Giáo trình MacroEconomics autralasian edtion 4th by blanchard

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Macr oeconomic s

NEW!

Oli v ie r Blanchar d Je f f r e y Sheen

Reflecting the
macroeconomic realities of
the Australasian economy ...

VIDEOS!

E di t i on 4

New to MyEconLab for Macroeconomics 4e are videos of
IMF Chief Economist and lead US author, Olivier Blanchard,

giving his insight into economics issues and how they
relate to the theories and concepts in the text. These
videos will help students understand how real-world issues
are affecting the world economy.

Oli v ie r Blanchar d
Je f f r e y Sheen

Macr oeconomics
AUSTRALASIAN EDITION
Edition 4

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Macr oeconomics
AUSTRALA SIA N EDITION

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Oli v ier Blanchar d
Je f f r e y Sheen

Macr oeconomics
AUSTRALA SIA N EDITION
Edition 4

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Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013
Pearson Australia
Unit 4, Level 3
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Authorised adaptation from the United States edition entitled Macroeconomics, 6th edition, ISBN
0133061639 by Blanchard, Olivier; Johnson, David R., published by Pearson Education, Inc., publishing as
Prentice Hall, Copyright © 2013.
Fourth adaptation edition published by Pearson Australia Group Pty Ltd, Copyright © 2013

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1 2 3 4 5 17 16 15 14 13

Author: Blanchard, Olivier (Olivier J.)
Title:
Macroeconomics : Australasian edition / Olivier Blanchard ; Jeffrey Sheen
Edition: 4th ed.
ISBN:
9781442559516 (pbk.)
ISBN:

9781442563018 (Vital Source)
Notes:
Includes index.
Subjects: Macroeconomics—Textbooks.
Other Author/Contributor: Sheen, Jeffrey R
Dewey Number:
339
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Professor Blanchard has done research on many macroeconomic issues,
including the effects of fiscal policy, the role of expectations, price rigidities,
speculative bubbles, unemployment in Western Europe, transition in Eastern
Europe, the role of labour-market institutions and the various aspects of
the current crisis. He has done work for many governments and many
international organisations, including the World Bank, the IMF, the OECD,
the EU Commission and the EBRD. He has published over 150 articles and
edited or written over 20 books, including Lectures on Macroeconomics with
Stanley Fischer.
He is a research associate of the National Bureau of Economic Research,
a fellow of the Econometric Society, a member of the American Academy

of Arts and Sciences and a past vice-president of the American Economic
Association.
He currently lives in Washington, DC with his wife, Noelle. He has
three daughters, Marie, Serena and Giulia.
JEFFREY SHEEN is a Professor of Economics at Macquarie University.
He did his undergraduate work in Cape Town, and received a PhD in
economics at the London School of Economics and Political Science in
1977. He has held research and teaching positions at the London School
of Economics, the University of Manchester, the University of Essex, the
University of Sydney and Macquarie University. He has been a visiting
economist at the Reserve Bank of Australia.
His research has been in the general fields of macroeconomics and
international economics. He has done both theoretical and applied work,
with a substantial interest in the Australian economy and has published
widely in international journals.
Professor Sheen is council member of the Economics Society of
Australia and has been a council member of the Australasian Standing
Committee of the Econometric Society. He is currently the managing editor
of the Economic Record, Australia’s leading professional economics journal,
and is a member of the Shadow Reserve Bank Board at the Centre for
Applied Macroeconomic Analysis at the Australian National University.
He currently lives in Sydney and has two adult children, Rani and Jacob,
who live in Toronto, Canada.

Abou t t he Au t hor s

OLIVIER BLANCHARD is the Robert M. Solow Professor of Economics
at the Massachusetts Institute of Technology. He did his undergraduate
work in France and received a PhD in economics from MIT in 1977. He
taught at Harvard from 1977 to 1982 and has taught at MIT since 1983.

He has frequently received the award for best teacher in the department
of economics. He is currently on leave from MIT and serves as the Chief
Economist at the International Monetary Fund.

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Introduction 1
Chapter 1 A Tour of the World 2
Chapter 2 A Tour of the Book 23

THECORE 46

•

TheShortRun 47
Chapter 3 The Goods Market 48
Chapter 4 Financial Markets 69
Chapter 5 Goods and Financial Markets:

The IS–LM Model 91

•

TheMediumRun 119
Chapter 6 The Labour Market 120
Chapter 7 Putting All Markets Together:
The AS–AD Model 147
Chapter 8 The Phillips Curve, the Natural
Rate of Unemployment and
Inflation 179
Chapter 9 The Crisis 203

•

TheLongRun 225
Chapter 10 The Facts of Growth 226
Chapter 11 Saving, Capital Accumulation
and Output 244
Chapter 12 Technological Progress and
Growth 269
Chapter 13 Technological Progress: The
Short, the Medium and the Long
Run 288

EXTENSIONS 310

•

Expectations 311

Chapter 14 Expectations: The Basic
Tools 312
Chapter 15 Financial Markets and
Expectations 336

Chapter 16 Expectations, Consumption and
Investment 360
Chapter 17 Expectations, Output and
Policy 381

•

TheOpenEconomy 401
Chapter 18 Openness in Goods and Financial
Markets 402
Chapter 19 The Goods Market
in an Open Economy 425
Chapter 20 Output, the Interest Rate and the
Exchange Rate 448
Chapter 21 Exchange Rate Regimes 471

•

BacktoPolicy 505
Chapter 22 Should Policy-makers
Be Restrained? 506
Chapter 23 Fiscal Policy:
A Summing Up 526
Chapter 24 Monetary Policy:
A Summing Up 550

•

Epilogue 574
Chapter 25 Epilogue: The Story of
Macroeconomics 575
Appendix 1 An Introduction to
National Income and Product
Accounts 589
Appendix 2 A Maths Refresher 597
Appendix 3 An Introduction to
Econometrics 603
Glossary 608
Index 627
List of Symbols 637

Brief Cont ent s

•

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Cont ent s

Preface

xviii

Introduction
Chapter 1
ATouroftheWorld

1
2

1.1 The crisis

3

1.2 Australia

6

1.3 The United States
Should you worry about the US fiscal
deficit?

10

1.4 The Euro area
How can European unemployment
be reduced?
What has the Euro done for its members?

12

1.5 China

15

1.6 Looking ahead

17

Appendix: Where to find the numbers?

