Abstract
This chapter briefly reviews the development of macroeconomics, with emphasis on the dynamic macroeconomic models, DSGE models, used in this book and the corresponding theoretical framework, the NCM.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The embryonic form of economics was embedded in the earliest economic thinking in ancient China, India and Graeco-Roman world. For economic thoughts before classical economics, including medieval economists thoughts, Mercantilism and international trade theories in sixteenth to eighteenth century, see the works of Aquinas [10], who discussed ‘just price’, Buridan and Klima [16], who analysed the value of money, Bodin [17], who attempted to explain inflation, von Hörnigk and Wilhelm [18], who tried to analyse the principles of national economy, Locke [19], who built his social contract theory to analyse money and price, and Law [20] who studied the value of money. The contribution of Baldwin and Langholm [21] also provided a conclusive summary of medieval economics thoughts.
- 2.
- 3.
Pioneered by the ‘marginal revolution’ with contributions of Menger [7], Jevons [8], Walras [9], who conducted one of the first comprehensive quantitative studies of general economic equilibrium, and many others, original classical doctrine transformed into a new stage—neoclassical economics.
- 4.
Early explanation of this self-adjusting market mechanism is known as the Say’s Law of market, which was disputed by Keynesian economists.
- 5.
In October 1979, the Fed switched its approach to monetary policy from the price of bank reserves to nonborrowed reserves, a monetary quantity variable.
- 6.
In 1973, BoE began to introduce an informal approach of monetary targeting, emphasizing a broad aggregate, M3. In 1976, such monetary targeting approach was adopted as BoE’s formal strategy.
- 7.
Economies introduced monetary targeting in this period include Canada, Germany, Switzerland and so forth.
- 8.
For example, as demonstrated by King [26], the monetary targets set by the BoE in 1980–1981 and 1983–1984 were never achieved. What is more, Mishkin [27] concludes that targeting the nonborrowed reserves did not give rise to the decreased volatility of M1 growth as expected. Rather, the fluctuations of M1 growth in the United States increased after such a change in monetary strategy. As in the U.K., the Fed failed to match its monetary target of M1 growth in all three years of the 1979–1982 period.
- 9.
As a result, operating strategies of monetary targeting lost their popularity among central banks in most Western economies. In October 1982, the Fed began to change its operating strategies, moving from monetary targeting to inflation targeting. Later in February 1987, the Fed officially ceased to set any M1 targets. In July 1993, Alan Greenspan testified in the Congress that the Fed would no longer set any monetary targets for policymaking purposes. A similar story can be witnessed in the U.K., the operating procedures based on monetary targeting was abandoned by the BoE in 1985. In October 1992, the Chancellor of the Exchequer announced to adopt inflation targeting as the operating strategy of the BoE.
- 10.
These issues even include the name of this theoretical framework, reflecting the diverse perspectives of scholars with different thinking of economics. A large group of macroeconomists argues that this mainstream theoretical framework is a New Keynesian Economics (NKE) contribution, since it is featured with short-term rigidities, which is the key hypothesis of Keynesian economics. In contrast, many macroeconomists refer to it as the New Neoclassical Economics or New Neoclassical Synthesis,because it is based on certain principle hypotheses of neoclassical economics, such as market competition, general equilibrium, rational expectation and long-run vertical Phillips Curve. Additionally, modern mainstream macroeconomics is often noted as Neo-Wicksellian Macroeconomics (NWM), for example the work of Woodford and Walsh [29], since it contains thinking stemming from Wicksell’s original theory [30]. In this book, we denote modern mainstream macroeconomics as New Consensus Macroeconomics to reach wider acceptance among researchers.
- 11.
More details of the monetary policy based on the Taylor rule can be found in the work of Rotemberg and Woodford [34].
- 12.
The most widely accepted method is the Calvo [33] pricing mechanism.
- 13.
- 14.
See Erceg et al. [54].
- 15.
A comprehensive discussion of the BEQM is conducted by Harrison et al. [55].
- 16.
More information can be found in the work of Murchison and Rennison [56].
- 17.
For more details, see Medina and Soto [57].
- 18.
For more details, see Adolfson et al. [58].
- 19.
For more details, see Brubakk et al. [61].
References
Lucas, R. (1983). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.
