money demand 90–1 real money supply 90–1 real wages 32, 142, 145, 146, 147, 152, 165, 184–5, 264, 265 receipts of factor income from the rest of the world 522, 546 recession(s) 4, 24, 32, 188, 546 double-dip, EU 8, and monetary–fiscal policy mix 95–7 and unemployment rate 138 ‘refi’ (refinancing) rate 77–8 regression 534, 546 regression line 534, 546 relative prices 23, 32 rental cost of capital see user cost of capital rental income of persons 523, 546 research and development (R&D) 243–5, 272, 517, 546 and appropriability of research results 245, 538 and fertility of research process 243–5, 541 and patent protection 245 reservation wages 140, 546 reserve ratio 84, 546 residential investment 47, 524, 546 residual 534, 546 retirement saving 314 returns to factors 207 returns to scale 207, 214 revaluations 350, 351, 399, 400, 546 Ricardian equivalence 465–7, 546 Ricardo, David 465 Ricardo–Barro proposition 465, 546 Riksbank 123, 487 risk 109, 287, 392, 397 stock prices and 300–1 risk averse 109, 546 risk premiums 109, 114, 288, 289, 292– 3, 546 and quantitative easing 495 Romer, Paul 231, 517 Roubini, Nouriel 518 Russia 69, 250 hyperinflation 474 MMM pyramid 302 see also Soviet Union Sachs, Jeffery 426 safe havens 393, 546 sales and investment 86, 99, 324 and profit 322–3 Samuelson, Paul 153, 156, 509 Sargent, Thomas 335, 336, 512 saving 68, 546 and current account balance 382–3 and depreciation 383 and investment equilibrium 58–9 paradox of 59, 61, 545 private 58–9, 61, 98, 183, 215–16, 225, 382, 383, 466, 545 propensity to save 59, 545 public 58–9, 61, 98, 223, 225, 382, 383, 466, 545 retirement 314 and social security systems 225–6 saving rate 209, 213, 216, 217–24, 546 and capital per worker 227, 229 China 14, 15 and consumption 223–4, 228–9 and output 219–2, 223, 226–7, 227–8, 229, 242–3 United States (US) 228 savings 68 Schelling, Tom 440 Scholz, John 314 Schumpeter, Joseph 267, 517 Schwartz, Anna 511 securities junior 118, 543 mortgage–based 3, 118 senior 118, 546 securitisation 118, 546 seignorage 473–4, 492–3, 546 Selten, Reinhard 440 senior securities 118, 546 separations 135, 136, 139–40, 546 services 524, 546 Seshadri, Ananth 314 shadow banking 110, 113, 546 shadow cost 320 Shafir, Eldar 492 shares see stocks Shiller, Robert 116 Shleifer, Andrei 517, 519 shocks 546 asymmetric 420–2 propagation mechanisms 188–9, 545 shoe-leather costs 490, 546 short run 35, 148, 546 equilibrium 410, 411 exchange rates in 419 fiscal consolidation in 182, 188, 336 inflation target 485 IS–LM model and 99, 100 30/05/2017 12:57 INDEX 561 productivity growth and output and unemployment in 260–2, 266 short-term interest rates 287, 546 Singapore 205, 349 skill-biased technological progress 272, 547 slope 531, 547 Slovakia 465 Slovenia 465 social security 225–6 United States (US) 476 Solow residual 257, 547 Solow, Robert 153, 156, 206, 251, 257, 510 solvency 111 South Korea 205, 248–9, 250, 498 Soviet Union output growth 220 see also Russia Spain 423, 424 bond spreads 471 current account deficit 379 debt-to-GDP ratio 464, 465 housing prices 498 output per person 200, 203 output per worker 251 real exchange rate 422 technological progress 251 unemployment rate 10, 11, 163, 422 spending caps 448–9, 547 spread (bonds) 471, 472, 547 Stability and Growth Pact (SGP) 436, 447–8, 547 stagflation 185, 512, 547 staggering (of wage and