Euro Area Macroeconomics

This book is meant to represent a companion publication to the earlier and more basic book entitled “Fundamentals of monetary policy in the euro area” insofar as it covers topics that are more of a macroeconomic nature. Given the strong empirical focus that macroeconomics has witnessed over the last decades, the book aims at supplementing the basic concepts with a number of real-world examples conducted with adequate econometric tools.

Part I is meant to provide the reader with the basics. The key concepts are defined and some simple analysis is carried out in verbal and graphical form.

Part II takes some selected issues up and makes an attempt to dig deeper into the relevant issues. In particular, the institutional foundations of the European Economic and Monetary Union (EMU) are summarised and the process of European monetary integration is described in more detail. Additional topics are price indices and inflation, measures of real economic activity and unemployment.

1. Introduction and Motivation

• I

1. Understanding Economics
   1. Learning Objectives
   2. Basic Concepts
   3. Microeconomics and Macroeconomics
   4. Some Key Macroeconomic Variables
   5. Some Key Macroeconomic Issues
   6. A Short History of Economics
   7. Summary
2. A Look into the Toolbox
   1. Learning Objectives
   2. Models
   3. Types of Analysis
   4. Analysis of Supply and Demand
   5. Complementary and Substitute Goods
   6. Slope and Elasticity
   7. Summary

• II

1. National Income Accounting
   1. Learning Objectives
   2. Accounting Conventions
   3. Nominal and Real GDP
   4. GDP and Welfare
   5. A Circular Flow Analysis
   6. Summary
2. The Market for Goods
   1. Learning Objectives
   2. Basic Considerations
   3. The Consumption Function
   4. The Investment Function
   5. Equilibrium in the Market for Goods
   6. The Investment Multiplier
   7. The Government Multiplier
   8. The IS Curve
   9. Unravelling the Secrets of the Twin Deficits
   10. Summary
3. The Money Market
   1. Learning Objectives
   2. Basic Considerations
   3. Institutional Background of Euro Area Monetary Policy
   4. Money Supply
   5. Money Demand
   6. Equilibrium in the Money Market
   7. Summary
4. The IS-LM-Model
   1. Learning Objectives
   2. Equilibrium in the Markets for Goods and Money
   3. Disequilibria
   4. Some Comparative-Static Analysis
   5. Policy Mix
   6. Summary
5. The IS-LM Model in an Open Economy Context
   1. Learning Objectives
   2. The Balance of Payments
   3. Fixed and Floating Exchange Rates
   4. Policy Effects in a Regime of Fixed Exchange Rates
   5. Policy Effects in a Regime of Flexible Exchange Rates
   6. Summary
6. The Labour Market
   1. Learning Objectives
   2. Basic Considerations
   3. The Labour Market in a Classical View
   4. The Labour Market in a Keynesian View
   5. Summary
7. Aggegate Supply and Demand
   1. Learning Objectives
   2. Aggregate Demand
   3. Aggregate Supply
   4. Equilibrium in the Short Run
   5. Equilibrium in the Long Run
   6. Various Shapes of Aggregate Supply
   7. Summary
8. Macroeconomic Shocks and Policy Space
   1. Learning Objectives
   2. Aggregate Demand Shocks and Aggregate Supply Shocks
   3. Monetary Policy and Aggregate Demand Shocks
   4. Monetary Policy and Aggregate Supply Shocks
   5. Summary

