Heijdra Foundations of Modern Macroeconomics (Oxford, 2002)

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Preface

In this book we try to present a balanced overview of modern macroeconomic theory. We have adhered to two guiding principles in writing this book. First, we have adopted a rather eclectic approach by paying attention not just to the most recent insights in the field but also to developments that are currently less fashionable. In doing so we hope to provide the students with a better overview of current and past debates in macroeconomic theory. We have thus chosen to include discussions of the IS-LM model, the adaptive expectations hypothesis, and the quantity rationing models of the early 1970s. Though these theories are currently less fashionable (and, as some economists argue, may even be "outdated") it is our firm conviction that they nevertheless provide important insights. For example, to fully appreciate the importance of the rational expectations hypothesis, a good understanding of the adaptive expectations hypothesis (its immediate predecessor) is indispensable. Similarly, to really understand the contributions made in recent years by Real Business Cycle economists it is useful to have a firm understanding of the IS-LM model, whilst a familiarity with the quantity rationing literature helps in appreciating the New Keynesian insights. Finally, "old habits die slowly" and the IS-LM model is still used extensively even though, as Blanchard has pointed out recently, many people may not even know they are using it (2000b, p. 1405).

Our second guiding principle concerns the adopted style of the book. In addition to introducing the different theories by verbal and graphical means, we have also aimed to successively develop "the tools of the trade" of modern macroeconomics. In this aspect our book is related to Allen's (1967) marvellous macroeconomic toolbook. So instead of only providing students with a verbal/intuitive understanding of the material (valuable as it is), we also want to teach them the basic modelling tricks of modern macroeconomics. Where needed we present the full details of both the models and their solutions. We expect that students who have worked through our book should have little or no problems with more advanced graduate textbooks like Blanchard and Fischer (1989), Farmer (1993), Obstfeld and Rogoff (1996), Romer (2001), Turnovsky (1997, 2000), Sargent (1987a), and Ljungqvist and Sargent (2000). Similarly, the student should be well prepared to read (and appreciate) the magnificent survey articles in the recent macroeconomics handbook by Taylor and Woodford (1999).

How did this book get written? We started to think about writing this book in 1993 when we were both employed at the University of Amsterdam. The second author benefited much from his experience teaching courses in macroeconomic theory and policy at the London School of Economics together with Charles Bean and John Hardman Moore. Handwritten notes on the first ten chapters were developed by the second author and expanded into a set of typed lecture notes by the first author in early 1995. These notes carried the provisional title of Macroeconomics in Sixteen Frames, even though only ten "frames" existed at that time. (Recall that projection at a rate of at least sixteen frames per second underlies the principle of motion pictures. The working title was thus intended to signal that the book presents a smooth overview of modern macroeconomics.) We determined the contents of the remaining frames and the Mathematical Appendix together and the first author completed the work on the book on a part-time basis during the period 1995-2001.

Our book can be used both in the undergraduate and the graduate curriculum. In the undergraduate curriculum, Chapters 1-11 can be used in a second (intermediate) macroeconomics course whilst Chapters 12-17 are aimed at final-year advanced undergraduates. For example, we have ourselves used Chapters 1-10 in our secondyear macroeconomics courses at the Universities of Amsterdam and Groningen. Students in these institutions typically study a book like Mankiw (2000a) in their first-year course. In the graduate curriculum, the book can be used as the main text in a first-semester macro course or as a supplementary text for an advanced graduate macro course. The book is well suited for beginning graduate students with no or insufficient previous training in macroeconomic theory. Parts of Chapters 13-17 were used in the various graduate courses we have taught over the years for the Netherlands Network of Economics (NAKE) and the Tinbergen Institute. Graduate courses based on the material in this book were also given in the European University Institute (Florence), the Institute for Advanced Studies (Vienna), and SERGE (Prague).

Despite considerable effort on our part (and that of the editorial team of Oxford University Press), we are almost sure that some typos and errors are still "out there" to be discovered. We pledge to publish all such errors and typos as we become aware of them. We will make the errata documents available through the home page of the first-mentioned author. At the time of writing, the link is: http://www.eco.rug.nl/medewerk/heijdra . On this home page we will also place the problem sets for the book as they become available.

We have received comments from many students and colleagues over the years. Particularly detailed comments were received from two anonymous referees, Jaap Abbring, Leon Bettendorf, Lans Bovenberg, Erik Canton, Robert Dur, Switgard Feuerstein, Christian Groth, Albert van der Horst, Jan-Peter Kooiman, Jenny Ligthart, and Partha Sen. Peter Broer provided technical assistance on Chapters 15-17 and Thijs Knaap helped with the impulse-response graphs in Chapter 15. The first drafts of Chapters 16-17 were written during a visit of the firstmentioned author to the Economic Policy Research Unit (EPRU) of the University

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of Copenhagen ii excellent researL We were very fa Despite the fact 1 handed in a type maintained a cr fine tuning of ts.

Bryant, also of Ox

ing this book in 1993 3 rn. The second author economic theory and 2harles Bean and John rs were developed by tes by the first author

rroeconomics in Sixteen

Recall that projection le principle of motion

• the book presents a d the contents of the er and the first author he period 1995-2001. graduate curriculum. In a second (intermedi_it final-year advanced , rs 1-10 in our secondrn and Groningen. fankiw (2000a) in their e used as the main text f an advanced graduate

.te students with no or is of Chapters 13-17 over the years for the n Institute. Graduate in the European Unies (Vienna), and SERGE

Modal team of Oxford id errors are still "out Trors and typos as we ,-nts available through writing, the link is: we will also place the

d colleagues over the anonymous referlc Canton, Robert Dur,

st, Jan-Peter Kooiman, echnical assistance on Ise-response graphs in ring a visit of the first- RU) of the University

Preface

of Copenhagen in January 2000. We are grateful to EPRU for its hospitality and excellent research facilities.

We were very fortunate to work with Andrew Schuller of Oxford University Press. Despite the fact that we missed many deadlines over the years, and ultimately handed in a typescript almost twice the size we originally promised, Andrew has maintained a cheerful disposition and a steady interest in the project. During the fine tuning of the book we benefited tremendously from the efforts of Rebecca Bryant, also of Oxford University Press.

Ben J. Heijdra Rick van der Ploeg

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Detailed Contents

Detailed Contents

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