Is there a core of practical Macroeconomics

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Taylor: believes there is a set of key principles- a core- of macroeconomics about which there is a wide agreement. The core is practical in the sense that it is having beneficial effect on macroeconomic policy, especially monetary policy, and has resulted in improvements in policy in the last 15 years. He has five key principles:

• Over the long term, labor productivity growth depends on the growth of capital per hour of work and in growth of technology or, more precisely, on movement along as well as shift of the production function (Solow). If one adds to this labor productivity growth an estimate of labor- force growth, one gets an estimate of the long-run growth rate of real GDP or potential GDP growth.

• There is no long-term trade-off between the rate of inflation and the rate of unemployment; a corollary is that a shift by the central bank to higher rate of money growth will simply result in more inflation in the long run, with the unemployment rate remain unchanged. Empirical and theoretical research provides strong support for this. This implies that central bankers should pick a long-run target range for inflation and stick with it.

• There is short run trade- off between variability of inflation and variability of unemployment. There is still debate about the reason for this trade- off. Therefore, monetary policy should keep the growth of aggregate demand stable in order to prevent fluctuations in real output and inflation.

• People’s expectations are highly responsive to policy, and thus, expectation matter for assessing the impact of monetary and fiscal policy.

• When evaluating monetary and fiscal policy one should not isolated change in the instruments of policy, but rather a series of changes linked by a systematic process or policy rule.

Recently there has been increased practical interest in policy rules. But this characterization of a core of practical macroeconomics is not meant to imply that everything is settled in macroeconomics, there are still great debates going on.

Solow: Real output is most advanced capitalist economies fluctuates around a rising trend.

He thinks it is a part of common core of macroeconomics that the trend movement is predominately driven by the supply side the economy (the supply of factors of production and total factor productivity) and that the appropriate vehicle for analyzing the trend motion is some sort of growth model.

In his picture of the core fluctuations in unemployment rate and real GDP are predominantly driven by aggregate demand impulses and the appropriate vehicle for analyzing them is some model of various sources of expenditure.

The whole point of “real business cycle theory: is the assertion that these short run motions of the economy are in fact supply driven but these has been empirical failure. So Martin Eichenbaum and his co-workers have found that demand side impulses play the dominant role in short run macroeconomics fluctuations. Solow nominate the aggregate demand origin of most short run fluctuations in real output as a part of the common core of macroeconomist but he thinks that must because some prices and wages are not flexible enough to clear their markets more or less continuously.

There remains the question of the proper modeling strategy for macroeconomics of the aggregate demand in short run. Solow’s choice would be to model the main components of aggregate demand more or less opportunistically. The alternative is to impose the structure of intertemporal utility maximization from the very beginning. He would nominate as part of the usable core any reasonable, empirically successful set of equations for describing aggregate demand. Most of such macroeconomics models are modified or extended version of something like IS-LM.

He also said that the main, perhaps the only, merit of the rational expectation hypothesis in macro appears to be its definiteness. But in short run the rational expectation seems to have little to recommend it. One major weakness in the core of macroeconomics is the lack of real coupling between the short run picture and the long run picture.

Blanchard: believes that there is a core of usable macroeconomics that is very close to Paul Samuelson “neoclassic synthesis”:

• In the short run, movements in economic activity are dominated by movements in aggregate demand.

• Overtime, the economy tends to return to steady-state growth path. These intertemporal changes deliver a complex characterization of the effects of shocks and macroeconomics policy.

Medium and Long run: Macroeconomics has limited understanding of median and long run. Market imperfections are central to steady-state growth path. Macroeconomics are a long way from having even a decent quantitative understanding of either the rate of growth of the total factor productivity or natural rate of unemployment, although the last ten years have seen major development in analysis of both them. There are more features of the steady- state growth path that need to be explained: changes in wage distribution and movement in capital and labor shares.

Short run: He believes that macroeconomics has better understanding of the short run. Ever since Keynes, the standard explanation of why movements of aggregate demand affect output in the short run has relied on the presence of nominal rigidities of price level and interest rate. New Keynesians have shown small rigidities can indeed add up and lead to large effects. Because of uneasiness macroeconomists tried to rebuild models without recourse to nominal rigidities but they weren’t very successful. The IS-LM model and Mundell-Fleming model have proved incredibly useful in analyzing fluctuations and the effects of policy. The empirical evidence has confirmed over and over again the amazing power of monetary and exchange-rate policies to affect real activity.