20

Chapter 2
ATouroftheBook

11

14
14

23

2.1 Aggregate output
GDP: Production and income
Nominal and real GDP
GDP: Level versus growth rate

23
24

25
27

2.2 The unemployment rate
Why do economists care about
unemployment?

29

2.3 The inflation rate
The GDP deflator
The consumer price index
Why do economists care about
inflation?

32
32
33

2.4 Output, unemployment and the inflation
rate: Okun’s law and the Phillips curve
Okun’s law
The Phillips curve

30

34
35
35
36

2.5 The short run, the medium run, the
long run

37

2.6 A tour of the book
The core
Extensions
Back to policy
Epilogue

38
38
39
39
39

Appendix: The construction of real GDP
and chain-type indexes

44

THE CORE
THESHORTRUN

46
47

Chapter 3

TheGoodsMarket

48

3.1 The composition of GDP
3.2 The demand for goods
Consumption (C )
Investment (I)
Government spending (G)

49
50
51
52
53

3.3 The determination of equilibrium output
Using algebra
Using a graph
Using words
How long does it take for output to adjust?

53
54
55
57
57

3.4 Investment equals saving: An alternative
way of thinking about goods–market

equilibrium

61

3.5 Is the government omnipotent? A warning 63
Chapter 4
FinancialMarkets

69

4.1 The demand for money
Deriving the demand for money

69
71

4.2 Determining the interest rate: I
Money demand, money supply and the
equilibrium interest rate
Monetary policy and open market
operations
Bond prices and bond yields
Choosing money or choosing the
interest rate?
Money, bonds and other assets

73

4.3 Determining the interest rate: II
What banks do

The supply of and demand for
central bank money
The demand for money
The demand for reserves
The demand for central bank money
The determination of the interest rate

78
78

73
76
76
77
78

81
81
82
82
83

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CONTENTS

4.4 Two alternative ways of looking at the
equilibrium
The interbank cash market and
the cash rate
The supply of money, the demand
for money and the money multiplier
Understanding the money multiplier

83
84
85
85

Chapter 5
GoodsandFinancialMarkets:TheIS–LMModel

91

5.1 The goods market and the IS relation
Investment, sales and the interest rate
Determining output
Deriving the IS curve
Shifts of the IS curve

91
92
92
94
95

5.2 Financial markets and the LM relation

96

Real money, real income and the
interest rate
Deriving the LM curve
Shifts of the LM curve

96
96
97

5.3 Putting the IS and the LM relations
together
98
Fiscal policy, activity and the interest rate 99
Monetary policy, activity and the
interest rate
102
5.4 Using a policy mix

104

5.5 How does the IS–LM model fit the facts?

109

Appendix: An alternative derivation of

the LM relation as an interest rate rule
THEMEDIUMRUN
Chapter 6
TheLabourMarket

116
119
120

6.1 A tour of the labour market
The large flows of workers

120
121

6.2 Movements in unemployment

125

6.3 Wage determination
Bargaining
Efficiency wages
Wages, prices and unemployment
The expected price level
The unemployment rate
The other factors

127
129
129

131
131
131
131

6.4 Price determination

132

6.5 The natural rate of unemployment
The wage-setting relation
The price-setting relation
Equilibrium real wages and unemployment
From unemployment to employment
From employment to output

133
133
134
134
135
136

6.6 Tax distortions and the natural rate of
unemployment

137

6.7 Where we go from here

139

Appendix: Wage- and price-setting relations
versus labour supply and labour demand

144

Chapter 7
PuttingAllMarketsTogether:TheAS–ADModel

147

7.1 Aggregate supply

148

7.2 Aggregate demand
Deriving the AD curve with a fixed
money stock
Deriving the AD curve with an
interest rate rule

150
151
153

7.3 Equilibrium in the short run and in the
medium run
Equilibrium in the short run
From the short run to the medium run

155
155
156

7.4 The effects of a monetary policy
expansion
The dynamics of adjustment
Going behind the scenes
The neutrality of money

158
158
159
160

7.5 A decrease in the budget deficit
Deficit reduction, output and the
interest rate
Budget deficits, output and investment

162
164
164

7.6 An increase in the price of oil
Effects on the natural rate of
unemployment
The dynamics of adjustment

166

7.7 Conclusions
The short run versus the medium run
Shocks and propagation mechanisms
Where we go from here

171
172
172
173

167
168

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CONTENTS

Chapter 8
ThePhillipsCurve,theNaturalRateof
UnemploymentandInflation
8.1 Inflation, expected inflation and
unemployment

179

180

THELONGRUN
Chapter 10
TheFactsofGrowth

225
226

10.1 Measuring the standard of living

227
231

8.2 The Phillips curve
The early incarnation
Mutations
The Phillips curve and the natural
rate of unemployment
The neutrality of money, revisited

