A Practical Guide to Macroeconomics

Contents
List of Figures page x
List of Tables xiv
Preface xv
1 Introduction: Is Macroeconomics Useful? 1
1.1 Existence versus stability 2
1.2 Microfoundations and Aggregation 5
1.3 Toward a Practical Macroeconomics 14
1.4 Digression: Does Aggregation Save Microeconomics? 15
2 Trends and Cycles, Shocks and Stability 18
2.1 Measuring Trend and Cycle 20
2.2 Digression: “Why You Should Never Use the Hodrick–
Prescott Filter” 30
2.3 Shocks and Their Propagation 32
2.4 What Seasonal Cycles Suggest about Business Cycles 39
2.5 Recessions and Stability 40
3 Determinants of Aggregate Spending and Saving 46
3.1 Personal Consumption 46
3.2 Digression: The Inflation-Adjusted Saving Rate 57
3.3 Private Fixed Investment 60
3.4 Digression:Why Don’t Interest Rates Matter for Investment? 69
3.5 Inventory Investment 71
3.6 Digression: Production, Inventories, and Self-Organizing
Criticality in the Economy 73
3.7 Exports and Imports 76
3.8 Putting It All Together 77
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viii Contents
4 Production Functions and Growth Accounting 79
4.1 US Output Growth over Time 80
4.2 Growth Accounting and Potential Output 84
4.3 Production Functions and Factor Aggregates 89
4.4 Allocation and Labor’s Share of Income 92
4.5 Digression: A Result that Probably Isn’t 95
4.6 Digression: A Solution that Definitely Isn’t 99
4.7 CanWe Live without Potential Output? 101
5 The Macroeconomics of “the” Labor Market 104
5.1 The Beveridge Curve 104
5.2 The Beveridge Curve without a Matching Function 120
5.3 Two Other Simple Aggregate Relations 128
5.4 WhatWe Miss with Aggregation 135
5.5 The Concept of Labor Market Slack 138
5.6 Digression: Defining the Natural Rate in a Pandemic 143
6 Understanding US Inflation Dynamics 146
6.1 An Empirical Characterization of Postwar US Inflation
Dynamics 149
6.2 TheWage–Price Spiral, Then and Now 156
6.3 Some Stylized Facts about Inflation Dynamics 160
6.4 Supply (and Related) Shocks 167
6.5 Measuring Slack 172
6.6 Digression:What Missing Disinflation? 175
6.7 CanWe Explain Any of This? 178
6.8 Digression: Markups and Margins 187
6.9 Data Appendix for Chapter 6 191
7 What Does Monetary Policy Do? 193
7.1 Monetary Policy Shocks:Who Cares? 193
7.2 Monetary Policy in Theory 201
7.3 Digression: Reasons to Be Skeptical about “R-Star” 204
8 WhatDoesFiscalPolicyDo? 207
8.1 The Multiplier Perplex 208
8.2 Empirical Evidence on the Multiplier 217
8.3 Measuring Fiscal Stance 220
8.4 Government Debt Management 223
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Contents ix
9 Conclusion: Is (Macro)economics Useful? 227
9.1 Selection Pressures that Engender a “Two-Cultures”
Problem in Economics 229
9.2 Economics as Apologetics 233
9.3 A Code of Conduct for Policy Analysts 236
Appendix A Measuring Prices 239
A.1 Consumption Price Indexes 239
A.2 Chain Aggregation 243
A.3 Potential Sources of Bias 245
A.4 Other Price Measures 249
A.5 Alternative Measures of Core Inflation 250
A.6 Measures of Nominal and RealWages 253
A.7 Measures of Long-Run Inflation Expectations 256
Appendix B Measuring Output 259
Appendix C Measuring Employment 265
Appendix D Seasonal Adjustment in a (Very Small) Nutshell 269
Appendix E Other Odds and Ends 274
Bibliography 282
Index 298
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Figures
1.1 Path dependence under disequilibrium trading page 5
2.1 Natural log of real GDP 19
2.2 Cyclical component from a Beveridge–Nelson decomposition 20
2.3 Cyclical component from an unobserved components model
and CBO’s output gap estimate 21
2.4 Cyclical component from a VAR-based Beveridge–Nelson
decomposition 23
2.5 Cyclical component from Kamber–Morley–Wong
Beveridge–Nelson filter 25
2.6 Filtered log real GDP (times 100) and unemployment rate
obtained from the Baxter–King bandpass filter 28
2.7 Estimated coherence between real GDP growth and the change
in the unemployment rate 29
2.8 Unemployment rate and estimated trend from lowpass filter 30
2.9 Cyclical component fromHodrick–Prescott filter 31
2.10 Recession probabilities implied by Markov switching model 36
2.11 Deviations of log real GDP from trend implied by a “plucking”
model of recessions 38
2.12 Seasonally adjusted and unadjusted log real GDP 39
2.13 An example where the real-balance effect is too weak and price
flexibility fails to deliver market clearing 42
3.1 Uncertainty induces a precautionary saving motive 49
3.2 Consumption as a function of cash-on-hand 50
3.3 The saving rate with a correction for inflation 57
3.4 Hurdle rates from various surveys of businesses 70
3.5 Nominal and real inventory-to-sales ratios 73
3.6 A power law for inventories…(?) 75
4.1 Real GDP per capita and its low-frequency trend 81

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