COLLABORATIVE

ROGRAMME IN ECONOMICS FOR ANGLOPHONE

AFRICA (EXCEPT NIGERIA)

ECO 620: MACROECONOMICS COURSE OUTLINE

Revised September 2008

L Introduction
This course is an advanced treatment of contemporary macroeconomic th ,~ory. Current controversies
will be discussed as well as relevance of theoretical and policy issues in an African context. It is
structured to ensure that macroeconomic problems and analysis that are centrally important at the
beginning of the 21s' century are fully treated. Thus, the course gives prominence to the dynamic openeconomy aspects of macroeconomics, including problems of policy credibility. Therefore it engages
with both the mainstream of modern, advanced macroeconomics and the main characteristics of
African countries' macroeconomic issues. It contrasts with traditional courses which are organized
around the counterposition of Keynesian and classical (or monetarist) results in a comparative static,
closed economy framework. This course outline covers two semesters of 120 hours.
2. Objectives of the Course
The aim of the course is to equip the students with rigorous macroeconomic tools with the African
flavour. At the end of the course, students are expected to be able to:
a) thoroughly understand the structure of a macroeconomic sycem and its underlying
theoretical framework;
b) use methodology and techniques studied in conceptualizing and postulating relevant
macroeconomic issues;
c) evaluate macroeconomic policies;
d) cultivate a critical perspective to current dcvelcpments in m'Icroeconomics.
3. Pre-requisites for the Course:
The pre-requisite is that the student has a satisfactory knowledge of intermediate macroeconomics
and quantitative techniques.
4. Readings
The following textbooks are recommended
Agener, Pierre-Richard and Peter J. Montiel (2008), Developmew M(;,r-oeconnmics, Princeton:
Princeton University Press, Third Edition.
Romer, D. (2006) Advanced Macroeconomics, New York: McGraw-Hill, 3" 1 Edition Murshed, SM.
(1997), Macroeconomics,for Open Economies, London: Dryden Press. Branson, WH. (1989)
Macroeconomic Them) , and Polic~y, Third Edition, Nev, Y(,!-k-. Harper & Row.
However, no single textbook would be adequate for the course. The four textbooks are not, in general,
intended to be alternatives. In most topics, the textbook references are complements, each offering
specific parts of the whole topic.
Other selected textbooks
Blanchard, O.J. and S. Fischer (1989), Lectures on Macroeconornics. MIT Press.
Dornbusch, R., S. Fischer and Richard Startz (2007), Macroeconomics. McGraw-Hill.
Dernberg (1989), Global Macroeconomics, Harper and Row.

Sargent (1987), Macroeconomic 7heosy. Academic Press.

Keynes (1936), The General Theory of Employment, Interest and
ll~fnney. Mankiw (1997), A7acroeconomics.
Obstfeld (1996), Foundations of lnter rrational Economics. MIT Press.
Walsh. C (1998), Money and Monetary Policy. MIT Press.
Sachs, Jeffrey and Felipe Larrain (1993), Macroecono7ics in the Global Economy
Ileijdra, B. and F. Van der Ploeg (200?), Foundations of Modern .11acroeconoinic.c,
Oxford University Press.
Woodford, M. (1999), Revolution and Evolution in Twentieth Century Hacoecoromics,
http://www.princeton.edu/~woodford/
5. Course Assessment
The course assessment will consist of coursework assignments, tests
and a final examination. The mark allocation will be as follows:

Coursework 40 marks

Final examination 60 marks.

Course Outline
SEMESTER I

1. Introduction (4 hours)

A brief review of evolution of macroeconomics

The types of macroeconomic models.
Data problems in the African context
*George Akerlof, (2007),"The Missing Motivation in Macroeconomics," American
Economic Review, March, pp. 5-36.
Stanley Fischer (1998), "Recent Developments in Macroeconomics" The Economic - .Journal, pp 294
- 339.
Gregory N. Mankiw, (1990) "A Quick Refresher Course in Macroeconomies", .Iov,nal of Economic
Literature, Vol. 28, pp. 1645 - 1660.
Woodford, M. (1999), Revolution and Evolution in Twentieth Century Macoeconomics,
http://www.princcton.edu/-woodford/

2. Review of Basic Macroeconomics -(6 hours)

National income and product accounts and system of national accounts.

