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ADVANCED. MACROECONOMICS. Third Edition. David Romer. University of California, Berkeley. McGraw-Hill. Irwin. Boston Bur

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ADVANCED MACROECONOMICS Third Edition

David Romer University of California, Berkeley

McGraw-Hill Irwin Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

CONTENTS

Preface to the Third Edition Introduction Chapter 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

Part A 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Part B 2.8 2.9 2.10

1 THE SOLOW GROWTH MODEL

Some Basic Facts about Economic Growth Assumptions The Dynamics of the Model The Impact of a Change in the Saving Rate Quantitative Implications The Solow Model and the Central Questions of Growth Theory Empirical Applications The Environment and Economic Growth Problems

Chapter 2

xvii

INFINITE-HORIZON AND OVERLAPPING-GENERATIONS MODELS

5 5 9 14 17 22 26 29 37 44

48

THE RAMSEY-CASS-KOOPMANS MODEL

48

Assumptions The Behavior of Households and Firms The Dynamics of the Economy Welfare The Balanced Growth Path The Effects of a Fall in the Discount Rate The Effects of Government Purchases

48 50 56 62 63 65 70

THE DIAMOND MODEL

76

Assumptions Household Behavior The Dynamics of the Economy

76 77 80

ix

CONTENTS

2.11 The Possibility of Dynamic Inefficiency 2.12 Government in the Diamond Model Problems

Chapter 3 Part A 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Part B

87 91 92

NEW GROWTH THEORY

100

RESEARCH AND DEVELOPMENT MODELS

101

Framework and Assumptions The Model without Capital The General Case The Nature of Knowledge and the Determinants of the Allocation of Resources to R&D Endogenous Saving in Models of Knowledge Accumulation: An Example Models of Knowledge Accumulation and the Central Questions of Growth Theory Empirical Application: Population Growth and Technological Change since 1 Million B.C.

101 103 108

CROSS-COUNTRY INCOME DIFFERENCES

Extending the Solow Model to Include Human Capital 3.9 Empirical Application: Accounting for Cross-Country Income Differences 3.10 Social Infrastructure 3.11 A Model of Production, Protection, and Predation 3.12 Differences in Growth Rates Problems

115 122 125 127 132

3.8

Chapter 4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8

REAL-BUSINESS-CYCLE THEORY

Introduction: Some Facts about Economic Fluctuations Theories of Fluctuations A Baseline Real-Business-Cycle Model Household Behavior A Special Case of the Model Solving the Model in the General Case Implications Empirical Application: The Persistence of Output Fluctuations

133 138 144 154 161 166

174 174 178 180 183 187 192 197 203

CONTENTS

4.9

Empirical Application: Calibrating a Real-BusinessCycle Model Extensions and Limitations Problems

4.10

Chapter 5 5.1 5.2 5.3 5.4 5.5 5.6

TRADITIONAL KEYNESIAN THEORIES OF FLUCTUATIONS Aggregate Demand The Open Economy Alternative Assumptions about Wage and Price Rigidity Output-Inflation Tradeoffs Empirical Application: Money and Output Empirical Application: The Cyclical Behavior of the Real Wage Problems

Chapter 6

Part A 6.1 6.2 6.3 Part B 6.4 6.5 6.6 6.7

Part C 6.8 6.9 6.10 6.11

MICROECONOMIC FOUNDATIONS OF INCOMPLETE NOMINAL ADJUSTMENT

Xi

208 210 216

222 223 231 242 251 258 264 266

271

THE LUCAS IMPERFECT-INFORMATION MODEL

272

The Case of Perfect Information The Case of Imperfect Information Implications and Limitations

273 276 280

NEW KEYNESIAN ECONOMICS

285

A Model of Imperfect Competition and Price-Setting Are Small Frictions Enough? Real Rigidity Coordination-Failure Models and Real Non-Walrasian Theories

286 290 294 303

DYNAMIC NEW KEYNESIAN MODELS AND STAGGERED PRICE ADJUSTMENT

309

Building Blocks of Dynamic New Keynesian Models Predetermined Prices Fixed Prices The Caplin-Spulber Model

310 316 319 326

xii

CONTENTS

6.12 Empirical Applications 6.13 The Mankiw-Reis Model Problems

Chapter 7 7.1 7.2 7.3 7.4 7.5 7.6

Consumption under Certainty: The PermanentIncome Hypothesis Consumption under Uncertainty: The Random-Walk Hypothesis Empirical Application: Two Tests of the RandomWalk Hypothesis The Interest Rate and Saving Consumption and Risky Assets Beyond the Permanent-Income Hypothesis Problems

Chapter 8 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10

INVESTMENT

Investment and the Cost of Capital A Model of Investment with Adjustment Costs Tobin's q Analyzing the Model Implications Empirical Application: q and Investment The Effects of Uncertainty Kinked and Fixed Adjustment Costs Financial-Market Imperfections Empirical Application: Cash Flow and Investment Problems

Chapter 9 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9

CONSUMPTION

UNEMPLOYMENT

Introduction: Theories of Unemployment A Generic Efficiency-Wage Model A More General Version The Shapiro-Stiglitz Model Implicit Contracts Insider-Outsider Models Hysteresis Search and Matching Models Empirical Applications Problems

328 333 339

346 347 353 356 361 366 3 70 380

386 386 389 395 396 400 406 409 413 417 428 433

437 437 439 444 448 460 464 467 472 481 489

CONTENTS

Chapter 10

INFLATION AND MONETARY POLICY

10.1 Inflation, Money Growth, and Interest Rates 10.2 Monetary Policy and the Term Structure of Interest Rates 10.3 The Dynamic Inconsistency of Low-Inflation Monetary Policy 10.4 Addressing the Dynamic-Inconsistency Problem 10.5 What Can Policy Accomplish? 10.6 Interest-Rate Rules and the Conduct of Policy 10.7 A Model for Analyzing Interest-Rate Rules 10.8 Seignorage and Inflation 10.9 The Costs of Inflation Problems

Chapter 11 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8

BUDGET DEFICITS AND FISCAL POLICY

The Government Budget Constraint The Ricardian Equivalence Result Ricardian Equivalence in Practice Tax-Smoothing Political-Economy Theories of Budget Deficits Strategic Debt Accumulation Delayed Stabilization Empirical Application: Politics and Deficits in Industrialized Countries 11.9 The Costs of Deficits 11.10 A Model of Debt Crises Problems

xiii

496 497 501 506 510 520 525 533 538 547 552

559 560 567 569 573 579 582 592 598 603 607 613

References

619

Author Index

656

Subject Index

663

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