Recommended Readings and Websites Covering
Recent Trends in Macroeconomic Theory

Last Updated: 29 August 2007

Site Maintained By:

Professor Leigh Tesfatsion

Department of Economics/375 Heady

Iowa State University

Ames, Iowa 50011-1070

(515) 294-0138

http://www.econ.iastate.edu/tesfatsi/

tesfatsi AT iastate.edu

Econ 606 Home Page (Ph.D. Module on Macro Coordination)

Econ 602 Home Page (Ph.D. Module on Growth Theory)

Econ 502 Home Page (Master's Level Macro Theory)

Topic Areas

• I. Introduction
• II. Review and Critique of IS-LM Modeling
• III. Economic Growth: A Microfoundations Approach
• III-Addendum. Microfoundations Issues: Consumer Behavior Illustratinos
• IV. Expectations Modeling and Time Inconsistency Issues
• V. Coordination Issues
• VI. International Aspects

I. INTRODUCTION

1. Overview

   Suggested Readings and Websites:

   • David Colander, "The Future of Economics: The Appropriately Educated in Pursuit of the Knowable", Cambridge Journal of Economics 2005 29(6), 927-941. The published article can be freely accessed here by CJE subscribers (hence it should be accessible through ISU-owned pc's). ON-LINE
     Abstract: This interesting article addresses several key issues that will be addressed in Econ 502: namely, the past, current and future roles of rationality and equilibrium/coordination assumptions within macroeconomic theory. The article is oriented towards graduate students of economics.

     David Colander, "Introduction", emphasis on pp. 1-16, in David Colander (ed.), Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge University Press, Cambridge, UK, 2006.

     G. R. Feiwel, "Quo Vadis Macroeconomics? Issues, Tensions, and Challenges", Chapter 1 (pp. 1-100) in G. R. Feiwel, ed., Issues In Contemporary Macroeconomics and Distribution, op. cit..

     Abstract: Feiwel offers a thoughtful critique of macro theory circa 1985 still highly relevant for macro theorists today. The discussion is at a relatively advanced conceptual level. Students might wish to skim rather quickly through this survey for now, to get a general overview, and re-read it later with more care as additional topics are covered in class.

     K. Hoover, The New Classical Macroeconomics, Basil Blackwell, 1988, Chapter 1: The Varieties of Macroeconomics (pp. 3-19).

     Robert King, "New Classical Macroeconomics" (8pp), entry in the Concise Encyclopedia of Economics. ON-LINE

     Axel Leijonhufvud, "Episodes in a Century of Macroeconomics", pp. 27-45 in David Colander (ed.), Post Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge University Press, Cambridge, UK, 2006.

     Abstract: Leijonhufvud gives a decidely different view from Woodford (below) regarding the history of macroeconomics over the past century.

     N. Gregory Mankiw, "New Keynesian Economics" (7pp), entry in the Concise Encyclopedia of Economics. ON-LINE

     Paul Streeten, What's Wrong with Contemporary Economics? (pdf,219K), Interdisciplinary Science Reviews 27(1), 2002, 13-24. ON-LINE

     Abstract: This study argues that, in educating economists, we are tending to produce narrow minded specialists without understanding of institutions and the history of economic thought, and without the ability to evaluate both quantitative and non-quantitative data and to weigh evidence against the backdrop of a wide vision of reality. The author is a professor emeritus of economics of Boston University, a consultant to the United Nations, and a founder of the journal World Development.

     Michael Woodford, "Revolution and Evolution in Twentieth Century Macroeconomics (pdf, 119K), presented at the conference Frontier of the Mind in the Twenty-First Century, Library of Congress, Washington, D.C. ON-LINE

     Abstract: Woodford is the author of Interest and Prices: Foundations of a Theory of Monetary Policy (Princeton University Press, 1999), an influential new attempt to address macroeconomic stabilization policy from within a rational expectations framework.

     The History of Economic Thought Website maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York.

     Symposium: Forecasts for the Future of Economics, Journal of Economic Perspectives 14 (Winter 2000). Articles by W. E. Becker, R. H. Thaler, B. Allen, R. M. Solow, and R. E. Lucas, Jr.

2. Empirical Characteristics of the U.S. Economy

   Suggested Readings and Websites:

   • Robert T. Atkinson (Vice President, Progressive Policy Institute) maintains a Web site titled The New Economy Index which analyzes the degree to which the 50 state economies of the U.S. are "structured and operated in accordance with the tenets of the New Economy."

   • Nathan Balke and Robert Gordon, "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, February 1989, pp. 38-92.
     Abstract: The authors address the issued raised in Sheffrin, Chapter 2: Have We Stabilized the Economy? (pp. 13-50). They dispute the claims by Christina Romer, reported in Sheffrin, that the business cycle has not moderated since World War II.

     J. Bradford DeLong and Lawrence H. Summers, "The `New Economy': Background, Historical Perspective, Questions, and Speculations" (html,84K), Federal Reserve Bank of Kansas City Economic Review, Volume 86, Number 4, Fourth Quarter 2001, pages 29-59.

     J. Bradford DeLong and A. Michael Froomkin, "Speculative Microeconomics for Tomorrow's Economy", November 14, 1999, Version C5.

     J. Bradford DeLong (Economics, UC Berkeley) maintains a Web site titled the New Economy Master Page that provides links to his writings and other source materials on the "New Economy."

     Danny T. Quah maintains a site called The Weightless Economy, which provides resources related to his article of the same title appearing in appearing in Business Economist, Vol. 30, No. 1, March 1999, pages 40-53.

     The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) maintains an empirical information site on U.S. Business Cycle Expansions and Contractions that includes a discussion of the specific procedures used by the NBER to date the beginning and end of U.S. recessions.

