We estimate the fiscal (spending) multiplier using quarterly US data, 1981Q3-2024Q4. We define government spending shocks as actual minus expected expenditure growth, the latter obtained from the Survey of Professional Forecasters. We employ the Jord & agrave; local projections method, coupled with state dependence of parameters, with smooth transition between states. A key testable hypothesis is that the positive and negative spending shocks have numerically (as well as qualitatively) different effects. We find that multipliers of shocks differ qualitatively (in terms of cyclicality) as well as quantitatively. Multipliers are almost always above unity (and often well above). Importantly, we uncover evidence that negative shocks have stronger effects over longer periods of time in the case of the FEC multipliers and likely with the PVIR-FM multipliers, too. Pooled-shock estimation can seriously bias results. Additionally, there is strong evidence that the two types of shock produce almost uniformly significantly different estimated coefficients of our key estimable equation.

This paper investigates how the presence of social capital affects the externality arising from status-seeking preference as a parable for inefficient antagonistic behavior. It is assumed that the stock of social capital is accumulating through joint social interaction between rational individuals who are forward looking. Using a differential game, we show that although the presence of social capital mitigates the tendency of overconsumption over time, social capital ends up declining to zero. It is also shown that the benefits from social capital enhance the motivation of individuals to accumulate social capital thereby leading to deter overaccumulation and thus possibly improving social welfare.

The book reviews the theoretical foundations of macroeconomic, fiscal, and monetary policy. It offers a panoramic view of macroeconomic theory, covering a wide range of topics that are not customarily dealt with in macroeconomics texts, as well as more standard material. The style is intuitive and accessible, relying on basic calculus, but explained discursively and using diagrams. Advanced theory is bridged with more elementary/intermediate material. Established models are reviewed alongside current research. There is an extensive review of empirical evidence on virtually every topic, supplemented by narrative accounts for various episodes. The policy implications of the various theories are emphasized throughout. The chapters are largely self-contained so that different courses can focus at different places. A ‘Guidance for Further Study’ section and extensive bibliography give plenty of ideas for all levels of independent study, from UG Projects to M.Sc. dissertations to Ph.D. theses. The book should be seen as an affirmation that there is a well-developed body of theory that is invaluable for an in-depth understanding of the macroeconomy and policy; equally, there is much scope for critical discussion and debate. Thus, the key feature is a balance between: breadth as well as depth; analytical treatment and intuition; theory and evidence; vintage theories and current directions; theory and policy; (established) theory and debate. As such, the book should appeal to a variety of instructors and students of macroeconomics at advanced undergraduate or graduate level, as well as those in related fields such as political economy.

This chapter discusses monetary policy. It is informally divided in two parts: The former discusses the rationale for and the main features of the current institutional ‘architecture’ related to monetary policy. A formal analysis of time inconsistency of optimal discretionary policy and the concomitant inflationary bias is followed by analyses of commitment and reputation. Subsequently, the Chapter looks at possible resolutions of the difficulties associated with discretionary policy, including independent Central Banks and inflation targeting. It also discusses the new features and proposals that emerged post-2007–9. A ‘policy in practice’ section looks at Taylor rules. In the latter part, we review the recent analyses on financial structure and the ‘credit channel(s)’ of monetary policy transmission. The chapter concludes with a review of Quantitative Easing, macroprudential regulation, and the current thinking on monetary policy as part of a wider package of optimal stabilization policy.

This chapter reviews the theory of growth. As motivation, it first discusses a range of related facts, including structural change and facts on the ‘new economy. It then launches into the Solow Growth Model (SMG) and related issues. The question of convergence, growth/development accounting, and the world income distribution are discussed next. The later part of the chapter discusses Endogenous Growth Theory(ies) (EGT). After offering an intuitive discussion of the limitations of SMG that EGT aims to rectify, the chapter reviews the AK model, including the processes that underpin it and its properties, and human capital, including its two-sector formulation. Newer EGT models are then reviewed, including models based on expanding product variety and those based on improving quality and product replacement (‘creative destruction’). The chapter concludes with evidence, the policy implications of EGT, and directions of current research.

This chapter analyses the Rational Expectations Hypothesis (REH), a pillar of forward-looking macroeconomics that emphasizes expectations. It also develops its implications in terms of ‘market efficiency’ and related concepts. It then reviews New Classical Macroeconomics: its main tenets, the ‘Lucas supply function’ that is crucial for much subsequent theory, and the ‘Lucas island model’ that underpins it. The centrepiece ‘Policy Ineffectiveness Proposition’ (PIP) is developed both intuitively and more formally. Subsequently, the chapter reviews one major line of criticism of PIP, the fact that markets may not clear, based in particular on staggered wage setting. Broader criticisms of the REH, including ‘bounded rationality’, are also reviewed. The chapter concludes with yet another landmark contribution of Robert Lucas, namely the ‘Lucas critique’ of activist stabilization policy.

