Macroeconomic Policy Management

The course covers major problems and methods in macroeconomics, with particular focus on issues faced by policymakers in small, open economies. Modern macro is characterized by three fundamental features: economic outcomes are determined in general equilibrium; expectations play a crucial role and all analysis must be based on micro-foundations. Firms depend on consumers, who in turn depend on labor income, profits and rents, which are influenced by government decisions and the environment in which they work. Therefore, in general equilibrium, everything is related to everything, and we must carefully analyze how the economy will respond to those forces that can be considered “exogenous.” At the same time, Current behavior crucially depends on expectations about the future and those beliefs are shaped by the credibility of policies, the reputation of policymakers and the likelihood of potential “shocks.” Finally, economic incentives determine actions and we must make sure that our analysis of decision processes is incentive compatible. Macroeconomic outcomes (unemployment, inflation, growth, income distribution) may or may not be optimal and, if they are not, there usually is room for well-designed policy actions to bring us closer to more socially desirable results.  In this class we will develop a basic understanding of models and theoretical foundations, but the relevant analytical framework will be presented in the context of current policy dilemmas. Students are expected to build a technical foundation to allow them a reasonably sophisticated understanding of the existing state of economic policy debates. We will discuss theory and evidence on determinants of growth, economic stabilization, inflation, monetary, fiscal and financial policies. Along the way, we will touch on “hot” policy discussions: the future of capitalism and income distribution; policies to generate growth and the role of government; global economic imbalances, secular stagnation and the long decline in risk free interest rates; economic adjustment in the wake of shocks (technology breakthroughs, pandemics, regulatory fads); should advanced economies worry about the high levels of debt or should they engage in fiscal expansion? How about emerging markets with much more limited access to borrowing? How should monetary policy be conducted to attain desired inflation levels? Why does the financial sector play such a crucial role in a modern economy and why do financial meltdowns create such high cost