3. Macro Modeling: Alternative Approachs

   Suggested Readings and Websites:

   • The Alliance for Innovative Manufacturing (AIM) at Stanford University maintains an interesting site titled How Everyday Things Are Made. This site provides manufacturing video (virtual factory tours) covering the manufacturing processes for over forty types of common products (cars, planes, chocolate, glass bottles, etc.). These videos stress the extraordinary degree of coordination among input suppliers, producers, and distributors required to bring to market even seemingly simple products such as a jelly bean.

II. REVIEW AND CRITIQUE OF IS-LM MODELING

1. The Basic IS-LM Model

   Suggested Readings and Websites:

   • Peter Blaug, Economic Theory in Retrospect, Cambridge University Press, 1979, Chapter 15 (pp. 665-696). [Historical perspective.]

   • Victoria Chick, Macroeconomics After Keynes: A Reconsideration of the General Theory, MIT Press, Cambridge, MA, 1983, Chapters 1-2.
     Abstract: Chick argues forcefully that the basic IS-LM model trivializes Keynes's general theory.

     Avi Cohen and Geoffrey Harcourt, "Cambridge Capital Theory Controversies", Journal of Economic Perspectives (JEL), Winter 2003, 199-214, plus follow-up discussion in the "Comment" section of JEL, Volume 17, No. 4 (Fall 2003), 227-233.

     Abstract: This article relates the history surrounding the finding that the relation between aggregate capital -- however measured or aggregated -- and its "factor price" is in general nonmonotonic, contradicting the usual neoclassical presumption that factor prices reflect relative factor scarcity. Also concludes, regarding aggregation in general, that the use of aggregate production functions in macroeconomic models is extremely problematic and that empirical "good fit" justifications are illegitimate.

     J. Popkin, "The U.S. National Income and Product Accounts" Journal of Economic Perspectives 14 (Spring 2000), 215-224.

     C. Steindel, "Chain-Weighting: The New Approach to Measuring GDP", Federal Reserve Bank of New York, Vol. 1, No. 9, December 1995.

     Symposium: Measuring the CPI, Journal of Economic Perspectives, Winter 1998, Volume 12, Number 1. Articles by M. J. Boskin et al., K. G. Abraham et al., A. Deaton, W. E. Diewert, W. D. Nordhaus, and R. A. Pollak.

2. Aggregate Supply and Price Adjustment

   Suggested Readings and Websites:

   • D. Carlton, "The Theory and Facts of How Markets Clear: Is Industrial Organization Valuable for Understanding Macroeconomics?", Chapter 15 (pp. 909-946) in R. Schmalensee and R. D. Willig, Handbook of Industrial Organization, Volume I, Elsevier Science Publishers B.V., 1989.
     Abstract: In Sections 3-4, the author discusses empirical evidence on price rigidity and possible explanations in terms of the role of non-price mechanisms for achieving market-clearing resource allocations.

     V. Chick, Macroeconomics After Keynes: A Reconsideration of the General Theory, MIT Press, Cambridge, MA, 1983, Chapters 4-7.

     Abstract: This book presents an advanced treatment of coordination issues. Some of these issues will be taken up in part V of the course. Students with a good background in macro might want to take a look at this material.

     R. Clarida, J. Gali, and Mark Gertler, "The Science of Monetary Policy: A New Keynesian Perspective", Journal of Economic Literature 37 (December 1999), pp. 1661-1707.

     Abstract: The authors argue that temporary nominal price rigidities provide the key friction that gives rise to nonneutral effects of monetary policy.

     D. Demery et al., op. cit., Chapter 5: The History and Significance of the Phillips Curve, pp. 169-225.

     Abstract: This article focuses on some of the controversies that have arisen over the estimation of the Phillips curve relation. This reading will be most useful for students with a background and interest in econometrics issues.

     P. Howitt, The Keynesian Recovery and Other Essays, The University of Michigan Press, Ann Arbor, 1990.

     Abstract: The author argues that the reduction of the coordination problem in macro to "sticky prices" is at the root of the decline in Keynesian economics -- although major coordination failures exist, there is no good reason for attributing them to a lack of price flexibility.

     D. Romer, "Keynesian Macroeconomics Without the LM Curve", Journal of Economic Perspectives 14 (Spring 2000), pages 149-169.

     J. Simon, "Great and Almost-Great Magnitudes in Economics", Journal of Economic Perspectives 4 (1990), 149-156.

     Symposium: The Natural Rate of Unemployment, Journal of Economic Perspectives, Winter 1997, Volume 11, Number 1. Articles by J. Stiglitz, R. J. Gordon, D. Staiger et al., O. Blanchard and L. F. Katz, R. Rogerson, and James K. Galbraith.

     Symposium: Business Cycles, Journal of Economic Perspectives, Spring 1999, Volume 13, Number 2. Articles by J. B. De Long, C. D. Romer, S. Basu and A. M. Taylor, and V. Zarnowitz.

III. ECONOMIC GROWTH: MICROFOUNDATIONS ISSUES

1. Introduction to Economic Growth

   Suggested Readings and Websites:

   • Economic Growth Resources (html) (Jonathan Temple, U of Bristol, UK). Resources included at this site include surveys, references, researchers, papers, data sets, journals, events, networks, and related links.

   • The Growth Theory Website maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York.

2. Aggregate Production Functions: Form and Measurement

   Suggested Readings and Websites:

   • As part of a general site on the history of economic thought, researchers at the New School of Social Research (New York, NY) maintain a website providing an in depth discussion of the concept of a Production Function.

