By Kartik B. Athreya
Macroeconomists were caricatured both as credulous savants in love with the great thing about their mathematical types or as free-market fundamentalists who admit doubtless as to the market's knowledge. during this e-book, Kartik Athreya attracts a more true photo, providing a nontechnical description of trendy principles and versions in macroeconomics, and arguing for his or her price as interpretive instruments in addition to their coverage relevance. Athreya intentionally leaves out the technical equipment, delivering a necessary consultant to the occasionally summary rules that force macroeconomists' examine and useful coverage advice.
Athreya describes the most method of macroeconomic version building, the foundational Walrasian general-equilibrium framework, and its sleek model, the Arrow-Debreu-McKenzie (ADM) version. within the middle of the publication, Athreya indicates how the Walrasian technique shapes and unifies a lot of contemporary macroeconomics. He info types crucial to ongoing macroeconomic analyses: the neoclassical and stochastic development types, the ordinary incomplete-markets version, the overlapping-generations version, and the average seek version. Athreya's available primer lines the hyperlinks among the perspectives and coverage recommendation of recent macroeconomists and their shared theoretical approach.
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Extra info for Big Ideas in Macroeconomics: A Nontechnical View
The idea has attracted serious attention; many authors have written papers documenting the joint movement of a stock market index and the sum of household consumption expenditures. , Ludvigson and Steindel 1999), and on the face of it, the line of reasoning seems natural: households, looking ahead to the future, see that their stock portfolio has increased in value. So, rather than waiting until old age to sell the stocks and spend the money, why not sell some of it and spend more now? The problem with this view is that, while it is certainly sensible when talking about any single household, it may not make sense when looking at aggregate data.
For instance, if one were interested in predicting the effects of an investment tax credit to firms, then as long as within-firm incentive issues were not paramount for this question, the ADM model’s more spare representation of production and firms would allow the macroeconomist to construct a richer model of the physical investment process at firms and obtain sensible predictions. In other words, the ADM model simplifies firms and thus gains tractability, but loses the ability to analyze any serious questions having to do with the nature of incentives within organizations.
This is so even though none of them were certain, at the time they purchased or sold the assets, about what corporate profits would turn out to be in the next trading session. The restrictions imposed on admissible outcomes by their use of this notion of equilibrium immediately allowed Mehra and Prescott to use aggregate US data to compute the rates of return that bonds and stocks would each generate. The Modern Macroeconomic Approach 23 Given the equilibrium model chosen, the final part of step 4 is, in many cases, to evaluate the change in well-being of households.