181
181
182

10.2 Growth in rich countries since 1950
The large increase in the standard

of living since 1950
The convergence of output per person

232
232

187
189

10.3 A broader look across time and space
Looking across two millennia
Looking across countries

234
234
234

8.3 A Summary and many warnings
Variations in the natural rate across
countries
Variations in the natural rate over time
Disinflation, credibility and
unemployment
High inflation and the Phillips
curve relation
Deflation and the Phillips
curve relation

190

10.4 Thinking about growth: A primer
The aggregate production function

236
236

Appendix: From the aggregate supply
relation to a relation between inflation,
expected inflation and unemployment
Chapter 9
TheCrisis
9.1 From a housing problem to a
financial crisis
Housing prices and subprime
mortgages
The role of banks
Leverage
Complexity
Liquidity
Amplification mechanisms

190
192
194
196
197

202
203

203
204
205
206
207
208
208

9.2 The use and limits of policy
Initial policy responses
The limits of monetary policy:
The liquidity trap
The limits of fiscal policy: High debt

208
210

9.3 The slow recovery
Why is the US recovery so slow?

216
217

212
215

Returns to scale and returns to factors
237
Output per worker and capital per worker 237
The sources of growth

238
Chapter 11
Saving,CapitalAccumulationandOutput
11.1 Interactions between output and capital
The effects of capital on output
The effects of output on capital
accumulation
Output and investment
Investment and capital accumulation
11.2 The implications of alternative
saving rates
Dynamics of capital and output
Steady-state capital and output
The saving rate and output
The saving rate and consumption

244
244
245
246
246
247
247
248
250
251
253

11.3 Getting a sense of magnitudes
The effects of the saving rate on

steady-state output
The dynamic effects of an increase
in the saving rate
The saving rate and the golden rule

257

11.4 Physical versus human capital
Extending the production function
Human capital, physical capital,
and output
Endogenous growth

261
261
262
263

Appendix: The Cobb–Douglas production
function and the steady state

266

257
258
259

x
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CONTENTS

Chapter 12
TechnologicalProgressandGrowth
12.1 Technological progress and the
rate of growth
Technological progress and the
production function
Interactions between output and capital
Dynamics of capital and output
The effects of the saving rate
12.2 The determinants of technological
progress
The fertility of the research process
The appropriability of research results

269

EXTENSIONS
EXPECTATIONS

310
311

269

Chapter 14
Expectations:TheBasicTools

312

269
271
273
274
275
277
278

12.3 The facts of growth revisited
Capital accumulation versus
technological progress in rich
countries since 1985
Capital accumulation versus
technological progress in China

281

Appendix: Constructing a measure of
technological progress

286

Chapter 13
TechnologicalProgress:TheShort,theMedium

andtheLongRun
13.1 Productivity, output and
unemployment in the short run
Technological progress, aggregate
supply and aggregate demand
The empirical evidence
13.2 Productivity and the natural rate of
unemployment
Price setting and wage setting revisited
The natural rate of unemployment
The empirical evidence

279

279

288

288
289
291
292
293
293
295

13.3 Technological progress, churning and
distribution effects
The increase in wage inequality
The causes of increased wage inequality

298
300
301

13.4 Institutions, technological progress and
growth

303

14.1 Nominal versus real interest rates
Nominal and real interest rates in
Australia since 1978

312
315

14.2 Nominal and real interest rates,
and the IS–LM Model

319

14.3 Money growth, inflation, nominal
and real interest rates
Revisiting the IS–LM model

320

Nominal and real interest rates in
the short run

Nominal and real interest rates in
the medium run
From the short run to the medium run
Evidence on the Fisher hypothesis
14.4 Expected present discounted values
Computing expected present
discounted values
A general formula
Using present values: Examples
Constant interest rates
Constant interest rates and payments
Constant interest rates and payments,
forever
Zero interest rates
Nominal versus real interest rates,
and present values
Appendix: Deriving the expected
present discounted value using real or
nominal interest rates
Chapter 15
FinancialMarketsandExpectations
15.1 Bond prices and bond yields
Bond prices as present values
Arbitrage and bond prices
From bond prices to bond yields
Interpreting the yield curve
The yield curve and economic activity

320

320
322
323
324
327
327
328
328
329
329
329
330
330

334
336
336
339
339
340
341
342

xi
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CONTENTS

15.2 The stock market and movements
in stock prices
Stock prices as present values
The stock market and economic activity
A monetary expansion and the stock
market
An increase in consumer spending
and the stock market
15.3 Risk, bubbles, fads and asset prices
Stock prices and risk
Asset prices, fundamentals and bubbles
House prices and housing finance
Chapter 16

344
345
347
348
348
351
351
351
353
360

Expectations,ConsumptionandInvestment
16.1 Consumption

The very foresighted consumer
An example
Towards a more realistic description
Putting things together: Current income,
expectations and consumption

360
361
362
363

16.2 Investment
Investment and expectations of profit
Depreciation
The present value of expected profits
The investment decision
A convenient special case
Current versus expected profit
Profit and sales

367
367
367
367
368
370
371
373

16.3 The volatility of consumption

and investment
Appendix: Derivation of the expected present
value of profits under static expectations
Chapter 17
Expectations,OutputandPolicy
17.1 Expectations and decisions: Taking stock
Expectations, consumption and
investment decisions
Expectations and the IS relation
The LM relation revisited
17.2 Monetary policy, expectations and
output

365

374

From the short nominal rate to
current and expected real rates
Monetary policy revisited
17.3 Deficit reduction, expectations and
output
The role of expectations about the
future
Back to the current period
THEOPENECONOMY
Chapter 18
OpennessinGoodsandFinancialMarkets
18.1 Openness in goods markets
Exports and imports

The choice between domestic
goods and foreign goods
Nominal exchange rates
From nominal to real exchange rates
From bilateral to multilateral
exchange rates