   • Jesus Felipe and Franklin M. Fisher, "Aggregation in Production Functions: What Applied Economists Should Know", (pdf,242K) Metroeconomica, Vol. 54, May 2003, 208-262.
     Abstract: "This paper surveys the theoretical literature on aggregation of production functions. The objective is to make neoclassical economists aware of the insurmountable aggregation problems and their implications. We refer to both the Cambridge capital controversies and the aggregation conditions. The most salient results are summarized, and the problems that economists should be aware of from incorrect aggregation are discussed. The most important conclusion is that the conditions under which a well-behaved aggregate production function can be derived from micro production functions are so stringent that it is difficult to believe that actual economies satisfy them. Therefore, aggregate production functions do not have a sound theoretical foundation. For practical purposes this means that while generating GDP, for example, as the sum of the components of aggregate demand (or through the production or income sides of the economy) is correct, thinking of GDP as GDP=F(K,L), where K and L are aggregates of capital and labor, respectively, and F(*) is a well-defined neoclassical function, is most likely incorrect. Likewise, thinking of aggregate investment as a well-defined addition to 'capital' in production is also a mistake. The paper evaluates the standard reasons given by economists for continuing to use aggregate production functions in theoretical and applied work, and concludes that none of them provides a valid argument."

     Iain Fraser, "The Cobb-Douglas Production Function: An Antipodean Defence?" (pdf,77K), Economic Issues, Volume 7, Part 1, March 2002.

     Abstract: "In this paper a re-examination of the original time-series data sets used by Professor Doublas and associated researchers to establish the existence of an aggregate production function is undertaken. Particular attention is paid to the issue of whether the data provide deductive support for the `Laws of Production' as claimed by Doublas (1948). Various statistical methods are used to analyse the data to see if the claims of Douglas are justified. Only the New South Wales data and to a lesser extent the New Zealand data yield results that support the assertions of Douglas --- hence the Antipodean defence."

     Warren P. Hogan, "Technical Progress and Production Functions", The Review of Economics and Statistics, Vol. 40, 1958, pp. 407-411.

     Abstract: The author critique's Solow's conception of an aggregate production function Y = AF(K,L) and growth accounting. He argues that the strong relationship between output and capital, as calculated by Solow's technique, must necessarily hold as long as the fractions of income wL/Y and rK/Y going to wages and capital rental ("profits") are roughly constant over time.

     Anwar Shaikh, "Laws of Production and Laws of Distribution: The Humbug Production Function", The Review of Economics and Statistics, Vol. 56, 1974, pp. 115-120.

     Abstract: The author elaborates on the criticism by Hogan (1958) of Solow's conception of an aggregate production function Y = AF(K,L) and growth accounting. Using an invented set of data points spelling out the word "humbug" in K-Y space, and assuming constant fractions of income going to wages and capital rental ("profits"), he shows that Solow's technique applied to this data set results in an estimated production relation F(K,L) that exhibits smooth concave curvature in K-Y space.

     Robert Solow, "Technical Change and the Aggregate Production Function", The Review of Economics and Statistics, Vol. 39, 1957, pp. 312-320.

     Abstract: This classic paper introduces the aggregate production function Y = AF(K,L) and the concept of "growth accounting."

     Jonathan Temple, "Aggregate Production Functions and Growth Economics" (pdf,267K), International Review of Applied Economics, 20(3), July 2006, 301-317.

     Abstract: "Rigorous approaches to aggregation indicate that aggregate production functions do not exist except in unlikely special cases. This paper considers the awkward implications for growth economics. It provides a conventional defence of growth theory in terms of ‘parables’ and then considers how empirical growth research might avoid the need for aggregate production functions."

3. Total Factor Productivity: Definition and Measurement

   Suggested Readings and Websites:

   • W. Erwin Diewert, "The Challenge of Total Factor Productivity" (pdf,82K), Internal Productivity Monitor, Vol. 1 (2000), 45-52.
     Abstract: The author argues that total factor productivity estimates at the industry level for any country are likely to be inaccurate at the present time due to measurement problems, and that national productivity estimates are likely to be much more accurate than subnational industry estimates.

     W. Erwin Diewert and Alice O. Nakamura, "The Measurement of Aggregate Total Factor Productivity Growth" (pdf,272K), in J. J. Heckman and E. E. Leamer (eds.), Handbook of Econometrics, Volume 6, Handbooks in Economics Series, Elsevier, North-Holland.

     Abstract: The authors provide a careful detailed discussion of alternative concepts and perspectives on the measurement of total factor productivity growth.

     Jesus Felipe and John S. L. McCombie, "Is a Theory of Total Factor Productivity Really Needed?" (pdf,1,8M), Metroeconomica 58(1), 2007, 195-229.

     Abstract: This paper addresses the question of whether or not a theory of total factor productivity is needed in order to explain the observed large per capita income differences across countries. As the argument that it is needed has been reached by calculating TFP empirically, we show that the way the estimates of TFP have been computed is not an innocuous issue. To illustrate our point, we discuss how two well-known textbooks on growth theory present the arguments and the problems associated with these expositions. We conclude that the tautological nature of the estimates of TFP lies at the heart of an important question that the empirical literature on economic growth has been dealing with during recent years. Hence, our arguments cast doubt on the need for a theory of TFP."

     David T. Owong, "Productivity Growth: Theory and Measurement" (pdf,60K).

     Abstract: The author provides a relatively simple introduction to the definition and measurement of productivity, with a stress on total factor productivity. The author uses simple analytical examples to illustrate alternative measures and the relationships among these measures.

     Stefano Scarpetta, Andrea Bassanini, Dirk Pilat, and Paul Schreyer, "Economic Growth in the OECD Area: Recent Trends at the Aggregate and Sectoral Level" (pdf,779K), Working Paper No. ECO/WKP(2000)21, Economics Department, OECD, Release Date: 19 June 2000.

     Abstract: The paper provides a thorough thoughtful discussion of growth performance in the OECD countries over the period 1980-2000. Special attention is given to developments in labor productivity, allowing for human capital accumulation, and to total factor ("multifactor") productivity allowing also for changes in the composition and quality of physical capital. The evidence indicates wide (and growing) disparities in GDP per capita growth, while differences in labor productivity have remained fairly stable. These patterns are explained by different employment growth rates across countries. In the most recent years, a rise in total factor productivity growth in industries associated with information and communication technology (ICT) has boosted aggregate growth in some countries (e.g., the United States). The report includes a statistical annex as well as an annex providing a detailed discussion of measurement issues and data sources.

