Topics in applied macrodynamic theory

This book is about the study of topics in macro dynamics from an applied, empirical perspective. The modeling philosophy behind most of the chapters ofthisbookisofKeynesiannature,representinganattempttorevivethist- oreticalperspectiveontheworkingofthemacroeconomy. Themacroeconomic research pursued here is somewhat di?erent from the mainstream literature using the Dynamic Stochastic General Equilibrium (DSGE) approach as the basic modeling device. The main features of the latter are the assumptions of intertemporally optimizing agents, rational expectations, competitive m- kets and price mediated market clearing through su?ciently ?exible prices and wages. The New Keynesian approach to macroeconomics has, in the last decade or so, to a large extent, also adopted the DSGE framework, building on intertemporally optimizing agents and market clearing, but favoring more the concept of monopolistic competition, sticky wages and prices and nominal as well as real rigidities. An path breaking work of this type is the recent book by Woodford (2003). However, it is well known that the intertemporal approach of smoothly optimizing agents and fast adjustments in order to establish temporal or - tertemporal marginal conditions in the product market, labor and capital markets, has not been very successful to match certain stylized facts on those markets. A further de?ciency of those intertemporal decision models is that macroeconomic feedback e?ects―and their stabilizing or destabilizing impact on the macroeconomy―have rarely been considered in those models. Yet, those feedback mechanisms, relevant for the interaction of all three markets, have been theoretically and empirically explored since the 1930s.

This book presents topics in applied dynamic macrotheory for closed and open economies. The authors give an advanced treatment of macroeconomic topics such as the Phillips curve, forward and backward looking behavior, open economy macrodynamics, structural macroeconometric model building as well as the empirics of Keynesian oriented macro models. They start from the closed economy and consider open economies for fixed and flexible exchange rate systems with free international capital flows later on. The dynamics of open economies in the context of interacting two country models are treated as well. The macrofounded approach extends and integrates non-market-clearing traditions in macrodynamics. It is compared to New Keynesian approaches which are generally rigorously microfounded, but often neglect to study macroeconomic feedback mechanisms (that may be stabilizing or destabilizing).

The chapters - though representing a coherent whole - are self-contained and can be used independently of each other.

Tired of RAIOM (Rational Agent Intertemporally Optimizing Model)? Then this is the book for you, a book on macroeconomics in the Keynesian (without any New-, Post-, Neo-, or other prefix) tradition. Fan of RAIOM? Then this is the book for you, it shows how it is possible to study dynamics without jumping on stable arms (or manifolds). A bonus is the econometric study of the theories set forth by the authors. All (macro)economists should read this book.
Professor Giancarlo Gandolfo, University of Rome "La Sapienza"

... The authors succeed in providing substantial insight into macroeconomic models. Both the models and the analysis of actual references cited are alone worthy of attention. This text is worthy of substantial effort to absorb and master its insights; not a book to be neglected or casually read.
Professor James B. Ramsey, New York University