381
381
381
382
385
385

391
392
392
401
402
403
403
406
406
408
410

18.2 Openness in financial markets
The balance of payments
The current account
The capital account

The choice between domestic and
foreign assets
Interest rates and exchange rates

412
412
412
413

18.3 Conclusions and a look ahead

419

Chapter 19
TheGoodsMarketinanOpenEconomy

425

19.1 The IS relation in the open economy
380

385
386

416
417

The demand for domestic goods
The determinants of C, I and G
The determinants of imports

The determinants of exports
Putting the components together

425
425
426
426
427
427

19.2 Equilibrium output and the trade
balance

428

19.3 Increases in demand, domestic or
foreign
Increases in domestic demand
Increases in foreign demand
Fiscal policy revisited

429
429
431
432

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CONTENTS

19.4 Depreciation, the trade balance and output
Depreciation and the trade balance:
The Marshall–Lerner condition
The effects of a depreciation
Combining exchange rate and
fiscal policies

434
434
435

19.5 Looking at dynamics: The J-curve

437

435

19.6 Saving, investment and the current
account balance

439

Appendix: Derivation of the Marshall–Lerner
condition

447

Chapter 20
448
Output,theInterestRateandtheExchangeRate
20.1 Equilibrium in the goods market

448

20.2 Equilibrium in financial markets
Money versus bonds
Domestic bonds versus foreign bonds

449
450
450

20.3 Putting goods and financial
markets together

454

20.4 The effects of policy in an open economy 456
The effects of fiscal policy in an open
economy
456
The effects of monetary policy in
an open economy
458

20.5 Fixed exchange rates
Pegs, crawling pegs, bands, the EMS
and the euro
Pegging the exchange rate and monetary
control
Fiscal policy under fixed exchange rates

460
460
461
462

Appendix 1: Exchange rates, interest
rates and capital substitutability

467

Appendix 2: Fixed exchange rates,
interest rates and capital mobility

468

Chapter 21
ExchangeRateRegimes
21.1 The medium run
Aggregate demand under fixed
exchange rates
Equilibrium in the short run and in the
medium run
The case for and against a devaluation

471
472
472
473
475

21.2 Exchange rate crises under fixed
exchange rates
21.3 Exchange rate movements under
flexible exchange rates
Exchange rates and the current
account
Exchange rates, and current and
future interest rates
Exchange rate volatility
Overshooting exchange rates
Short-run and medium-run equilibrium
under flexible exchange rates
Monetary policy contraction—
the medium run
Monetary policy contraction—from
the short run to the medium run
Rational or adaptive expectations
A permanent fiscal shock
21.4 Choosing between exchange
rate regimes
Common currency areas
Hard pegs, currency boards and
dollarisation

477
481
482
482
483
484
486
486
488
490
490
490
491
493

Appendix 1: Deriving aggregate demand
under fixed exchange rates

501

Appendix 2: The real exchange rate, and
domestic and foreign real interest rates

502

BACKTOPOLICY
Chapter 22
ShouldPolicy-makersBeRestrained?

505
506

22.1 Uncertainty and policy
How much do macroeconomists
actually know?
Should uncertainty lead policy-makers
to do less?
Uncertainty and restraints on
policy-makers

507

22.2 Expectations and policy
Hostage takings and negotiations
Inflation and unemployment revisited
Establishing credibility
Time consistency and restraints on
policy-makers

511
511
512
513

507
509
510

514

xiii
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CONTENTS

22.3 Politics and policy
Games between policy-makers
and voters
Games between policy-makers
Politics and fiscal restraints
Chapter 23
FiscalPolicy:ASummingUp

515
515
517
518
526

23.1 What you have learned

526

23.2 The government budget constraint:

deficits, debt, spending and taxes
The arithmetic of deficits and debt
Current versus future taxes
Full repayment in year 2
Full repayment in year t

527
527
530
530

Debt stabilisation in year t
The evolution of the debt-to-GDP ratio
23.3 Ricardian equivalence, cyclical adjusted
deficits and war finance
Ricardian equivalence
Deficits, output stabilisation and the
cyclically adjusted deficit
Wars and deficits
Passing on the burden of the war
Reducing tax distortions by tax
smoothing
23.4 The dangers of high debt
High debt, default risk and vicious
cycles
Debt default
Money finance

530
532

533
535
535
536
537
537
538
538
539
543
543

Chapter 24
MonetaryPolicy:ASummingUp

550

24.1 What we have learned

551

24.2 The optimal inflation rate
The costs of inflation
Shoe-leather costs
Tax distortions
Money illusion
Inflation variability
The benefits of inflation
Seignorage

552
552
552
553
554
555
556
556

The option of negative real
interest rates
Money illusion revisited
The optimal inflation rate:
The current debate

556
557
557

24.3 The design of monetary policy
Money growth targets and
target ranges
Money growth and inflation revisited
Inflation targeting
Interest rate rules

557

24.4 Challenges from the crisis
The liquidity trap

Avoiding falling into the trap

562
563
563

Getting out of the trap
Dealing with the trap
Macro prudential regulation
Appendix: The Reserve Bank of
Australia in action
EPILOGUE
Chapter 25
Epilogue:TheStoryofMacroeconomics

558
558
560
561

563
563
564
570
574
575

25.1 Keynes and the Great Depression

575

25.2 The neoclassical synthesis
Progress on all fronts
The IS–LM model

576
576

Theories of consumption, investment
and money demand
Growth theory
Macroeconometric models
Keynesians versus monetarists
Monetary policy versus fiscal policy
The Phillips curve
The role of policy
25.3 The rational expectations critique
The three implications of rational
expectations
The Lucas critique
Rational expectations and the
Phillips curve
Optimal control versus game theory
The integration of rational expectations

576
576
577
577
577

577
578
578
578
579
579
579
580
580

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CONTENTS

The implications of rational expectations 580
Wage and price setting
580
The theory of policy
581
25.4 Recent developments up to the crisis
New classical economics and real
business cycle theory
New Keynesian economics
New growth theory

Towards an integration

581
581
582
583
583

25.5 First lessons from the crisis

584

Appendices

588

Appendix 1 An Introduction to National
Income and Product Accounts

589

Appendix 2 A Maths Refresher

597

Appendix 3 An Introduction to
Econometrics

603

Glossary

608

Index

627

List of Symbols

637

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Focus Boxes

Real GDP, technological progress and the price of computers

28

Did Spain really have a 24 per cent unemployment rate in 1994?