4. Neoclassical Growth Models

   Suggested Readings and Websites:

   • The Neoclassical Growth Website maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York.

   • The Multi-Sector Growth Website maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York.

   • The Optimal Growth Website maintained by the Schwartz Center for Economic Policy Analysis (CEPA) at the New School for Social Research, New York.

III-Addendum. MICROFOUNDATIONS ISSUES: CONSUMER BEHAVIOR ILLUSTRATIONS

1. The Forward-Looking Consumption Hypothesis

   Suggested Readings and Websites:

   • Symposium on Consumption Behavior, Journal of Economic Perspectives, Volume 15, No. 3, Summer 2001.

   • A. Deaton, Understanding Consumption, Oxford U Press, NJ, 1992. [Overview of recent theoretical and empirical research on savings and consumption, emphasizing the interplay between micro and macro, and between cross-sectional and panel data. Will be most useful for students with a background and interest in econometrics.]

     Shane Frederick, George Loewenstein, and Ted O'Donoghue, "Time Discounting and Time Preference: A Critical Review", Journal of Economic Literature, Vol. XL (June 2002), 351-401.

     Abstract: The authors argue that the discounted utility model of intertemporal choice, widely used by economists, has little empirical support. The authors note that early twentieth century economists commonly viewed intertemporal choices as reflecting an interplay of disparate and often competing psychological motives, and they argue that this approach should be resurrected. In particular, they argue that descriptive adequacy (based on empirically supported psychological factors) should be stressed over theoretical elegance.

2. A Simple Flexible-Price IS-LM Model with Bonds and Wealth Effects

3. Micro Modeling of Forward-Looking Consumer Behavior

4. The Budget Deficit and Ricardian Equivalence

   Suggested Readings and Websites:

   • A. Deaton and J. Muellbauer, Economics and Consumer Behavior, Cambridge University Press, 1984.

   • B. Douglas Bernheim, "Ricardian Equivalence: An Evaluation of Theory and Evidence", in Stanley Fischer, Ed., NBER Macroeconomics Annual, MIT Press, Cambridge, MA, 1987, pp. 263-304.

   • R. E. Hall, "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidences", Journal of Political Economy 86 (December 1978), 971-988. [Classic article]

   • G. Hess and B. K. Wilson, "Reinterpreting Excess Sensitivity with Precautionary Savings", RWP 94-10, Federal Reserve Bank of Kansas City, December 1994. [Excellent reference list citing key studies on the permanent income hypothesis.]

   • L. Kotlikoff, Generational Accounting: Knowing Who Pays, and When, for What We Spend, The Free Press, Macmillan, Inc., 1992.

   • T. Sargent, Chapter 2: "Reaganomics and Credibility" (pp. 19-39), in T. Sargent, Rational Expectations and Inflation, Harper and Row, 1986. BOOK ON CLOSED RESERVE.

   • Symposium: The Budget Deficit and Ricardian equivalence, Journal of Economic Perspectives, Spring 1989, Volume 3, Number 2. Articles by J. Yellen, E. Gramlich, R. Barro, B. Douglas Bernheim, and R. Eisner.

IV. EXPECTATIONS MODELING AND TIME INCONSISTENCY ISSUES

1. Adaptive versus Rational Expectations

   Suggested Readings and Websites:

   • D. Demery et al., op. cit., Chapter 6: "The Macroeconomic Implications of the Rational Expectations Hypothesis" (pp. 226-269). BOOK ON CLOSED RESERVE.

   • R. Farmer, The Macroeconomics of Self-Fulfilling Prophecies, MIT Press, 1993.

   • K. Hoover, op. cit., Chapter 2: "Clearing Labor Markets" (pp. 23-37).

   • R. Lucas, Jr., "Adaptive Behavior and Economic Theory" Journal of Business 59 (1986), 401-426.

   • R. Lucas, Jr., "Unemployment Policy" pp. 240-247 in R. E. Lucas, Jr. (ed.), Studies in Business Cycle Theory, MIT Press, Cambridge, MA, 1987 (Sixth Printing).

   • F. S. Mishkin,"The Rational Expectations Revolution: A Review Article of Preston J. Miller, ed., The Rational Expectations Revolution: Readings from the Front Line," Journal of International and Comparative Economics, Volume 5, 1996 (pdf preprint,1026K).

   • Resource portal on Learning and the Embodied Mind covering research on embodied cognition, evolutionary psychology, and learning algorithms for agent-based computational modeling.

2. Implications for Policy Choice Over Time

   Suggested Readings and Websites:

   • P. Davidson, "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective" Journal of Economic Perspectives 5 (1991), 129-143.

   • D. Demery, op. cit., Chapter 2: Stabilization Policy (pp. 6-52).

   • P. Fisher, Rational Expectations in Macroeconomic Models, Kluwer, MA, 1992.

   • R. Frydman and E. S. Phelps, eds., Individual Forecasting and Aggregate Outcomes: Rational Expectations Examined, Cambridge University Press, Cambridge, 1983.

   • Douglas Gale, Money: In Equilibrium, Cambridge University Press, Cambridge, 1982, Chapters 1 through 3 (pp. 1-135) plus Bibliographic Notes (pp. 335-337).

   • L. Hansen and T. Sargent, Rational Expectations Econometrics, Westview Press, Boulder and Oxford, 1991.

   • T. M. Havrilesky, op. cit., Chapter 5 ("A Survey of Large-Scale Macroeconometric Models: Their Workings and Shortcomings") and Chapter 6 ("The Rational Expectations Hypothesis: Survey and Recent Research").

   • K. Hoover, op. cit., Chapter 4: The Limits of Monetary Policy: Macroeconomic Models (pp. 65-86).

   • R. G. King, "Will the New Keynesian Macroeconomics Resurrect the IS-LM Model" Journal of Economic Perspectives 7 (Winter 1993), 67-82.
     Abstract: King argues that the alleged New Keynesian attempt to resurrect the IS-LM framework will hinder the development of a new generation of macroeconometric policy models in which rational expectations play a central role.

