The Evolution of Macroeconomic Theory and Policy

Ifanyonehadadoubtregardingtheimportanceofmacroeconomics the?nancial andeconomiccrisisof2007-2009shouldhaverelievedhim/herofit.Furthermore at times the unfolding drama and its historical background was an education in macroeconomicsinitself.Itseemedeveryonewasanxioustolearnaboutthecauses of the crisis its turns and twists and the possible remedies and their effecti- ness.Thisisbe?ttingsincemacroeconomics asweknowitnowwastheproduct ofanothereconomiccrisis. OnThursday October 24 1929 (known asBlack Thursday) thestockmarket crashed.Withinayear thenumberofjoblessworkersclimbedtomorethanfour millionandhungryprotesterstooktothestreetsofNewYork.ThusbegantheGreat Depression which in the course of the decades to come changed the economies ofindustrialcountries fundamentallytransformedourvisionoftheeconomyand economicpolicy andbroughtintoprominenceabranchofeconomicsthatin1933 RagnarFrisch christenedmacroeconomics. Overthenext80yearstheinteractionofeconomicevents economictheory and economicpolicyresultedinabodyofknowledgethatisanintegralpartofpolitical andeconomicdiscourseandindeedofeverydaylifeintheUnitedStatesandaround theworld.Economists businessleaders policymakers andallconcernedcitizens needtobefamiliarwithmacroeconomics. Macroeconomics is best understood in a historical context. The book offers an introduction to macroeconomic theory and policy as they relate to events and developments of thepast 80years. The United States economy and its?scal and monetarypoliciesarethemainconcerns butbecausetheUnitedStateseconomy andworldeconomiesareintertwined thestoriesoftheirinteractionswillalsobe recounted. Let me emphasize that the book is neither an economic history of the United States nor a history of economic thought. The purpose of this book is to teach macroeconomicsinthecontextofactualeventsandwithemphasisontherelati- shipsbetweenmacroeconomictheoryandpolicy. Students of economics professional economists and the interested public are the target audience. The book can be used as the main text or a supplement in advancedundergraduateandbeginninggraduatecoursesinmacroeconomics.P- fessionaleconomistsmay?nditausefulreference.Thebookisnotintendedfor vii viii Contents readerswithnobackgroundineconomics.Butanyonewhoisreadytoexpendthe effortandisnotputoffbyoccasionalequationscouldbene?tfromreadingit. IwouldliketothankSpringer-VerlageditorsBarbaraFessandChristianeBeisel for their help support and understanding during the writing of this book. I also wouldliketothankAnnaDittrichofSpringer-VerlagandSaranyaBaskarandher colleagues at Integra for their excellent work in producing the book. Colleagues friends and students helped with their comments and questions. In particular I would like to thank Neil Alper Oscar Brookins William Dickens Tess Forsell AmaritaNattwhoreadallorlargepartsofthebookandmadeextensivesuggestions andcorrections.MythanksalsogoestoAndrewSumandMariaLuengo-Pradowho madeusefulcomments.StudentsinmygraduatemacroeconomicsclassYuanGao (Highfar) EmilyHalle YelenaKuznetsov AliciaParillo andBrianSiebendetected errorsandmadesuggestionsforimprovement.