The aim of the course is to go beyond the static Aggregate Demand / Aggregate Supply framework analyzed in undergraduate course by introducing dynamic considerations and a crucial role for of agents’ expectations. The discussion will be organized around the concept of the expectations-augmented Phillips curve, which features a dynamic tradeoff between inflation and unemployment or output. The role of macroeconomic policy will be reconsidered in this context, both in terms of comparative statics and transitional dynamics, and the validity of the results will be discussed considering different assumptions regarding the formation of agent’s expectations: adaptative expectations, rational expectations, etc.
Courses outline:
Chap. I: The Phillips curve
- The empirical Phillips curve
- Theory: the expectations-augmented Phillips curve (EAPC)
- The natural rate of unemployment
- Relating unemployment to output: Okun’s law and the output gap
Chap. 2: A framework for macroeconomic policy analysis
- Macroeconomic policy in the standard EAPC framework: the Monetarist analysis
- Dynamic analysis with phase diagrams: steady-state, transitional dynamics
- Macroeconomic policy: demands shocks, supply shocks
- Introduction of rational expectations: the New Classical Economy