     A. Kirman and M. Salmon, eds., Learning and Rationality in Economics, Blackwell, Cambridge, MA, 1995.

     A. Kramer, Conversations With Economists, Rowman and Allenheld, 1983.

     R. Lucas, Jr., "Econometric Policy Evaluation: A Critique", pp. 104-130 in R. Lucas, Jr., Editor, Studies in Business Cycle Theory, MIT Press, 1981. [Famous source of the "Lucas Critique."]

     R. Lucas, Jr., Studies in Business Cycle Theory, MIT Press, Cambridge, MA, 1987 (Sixth Printing).

     R. Lucas, Jr., and T. Sargent, Rational Expectations and Econometric Practice, University of Minnesota Press, Minneapolis, 1981.

     P. Miller, ed., The Rational Expectations Revolution: Readings from the Front line, MIT Press, 1994.

     J. Muth, "Rational Expectations and the Theory of Price Movements", Econometrica 29, 1961, 315-335.

     T. Sargent, Macroeconomic Theory, Academic Press, N.Y., 1987, V and VIII.

     T. Sargent, Bounded Rationality in Macroeconomics, Oxford: Clarendon Press, 1993.

     T. Sargent and N. Wallace, "Rational Expectations and the Theory of Economic Policy", Journal of Monetary Economics 2 (1976), 169-183.

     Abstract: Sargent and Wallace provide a simple example in which rational expectations together with the natural rate hypothesis render monetary policy "ineffective" in the sense that government is unable to use monetary policy to exert systematic control over real income.

     E.-M. Sent, The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent's Achievements, Cambridge University Press, Cambridge, UK, 1998.

     S. M. Sheffrin, Rational Expectations, Second Edition, Cambridge University Press, Cambridge, UK, 1996.

     Lars E. O. Svensson, "Comments on Nancy Stokey: `Rules versus discretion after twenty five years'" (pdf,9pp), comments prepared for the NBER Macroeconomics Annual, Princeton University, April 2002.

V. COORDINATION ISSUES

1. Walrasian Equilibrium: A Benchmark of Coordination Success?

   Suggested Readings and Websites:

   • Samuel Bowles, "Prologue" (pdf,19pp), Microeconomics: Behavior, Institutions, and Evolution, Princeton University Press, Princeton, N.J., 2003.

   • Samuel Bowles and Herbert Gintis, "Walrasian Economics in Retrospect" Working Paper, University of Massachusetts, Amherst, January 2000, to appear in the Quarterly Journal of Economics. A preprint is available (pdf,28pp).

   • George R. Feiwel (ed.), Arrow and the Ascent of Modern Economic Theory, New York University Press, Washington Square, New York, 1987.

   • D. W. Katzner, The Walrasian Vision of the Microeconomy: An Elementary Exposition of the Structure of Modern General Equilibrium Theory, University of Michigan Press, Ann Arbor, 1989.

   • James Konow, "Which is the Fairest One of All? A Positive Analysis of Justice Theories" Journal of Economic Literature, Volume XLI (December 2003), 1188-1239.

   • Christopher D. Mackie, Canonizing Economic Theory: How Theories and Ideas are Selected in Economics, M. E. Sharpe, Inc., 1998.

   • V. L. Smith, "Economics in the Lab" Journal of Economic Perspectives 8 (Winter 1994), 113-131, and "Theory, Experiments, and Economics," Journal of Economic Perspectives 3 (1989), 151-169.

2. Post-Walrasian Macroeconomics

   Suggested Readings and Websites:

   • The Alliance for Innovative Manufacturing (AIM) at Stanford University maintains an interesting site titled How Everyday Things Are Made (html). ON-LINE
     Abstract: The site provides manufacturing video (virtual factory tours) covering the manufacturing processes for over forty types of common products (cars, planes, chocolate, glass bottles, etc.). These videos stress the extraordinary degree of coordination among input suppliers, producers, and distributors required to bring to market even seemingly simple products such as a jelly bean.

     George A. Akerloff, "Behavioral Macroeconomics and Macroeconomic Behavior" The American Economic Review, Volume 92, No. 3, June 2002, pages 411-433.

     R. Barro and H. Grossman, Money, Employment, and Inflation, Cambridge U Press, Cambridge, 1976. [The "young" Barro takes a disequilibrium stance.]

     John Bryant, "Team Coordination Problems and Macroeconomic Models" pages 157-171 in David Colander, Beyond Microfoundations: Post-Walrasian Macroeconomics, Cambridge University Press, 1996.

     V. Chick, Macroeconomics After Keynes: A Reconsideration of the General Theory, MIT Press, Cambridge, MA, 1983, Chapters 9 and 17.

     R. Clower, "The Keynesian Counter-Revolution: A Theoretical Appraisal", in The Theory of Interest Rates, ed. by F. Hahn and F. Brechling, Macmillan, London, 1965.

     Robert Clower and Peter Howitt, "Taking Markets Seriously: Groundwork for a Post Walrasian Macroeconomics" Chapter 2 (pp. 21-37) in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge, UK, 1996.

     David Collander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge, MA, 1996.

     David Colander, "Overview", Chapter 1 (pp. 1-17) in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge, UK, 1996.

     R. W. Cooper, Coordination Games: Complementarities and Macroeconomics, Cambridge University Press, UK, 1999.

     Vincent Crawford (University of California at San Diego, CA), "John Nash and the Analysis of Strategic Behavior" (pdf,7pp), Working Paper, Department of Economics, UCSD, January 2000.

     George R. Feiwel (ed.), The Economics of Imperfect Competition and Employment: Joan Robinson and Beyond, New York University Press, Washington Square, New York, 1989.