31

The Lehman bankruptcy, fears of another Great Depression and shifts in the consumption function 59
The paradox of saving

62

Semantic traps: Money, income and wealth

70

Who holds US currency?

72

Bank runs, deposit insurance and wholesale funding

79

Deficit reduction: Good or bad for investment?

102

The US recession of 2001

106

The Australian Labour Force Survey (LFS)

122

Henry Ford and efficiency wages

130

How long-lasting are the real effects of money?

161

Oil price increases: Why were the 2000s so different from the 1970s?

171

Theory ahead of facts: Milton Friedman and Edmund Phelps

188

What explains European unemployment?

190

Why has the US natural rate of unemployment fallen since the early 1990s and how will
the crisis affect it?

193

Increasing leverage and alphabet soup: SIVs, AIG and CDSs

206

Japan, the liquidity trap and fiscal policy

216

Do banking crises affect the natural level of output?

219

The construction of PPP numbers

228

Does money lead to happiness?

230

Capital accumulation and growth in France in the aftermath of World War II

250

Social security, saving and capital accumulation

255

The diffusion of new technology: Hybrid corn

277

Technological progress, unemployment and the Australian expansion since 1996

297

Job destruction, churning and earnings losses

299

The importance of institutions: North and South Korea

304

What is behind Chinese growth?

305

Why deflation can be very bad: Deflation and the real interest rate in the Great Depression

316

Nominal interest rates and inflation across Latin America in the early 1990S

325

The vocabulary of bond markets

338

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FOCUS BOXES

Making (some) sense of (apparent) nonsense: Why the stock market moved yesterday
and other stories

350

Famous bubbles: From tulipmania in 17th-century Holland to Russia in 1994

352

The increase in US housing prices in the 2000s: Fundamentals, or a bubble?

354

Up close and personal: Learning from panel data sets

361

Do people save enough for retirement?

364

Investment and the stock market

369

Profitability versus cash flow

372

The liquidity trap, quantitative easing and the role of expectations

388

Rational expectations

390

Can a budget deficit reduction lead to an output expansion? Ireland in the 1980s

395

Can exports exceed GDP?

405

GDP versus GNP: The example of Kuwait

415

Buying Brazilian bonds

418

The G20 and the 2009 fiscal stimulus

433

The US current account deficit: Origins and implications

440

Sudden stops, safe havens and the limits of the interest parity condition

453

Monetary contraction and fiscal expansion: The United States in the early 1980s

458

German unification, interest rates and the EMS

463

The return of Britain to the gold standard: Keynes versus Churchill

476

The 1992 EMS crisis

479

The euro: A short history

492

Lessons from Argentina’s currency board

494

Twelve macroeconometric models

508

Was Alan Blinder wrong in speaking the truth?

514

The stability and growth pact: A short history

520

Inflation accounting and the measurement of deficits

529

How countries decreased their debt ratios after World War II

534

Deficits, consumption and investment in the United States during World War II

538

The US budget deficit challenge

539

Money illusion

554

LTV ratios and housing price increases from 2000 to 2007

566

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Pr ef ace

We had three main goals in writing this book:
• To make close contact with current macroeconomic events. What makes macroeconomics exciting
is the light it sheds on what is happening around the world, from the major economic crisis that has
engulfed the world since 2008, to the budget deficits of the United States, to the problems of the
Euro area, to high growth in China, and to the mining boom in Australia. These events, and many
more, are described in the book—not in footnotes, but in the text or in detailed ‘focus’ boxes. Each
box shows how you can use what you have learned to get an understanding of these events. Our
belief is that these boxes not only convey the ‘life’ of macroeconomics, but also reinforce the lessons
from the models, making them more concrete and easier to grasp.
• To provide an integrated view of macroeconomics. The book is built on one underlying model,
a model that draws the implications of equilibrium conditions in three sets of markets: the goods
market, the financial markets and the labour market. Depending on the issue at hand, the parts of

the model relevant to the issue are developed in more detail while the other parts are simplified
or lurk in the background. But the underlying model is always the same. This way, you will see
macroeconomics as a coherent whole, not a collection of models. And you will be able to make sense
not only of past macroeconomic events, but also of those that unfold in the future.
• To adapt the original US-based version of the book to Australasia. To do so, we treat Australia as
home, and, throughout the book, consider Australasian developments. Our treatment of monetary
policy, in particular, reflects how it is conducted in practice in Australia (and in most other countries),
as interest rate setting. This makes it easier for you to understand the arguments about monetary
policy that you read about in the newspaper or see on TV.