The static and dynamic IS-LM model (product and money market cquilibrium).
Neoclassical model.

Monetary and fiscal policies.

Branson Ch 4, 5 and Ch 17.
Romer Ch 5.
Taylor (1981), "IS-LM in the Tropics: Diagrammatics of the New Structuralist Macro Critique", in
Cline and Weintraub (eds), Economic Stabilization in Developing Countries,
I-Iicks (1937), Mr Keynes and the Classics, Econoinetrica, Vol 5, p 147-59,
Corden (1987), "The Relevance for Developing Countries of Recent Developments in
Macroeconomic Theory", The World Bank Research Observer, Vol 2, No 2. Lipumba et al.
(1989), "Supply Constrained Macroeconomic Model of Tanzania",
,Journal of Economic Modelling, No 3.
Brian Snowdon, Howard R. Vane (2005), Modern Macroeconomics, Massachusetts: Edward Elgar
Publishing Limited.
3. Open Economy Macroeconomics (14 hours)

Extension of the basic 1S-LM model to foreign sector: the Mu:zdell-Fleminb model.

Balance of payments theories: elasticities, absorption, and the monetary approaches.

Exchange rate determination

External and internal balance and the theory of economic policy.

 Two-sector dependent model

Dutch Disease.

Trade liberalization and the macroeconomy.

Murshed Ch 1-7 & 11.
Agenor & Montiel Ch 2.
1 telmers et al. (1987), The Open Economy : Tools for Policy makers in Developing Countries, The
World Bank, Washington
Edwards (1989), Real Exchange Rate, Devaluation andAdjustment. The MIT Press. Corden (1986),
Inflation, Exchange Rates and the World Economy. University of Chicago Press.
I<rugman and Taylor (1978), "Contractionary Effects of Devaluation", Journal of International
Economics.
van Wijnbergen (1986), "Exchange Rate Management and Stabilization policies in
Developing Countries", Journal of Development Economics.
Lizondo (1987), "Exchange rate Differential and Balance of Payments Under Dual
exchange Rates", Journal of Development Economics, Vol 26.
Lizondo (1987), "Unification of Dual Exchange Rate Markets", Journal of Inierncrtinnal
Economics, Vol 22.
Pinto (1989), "Black Market Premia, Exchange Rate Unification, and Inflation in Sub
Sahara Africa", The World Bank Economic Review, Vol 3. No 3.
Agenor, P. (1990), "Stabilisation Policies in Developing Countries with a Parallel Market
for Foreign Exchange: A Formal framework", IVIFStuff Papers, Scpteniber.
Mark, N (2001), International Macroeconomics and Finance: Theorv and Econometric
Methods, Oxford: B(ackwell Publishers.
4. Consumption and Saving (14 hours)

Evolution of theory: Absolute income hypothesis, Relative income hypothesis, Permanent

income hypothesis, Life-cycle hypothesis, Hall's rational expectations hypothesis

Saving and portfolio decisions.

Recent developments and policy issues: Ricardian equivalence theorem.

Applications and relevance of consumption and saving theories to developing countries.

Branson Ch 12.
Romer Ch 7.
Agenor & Montiel Ch 3.
Keynes Ch 8-10.
Friedman (1957), A Theory of the Consumption Function.
Duesenberry (1956), "Income, Saving and the Theory of the Consumption Function, Ando and
Modigliani, The Life Cycle Hypothesis of Saving: Aggregate If-ripiications and Tests", American
Economic Review, March 1963.
Barro, R. (1974), "Are Government Bonds Net Wealth?", Journal of Political Economy. Deaton
(1989), "Saving in Developing Countries: Theory and Review'"' Proceedings of

The World Bank Annual Conf'etence on Developinent Economics, p 61-96. Giovannini (1983),
"The interest Rate Elasticity of Savings in Developing Countries: The Existing Evidence", World
Development, Vol 11.
Giovannini (I9&5), 'Savings and=the Real - Interest -in- LDCs", -Journal of Development Economics
Vol 18
Raut and-~Vizanarsi, .(~.~9D), -`z Determ inants af~ Consumption-and-Savings. Behaviour in
Developirig Couritries'~,~'~'he'T~Tvild:BankE~onr~mic:R-euiew;~Vo1-3;-?~To.
3:
Blinder- and--Deaton
"The Time Ser`ies Consumption Function Revisited",
Brookings Papers on Economic Activity 2.
Hall, 2(1978), "Stochastic Implications of the Life Cycle-Permanent Income
Hypothesis: Theory and Evidence", Journal Of Political Economy, Vol 86, No 6. Hall, R.
(1988), "Intertemporal Substitution in Consumption", .1ournal of Political
Economy, Vol 96, No 2.
5. Investment (10 hours)

Overview: Business fixed investment, Investment in Housing. Inventory investment.