     J. Friedman, ed., Problems of Coordination in Economic Activity, Kluwer Academic Publishers, Boston, 1994.

     Robert Gibbons, "An Introduction to Applicable Game Theory", Journal of Economic Perspectives, Volume 11, Number 1 (Winter 1997), pages 127-149.

     Kevin D. Hoover, The New Classical Macroeconomics: A Skeptical Inquiry, Basil Blackwell, Cambridge, MA, 1992 (paperback edition, ISBN 0-631-17263-7).

     P. Howitt, The Keynesian Recovery and Other Essays, The University of Michigan Press, Ann Arbor, 1990.

     Peter Howitt, "Introduction: Prices and Coordination in Keynesian Economics", Chapter 1 (pp. 1-23, focus on 1-19) in Peter Howitt, The Keynesian Recovery and Other Essays, The University of Michigan Press, Ann Arbor, MI, 1990.

     Peter Howitt, "The Keynesian Recovery" Chapter 3 (pp. 70-85) in Peter Howitt, The Keynesian Recovery and Other Essays, The University of Michigan Press, Ann Arbor, MI, 1990.

     A. Leijonhufvud, On Keynesian Economics and the Economics of Keynes, Oxford University Press, 1968, Chapter II (pp. 49-102).

     A. Leijonhufvud, Information and Coordination, Oxford University Press, Oxford, 1981.

     Axel Leijonhufvud, "Towards a Not-Too-Rational Macroeconomics", Chapter 3 (pp. 39-55) in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge, MA, 1996.

     Charles F. Manski, "Economic Analysis of Social Interactions", Journal of Economic Perspectives, Volume 14, Number 3, Summer 2000, pp. 115-136.

     John McMillan, Reinventing the Bazaar: A Natural History of Markets, W. W. Norton & Co., 2002.

     Abstract: "New ideas in economics, and some old ones, are used in the chapters that follow to dissect exotic, innovative, and everyday marketplaces -- some in physical space, others in cyberspace. How do markets work? What can they do? What can't they do? These are the questions I will address."

     Douglas C. North, The New Institutional Economics and Development (pdf,30K), Working Paper, Washington University at St. Louis, 1993.

     D. Patinkin, Money, Interest, and Prices, Harper & Row, N. Y., 1965, Chapter 13.

     W. Peterson, op. cit., Chapter on Post Keynesian Economics.

     J. Roberts, "An Equilibrium Model with Involuntary Unemployment at Flexible, Competitive Prices and Wages", The American Economic Review 77 (1987), 856-874.

     C. Russell and A. John, "Coordinating Coordination Failures in Keynesian Models", Quarterly Journal of Economics 103 (August 1988), 441-464.

     Joseph E. Stiglitz, "Information and the Change in the Paradigm in Economics", The American Economic Review, Volume 92, No. 3, June 2002, pages 460-501.

3. The New Keynesian Approach

   Suggested Readings and Websites on the Efficiency Wage Theory:

   • R. Freeman, "War of the Models: Which Labour Market Institutions for the 21st Century?", Labour Economics 5 (1998), 1--24.

   • K. M. Murphy and R. H. Topel, "Efficiency Wages Reconsidered: Theory and Evidence", pp. 204-240 in: Yoram Weiss and Gideon Fishelson (eds.), Advances in the Theory and Measurement of Unemployment, Macmillan, London, 1990. [Theoretical and empirical critique of the New Keynesian theory of the efficiency wage.]

   • R. M. Solow, "Another Possible Source of Wage Stickiness", pp. 41-44 in Akerloff and Yellen, op. cit.. [Classic article.]

   • Symposium: Wage Inequality, Journal of Economic Perspectives, Spring 1997, Volume 11, Number 2. Articles by P. Gottschalk, G. E. Johnson, R. H. Topel, and N. M. Fortin and T. Lemieux.

   Suggested Readings an Websites on New Keynesian Economics in General:

   • Symposium: Keynesian Economics Today, Journal of Economic Perspectives Winter 1993, Volume 7, Number 1. Articles by N. Gregory Mankiw, David Romer, James Tobin, and Robert G. King.

   • G. A. Akerloff, An Economic Theorist's Book of Tales, Cambridge University Press, C. 1984.

   • V. Chick, Macroeconomics After Keynes: A Reconsideration of the General Theory, MIT Press, Cambridge, MA, 1983, Chapters 4-8 (especially chapters 4,7, and 8).

   • A. Deaton, "Model Selection Procedures, or Does the Consumption Function Exist?", Chapter 5 (pp. 43-69) in G. Chow and P. Corsi (eds.), Evaluating the Reliability of Macro-Economic Models, John Wiley, 1982.

   • H. Dixon and N. Rankin, eds., The New Macroeconomics: Imperfect Markets and Policy Effectiveness, Cambridge University Press, 1995.

   • A. Drazen, "Recent Developments in Macroeconomic Disequilibrium Theory", Econometrica 48 (1980), 293-306. [Survey of pre-1980 work.]

   • T. Eggertsson, Economic Behavior and Institutions, Cambridge Surveys of Economic Literature, Cambridge University Press, 1990.

   • George R. Feiwel, ed., The Economics of Imperfect Competition and Employment: Joan Robinson and Beyond, New York University Press, 1989.

   • F. M. Fisher, Disequilibrium Foundations of Equilibrium Economy, Cambridge University Press, Cambridge, 1986.

   • R. J. Flanagan, Chapter 9:Implicit Contracts, Explicit Contracts, Wages (pp. 198-204) in T. Havrilesky, ed. op. cit.

   • Douglas Gale, Money: In Disequilibrium, University of Cambridge Press, Cambridge, 1983, Chapter 1 (pp. 16-50) and Chapter 5 (pp. 262-296) plus Bibliographical Notes (pp.349-351 and 355-356).

   • P. Howitt, The Keynesian Recovery and Other Essays, The University of Michigan Press, Ann Arbor, 1990.

   • A. Lindbeck and D. J. Snower, The Insider-Outsider Theory, MIT Press, c. 1988.