New to this edition
• Chapter 1 starts with a history of the crisis, giving a sense of the landscape, and setting up the issues
to be dealt with throughout the book.
• A new Chapter 9, which comes after the short- and medium-run architecture has been put in place,
focuses specifically on the crisis. It shows how one can use and extend the short-run and medium run
analysis to understand the various aspects of the crisis, from the role of the financial system to the
constraints on macroeconomic policy. This new chapter replaces Chapter 22 in the previous edition,
and provides a substantial updating of the analysis of the crisis and subsequent events.
• Material on depressions and slumps has been relocated from later chapters to Chapter 9, and the
material on very high inflation has been reduced and included in Chapter 23.
• A rewritten Chapter 23, on fiscal policy, focuses on the current debt problems of the governments of
many advanced economies in the world today.
• Chapters 22 to 25 draw the implications of the crisis for the conduct of fiscal and monetary policy in
particular, and for macroeconomics in general.
• Many new focus boxes have been introduced and look at various aspects of the crisis, among them the
following: ‘The Lehman bankruptcy, fears of another Great Depression and shifts in the consumption
function’ in Chapter 3; ‘Bank runs, deposit insurance and wholesale funding’ in Chapter 4; ‘The
liquidity trap, quantitative easing and the role of expectations’ in Chapter 17; ‘The G20 and the
2009 fiscal stimulus’ in Chapter 19; ‘How countries decreased their debt ratios after World War II’ in
Chapter 23; and ‘LTV ratios and housing price increases from 2000 to 2007’ in Chapter 24.

• Figures and tables have been updated using the latest data available.

Organisation
The book is organised around two central parts: a core, and a set of two major extensions. An introduction
precedes the core. The two extensions are followed by a review of the role of policy. The book ends with
an epilogue.

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PREFACE

The following flowchart makes it easy to see how the chapters are organised, and fit within the book’s
overall structure.
INTRODUCTION
A Tour of the World Chapter 1
A Tour of the Book Chapter 2

THE CORE
The Short Run
The Goods Market Chapter 3
Financial Markets Chapter 4
Goods and Financial Markets: The IS–LM Model Chapter 5

The Medium Run
The Labour Market Chapter 6

Putting All Markets Together: The AS–AD Model Chapter 7
The Phillips Curve, the Natural Rate of Unemployment
and Inflation Chapter 8
The Crisis Chapter 9

The Long Run
The Facts of Growth Chapter 10
Saving, Capital Accumulation and Output Chapter 11
Technological Progress and Growth Chapter 12
Technological Progress: The Short, the Medium and the
Long Run Chapter 13

THE OPEN ECONOMY

EXPECTATIONS
Expectations: The Basic Tools Chapter 14
Financial Markets and Expectations Chapter 15
Expectations, Consumption and Investment Chapter 16
Expectations, Output and Policy Chapter 17

EXTENSIONS

Openness in Goods and Financial Markets Chapter 18
The Goods Market in an Open Economy Chapter 19
Output, the Interest Rate and the Exchange Rate Chapter 20
Exchange Rate Regimes Chapter 21

BACK TO POLICY
Should Policy-makers Be Restrained? Chapter 22
Fiscal Policy: A Summing Up Chapter 23

Monetary Policy: A Summing Up Chapter 24

EPILOGUE
The Story of Macroeconomics Chapter 25

• Chapters 1 and 2 introduce the basic facts and issues of macroeconomics. Chapter 1 focuses on the
crisis, and then takes a tour of the world, from Australia, to the United States, to Europe, and finally
to China. Some instructors will prefer to cover Chapter 1 later, perhaps after Chapter 2, which
introduces basic concepts, articulates the notions of short run, medium run and long run, and gives
the reader a quick tour of the book.
While Chapter 2 gives the basics of national income accounting, we have put a detailed treatment
of national income accounts in Appendix 1 at the end of the book. This decreases the burden on the
beginning reader, and allows for a more thorough treatment in the appendix.
• Chapters 3 through 13 constitute the core. Chapters 3 through 5 focus on the short run. These three
chapters characterise equilibrium in the goods market and in the financial markets, and they derive
the basic model used to study short-run movements in output, the IS–LM model.

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PREFACE

Chapters 6 through 8 focus on the medium run. Chapter 6 focuses on equilibrium in the labour
market and introduces the notion of the natural rate of unemployment. Chapters 7 and 8 develop a
model based on aggregate demand and aggregate supply and show how that model can be used to

understand movements in activity and movements in inflation, both in the short and in the medium run.
The current crisis is a sufficiently important and complex event that it deserves its own chapter,
within the core. Building on and extending Chapters 6 to 8, Chapter 9 focuses on the origins of the
crisis, the role of the financial system, and the constraints facing fiscal and monetary policy, such as
the liquidity trap and the high level of public debt.
Chapters 10 through 13 focus on the long run. Chapter 10 describes the facts, showing the
evolution of output across countries and over long periods of time. Chapters 11 and 12 develop
a model of growth and describe how capital accumulation and technological progress determine
growth. Chapter 13 focuses on the effects of technological progress not only in the long run, but
also in the short run and in the medium run. This topic is typically not covered in textbooks but is
important. And the chapter shows how one can integrate the short run, the medium run, and the long
run—a clear example of the payoff to an integrated approach to macroeconomics.
• Chapters 14 through 21 cover the two major extensions.
Chapters 14 through 17 focus on the role of expectations in the short run and in the medium run.
Expectations play a major role in most economic decisions, and, by implication, play a major role in
the determination of output.
Chapters 18 through 21 focus on the implications of openness of modern economies. Chapter 21
focuses on the implications of different exchange rate regimes, from flexible exchange rates, to fixed
exchange rates, currency boards and dollarisation.
• Chapters 22 through 24 return to macroeconomic policy. Although most of the first 21 chapters
constantly discuss macroeconomic policy in one form or another, the purpose of Chapters 22 through
24 is to tie the threads together. Chapter 22 looks at the role and the limits of macroeconomic policy
in general. Chapters 23 and 24 review fiscal policy and monetary policy. Some instructors may want
to use parts of these chapters earlier. For example, it is easy to move forward the discussion of the
government budget constraint in Chapter 23 or the discussion of inflation targeting in Chapter 24.
• Chapter 25 serves as an epilogue; it puts macroeconomics in historical perspective by showing the
evolution of macroeconomics in the last 70 years, discussing current directions of research, and the
lessons of the crisis for macroeconomics.