Say, A. (1803). A treatise on political economy: Or the production, distribution and consumption of wealth. https://doi.org/10.4028/www.scientific.net/AMM.613.214.
Mill, J. (1901). The principles of political economy. London: Macmillan.
Ricardo, D. (1891). Principles of political economy and taxation. The Economic Journal, 1(4), 769.
Bohm-Bawerk, E. (1894). The ultimate standard of value. Annals of the American Academy of Political & Social Science, 5(5), 149–208.
Smith, A. (2015). An inquiry into the nature and causes of the wealth of nations. Journal of the Early Republic, 35(1), 1–23.
Menger, C. (1871). Principles of economics. London: Macmillan.
Jevons, W. (1888). The theory of political economy. London: Macmillan.
Beach, F., Walras, L., & William, J. (1955). Elements of pure economics, or, the theory of social wealth. Canadian Journal of Economics & Political Science, 21(3), 383.
Aquinas, T. (1702). Summa theologica. New York: Fordham University Press.
Keynes, J. (1936). The general theory of employment interest and money. London: Macmillan.
Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica, 1(4), 337–357.
Bernanke, B., & Harold, J. (1990). The gold standard, deflation, and financial crisis in the great depression: An international comparison (NBER Working Papers), 8, 33–68.
Dalio, R. (2018). Big debt crises. Westport: Bridgewater.
Keynes, J. (2010). The end of laissez-faire. London: Palgrave Macmillan UK.
Buridan, J., & Klima, G. (2001). Summulae de dialectica. New Haven: Yale University Press.
Bodin, J. (1992). Bodin: On sovereignty. Cambridge: Cambridge University Press.
von Hörnigk., & Wilhelm, P. (1708). Oesterreich über alles, wann es nur will. Regensburg: Verlagsort.
Locke, J. (1993). Some considerations of the consequences of the lowering of interest, and raising the value of money: In a letter to a Member of Parliament. London: Awnsham and John Churchill.
Law, J. (1993). Money and trade considered with a proposal for supplying the nation with money. London: R. & A. Foulis.
Baldwin, J., & Langholm, O. (1994). Economics in the medieval schools: Wealth, exchange, value, money and usury according to the Paris theological tradition, 1200–1350. Speculum, 69(1), 200.
Friedman, M. (1960). A program for monetary stability. New York: Fordham University Press.
Friedman, M. (1968). Dollars and deficits. Upper Saddle River: Prentice-Hall.
Friedman, M. (1981). The roles of money and credit in macroeconomic analysis (NBER Working Papers). https://doi.org/10.3386/w0831.
Lucas, R.(1976). Econometric policy evaluation: A critique. In D. V. Pritchett (Ed.), Carnegie-Rochester Conference Series on Public Policy (pp. 19–46). Amsterdam: Elsevier.
King, M. (1997). Changes in UK monetary policy: Rules and discretion in practice. Journal of Monetary Economics, 39(1), 81–97.
Mishkin, F. (2001). From monetary targeting to inflation targeting: Lessons from the industrialized countries (Policy Research Working Paper Series). https://doi.org/10.1596/1813-9450-2684.
Blinder, S. (1999). Central banking in theory and practice. Cambridge: MIT Press.
Woodford, M., & Walsh, C. (2005). Interest and prices: Foundations of a theory of monetary policy. Economica, 9(287), 550–552.
Wicksell, K. (1936). Interest and prices: A study of the causes regulating the value of money. American Economic Review, 26(3), 493–495.
Goodfriend, M., & King, G. (1997). The new neoclassical synthesis and the role of monetary policy. NBER Macroeconomics Annual, 12, 231–296.
Arestis, P. (2009). New consensus macroeconomics: A critical appraisal. SSRN Electronic Journal, 564, 1–26.
Calvo, G. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Economics, 12(3), 383–398.
Rotemberg, J., & Woodford, M. (1997). Oligopolistic pricing and the effects of aggregate demand on economic activity. Journal of Political Economy, 100, 1153–1207.
Solow, R. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94.
Solow, R. (1957). Technical change and the aggregate production function. The Review of Economics and Statistics, 39(3), 312–320.
Kydland, F., & Prescott, E. (1982). Time to build and aggregate fluctuations. Econometrica, 50(6), 1345–1370.
