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£665 + VAT
29 October 2018 09:30
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The circular flow model of the economy with and without explicit consideration of the government budget position.
- Injections withdrawals equilibrium
- Balance of Payments structure
- Economic Equilibrium of the Balance of Payments
- Balance of payments disequilibrium and foreign exchange market intervention
- The government budget position and circular flow equilibrium
The circular flow model is covered in most macroeconomics textbooks in a rather context free manner. This course aims to link the implied injections-withdrawals equilibrium constraints to topical economic debates, such as the qualitative nature of a balance of payments equilibrium and the role of the recent sustained disequilibrium with China in fuelling the pre-recession bubble.
The quantity theory of money and the traditional monetarist model of the economy.
- Fisher equation (MV=PY)
- Money neutrality
- Underlying assumptions and money supply endogeneity
- Money market equilibrium, functions of money and motives for money demand
- Money and interest rates
The quantity theory of money is generally well known and this refresher will concentrate on establishing the nexus with the circular flow model and on recapitulating the implied hypothesis of money neutrality. Against this background the continued relevance of inflation control via the money supply as an approach underlying modern central bank design will be discussed and the limitations of money supply led inflation control will be discussed. The discussion of interest rates in this context marks a departure from the strict quantity theory. It is, however essential for the policy context and provides a connection to the subsequent discussion of the Keynesian synthesis.
Review of the Keynesian model of aggregate demand for the open and closed economy (IS-LM and Mundell Fleming models)
- The LM curve and the money market
- IS curve and goods market equilibrium
- Multiplier effects and the IS curve
- Interest parity and the BP curve (Mundell Fleming model)
- Open and closed economy aggregate demand functions
This session will concentrate on a recapitulation of the standard IS-LM and open economy (Mundell-Fleming) framework. The neo-classical synthesis will be linked to the original discussion by Hicks and will be shown in a modern framework as a model of the aggregate demand curve, highlighting the weakness of conventional assumptions on supply elasticities.
Policy implications: business cycles, liquidity preference and the liquidity trap.
- Fiscal and monetary policy intervention in open and closed economies
- Implications for aggregate demand
- Implications for reserve holdings
- Extreme case: the liquidity trap –effectiveness of monetary and fiscal policy
- Recent practical applications and their reflection in theory
This session will revise the scope for countercyclical monetary and fiscal policy in attempting stabiliying policy intervention. The extreme case of a liquidity trap and the relationship to the current crisis scenario will be considered, taking account of the expected realtionship between asset prices and prevailing interest rates in the liquidity trap case.
Labour markets and aggregate supply
- Production functions and labour demand
- Labour supply and equilibrium
- Differential price expectations and short term supply reactions
- Alternative views of the labour market (wage rigidities, efficiency wages)
Revision of the classic Walrasian link between labour market equilibrium and aggregate supply in product markets. The role of information asymmetries in the adjustment to unexpected shocks and the implications for temporary disequilibria will be addressed. This theory background will be related to a comparative static aggregate supply curve. In addition, it will be asked what the shortcomings of this benchmark model are, and which key features of labour markets are ignored.
Dynamic aggregate supply and demand model
- Dynamic specifications of aggregate demand and supply functions
- Phillips curve interpretation
- Expectations formation and adjustment speed
- Putative output – inflation trade-offs and central bank independence
The second part of the morning session will derive dynamic aggregate demand and supply functions and relate the framework established so far to actual and expected inflation rates. This policy framework has been formulated against the background of an inflation prone environment. Issues such as the role of asset prices will be addressed with a view to further discussion in the afternoon session.
The afternoon session will move away from the recapitulation of mainstream theory by focussing on alternative paradigms and gradually proceeding towards a more flexible discussion of the benchmark macroeconomic model.
Alternative views: Austrian and Keynesian perspectives on the business cycle
- Austrian views of human action (market order as catalaxy, prices as allocation tools)
- Time preferences and interest rate distortions
- Critique of central and fractional reserve banking
- Diagrammatic representation of Austrian Business Cycle Theory
- Keynes, Hayek and money supply endogeneity
Theorists in the Austrian school of economics have criticised central banking and fiat money systems for some time and have for some time predicted the kind of crisis which is currently under way. In this session we will discuss the nature, the merits and the shortcomings of the Austrian approach to economics. To enable a comparison with mainstream business cycle models, we will follow Garrison's diagrammatic approach linking loanable funds markets and capital structure.
The Keyensian critique of economics has mainly found its way into the mainstream via the neo-classical synthesis of the Keynesian approach embedded in the IS-LM framework. In reconsidering the Keynesian view we can take a step back and ask which aspects of Keynesian discourse have been omitted and what they have to add to the formalised Keynesian model.
Applied context: the housing bubble, asset price inflation and microeconomic linkages
- Asset price inflation and valuation
- Present values of future earnings and predicted growth in asset value
- Drivers of housing bubbles
- Incentive compatible contracts and bonus payments
- Moral hazard and systemic risk
One indicator of economic activity which has been consistently omitted from policy targets (such as inflation or money supply growth targets) are asset price movements. We will go back to basics, look what simple present value based evaluation benchmarks imply for asset values and how plausible these implications appear to be.
We will also take a brief look at some of the micro-economic basic assumptions underlying some financial market arrangements and then ask how issues like moral hazard impact on the assessment of banking practices.