This chapter offers an introduction to the methods and main models used in dynamic macroeconomics. After reviewing key concepts such as lifetime utility maximization and the period-by-period and intertemporal budget constraints, first-order conditions for intertemporal optimization (the Euler equation and the labour-leisure choice) are developed. These methods are applied in developing the workhorse Ramsey model, with discussion of related concepts such as dynamic efficiency and market equilibrium versus the command optimum. An extension of the Ramsey model incorporates adjustment costs in investment and develops the user cost of capital. Furthermore, the Sidrauski model, with its implications for monetary economies, is reviewed. Finally, the discussion turns to another workhorse dynamic model, the overlapping-generations model and its implications. As an application of this model, the properties of various methods of funding social insurance are discussed.

This chapter reviews the theory related to business cycles. After outlining early approaches (including the multiplier-accelerator interaction and Goodwin cycles), it proceeds to discuss the modern debates between New Classical/Real Business Cycle (RBC) theorists and New Keynesians. This discussion is structured at various levels: more intuitive and discursive, then more analytical with the development of a formal RBC model and of a Dynamic Stochastic General Equilibrium model that synthesizes the two approaches. The chapter continues with a review of Vector Autoregressions. Finally, a narrative of a number of episodes is offered: the Great Depression, post-World War II cycles, Japan, effects of oil on business cycles, and the Great Recession (2007–9) and the subsequent slow recovery. The overarching philosophy is that a suite of models, old and new, and approaches, modelling, econometric, and narrative, are useful in offering complementary perspectives.

The causal relationship between FDI inflows and growth is of great policy interest, yet the state of concrete knowledge on the issue is rather poor. Our contribution is to investigate the causal relationship between the ratio of FDI to GDP (FDIG) and economic growth (GDPG) using a battery of cutting-edge methods and an extensive data set. We employ the heterogeneous-panel tests of the Granger non-causality hypothesis based on the works of Hurlin, C. 2004a. Testing Granger Causality in Heterogeneous Panel Data Models with Fixed Coefficients. Mimeo: University of Orléans, (Fisher, R. A. 1932. Statistical Methods for Research Workers. Edinburgh: Oliver & Boyd., Fisher, R. A. 1948. ‘Combining Independent Tests of Significance.’ American Statistician 2 (5): 30–31) and Hanck, C. 2013. ‘An intersection test for panel unit roots.’ Econometric Reviews 32 (2): 183–203. Our panel data set is compiled from 136 developed and developing countries over the 1970-2006 period. According to the Hurlin and Fisher tests, FDIG unambiguously Granger-causes GDPG for at least one country. However, the results from these tests are ambiguous regarding whether GDPG Granger-causes FDIG for at least one country. Using a test based upon Hanck, C. 2013. ‘An intersection test for panel unit roots.’ Econometric Reviews 32 (2): 183–203, both with and without one structural break in the vector autoregression, we are able to determine whether and for which countries there is Granger-causality. This test suggests that at most there are six countries (Estonia, Guyana, Poland, Switzerland, Tajikistan and Yemen) where FDIG Granger-causes GDPG and at most four countries (Dominican Republic, Gabon, Madagascar and Poland) where GDPG Granger-causes FDIG.

This chapter reviews the basic tenets of the New Keynesians (NK); i.e. the school of thought that sought to preserve the insights of Keynes on the desirability of activist stabilization policy, but taking on board the methodological and other advances of the New Classicals. As markets do not clear due to price stickiness, the latter is thoroughly reviewed: causes, including ‘menu costs’, empirical evidence, and implications for price level dynamics are outlined. Other models of wage rigidity as well as new directions of NK theory are also reviewed. Furthermore, the chapter reviews inflation: its costs, causes, and recent ‘great moderation’. It concludes with a critical analysis of the NK model of inflation, and with a review of how this model of inflation can be incorporated into a baseline ‘three-equation New Keynesian model’.

The chapter reviews basic building blocks of macroeconomic theory, such as the production function, labour supply and demand. It also reviews elementary models such the IS-LM, AD-AS, and the Phillips Curve. In doing so, it provides a bridge between standard elementary/intermediate material, that readers of this book will have typically been exposed to, and the more advanced macroeconomics that is its main subject. Alongside analytics, the chapter outlines the history of macroeconomics as a way of better appreciating the models and current theory. The policy implications of various theories and models are centrepieces. A brief detour into formal theory of policy-making offers additional policy perspectives. The chapter also summarizes six benchmark ‘policy ineffectiveness propositions’ developed in subsequent chapters, as a way of looking ahead.