price decisions) 514–15, 516, 547 Standard & Poor’s 500 Composite Index 294, 295 standard of living 24, 197–200, 241, 547 China 13 euro area large increase in since 1950 202–3 United States (US) standardised employment deficit see cyclically adjusted deficit ‘Starve the Beast’ strategy 445 state of technology 206–7, 208, 209, 237, 260, 547 static expectations 319, 335, 547 expected present value of profits under 328 statistical discrepancy 356, 547 steady state 219, 547 capital per worker 227 and Cobb–Douglas production function 235 output per (effective) worker 226–7, 242, 243 Stevenson, Betsey 201 stock, as a variable 68, 547 Z06 Macroeconomics 85678.indd 561 stock markets and economic activity 297–300 consumer spending increase 298–9 monetary expansion 298 stock prices 294–300, 303 and arbitrage 295–7 bubbles 301–2 ex-dividend price 295 fundamental value 301, 302 and investment 318 as present values 295–7 random walk 297 and risk 300–1 US, euro area and emerging economies (2007–2010) stocks (shares) 68, 294, 547 equity premium 296 Stone, Richard 21 strategic interactions 440, 547 Strauss-Kahn, Dominique 375 structural change 267, 547 structural deficit see cyclically adjusted deficit structural rate of unemployment 147, 547 structured investment vehicles (SIVs) 117–18, 119, 547 structures 524, 547 subprime mortgages 3, 116–17, 547 sudden stops 392, 423, 424, 47 Summers, Robert 198 supply siders 398, 547 Sweden 10 inflation targeting 487–9 output gap 487 output per person 200 output per worker 251 Riksbank 123, 487 technological progress 251 unemployment rate 10, 489 Switzerland 31, 248 export ratio 349 System of National Accounts (SNA) 21 t statistic 535, 547 Taiwan 205 tariffs 346, 547 TARP see Troubled Asset Relief Program tax 51, 52, 60, 455 brackets 32, 491 capital gains 490 and consumption 50, 331, 333, 466 current versus future 457–60 cuts 444, 446, 458, 465, 466 and disposable income 93 and equilibrium output 93 France 1920s 462 Germany 1920s 461 and government debt 455, 457–60 on imports see tariffs increases 92–3, 95, 99, 466 indirect 523, 542 and inflation 32, 490–1 and IS curve 89 and LM curve 90 smoothing 469, 547 United States (US) 4, 398, 446 Taylor, John 485–6, 514–15, 516 Taylor rule 486, 547 technocracy movement 263 technological progress 14, 26, 144, 209, 215, 231, 232, 518, 547 and churning 267–9 determinants of 243–7 management, innovation and imitation 246–7 research and development (R&D) 243– 5, 517 and inequality 269–74 measurement of 257–8 and output 260–2 skill-biased 272, 547 and structural change 267 and unemployment 260–2, 263–7, 517 technological progress and growth 222, 251–3 China 252–3 institutions and 247–9 output and capital dynamics of 240–2 interactions between 239–40 production function 237–8 rich countries since 1985 251–2 saving rate, effects of 242–3 technological unemployment 263, 547 technology adaptation of 246 new, diffusion of 244 state of 206–7, 208, 209, 237, 260, 547 technology frontier 246, 547 temporary help agencies 164, 165 term premium 289, 547 term structure of interest rates see yield curve time inconsistency 245, 441, 442, 443, 444, 504–5, 513, 547 Tirole, Jean 519 Tobin, James 318, 319, 510 Tobin’s q 318–19, 547 total factor productivity (TFP) growth 257, 547 total wealth 310, 547 toxic assets 118, 547 tradable goods 348, 547 trade inter-industry 421 