Hansen, G. (1985). Indivisible labor and the business cycle. Journal of Monetary Economics, 16(3), 309–327.
Cooley, T., & Hansen, G. (1989). The inflation tax in a real business cycle model. The American Economic Review, 79(4), 733–748.
Lucas, R., & Stokey, N. (1987). Money and interest in a cash-in-advance economy. Econometrica, 55(3), 491–513.
Sidrauski, M. (1967). Rational choice and patterns of growth in a monetary economy. The American Economic Review, 57(2), 534–544.
Bernanke, B., & Gertler, M. (1989). Agency costs, net worth, and business fluctuations. The American Economic Review, 79(1), 14–31.
Bernanke, B., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics, 1, 1341–1393.
Christiano, L., Eichenbaum, M., & Evans, C. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1), 1–45.
Christiano, L., Motto, R., & Rostagno, M. (2010). Financial factors in economic fluctuations (European Central Bank Working Papers), 1192.
GalÃ, J., & Gertler, M. (2007). Macroeconomic modelling for monetary policy evaluation. The Journal of Economic Perspectives, 21(4), 25–45.
Smets, F., & Wouters, R. (2007). Shocks and frictions in US business cycles: A Bayesian DSGE approach. The American Economic Review, 97(3), 586–606.
Iacoviello, M. (2005). House prices, borrowing constraints, and monetary policy in the business cycle. The American Economic Review, 95(3), 739–764.
Iacoviello, M., & Neri, S. (2010). Housing market spillovers: Evidence from an estimated DSGE model. American Economic Journal: Macroeconomics, 2(2), 125–164.
Tovar, C. (2009). DSGE models and central banks. Economics: The Open-Access, Open-Assessment E-Journal, 3(16), 2178–2178.
Christoffel, K., Coenen, G., & Warne, A. (2008). The new area-wide model of the Euro area: A micro-founded open-economy model for forecasting and policy analysis. Social Science Electronic Publishing, 119(35), 171–192.
Fagan, G., Henry, J., & Mestre, R. (2005). An area-wide model for the Euro area. Economic Modelling, 22(1), 39–59.
Marcellino, M., Stock, J., & Watson, M. (2003). Macroeconomic forecasting in the Euro area: Country specific versus area-wide information. European Economic Review, 47(1), 1–18.
Erceg, C., Guerrieri, L., & Gust, C. (2006). SIGMA: A new open economy model for policy analysis (International Finance and Economics Discussion Papers), 835.
Harrison, R., Nikolov, K., Quinn, M., Ramsay, G., Scott, A., & Thomas, R. (2005). The Bank of England quarterly model. London: Bank of England.
Murchison, S., & Rennison, A. (2006). ToTEM: The Bank of Canada’s new quarterly projection model. The Bank of Canada Technical Reports, 1994, 23–38.
Medina, J., & Soto, C. (2007). The Chilean business cycles through the lens of a stochastic general equilibrium model (Central Bank of Chile Working Papers), 457.
Adolfson, M., Laséen, S., Lindé, J., & Villani, M. (2007). RAMSES—-A new general equilibrium model for monetary policy analysis. Sveriges Riksbank Economic Review, 2, 5–41.
Florian, D., & Montoro, C. (2009). Development of mega-D: A DSGE model for policy analysis. Lima: Central Reserve Bank of Peru.
Castillo, P., Montoro, C., & Tuesta, V. (2006). An estimated stochastic general equilibrium model with partial dollarization: A Bayesian approach. Documentos de Trabajo (Banco Central de Chile), 381, 1–72.
Brubakk, L., Husebø, T., Maih, J., Olsen, K., & Østnor, M. (2006). Finding NEMO: Documentation of the Norwegian economy model. Norges Bank Staff Memo, 6, 1–87.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2020 The Author(s)
About this chapter
Cite this chapter
Jia, D.L. (2020). Introduction to Modern Macroeconomic Models. In: Dynamic Macroeconomic Models in Emerging Market Economies. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-15-4588-7_1
Download citation
DOI: https://doi.org/10.1007/978-981-15-4588-7_1
Published:
Publisher Name: Palgrave Macmillan, Singapore
Print ISBN: 978-981-15-4587-0
Online ISBN: 978-981-15-4588-7
eBook Packages: Business and ManagementBusiness and Management (R0)