ECON 3102

Macroeconomics 3, 2012
The School of Economics, ANU

Course Outline

Personnel:

Lecturer and Coordinator: Dr William Coleman
HW Arndt, 1021
william.coleman@anu.edu.au

Co-ordinating Tutor:
Mr Jakub Kielbasa
HW Arndt, 2020
ph: 6125 7325.
jakub.kielbasa@anu.edu.au

Tutor: Mr Omer Majeed
omer.majeed@anu.edu.au


Administrative Assistant: Terry Embling
HW Arndt, 1013
Ph: 6125 0384

Lecture Times:
Wednesday: 9.00-10.00 Copland LT
Thursday: 9.00-10.00 Copland LT

Supplementary Lecture Time:

Monday: 9.00-10.00 Copland LT

The supplementary lecture time is allocated to three mid-term tests, for revision
sessions, and possibly for visiting speakers.

The first lecture in the course will take place at this time, Monday July 23.

Tutorials:

There will be one tutorial per week, with problems circulated a week in advance.
The tutorials begin in Week 2.
Students will enrol in a tutorial online via the university's ETA system. Any students
wanting to change their tutorial time may use the ETA system to do so for two weeks
after the first lecture. After this two week grace period, students can change their tutorial
only by applying to Jakub Kielbasa, and supplying him with adequate grounds for
changing. The ETA website is http://eta.fec.anu.edu.au/

Tutorials that receive a low enrolment will be cancelled.

The tutors are Jakub Kielbasa, Omer Majeed and William Coleman

Textbook:
There is no prescribed textbook.

Class Notes:
Extensive Class Notes will be available on Wattle.

Questions and feedback:
If you have problems with parts of the course you should, in the first instance, approach
your tutor. You are also encouraged to come and see me during Dr Colemans office
hour, at a time to be announced.

Assessment:
Assessment in Macroeconomics 3 will be based on,

A three hour examination to be scheduled in the Final Examination period in
November. This examination will have a reading period, and will require you to
answer 4 questions from a choice of 10. This exam will contribute 70 percent of
the total assessment.

A compulsory essay assignment to be completed by 6pm Friday October 19, which
will contribute 15 per cent of the assessment

Three mid-term tests which will be held during the semester during the Monday
lecture time. Each test will contribute 5 per cent of the assessment. The test
dates will be August 20, September 24, October 22. The tests are not
redeemable.

If you miss a test because of illness you must provide documentary evidence to me
within one week of the relevant test. Students who provide satisfactory documentary
evidence of illness will be imputed a mark based upon their performance on the final
exam. Students may apply to Dr Coleman before a test to not sit, on account of an
unavoidable and important work commitment that clashes with the test. Students
who are granted this application will also be imputed a mark based upon their
performance on the final exam.

Objectives:

This course provides fundamental theory for the illumination and appraisal for
macroeconomic issues.

Syllabus:

Measuring Living Standards: Allowing for Leisure and Lifespans

Making International Comparisons

The welfare meaning of macroeconomic aggregates

Spending and Saving

The End of Growth

Measuring, Productivity, Efficiency and Technical Progress

Finite Resources, the Limits to Growth and Sustainability

Labour Supply and Income Tax Policy

Is There an Optimal Population?

Intergenerational Equity

Convergence and Globalisation

Policy for Government Deficits and Debt
What is the right deficit or debt of government? Is there a right deficit?

Theories of Inflation: Quantity and Wicksellian

Inflation as a Tax, as a Cost and as a Optimum
Is price stability desirable ?

What to do about Bank Runs?

A Hayekian Model of the Business Cycle

A Classical Model of Unemployment
Is unemployment due to a lack of competitiveness in the labour market?

Keynesian Fiscal Policy for Recession

Policy or Self-correction?

Government Failure and Time Inconsistent Policy

Study requirements and expectations
Participation in this course requires you to:
- attend each lecture
- attend all tutorials (a roll will be marked)
- complete all tutorial assignments
- complete the essay assignment

Learning Outcomes:
On successful completion of the course, students will:

1. be able to use macroeconomic theory to examine and understand major
economic events in the Australian and global economy;

2.be able to appraise macroeconometric investigations of macro questions;

3. know how to use models, figures and mathematics to make clear
explanations of the economics at stake with intuition;
Wattle

Communications will be frequently posted on Wattle.