Investment in human capital. Neoclassical model, Marginal efficiency of capital, Accelerator
principle, Tobin's q theory. Adjustment costs, interrelated factor demand functions and
capacity utilization.
Liquidity constraints. Investment in fragmented markets: McKinnon complementary hypothesis.
Investment under uncertainty. Government policy and private investment: Crowding in,
crowding out.
Branson Ch 13.
Romer Ch 8.
Agenor & Montiel Ch.3.
Keynes Ch 11-12, 16.
Alchian, (1955), "The Rate of Interest, Fisher's Rate of Return over Costs and ~~eyr.Ps'
Internal Rate of Return", American Economic Review, December.
Hirshleifer (1958), "On the Theory of the Optimal Investment Decision", Journal of
Political Economy, August.
Jorgensen (1963), "Capital Theory and Investment Behaviour", American Economic Review, May.
Jorgensen, (1971), "Econometric Studies of Investment Behaviour", Journal of Economic Literature,
December.
Blejer and Khan (1984), "Government Policy and private investment", IMF Staff Papers, Vol 31, p
379-403.
Khan and Reinhart (1990), "Private Investment and Economic Growth in Developing Countries", World
Development, January.
Mussa (1977), "External and Internal Adjustment Costs and the Theory of Aggregate and Firm
Investment", Economica, May.
6. Labour Market and Unemployment (12 hours)
Efficiency wages in models of unemployment
Search and Matching models

 Hysteresis

Labour market issues in developing countries: informal sector, under employment,

brain drain, demand pull and supply push
Branson: ch.6, 7, 10,11 & 20.
Romer: ch.5, ch.6, ch.10.
Agenor & ivlontiel: ch.2, chs.9 & 17.
Vandemmoortele, J. (1991), "Employment Issues in sub-Saharan Africa", AERC Special Paper No.
14, 1991.
Collier and Lal (1996), Labour and Poverty in Kenya 1900 - 1980, Clarendon Press. Kanbur and
Mazumdar (1991), (eds), Labour Market and Adjustment, Economic Development Institute, The
World Bank.
Haroun Bhoorat et al. (2001), (eds), Fighting Poverty: Labour Market and Inequality in South
Africa, University of Cape Town Press.
Boateng, K. (1999), "Quality Jobs or Mass Employment", AERC RP98, October.

SEMESTER I I

7. Economic Growth (14 hours)

Introduction and stylised facts about economic growth

Harrod-Domar model

Neoclassical theory and growth accounting

Endogenous growth

Empirical literature
Branson: ch.23-25.
Romer: chsl-3.
Agenor & Montiel: ch. 15.
Stiglitz, et al (2006), Stability with Growth: Macroeconomics, Liberalization and Development,
Oxford University Press.
Romer, D. (1986), "Increasing Returns and Long-run Growth", Journal of Political Economy, Vol
94.
Khan, M.S. and D. Villanueva (1991), "Macroeconomic Policies and Long-Term
Growth: A Conceptual and Empirical Review", AERC Special Paper No. 13. Montiel, P.J. (1995),
"Financial Policies and Economic Growth: Theory, Evidence, and
Country Experience from Sub-Saharan Africa". AERC Special Paper 18, April.
AERC Plenary Papers in Journal of Afiiccrn Economies, Vol. 5 No.3 1996, Economic
Growth and Economic Consequences of External Shocks in Sub-Saharan Africa. Mohsin S. Khan and
D. Villaneuva (1991), "Macroeconomic Policies and Long-"l'crm
Growth: A Conceptual and Empirical Review", AERC Special Paper 13, M .y.
Ndulu, B. et al. (2008), (eds), The Political Economy of Economic Growth in Africa,
1960 - 2000, Vol 1& 2, Cambridge University Press.
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8. Real Business Cycles (6 hours)

Stylized facts about economic fluctuations

Theories of fluctuations
A baseline Real business cycle model
Romer, ch.4
Snowdon and Vane, chfi.
Mankiw, G. (1989), "Real Business Cycles: A new Perspective", Journal o/ Economic
Perspectives, Vol. 3 No. 3.