Structural changes from the third to the fourth edition

The structure of the fourth edition, namely the organisation around a core and two extensions, is
fundamentally the same as that of the third edition. This edition is, however, dominated more in many
ways by the crisis, and the many issues it raises. Thus, in addition to a first discussion of the crisis in
Chapter 1, and numerous boxes and discussions throughout the book, we have brought forward the
previous Chapter 22 on the crisis to Chapter 9.
At the same time, we have removed the two chapters on pathologies in the third edition. The reason
is simple, and in some ways, ironic. While we thought that it was important for macroeconomic students
to know about such events as the Great Depression, or the long slump in Japan, we did not expect the
world to be confronted with many of the same issues any time soon. While far from being as bad as the
Great Depression, the crisis raises many of the same issues as the Great Depression did. Thus, much of
the material covered in the chapters on pathologies in the third edition has been moved to the core and
to the two extensions.
We have also removed Chapter 9 of the third edition, which developed a framework to think about
the relation between growth, unemployment and inflation. This was in response to teachers who found
the framework too difficult for students to follow. Again, some of the material in that chapter has been
kept and integrated elsewhere, in particular in Chapter 8.

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PREFACE

Alternative course/unit outlines
Within the book’s broad organisation, there is plenty of opportunity for alternative course organisations.
We have made the chapters shorter than is standard in textbooks, and, in our experience, most chapters

can be covered in an hour and a half. A few (Chapters 5 and 7, for example) might require two lectures
to sink in.

Short courses (15 one-hour lectures or less)
A short course can be organised around the two introductory chapters and the core (Chapter 13 can be
excluded at no cost in continuity). Informal presentations of one or two of the extensions, based, for
example, on Chapter 17 for expectations (which can be taught as a stand-alone), and on Chapter 18 for
the open economy, can then follow, for a total of 14 lectures.
A short course might leave out the study of growth (the long run). In this case, the course can be
organised around the introductory chapters and Chapters 3 through 9 in the core; this gives a total
of nine lectures, leaving enough time to cover, for example, Chapter 17 on expectations, Chapters 18
through 20 on the open economy, for a total of 13 lectures.
Longer courses (20 to 25 one-hour lectures)
A full semester course gives more than enough time to cover the core, plus one or both of the two
extensions, and the review of policy.
The extensions assume knowledge of the core, but are otherwise mostly self-contained. Given the
choice, the order in which they are best taught is probably the order in which they are presented in
the book. Having studied the role of expectations first helps students to understand the interest parity
condition, and the nature of exchange rate crises.

Features
We have made sure never to present a theoretical result without relating it to the real world. In addition
to discussions of facts in the text itself, we have written a large number of focus boxes, which discuss
particular macroeconomic events or facts from around the world.
We have tried to recreate some of the student–instructor interactions that take place in the classroom
by the use of margin notes, which run parallel to the text. The margin notes create a dialogue with the
reader and, in so doing, smooth the more difficult passages and give a deeper understanding of the
concepts and the results derived along the way.
For students who want to explore macroeconomics further, we have introduced the following two
features:

• short appendices to some chapters, which expand on points made within the chapter
• A further reading section at the end of most chapters, indicating where to find more information,
including a number of key internet addresses.
Each chapter ends with three ways of making sure that the material in the chapter has been digested:
• a summary of the chapter’s main points
• a list of key terms
• a series of end-of-chapter exercises, some easy (‘Quick check’), some harder (‘Dig deeper’) and some
requiring either access to the internet or the use of a spreadsheet program (‘Explore further’).
A list of symbols in the back of the book makes it easy to recall the meaning of the symbols used in
the text.

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PREFACE

Acknowledgments and thanks
This book owes much to many. Olivier Blanchard thanks Adam Ashcraft, Peter Benczur, Peter Berger,
Efe Cakarel, Harry Gakidis, David Hwang, Kevin Nazemi, David Reichsfeld, John Simon, Jianlong Tan,
Stacy Tevlin, Gaurav Tewari, Corissa Thompson and Jeromin Zettelmeyer for their research assistance
over the years. He thanks the generations of students in 14.02 at MIT who have freely shared their
reactions to the book over the years. He has benefitted from comments from many colleagues and
friends. Among them are John Abell, Daron Acemoglu, Tobias Adrian, Chuangxin An, Roland Benabou,
Samuel Bentolila and Juan Jimeno (who have adapted the book for a Spanish edition); Francois
Blanchard, Roger Brinner, Ricardo Caballero, Wendy Carlin, Martina Copelman, Henry Chappell,