Co-ordinators Blog Site

You may find interest in,

markedlymacro.blogspot.com

Essay Assignment.

1. The essay assignment must have the structure of a scientific paper. They must be
divided into sections, each section with a heading.

Section 1; the Introduction; must tell the reader the question you propose to
investigate, and summarise the answer that your investigation has concluded with.
Section 2; The Theoretical Background
Section 3: Data and Measurement
Section 4: Empirics
Section 5: Extensions

2. A good essay assignment will among other things,
carefully consider measurement issues
explore the stability of estimated relationships across time (or space)
investigate if certain theory amendments improve performance
check if empirical performance is sensitive to specification of
functional form

3. All essay topics require the use of simple econometrics and/or statistics.

4. The essay assignment should not become an exercise econometric theory. Although
all essays involve an econometric investigation, the economic theory is of more import
than econometric theory in these assignments. Thus the essay should not rehearse the
derivation of the t-statistic, etc!


5. Regressions should be reported in a format similar to this one
,
Dependent
Variable
X QR NUM DW
R
2

SE
Y 0.95
(2.34)
56.5
(1.10)
0.067
(3.21)
1.87 0.67 0.09

The figures in the brackets are t-statistics. The diagnostics should at minimum include
R
2
, standard error, and a measure of autocorrelation in errors, but you may like to
include more.
6. Each essay assignment must include an appendix which tabulates all the
observations of all the variables they have used in their regressions. All variables must
be defined, and their sources listed.
7. References and Footnotes
1


Please use Harvard style references eg Author (2003) reports, Macroeconomics 3
changed my life (p 45). Then in the list of references,

1
WiththankstothestyleguideoftheInstituteofEconomicAffairs.
Journal article: Author, A. B. (2003) Article Title, Journal Title in Italics in Full,
volume, issue, page range.
Book: Author, A. B. and B. C. Author (2009) Book Title in Italics in
Full, Location: Publisher.
Chapter in edited volume: Author, A. B. (2009) Chapter Title, in C. D. Editor and E. F.
Anothereditor (eds.) Book Title in Italics in Full, Location: Publisher.
Online document: Author, A. B. (2009) Document Title Source:
http://www.theinternet.com/mypaper.html (accessed 10/10/2009).
8. Data sources
Many international organisations provide data at sites of varying degrees of user
friendlyness;

http://www.imf.org/external/data.htm
http://stats.oecd.org/Index.aspx
http://data.worldbank.org/topic
http://hdrstats.undp.org/en/tables/

Capital stock data is far from ubiquitous.
- The friendliest single source is an Excel file at
http://www.ifw-kiel.de/forschung/datenbanken/netcap
- Certain countries have made their own estimates of capital stocks US,
Australia, France, Japan, Finland (see
http://www.oecd.org/dataoecd/47/15/37542126.pdf for references).

- OECD data on the growth rate of capital may be found at
http://stats.oecd.org/Index.aspx?DatasetCode=STAN08BIS&lang=en. You would
need to turn these into a index of the level.

- Finally, check if the DX data base is available to you as an icon under Research
at the College of Business and Economics webface.
For some questions you may find helpful the free and easy to use data base that the
Reserve Bank maintains at http://www.rba.gov.au/Statistics/Bulletin/index.html.
You can use also use the ABS data base (Ausstat), by clicking on Databases on the
Librarys home page, and following through. Treasury has published its database as
Modellers' Database, ABS cat. No. 1364.0.15.003.
9. Take care in distinguishing real from nominal variables. Real variables are constant
price values, or chain volume indexes. Nominal variables are current prices values.
10. Plagiarised essays shall be deemed to be joint work, and marked accordingly.
Thus if two essays involve plagiarism, each will receive a 50% penalty; if three essays
involve plagiarism, each will receive a 66% penalty, and so on. Borrowing or sharing
regressions is deemed plagiarism. Students may, without penalty, co-operate in the
collection of data.
11. Essays submitted after the due date will receive a zero mark.