9. inflation and Expectations (10 hours')

Theories of inflation

Cost, effects and remedies of inflation

The short and long run Phillips curve

Expectations: static, adaptive and rational

Rational expectations in macroeconomic policy models: Rules vs discretion

Laidler and Parkin, (1975), "Inflation: A Survey", Economic.,'ouynal, December. Santomero and
Seater (1978). "The Inflation - Unemployment Tradeoff: A Critique of
the Literature", Journal qf Economic Literature, June.
Friedman, A (1968), "Role of Monetary Policy", American Economic Reviei-n, March. Lucas (1973),
"Some International Evidence Of 0UtpUt-Inflation Tradeoffs", American
Economic Revicw.
Sagent and Wallace (1976), "Rational Expectations and the Theory of Economic Policy", .Journal of
Monetary Economics.
Gordon, (1976), "Recent Developments in the Theory of Inflation and Unemployment", .Journal of
Monetary Economics.
Muth, (1961), "Rational Expectations and the Theory
Price Movements",
Econornetrica,.
Fischer and Modigliani (1978), "Towards an Understanding of the Real Effects and Costs of
Inflation", Weltwirtshaftliches, No. 114.
Tegene (1989), "The Monetarist Explanation of Inflation: The Experience of Six Af'rican
Countries", Journal of Economic Studies, Vol. 1, No. 1.
London (1989), "Money. Inflation and Adjustment Policy in Africa: Some Further
Evidence", African Development Review, Vol. 1, No. 1.
Nugent and Glezokoz (1982), "Phillips Curve in Developing Countries: '( he latin
American Case", Economic Development and Cultural Chan,l~e.
Njuguna S.N., (1999), "Monetary and Exchange Rate Policy in Kenya", AERC RP 9=t,
March.
Rutasitara, L. (2004), "l:xchange Rate Regimes and Inflation in Tanzania", AERC RP 138, February.
Kofi, M.O. (2007), A Modelling of Ghana's Inflation Experience: 1960 -- 2003. AERC RP 169, August.
Siebrits, Akinboade and Niedermier (2004), The Determinants of Inflation in South Africa: An
Economic Analysis, AERC RP 143, September.
,

10. Financial Markets and Monetary Policy (9 hours)

Financial markets: nature, structure and functions

Evolution of money demand theories and empirical studies

Money supply process and interest rates determination

Instruments, targets, and transmission mechanisms

Dynamic inconsistency of low inflation monetary policy

Mwega, F.M., S.M. Ngola and N. Mwangi, (1990), "Real Interest Rates and the Mobilization of
Private Savings in Africa", AERC RP 2, November. Oluremi tJgrm and Adeola Adenikinju (1995),
"Money Supply Mechanisms in Nigeria. 19,0 - 1998". AERC RP 39, November.
r~,1

-1

nUO,

H.H.L~. A H.rL~. ~ I t 1 77n7 nn

^7\
^7\
),

"Fiscal Operation, Money ) '% Supply ~~ and Inflation iii Tanzania",

11111nUO
,G~"'
AERC RP 65, November.

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11. Budget Deficit/Imbalances and Fiscal Policy (9 hours)

Measurement of deficits

Budget financing and Government budget constraint

Solvency and sustainability

I'he budget process and political economy theories of budget deficits.

Empirical application: politics and deficits in developing Countries.

