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Empirical macro.
Theoretical / empirical Long run (e.g. growth) / short run (e.g. cycles)
Long run theoretical macro usually works in continuous time. Long run empirical macro usually runs reduced form cross-country regressions. Short run theoretical macro usually works in discrete time. Short run empirical macro usually runs structural time series regressions.
This literature work with models that often contain a key equation that looks something like = where is productivity and is research. Read: Jones, Handbook of Economic Growth, Chapter 16 (2005) http://ideas.repec.org/p/nbr/nberwo/10767.html
And: Mankiw, Romer and Weil, A Contribution to the Empirics of Economic Growth (1992) http://www.jstor.org/stable/2118477
Structural change: how can we explain e.g. the rise of the service sector, or the increase in the skill premium for higher degrees?
This literature often works with models in which the elasticity of substitution between various factors of production is not equal to one. Read: Duarte and Restuccia, The Role of the Structural Transformation in Aggregate Productivity (2010) http://qje.oxfordjournals.org/content/125/1/129.short And: Acemoglu, Capital Deepening and Nonbalanced Economic Growth (2008) http://www.jstor.org/stable/10.1086/589523 And: Ngai and Pissarides, Structural Change in a Multisector Model of Growth (2007) http://www.aeaweb.org/articles.php?doi=10.1257/aer.97.1.429
This literature works with models in which climate change either reduces productivity or decreases utility.
Read: Golosov et al., Optimal Taxes on Fossil Fuel in General Equilibrium (2010) http://www.nber.org/papers/w17348.pdf
How should a country respond to discovering a significant new source of natural resources?
This literature works with multi-country models in which the resource is a factor of prodution.
Read: van der Ploeg, Natural Resources: Curse or Blessing? (2008) http://www.aeaweb.org/articles.php?doi=10.1257/ jel.49.2.366
Productivity shocks? News about future productivity? Investment specific technical change? Demand shocks? Preference shocks? Shocks to financial intermediation? Monetary policy shocks? Tax policy shocks? Government spending shocks?
Read: Beaudry and Lucke, Letting Different Views about Business Cycles Compete (2009) http://www.nber.org/chapters/c11806.pdf
Only if there is a substantial nominal rigidity in the economy. E.g. sticky prices or sticky wages. Read: e.g. Gali, Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework (first few chapters) (2008) And: Golosov and Lucas, Menu Costs and Phillips Curves (2007) http://www.jstor.org/stable/10.1086/512625
subject to a budget constraint, e.g.: + = 1 + where the capital stock evolves according to: = 1 1 + .
log + +
By taking First Order Conditions. And Market Clearing Conditions. Here on the consumer side we have: And on the firm side we have:
Capital price: =
=1
Solving nonlinear R.E. models is tricky, so they tend to be (log-) linearised first. (Higher orders of approximation are becoming more common too.) Dynare (http://www.dynare.org/) will do this for you.
These may be estimated (again, using Dynare). Or, they may be calibrated (chosen so that the behaviour of the model matches key moments of the data). = 0.36 = 0.99 = 0.025 = 0.95 = 0.009
Here we choose:
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0.2 0 -0.2
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One way of doing empirical macro is to directly estimate models like the one we just saw. Suppose we want to work in a theory free way though.
Difficult because policy variables (interest rates, government spending) respond systematically to the variables we are interested in (output, inflation). Does lowering nominal interest rates lead to a boom, or does the central bank just always set low nominal interest rates in expansions? Key idea: we need to see the response of variables to unexpected changes in e.g. interest rates.
The residuals from estimating VARs contain a mix of shocks. Two approaches to identify the shock we are interested in:
Output does not respond contemporaneously to interest rate shocks. Or: Interest rate shocks do not have a permanent effect on output. Or: Increases in interest rates lead to falls in prices. E.g. look at transcripts of FOMC meetings.
Modern Dynamic Stochastic General Equilibrium (DSGE) macro does not look like the ad hoc, arm-wavey subject you might have learnt at undergrad. DSGE models are powerful tools for explaining business cycles. Macro is a big, broad subject, and there are a lot of interesting topics still left to research.