Question 1.
Choose a country that begins with the last letter of your family name, and that has data
on capital stocks, employment and output.
Using data for the last few decades, estimate for it a Polynomial Aggregate Production
function,

TREND l l l q
T
o o o o o + + + + + = ....
3
3
2
2 1 0

q Y/K, l L/K, TIME = time trend

(i) Can you reject the hypothesis of constant marginal productivity of labour?
(Test this at mean of your labour per unit of capital data)
(ii) Can you reject the hypothesis of negative marginal productivity of labour?
(Test this at mean of your labour per unit of capital data).
(iii) Are your answers to (i) and (ii) altered if you drop from the regression
observations before your year of birth?
(iii) If you your answers to (i) and (ii) are affirmative calculate a point estimate
of (i) the elasticity of the demand for labour (Measure this at mean of
your labour per unit of capital data).
(iv) If at least one of your answers to (i) and (ii) are in the negative, what
adjustments can you make to improve the conformity of your estimates
to theory? (Lags? Other inputs?)

Question 2.
Growth theory suggests that per capita GDPs of countries should converge over time.
This implies that in a cross section regression of a sample of countries,
i i
Y = g | o +

g
i
average growth of gdp per capita country i in the years subsequent to starting year
Y
i
GDP per capita of country i at starting period
| should be negative.
Select all those countries whose name begins with the first letter of your family name,
and all those countries whose name begins with the first letter of your individual name.
Select additional countries with first letters that alphabetically neighbour
2
the countries
already selected to make up a total of 30 countries. Using the year of your birth as the
starting year, use this data to test the prediction..
(i) Can you reject beta being positive?
(ii) Assuming beta is estimated as negative, calculate the steady state level of
income that your regression implies will experience zero growth,
^
^
|
o
=
SS
Y

Compare it to current Australian per capita GDP.

(iii) Are your results qualitatively changed if you drop from your data set (i) all African
economies, or (ii) all transition economies (eg former USSR and Eastern
Europe)?
Question 3.
Consumption theory suggests that consumption growth should be only weakly related to
the growth rate in current income. Thus Ii this regression
Y C
g = g | o +

g
C
growth of household consumption
g
Y
contemporaneous growth rate in household income
| should be small.
Select a country whose name begins with the first letter of your family name. Use data
(annual or quarterly) back to the year of your birth to regress this hypothesis.
(i) What is the 95 percent confidence interval on beta? What does this suggest for
the propensity to consume out of current income?

2
BotswananeighboursChinainthissense.SodoesDenmark.Zambiadoesnot.
(ii) Calculate
Y
g
5
, which is defined for any period t as the average growth rate in
household income over the 5 years preceding period t. Estimate

Y Y C
g g = g
5
| | o + +

Comment on what your results indicate for the relative importance of current
income growth and permanent income growth in explaining consumption.


Question 4.
Perfect capital mobility suggests that the size of national Investment should be
unconnected with national Saving.
(i) Select from the Penn World Tables all those countries whose name begins with
the first letter of your family name, and all those countries whose name begins
with the first letter of your individual name. Select additional countries with
first letters that alphabetically neighbour the countries already selected to
make up a total of 30 countries. For the most recent available year regress
Investment share of GDP at current prices on the Saving share of GDP at
current prices. Are your results consistent with perfect capital mobility?
(ii) Repeat (i) for the year of your birth. Does this second regression tell a different
story?

Note: you will compute the Saving share as = 1 Consumption share -Government
share.
Note: the PennWorldTables are at
http://pwt.econ.upenn.edu/php_site/pwt62/pwt62_form.php
Question 5

The Quantity Theory of Money suggests that inflation is explained by money supply
growth .
i i
= |u o + H

i
H
i
=inflation rate country i
u
i
=money growth rate of country i
Select all those countries whose name begins with the first letter of your family name,
and all those countries whose name begins with the first letter of your individual name.
Select additional countries with first letters that alphabetically neighbour the countries
already selected to make up a total of 30 countries. Using the most recent year for which
data is conveniently available, use this data to test the prediction..
(i) Can you reject beta being zero? How much of the variation in inflation is
explained by money growth.
(ii) Re-estimate the equation for the year of your birth. Are your answers to (i)
qualitatively altered?