Management of budget surpluses

Romer: ch.11.
Branson: chs. 15 & 16.
Agenor & Montiel, chs.4, 6 & 10.
Kouassi and Bouhoun (1993), "The Determinants of Fiscal Deficit and Fiscal Adjustment of Cote
d'Ivoire", AERC RP 15.
Ekpo and Ndebbio, (1999), "Fiscal Operations in a Depressed Economy: Nigeria, 1960 - 1990",
AERC RP 44, March.
Egwaikhide, F.O. (1997), "Effects of Budget Deficits on the Current Account Balance in
Nigeria: A Simulation Exercise", AERC RP 70, November.
Klaus Schmidt-llebbel, (1995), "Fiscal Adjustment and Growth In and Out of Africa",
AERC Special Paper 19, April.
12. Macroeconomic Management and Policy Analysis in the African Context (8 hours)
Overview of stabilization theory and policy: Tinbergen theory of stabiilrati;;n, cost of
instrument stabilization
The IMF financial programming model
The World Bank models (RMSM and variants)
Other macro models
The relationship between orthodox programs, heterodox programs, and countries'
experience of stabilization/structural adjustment programmes
Agenor & Montiel: chs. 8, 11-14 & 16,
Soludo, C., (2002), "Macroeconomic Modelling and Economic Policy Mal<ing: A Survey
of Experience in Africa", AERC RP 121, November.
Mwega, F. and V. Seshemani, (1997), Economic Management in Sub-Saharan Afi ica,
AERC/East African Educational Publishers.
Atsain, A., S. Wangwe and A.G. Drabek (1994), (eds) Economic Policy Experience in Africa:
What Have We Learned? AERC Publication.

13. Optional Topics: (4 hours)

Disequilibrium Macroeconomics
- Limitations of Equilibrium models
- Quantity Constraint and rationing Models
- Macroeconomic foundations of incomplete nominal adjustments - Lucas
imperfect information model
- Staggered price adjustment

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Structuralist Macroeconomics
- Basic Assumptions of Structuralist Macroeconomics Income Distribution, Savings and Aggregate Output - Inflation
and "Forced saving"
- Sectoral Supply Conditions and Macroeconomic Adjustments
Behavioural macroeconomics
Akerlof, George (2002), "Behavioural Macroeconomics and Macroeconomic Behaviour", American
Economic Review.
Kopcke, Richard W. Jane Sneddon Little and Geofrey M.B Tootll (2003), (eds), How Humans
Behave: Implications for Economics and Economic Policy. Conference Proceedings, Boston
Federal Reserve Conference.
Taylor, C. (2004), Restructuring Macroeconomics: Structuralist Proposals ai7d Critique of
Mainstream, Harvard University Press,
*Barro R. and Grossman H(I971), "A General Disequilibrium Model of"Income and Employment"
American Economic Review.
*Bevan D. et al. (1987), "Peasant Supply Response in Rationed Economies" World
Developmcnt, Vol. 15, No. 4.
Clower R. (1967), "A Reconsideration of the Micro-Foundations of Monetary Theory"
reprinted Western Economic Journal, Vol. 6, pp. 1-9.
Cuddington, W., Johansson, and I1ofgren (1984), Disequilibrium Macroeconomics in
Open Economies Blackwell.
Malinvaud, F. (1977), The Theory of Unemployment Reconsidered, Blackwoll.
Patinkin D. (1965), Alloney, Interest and Prices, New York: Harper and Row. *Harris, L.
(1981), Monetary Economics, ch on Disequilibrium Macro
de Melo, J. and Robinson, S. (1982), General Equilibrium Models ,foj Development
Policy. Cambridge: Cambridge University Press.
Taylor, L. (1981), "IS-LM in the Tropics: Diagrammatics of the New Structuralist Macro Critique"
in Cline and Weintraub (eds.), Economic Stabilizatioa in Developing Countries.
Lipumba N. H. 1., Ndulu B.J. et al. (1989), "Supply constrained Macroeconomic Model
of Tanzania" .Journal of Economic Modelling, No. 3.
Ekpo, A. H. (1997), "The `New' Macroeconomics: How Relevant to Africa?" in
Economic Management in Sub-Saharan Africa, (eds.) F. M. Mwega and V.
Seshaman, Nairobi, East African Educational Publishers. PP. 8 - 27.
Friedman and Phelps E.(1984), Individual Forecasting and Aggregate Outcoines: "Rational
Expectations" Examined, Cambridge University Press.
*Taylor L. (1983), Structuralist Macroeconomics, Basic Books.
*Taylor, L. (ed.) (1990), Social Relevant Policy Analysis, Cambridge, MA: MIT Press

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