Blinder:also agrees that there is a core of practical macroeconomics. This believable core model falls well short of perfection but it is both useful and extensively used in policy analysis.

• The IS cure: is a functional relationship between real output and the real interest rate derived from the behavioral determinants of total spending, such as income, wealth, interest rate, the government budget, and so on. IS is central to Federal Reserve’s thinking of monetary policy. But there is a paradox: while the interest sensitivity of business investment spending is subject to doubt, the IS relationship between aggregate demand and interest rates appears to be there.

• The LM curve: ,relating real output to the nominal interest rate, no longer plays any role in serious policy analysis, having been supplanted by the assumption that the central bank controls the short run nominal interest rate.

• Aggregate demand and aggregate supply: specifying the rate of interest as a policy instrument turns the IS curve into aggregate demand curve. Many textbook then add aggregate supply curve and portray short run equilibrium. In this picture, the price level is presumed to adjust rapidly to equate aggregate demand and supply, while both prices and wages appear to be extremely sticky.

• The Philips Curve:relates wages or price inflation to the level of resource utilization. The empirical Philips curve has worked amazingly well for decades in US, Blinder call this fact “clean little secret” of macroeconomics.

• Okun’s Law: is even more atheoretical. This simple linear relationship between the percentage change in output and the absolute percentage change in the unemployment rate presumably embodies productivity, labor force participation and production function consideration.

• The term structure of interest rate: any long term interest rate in appropriate weighted average of current and expected future short term interest rate, plus a term premium. Unfortunately, this model fails a variety of empirical tests.

• Modeling expectation:He first talk about historical changes in modeling expectation and then mentions that the skeletal macro model allowed for only one expectational variable: expected inflation. Blinder concludes with one final example that assumed great practical importance in recent years: the effect of expected future government budget deficit.


Of course one cannot base ones macroeconomic expectations on these specific ideas alone, which are not exactly directed to general principles of how macroeconomics works. Many economists would not agree with these ideas. So in answer to the question posed by the title of this article, it is reasonable to claim that a core for practical macroeconomics does exist, the only problem is in getting the experts to agree on what it is!

Because of this delemma it is very difficult to convince new-commers to the subject to look at it from further away than the adopted position that they first encountered on introduction to the subject. Yet they should be doing this in order to appreciate the "big picture" and at the same time avoid the jungle of mixed facts and political fancies, which frequently are used by those who would like to express and impress their political views on younger minds. It is with this awareness of attitude, that some of the more recent writings and comments by this author have been placed on this site.

In particular it seems to be to be most correct to enquire into the nature of our social system as if it were a natural phenomenon like the society of other kinds of animals (elephants and monkeys come to mind, both of which show community and emotional trends) and to objectively examine how our society works. It is with this in mind that the writer constructed an improved way of modelling the structure of our society and this is presented under the WIKIA subject of "Macroeconomics". In this model a proper and full inclusion of all the factors which affect our social relations regarding the exchange of goods, services and valuable legal documents is provided.

The axiom of economics being about the production and distribution of wealth applies, as does the need to include in the subject the decision-making properties of the various elements or entities of the system. Another basic pair of axioms is that we tend to have unlimited desires but can satisfy them only with hard work which of necesity is applied to each using the least effort, so as to use this most efficiently. The three factors of production land, labour and durable capital goods as introduced by Adam Smith in 1765, have as returns the ground-rent, wages and interest (or yield, or dividends) on the investment, respectively.

However, as the population grows the land becomes more valuable and there develops a tendency to hoard it (by holding it out of use) and to restrict its access whilst speculating in its increasing value. This seems to be the natural result of Man's territorial nature, which again resembles animal behavours and from which we have yet to evolve. The resulting raised competitional pressure for use of the land that is available means that the cost of produced goods etc., rises until a stage is reached where less of them is demanded. A smaller proportion of the working men are subsequently needed. Since the land is owned by a small proportion of the total population, this means that working people can be denied employment and unemployment and poverty will be allowed to develop. This is why economic progress is so slow and often badly limited.

The resulting "bubble" in land prices and in produce eventually bursts and prices go down and more useful economic activity results, due to the later raised opportunities to work. This unstable nature of the economy was first described by Henry George in his seminal book "Progress and Poverty" in 1879. However as a "core item" this aspect of our society and its knowledge has been supressed and/or forgotten by the more recent economists (for political reasons) who tend to blame the way that money-control and debt are affecting the macro-economy as being the cause of the above-mentioned "business-cycles". We should note that George's claim as it being due to speculation in land values is more basic and for that reason likely to be stronger.

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