   • E. Malinvaud, The Theory of Unemployment Reconsidered, Blackwell, Oxford, 1977.

   • N. Gregory Mankiw and D. Romer, eds. New Keynesian Economics, Vol.1: Imperfect Competition and Sticky Prices, and Vol. 2: Coordination Failures and Real Rigidities, MIT Press Readings in Economics, Cambridge, MA, 1991.

   • E. S. Phelps, Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest, and Assets, Harvard University Press, Cambridge, MA 1994.
     Abstract: Phelps presents a systematic analysis of the determinants of aggregate employment and economic activity in which new microeconomic models of labor market and product market imperfections are stressed. See the review of this book by M. Woodford, "Structural Slumps," Journal of Economic Literature 32 (Dec 1994), 1784-1815.

     R. E. Quandt, The Econometrics of Disequilibrium, Oxford University Press, c. 1988.

     S. Rosen, "Implicit Contracts: A Survey", Journal of Economic Literature 23 (September 1985), 1144-1175.

     G. D. Rudebusch, The Estimation of Macroeconomic Disequilibrium Models With Regime Classification Information, Springer-Verlag Volume 28, New York, 1987.

     J. Silvestre, "The Market-Power Foundations of Macroeconomic Policy" Journal of Economic Literature 31 (March 1993), pp. 105-141.

     J. Stiglitz, "Alternative Approaches to Macroeconomics: Methodological Issues and the New Keynesian Economics", NBER Working Paper No. 3580, Cambridge, MA, January 1991.

     Abstract: This article presents a spirited survey and defense of New Keynesian economics by one of its principal developers.

     J. Stiglitz, "The Invisible Hand and Modern Welfare Economics", NBER Working Paper No. 3641, Cambridge, MA, 1991.

     J. Stiglitz, "Capital Markets and Economic Fluctuations in Capitalist Economies", European Economic Review 36.2/3 (1992), 269-306.

     Abstract: This article presents an interesting readable overview of theoretical and empirical work on New Keynesian economics from 1980 through 1992 by one of the principal developers of the approach.

     M. Weitzman, The Share Economy, Harvard University Press, 1984.

     O. E. Williamson, "The New Institutional Economics: Taking Stock, Looking Ahead", Journal of Economic Literature XXXVIII (September 2000), pp. 595-613.

4. Coordination Issues: More General Considerations

   Suggested Readings and Websites on Coordination Issues:

   • P. W. Anderson, K. Arrow, and D. Pines, The Economy as an Evolving Complex System, Proceedings Volume V, Santa Fe Institute Studies in the Sciences of Complexity, Addison Wesley, 1988.

   • W. Brian Arthur, Steven N. Durlauf, and David A. Lane, The Economy as an Evolving Complex System II," Proceedings Volume XXVII, Santa Fe Institute Studies in the Sciences of Complexity, Addison-Wesley, Reading, MA, 1997.
     Note: Gerald Silverberg (University of Maastricht, the Netherlands) has written a review of this volume [ (html,7pp), (pdf,9pp)].

     R. Axelrod, The Evolution of Cooperation, Basic Books, N.Y., 1984. [Seminal study on the evolution of cooperation that has motivated much subsequent work.]

     R. Axelrod, The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration, Princeton University Press, Princeton, N.J., 1997.

     K. Binmore, Playing Fair, Game Theory and the Social Contract, Volume 1, MIT Press, 1994.

     S. Bowles and H. Gintis, "The Revenge of Homo Economicus: Contested Exchange and the Revival of Political Economy", Journal of Economic Perspectives 7 (Winter 1993), 83-102, followed by comments by O. E. Williamson (pp. 103-108) and J. Stiglitz (pp. 109-114).

     Andy Clark, Being There: Putting Brain, Body, and World Together Again, MIT Press, 1998 (paperback edition).

     Joshua Epstein and Robert Axtell, Growing Artificial Societies: Social Science from the Bottom Up (html), The MIT Press, Cambridge, MA, 1996. This monograph is reviewed (ps,28K) by L. Tesfatsion in the Journal of Economic Literature (Vol. XXXVI, March 1998, 233-234).

     John Foster, Evolutionary Macroeconomics, Unwin-Hyman, Boston, 1989. [A thoughtful critique of past and current macro analysis, and a proposed framework for "evolutionary" macro foundations allowing for time-varying structure.]

     John Holland, Adaptation in Natural and Artificial Systems, MIT Press, 1992. [In its first 1975 edition, this book began a new field of study---genetic algorithms as the basis for learning and adaptation in complex systems. A basic primer for anyone interested in the work ongoing at the Santa Fe Institute.]

     Alan P. Kirman, "The Economy as an Interactive System", pp. 491-531 in W. Brian Arthur, Steven Durlauf, and David Lane (eds.), The Economy as an Evolving Complex System, II, Proceedings Volume XXVII, SFI Studies in the Sciences of Complexity, Addison-Wesley, Reading, MA, 1997.

     Alan P. Kirman, "Whom or What Does the Representative Individual Represent?", Journal of Economic Perspectives 6 (Spring 1992), 117-136.

     J. Kornai, "The Affinity Between Ownership Forms and Coordination Mechanisms: The Common Experience of Reform in Socialist Countries", Journal of Economic Perspectives 4 (Summer 1990), pp. 131-147.

     Paul Krugman, The Self-Organizing Economy, Blackwell, 1996.

     Abstract: Krugman argues that self-organization -- the apparently spontaneous evolution of order from initial disorder -- is a concept that can usefully be applied to many areas of economics, including business cycles and the spatial location of firms.

     David Lane, "Artificial Worlds and Economics", Journal of Evolutionary Economics 3 (1992), 89-107.

     Steven Levy, Artificial Life, Vintage Books, 1993. [An early but still useful and fun introduction to the field of artificial life. If you have any interest at all in the modeling of evolutionary socio-economic systems, you should definitely give this book a read.]