Ludwig Chincarini and Daniel Cohen (who has adapted the book for a French edition); Larry Christiano,
Bud Collier, Andres Conesa, Peter Diamond, Martin Eichenbaum, Gary Fethke, David Findlay,
Francesco Giavazzi and Alessia Amighini (who have adapted the book for an Italian edition); Andrew
Healy, Steinar Holden and Gerhard Illing (who has adapted the book for a German edition); Yannis
Ioannides, Angelo Melino (who has adapted the book for a Canadian edition); P. N. Junankar, Sam
Keeley, Bernd Kuemmel, Paul Krugman, Antoine Magnier, Peter Montiel, Bill Nordhaus, Tom Michl,
Dick Oppermann, Athanasios Orphanides and Daniel Pirez Enri (who has adapted the book for a Latin
American edition); Michael Plouffe, Zoran Popovic, Jim Poterba; Ronald Schettkat and Watanabe
Shinichi (who has adapted the book for a Japanese edition); Francesco Sisci, Brian Simboli, Changyong
Rhee, Julio Rotemberg, Robert Solow, Andre Watteyne and Michael Woodford.
Jeff Sheen is particularly grateful to Ben Wang, Shawn Leu, David Kim, Tony Phipps, Jacob Sheen,
Martha Burn, Trevor Whitehead, Ed Wilson and Judy Yates. He has also benefitted from comments and
suggestions from Anthony Brassil, Debajyoti Chakrabarty, Ken Clements, Nick de Roos, Megan Gu,
Jagdish Handa, Olan Henry, Meliyanni Johar, Raja Junankar, Mohammod Kabir, Geoff Kingston, Mary
Manning, Glenn Otto, Natalia Ponomareva, Andrew Wait and Graham White.
We thank the many people at Pearson Australia—in particular, Simone Bella, Sandra Goodall, Adam
Catarius, Laura Davies and Germaine Silva—who have helped in putting together this Australasian edition.
Thanks also goes to the many reviewers at other universities who provided valuable comments.
They are: Sam Tang, University of Western Australia; Sarath Delpachitra, Flinders University; Hongbo
Liu, James Cook University; Stuart McDonald, University of Queensland; Jayanta Sarkar, Queensland
University of Technology; Stella Huangfu, University of Sydney; Natalia Ponomareva, Macquarie
University; Shawn Leu, La Trobe University; Alex Blair, Macquarie University; Ratbek Dzhumashev,
Monash University.
At MIT, Olivier Blanchard continues to thank John Arditi for his absolute reliability. He has benefitted
from often-stimulating suggestions from his daughters, Serena, Giulia and Marie: he did not, however,
follow all of them. At home, he continues to thank Noelle for preserving his sanity.
Jeff Sheen thanks Elle for helping him keep healthy and happy in spite of the long hours needed to
produce this edition.
Finally, we thank Ronny Grewal for providing the brilliant image used on the front cover (see
rglifeart.smugmug.com).

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PREFACE

The teaching and learning package
This fourth Australasian edition of Macroeconomics is supported by an extensive range of supplementary
material to help both students and instructors.
The following material is available via the Pearson catalogue page (www.pearson.com.au/
9781442559516) or through the password-protected faculty resources section on MyEconLab:
• Instructor’s Manual. This discusses the pedagogical choices, alternative ways of presenting the
material and ways of reinforcing students’ understanding. For each chapter in the book, the manual
has seven sections: objectives, in the form of a motivating question; why the answer matters; key
tools, concepts and assumptions; summary; pedagogy; extensions; observations and additional
exercises. There is also a Solutions Manual which includes suggested answers to all end-of-chapter
questions and exercises.
• PowerPoint Presentations. Fully revised for the fourth Australian edition, a complete set of animated
PowerPoint slides has been created to bring visual interest to each chapter of the text. You can easily
edit these to your taste.
• Computerised Testbank. The Testbank (CTB) is a comprehensive set of multiple-choice, analytical
and short-answer questions, fully referenced to the text. The Testbank has been computerised and is
available in Testgen software.

MyEconLab

MyEconLab delivers rich online content and innovative learning tools in your classroom. Instructors
who use MyEconLab gain access to powerful communication and assessment tools, and their students
receive access to the additional learning resources described below.
• Students and MyEconLab. This online homework and tutorial system puts students in control of
their own learning through a suite of study and practice tools correlated with the online, interactive
version of the textbook and other media tools. Within MyEconLab’s structured environment, students
practise what they learn, test their understanding, and then pursue a study plan that MyEconLab
generates for them based on their performance on practice tests.
• Instructors and MyEconLab. MyEconLab provides flexible tools that allow instructors to easily and
effectively customise online course materials to suit their needs. Instructors can create and assign tests,
quizzes or homework assignments. MyEconLab saves time by automatically grading all questions
and tracking results in an online gradebook. MyEconLab can even grade assignments that require
students to draw a graph.
• Real-Time Data. The real-time data problems are new. These problems load the latest available
data from FRED, a comprehensive up-to-date data set maintained by the Federal Reserve Bank of
St. Louis. The questions are graded with feedback in exactly the same way as those based on static data.
• Videos. New to MyEconLab are videos of Olivier Blanchard giving his insight into economics
issues and how they relate to the theories and concepts in the text. These videos will help students
understand how real-world issues are affecting the world economy.
After registering for MyEconLab, instructors have access to downloadable supplements such as an
Instructor’s Manual, PowerPoint lecture notes, and a CTB. The CTB can also be used with MyEconLab,
giving instructors ample material from which they can create assignments.
MyEconLab is delivered in Pearson’s MyLab Mastering system, which offers advanced communication
and customisation features. Instructors can upload course documents and assignments and use advanced
course management features. For more information about MyEconLab or to request an instructor access
code, visit www.myeconlab.com.

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MyEconLab for Blanchard/Sheen
Macroeconomics, 4th edition

A guided tour for students and educators
Auto-generatedtestsand
assignments:EachMyLab
comeswithpreloaded
assignments,allofwhich
areautomaticallygraded
andincludeselectendof-chapterquestions
andproblemsfromthe
textbook.

Unlimitedpractice:ManyStudy
PlanandInstructor-assigned
exercisescontainalgorithms
toensurestudentsgetas
muchpracticeastheyneed.As
studentsworkthoughStudy
PlanorHomeworkexercises,
instantfeedbackandtutorial
resourcesguidethemtowards
understanding.

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