This chapter discusses monetary policy. It is informally divided in two parts: The former discusses the rationale for and the main features of the current institutional ‘architecture’ related to monetary policy. A formal analysis of time inconsistency of optimal discretionary policy and the concomitant inflationary bias is followed by analyses of commitment and reputation. Subsequently, the Chapter looks at possible resolutions of the difficulties associated with discretionary policy, including independent Central Banks and inflation targeting. It also discusses the new features and proposals that emerged post-2007–9. A ‘policy in practice’ section looks at Taylor rules. In the latter part, we review the recent analyses on financial structure and the ‘credit channel(s)’ of monetary policy transmission. The chapter concludes with a review of Quantitative Easing, macroprudential regulation, and the current thinking on monetary policy as part of a wider package of optimal stabilization policy.

This wide-ranging chapter reviews a number of models that underpin aggregate analyses (‘sectoral’ models). It begins with the profusion of work on consumption (Permanent Income Hypothesis, the Life-Cycle Model, and the modern analyses that sprang from the ‘random walk’ model). Saving, durable consumption, demographics, and behavioural elements are among the many topics reviewed. The chapter continues with investment, including issues such as: the accelerator, neoclassical model, user cost of capital, Tobin’s q, effects of financial imperfections, uncertainty, state-contingent (‘S-s’) models, vintages, technical progress, and inventories. Housing is reviewed next, another innovation of the book. Finally, the models of consumption are a stepping-stone towards the macroeconomics of finance. The topics reviewed here include the CCAPM and CAPM models, the equity premium puzzle, and the term structure of interest rates, as well as developments in stock markets and the growth of finance (‘financialization’).

We introduce distributive justice into a simple model of growth and distribution. Two groups (‘classes’) of otherwise identical, capital-rich and capital-poor individuals (‘capitalists’) and (‘workers’) are in conflict over factor (labour-capital) shares. Capitalists’ (workers’) ideal labour share is low (high) – but always tempered by the recognition that everyone supplies one unit of labour inelastically and desires a wage; and that the labour share impacts growth negatively in our ‘AK’ production economy. Social conflict is defined as the difference between the ideal labour shares of the two classes. This conflict is resolved by the two positive and three normative criteria we consider. Thus, the macroeconomy (growth, factor shares, distribution), social conflict and the methods of its resolution are jointly determined in a complete socio-economic equilibrium. We believe both this approach and our rich set of results are novel. We consider two positive (probabilistic voting and Nash bargaining, encapsulating electoral politics and socio-political bargaining) and two normative (justice) criteria (utilitarian and Rawlsian) of conflict resolution. Greater impatience, intensified status comparisons and negative consumption externalities, greater wealth inequality and a decline in productivity exacerbate social conflict. Status comparisons and wealth inequality tend to raise the labour share under all positive and normative criteria. Finally, we propose and analyse a criterion of ‘justice as minimal social friction’. Under the plausible assumption that the capitalists’ overall socio-political influence (numerical strength aside) is at least as high as that of workers, all positive methods imply a smaller labour share and more inequality than all our three criteria of distributive justice. We offer a numerical illustration of the key points.

We develop an overlapping-generations model with human capital accumulation and endogenous fertility containing a pollution externality. We study the effects of an environmental policy on individuals’ quality–quantity trade-off on children. In a Malthusian poverty trap, we show that a more stringent policy induces a reduction of fertility. In a state of perpetual development, we find a similar result and show that higher environmental quality, growth and welfare are compatible goals. Moreover, we show that the policy can be used as an instrument for initiating a country’s great transition from a state of poverty to a state of development.

In an AK model of growth with fixed and uniform labour supply but heterogeneous asset endowments by agents, we explore the conflict that arises in relation to the functional (labourcapital) distribution of output. Negative externalities make the competitive equilibrium inefficient. We develop the efficient utility frontier; we then analyse the outcomes in terms of growth and distributive (in)equality delivered by different ways of determining the labour (equivalently: capital) share. A clear order arises between various normative and positive arrangements such that Rawlsian is more egalitarian than utilitarian is more egalitarian than contractarian (Nash solution) is more egalitarian than median voter. We also propose a novel fourth concept of distributive justice („justice as minimal social friction‟) and show that it is more egalitarian than all except the Rawlsian solution.

We analyse the time‐consistent intertemporal behaviour of an individual who discounts the future hyperbolically (HD) in the absence of commitment. In continuous‐time, we extend Barro's ( Quarterly Journal of Economics , Vol. 114 (1999), pp. 1125–1152) analysis of a ‘sophisticated’ present‐bias in a deterministic setup and characterize consumption in an analytically tractable way. Furthermore, we embed this analysis into a ‘flexible AK’ model. Greater present bias increases the consumption‐capital ratio, decreases the steady‐state growth rate, while it increases the interest rate‐growth rate wedge. Dynamically, as the interest rate fluctuates over the business cycle, a greater present bias causes the consumption‐output ratio to be more procyclical and volatile, thus helping to resolve the ‘consumption‐output puzzle’. In the transitional dynamics, greater present bias causes a lower steady state capital stock. All of these effects are only present or at least more pronounced under HD than present value‐equivalent exponential discounting.