intra-industry 421 and wage inequality 272 world 120 trade balance 48, 348, 355, 369–70, 370–1, 372, 373, 396–7, 524, 547 depreciation and 376–8, 380–1 trade deficit 48, 355, 368, 369, 370, 373, 377–8, 396–7, 410, 547 US 348, 383, 393 30/05/2017 12:57 562 INDEX trade surplus 48, 348, 355, 368, 369, 370, 378, 547 trade-weighted real exchange rate 354 transfers to persons 525, 547 see also government transfers Treasury bills (T-bills) 289, 392–3, 547 Treasury bonds 289, 547 Treasury Inflation Protected Securities (TIPS) 289, 547 Treasury notes 289, 547 Trichet, Jean Claude 340 Troubled Asset Relief Program (TARP) 121–2, 547 Tulipmania 301–2 Tversky, Amos 492 twin deficits 399, 547 uncertainty and policy 437–40 unconventional monetary policy 122, 123, 494–6, 547 uncovered interest parity see interest parity condition underground economy 69, 547 underwater mortgages 116, 548 unemployment 27, 437, 548 and disinflation 335 duration of 136, 165, 540 equilibrium 146–7, 148 and equilibrium real wages 146–7 flows in and out of 136 and happiness 29–30 movements in 137–40 structural rate of 147, 547 and technological progress 260–2, 263–7, 517 see also natural rate of unemployment; unemployment rate unemployment insurance/benefits 143, 146, 147, 162, 163, 548 unemployment rate 10–11, 26–30, 135, 137, 214, 548 aggregate 138 China 13, 14 Europe 8, 10–11, 27, 28, 33, 162–4 and inflation 34–5, 153–72, 174, 441– 2, 443, 446, 485, 511 and output growth 33–4, 175, 176–7 and recessions 138 Sweden 489 United Kingdom (UK) 10, 11, 28, 154 United States see under United States and wages 140, 142, 143, 145, 146, 147, 154, 155, 513 unionisation, United States (US) 164 United Kingdom (UK) 10, 402 debt-to-GDP ratio 462, 463, 464, 465 and EMS 402, 414 and euro area, real and nominal exchange rates 352–3 exit from EU (Brexit) 12 export ratio 349 and financial crisis, policy responses 123 Z06 Macroeconomics 85678.indd 562 GDP growth 25, 26 gold standard, return to (1925) 412 housing prices 498 immigration concerns 12 income inequality 273 indexed bonds 289 inequality concerns 12 interest rates 107–8, 360 labour market 136 output per person 200 output per worker 251 pension system 225 technological progress 251 unemployment rate 10, 11, 28, 154 wage changes and unemployment 154 United States (US) bond yields 109, 110 budget deficits 122, 398, 399, 448–9, 456, 468–9 Budget Enforcement Act (1990) 448 Congressional Budget Office (CBO) 476, 539 consumption changes in since 1960 324–5 Second World War 468–9 ‘Contract with America’ 1994 (Republicans) 427, 436 currency in circulation 69 current account deficit 383 Current Population Survey (CPS) 27–8, 539 debt in medium and long run 476 debt-to-GDP ratio 444–5, 446, 456, 463, 464, 476 Economic Recovery Act (1981) 398 education spending 231 and wages 269–70, 271 export ratio 348, 349 federal deposit insurance 113 Federal Reserve see Federal Reserve and financial crisis 3–4, 116–20 policy responses 121–2 fiscal expansion early 1980s 398–9, 417–18 fiscal policy across states 422 GDP growth 24–5 Great Depression 166–7, 180–2 healthcare 476 housing prices 3, 4, 116–17, 302–3, 496–7, 518 income inequality 273–4 inflation rate 5, and unemployment 153, 154, 156–9, 160–1 interest rates 3, 4, 6–7, 77, 79, 95– 6, 122, 398, 476 effect of increase in 99–100 Great Depression 181 see also under Federal Reserve