• III

1. A Closer Look at Consumption
   1. Learning Objectives
   2. Basic Concepts
   3. The Permanent Income Hypothesis
   4. The Life Cycle Hypothesis
   5. Policy Implications
   6. Summary
2. A Closer Look at Investment
   1. Learning Objectives
   2. Basic Concepts
   3. The Accelerator Hypothesis
   4. The Neoclassical Theory of Investment
   5. Tobin’s Q Theory
   6. Policy Implications
   7. Summary
3. A Closer Look at Fiscal Policy
   1. Learning Objectives
   2. Automatic Stabilizers
   3. Cyclical and Structural Deficits
   4. The Laffer Curve
   5. Ricardian Equivalence
   6. Summary
4. A Closer Look at Money Demand
   1. Learning Objectives
   2. Basic Concepts
   3. The Baumol-Tobin Model
   4. The Portfolio Selection Approach
   5. Friedman’s Approach to Money Demand
   6. The Portfolio Balance Approach
   7. Policy Implications
   8. A Look at Some Empirical Evidence
   9. Summary

• IV

1. The European Union and the Euro Area
   1. Learning Objectives
   2. The European Union
   3. The European Central Bank
   4. The Roadmap to EMU
   5. Key Characteristics of the Euro Area Economy
   6. An Optimal Currency Area
   7. Advantages and Disadvantages of a Monetary Union
   8. Some Controversial Views about the Road
   9. Convergence Criteria
   10. Exiting the Euro Area
   11. The Future of EMU
   12. Summary
2. Business Cycle Fluctuations
   1. Learning Objectives
   2. Fluctuations in Real GDP
   3. Various Types of Cycles
   4. Business Cycle Indicators
   5. Output Gaps
   6. A Look at Some Empirical Evidence
   7. Summary
3. Unemployment
   1. Learning Objectives
   2. Basic Considerations
   3. Types of Unemployment
   4. Summary
4. Prices and Inflation
   1. Learning Objectives
   2. Goods and Baskets
   3. Inflation and the Price Level
   4. Effects of Inflation
   5. Inflation Indices
   6. The Harmonised Index of Consumer Prices
   7. Core and Non-Core Inflation
   8. Measurement Problems
   9. Perceived Inflation
   10. Hyperinflation
   11. A Look at Some Empirical Evidence
   12. Summary
5. Exchange Rates
   1. Learning Objectives
   2. Basic Concepts
   3. Exchange Rate Regimes
   4. Exchange Rates in the Long Run
   5. Exchange Rates in the Short to Medium Run
   6. ERM II
   7. A Look at Some Empirical Evidence
   8. Summary

• V

1. Monetary Theory
   1. Learning Objectives
   2. The Quantity Theory of Money
   3. The Phillips Curve
   4. The Scandinavian Model of Inflation
   5. The P-Star Approach
   6. The Two-Pillar Phillips Curve
   7. The Role of Expectations
   8. A Look at Some Empirical Evidence
   9. Summary
2. Monetary Policy
   1. Learning Objectives
   2. Money: History, Forms and Functions
   3. The Monetary Policy Transmission Process
   4. Time Lags of Monetary Policy
   5. Rules and Discretion in Monetary Policy
   6. The Conduct of Monetary Policy
   7. Monetary Policy Strategies
   8. The Monetary Policy Strategy of the ECB
   9. A Look at Some Empirical Evidence
   10. Summary
3. Monetary Policy in Practice
   1. Learning Objectives
   2. The Money Multiplier
   3. Taylor Rules
   4. Monetary Policy and the Zero Lower Bound
   5. A Look at Some Empirical Evidence
   6. Summary

• VI

1. Some International Aspects
   1. Learning Objectives
   2. Some International Organisations
   3. Some International Currency Regimes
   4. Summary
2. Growth Theory
   1. Learning Objectives
   2. Some Basic Considerations
   3. Growth of Capital per Person
   4. Growth in the Autonomous Factor
   5. A Look at Some Empirical Evidence
   6. Summary

• VII

1. List of Symbols and Abbreviations
2. Glossary
3. Annexes
   1. Some Large Numbers
   2. Stocks and Flows
   3. Levels and Growth Rates
   4. Some Useful Graphical Measures
   5. Some Useful Statistical Measures
   6. The Correlation Coefficient
   7. Linear Regression
4. List of Figures and Boxes
   1. List of Figures
   2. List of Boxes
5. References

• Endnotes