Advanced Macroeconomics

Knowledge

Macroeconomics 

Description

A fundamental question in macroeconomic theory and policy is which factors determine income, growth, inflation, employment and unemployment, as well as welfare. The traditional macroeconomic theory analyzes the role of fiscal and monetary policies, which should be used mainly in order to stabilize growth around a country’s long-term growth-rate. Based on the assumption of fully rational economic agents (e.g. consumers, investors, firms and government representatives), economic development follows a standard business cycle pattern, which is caused mainly by exogenous shocks of different types (e.g. demand- or liquidity shocks).

By contrast, behavioral economics is now receiving increased acceptance as an alternative way of analyzing economic developments including macroeconomics. Paul De Grauwe and Yuemei Yi propose a new behavioral framework for macroeconomics, which reflects that agents are heterogeneous. Moreover, these agents are subject to important cognitive limitations which determine their behavior. Instead of the earlier assumption of rational expectations, these agents use simple forecasting rules (heuristics), which are continuously evaluated with respect to their actual performance. Despite the simplicity of these behavioral rules, high complexity emerges in macroeconomic developments. It will be shown that adaptive learning leads to the emergence of a so-called animal spirit (market sentiments which are subject to waves of optimism and pessimism). As a result, macroeconomic development is characterized by periods of macroeconomic stability (tranquility) alternating in an unpredictable way with periods of boom and bust. This pattern can also include large and repeated economic crises. In other words, the distribution of income growth follows a non-normal distribution with fat tails.

The behavioral macroeconomic approach will be used to analyze the role of fiscal and monetary policy, structural reforms, and international synchronization of business cycles. Policy implications will be compared with conclusions of standard macroeconomic models. 

Learning objectives

Students will improve and deepen their knowledge and analytical capabilities in the areas of macroeconomics, economic policy, and empirical economics.

E-learning

yes

Preparation

Blanchard, O.: Macroeconomics, Global 9^th Edition, Pearson, 2025.

De Grauwe, P., Ji, Y.: Behavioural Macroeconomics: Theory and Policy, Oxford University Press, 2019.

De Grauwe, P., Ji, Y.: Behavioural Economics is also Useful in Macroeconomics. VOX CEPR Policy Portal, London, 2017. https://voxeu.org

Selected Papers.

Comment

High attendance (80%) at all lectures is obligatory!

Detailed information about the examinations

Examination before Teaching Agreement:

Single Choice Test (90 Minuts) in the last lecture unit 

Second additional field

Please indicate the language of the course here: 

English