investment changes in since 1960 320–1, 324–5 Second World War 468–9 labour mobility 420, 422 monetary base 495 monetary contraction early 1980s 398– 9, 417–18 mortgage crisis 3, 116–17 and NAFTA 347 as optimal currency area 419–20 output growth 4, 5, 6, 176, 181, 203, 228 Republican versus Democratic administrations 445, 446 output per person 200, 202, 203 output per worker 251 policy mix 1990s 98 and recession (2001) 95–7 productivity growth 7, 265–6 profit, changes in since 1960 320–1 propensity to consume 55 as safe haven 393 saving rate 213, 228 social security payments 476 spending caps 448–9 standard of living stock prices (2007–2010) taxation 4, 398, 446 technological progress 251 trade deficit 348, 383, 393 unemployment rate 5, 6, 27–8, 29, 137– 8, 164–5, 181 and inflation 153, 154, 156–9, 160–1 and output 176 and productivity growth 265–6 unionisation 164 wage determination 140 wage inequality 269–70, 271, 272 Uruguay 204 usable observations 535, 548 user cost of capital 320, 548 utility maximisation 518 value added 22, 548 Van Reenen, John 247 Venezuela 204 Venti, Steven 314 Vishny, Robert 519 Volcker, Paul 398, 464 Wachter, Till von 268 wage determination 140–3, 155, 514–15, 516 bargaining 140–1, 518 efficiency wage considerations 141–2, 143 and employment protection 143 and expected price level 142–3 and unemployment insurance/benefits 143, 146 and unemployment rate 140, 142, 143, 145, 146, 147, 155, 513 wage indexation 165–6, 548 wage-setting relation 145, 146, 152, 162, 184, 263–4, 266, 548 wages changes in, and unemployment (UK) 154 30/05/2017 12:57 INDEX 563 and education level 269–70, 272 efficiency 141–2, 143, 152, 516 inequality 269–72, 274 and inflation 166–7 minimum 143, 162 nominal 142–3, 144, 145, 155, 165 and price level 142–3, 145, 155 real 32, 142, 145, 146, 147, 152, 264, 265 reservation 140, 546 wars of attrition 446, 548 wars and budget deficits 468–9 Z06 Macroeconomics 85678.indd 563 wealth and consumption 310, 313–14 financial 68, 310, 541 housing 310, 542 human 310, 315, 330 non-human 310, 315, 330, 544 total 310, 547 wholesale funding 118–19, 121, 481, 548 Wicksell, Knut 178 Wicksellian rate of interest 178 see also natural rate of interest Wise, David 314 Wolfers, Justin 201 Woodford, Michael 518 Yellen, Janet 516 yield 287, 548 yield curve 287, 288, 293–4, 548 yield to maturity 287, 291–2, 548 zero lower bound 7, 78, 79, 95, 108, 122, 179, 180, 183, 293, 397, 481, 486, 493, 495, 548 Zimbabwe 475 zombie banks 123 30/05/2017 12:57 Z06 Macroeconomics 85678.indd 564 30/05/2017 12:57 Z06 Macroeconomics 85678.indd 565 30/05/2017 12:57 Z06 Macroeconomics 85678.indd 566 30/05/2017 12:57 Z06 Macroeconomics 85678.indd 567 30/05/2017 12:57 Z06 Macroeconomics 85678.indd 568 30/05/2017 12:57 ... www.pearson.com/uk F01 Macroeconomics 85678 Contents.indd 30/05/2017 06:59 Macroeconomics A European Perspective 3rd edition Olivier Blanchard, Alessia Amighini and Francesco Giavazzi Harlow, England • London... Blanchard, Olivier (Olivier J.), author | Amighini, Alessia, author | Giavazzi, Francesco, author Title: Macroeconomics : a European perspective / Olivier Blanchard, Alessia Amighini and Francesco... exchange rates and the creation of the European Economic and Monetary Union (EMU) His books include Limiting Exchange Rate Flexibility: The European Monetary System with Alberto Giovannini and