     Charles F. Manski, "Economic Analysis of Social Interactions," Journal of Economic Perspectives, Volume, No. 3 (Summer 2000), pp. 115-136.

     Ramon Marimon, Ellen McGrattan, and Thomas J. Sargent, "Money as a Medium of Exchange in an Economy with Artificially Intelligent Agents", Journal of Economic Dynamics and Control 14 (1990), 329-373.

     Richard Nelson, "Recent Evolutionary Theorizing About Economic Change", Journal of Economic Literature 33 (1995), 48-90.

     Jonathan Rauch, "Seeing Around Corners", The Atlantic Monthly, April 2002, pp. 35-48. Interested readers can also view animations in QuickTime format of some of the artificial societies discussed in Rauch's article.

     Thomas C. Schelling, Micromotives and Macro Behavior, W. W. Norton and Co., N.Y., 1978 [A classic little book.]

     Steven M. Sheffrin, op. cit., Chapter 6: "Strategic Models of Policy Making" (pp. 138-170) and Chapter 7: Constitutional Rules and Macro Policy (pp. 171-200). BOOK ON CLOSED RESERVE.

     Karl Sigmund, The Game of Life, Oxford University Press, 1993.

     "Agent-Based Computational Modeling and Macroeconomics" (pdf preprint,148K), Economic Report 05023, Department of Economics, Iowa State University, July 2005. To appear in David Colander (ed.), Post-Walrasian Macroeconomics: Beyond the Dynamic Stochastic General Equilibrium Model, Cambridge University Press, Cambridge, UK, 2006.

     Abstract: Agent-based Computational Economics (ACE) is the computational study of economic processes modeled as dynamic systems of interacting agents. This essay discusses the potential of ACE modeling tools for the study of macroeconomic systems. Points are illustrated using an ACE model of a two-sector decentralized market economy.

     Leigh Tesfatsion, "Agent-Based Computational Economics: Modeling Economies as Complex Adaptive Systems", Information Sciences, Volume 149, 2003, 263-269 (pdf preprint,72K)

     Leigh Tesfatsion, "Agent-Based Computational Economics", to appear in Francesco Luna, Alessandro Perrone, and Pietro Terna (eds.), Agent-Based Theories, Languages, and Practices, Routledge Publishers. [ (pdf preprint,269K), (ps preprint,352K)]. Note: This is a much-extended version of the previously cited Information Sciences survey of ACE research.

     Ulrich Witt (ed.), Explaining Process and Change: Approaches to Evolutionary Economics, The University of Michigan Press, Ann Arbor, 1992.

     H. Peyton Young, Individual Strategy and Social Structure: An Evolutionary Theory of Institutions, Princeton University Press, Princeton, N.J., 1998. ISBN 0-691-02684-X

VI. INTERNATIONAL ASPECTS

1. Exchange Rates

2. Balance of Payments and the Mundell-Fleming Model

3. New Directions

   Suggested Readings and Websites:

   • V. Argy, International Macroeconomics: Theory and Policy, Routledge, 1994.

   • Jonathan Eaton and Samuel Kortum, "Technology, Geography, and Trade", Econometrica, Volume 70, No. 5 (September 2002), 1741-1779.
     The authors develop a Ricardian general equilibrium trade model that takes into account geographic features.

     Jacob. A. Frenkel and Assaf Razin, Fiscal Policies and the World Economy, MIT Press, 1992.

     Jeffrey A. Frankel, On Exchange Rates, MIT Press, Cambridge, MA, 1993.

     K. A. Froot and R. H. Thaler, "Anomalies: Foreign Exchange", Journal of Economic Perspectives 4 (Summer 1990), pp. 179-192.

     G. Grossman (ed.), Imperfect Competition and International Trade, MIT Press, 1992.

     J. Helliwell,"Macroeconometrics in a Global Economy", American Economic Review, Papers and Proceedings 83 (May 1993), 294-299. [Brief survey of recent work on multi-country macroeconometric models.]

     Catherine L. Mann, "Perspectives on the U.S. Current Account Deficit and Sustainability", Journal of Economic Perspectives, Volume 16, Number 3, Summer 2002, 131-152.

     Abstract: Mann discusses the structural and policy changes that could be combined to counter the widening trajectory of the current account deficit. These changes include fiscal discipline and more robust U.S. household saving, more rapid economic growth abroad underpinned by higher productivity growth, more liberalized domestic and global markets for services, and more deeply integrated euro financial markets.

     W. J. McKibbin and J. Sachs, Global Linkages: Macroeconomic Interdependence and Cooperation in the World Economy, Washington D.C., The Brookings Institution, 1991.

     Abstract: This article documents the MSG2 global model of macro interdependence and then uses the model to assess the international effects of domestic monetary and fiscal policies and to simulate the consequences of macro policy coordination.

     M. Obstfeld and K. Rogoff, Foundations of International Macroeconomics, The MIT Press, Cambridge, MA, 1996.

     K. Rogoff, "The Purchasing Power Parity Puzzle", Journal of Economic Literature 34 (June 1996), 647-668.

     Abstract: Rogoff asks how is it possible to reconcile the extremely high short-term volatility of real exchange rates with the glacial rate (15 percent per year) at which deviations from PPP die out? Concludes that international markets, though becoming more integrated all the time, remain quite segmented, with large trading frictions across a broad range of goods.

     J. Sachs and F. Larrain, Macro in the Global Economy, op. cit..

     Symposium: Globalization in Perspective, Journal of Economic Perspectives, Fall 1998, Volume 12, Number 4. Articles by D. Rodrik, M. Obstfeld, R. C. Feenstra, and J. G. Williamson.

     M. Taylor, "The Economics of Exchange Rates", Journal of Economic Literature 33 (March 1995), pp. 13-47.

     Abstract: This article critically reviews literature on the exchange rate over 1975-1995.

Copyright © 2007 Leigh Tesfatsion. All Rights Reserved.