Macroeconomic Theory Sargent Pdf 194
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Therefore, the aim of this article is to propose a Lucas Critique lesson roadmap to be used by instructors in an advanced undergraduate macroeconomics class. The lesson consists of three parts. The first one is a grading exercise to show students that the subject is closer to their real-life than they think. In the second part of the lesson, we explain the Lucas Critique by means of a Keynesian Consumption Function and an Optimal Consumption Function based on a version of the Permanent Income Hypothesis (PIH). We derive the marginal propensity to consume in Hall's (1978) version of the PIH, which depends on the probability of unemployment. We then illustrate the Lucas Critique by analyzing how consumers respond to an unemployment insurance policy. Finally, in the third part of the lesson, we present two optional topics, which are an extension of the optimal consumption function and some empirical results related to the Lucas Critique.
Besides this introduction, the article is organized as follows. Section 2 is dedicated to showing some literature on teaching macroeconomics to undergraduates. Section 3 presents a Lucas Critique lesson plan based on the proposed material. Section 4 brings the topic to students' lives by means of an instructor's grading system. Section 5 reports the Keynesian Consumption Function, a behavioral equation subject to the Lucas Critique. Section 6 reviews the discussion between the Lucas Critique and the system of equations adopted by macroeconomists in the 1960s. Section 7 brings the discussion related to Optimal Consumption and Hall's version of the PIH, in which we add both unemployment risk and insurance policy. Section 8 brings some empirical results related to the Lucas Critique, which can be used as an additional presentation of the topic. The last section draws some conclusions.
Several articles have been written on teaching macroeconomics at an undergraduate level. For instance, Becker (2000) argued that improving the teaching quality in economics is an important tool to help reverse a downward trend in the number of undergraduates majoring in economics in the USA. The author offered some suggestions on how to change the concepts taught and addressed how students could be assessed and how pedagogical practices could be evaluated.
De Araujo, O'Sullivan and Simpson (2013) discussed what should be taught in intermediate macroeconomics, especially in relation to the Keynesian/classical divide. The authors considered the pros and cons of each approach and how they were dealt with in textbooks. Gärtner, Griesbach and Jung (2013) worked on a survey among undergraduate instructors in Europe and the USA, on teaching macroeconomics after the global financial crisis. The results showed that macro models were taught in the same way as before the crisis, except for public debt dynamics. However, interest grew in topics related to financial markets, case studies, economic history and history of economic thought.
Reingewertz (2013) showed that flowcharts could be a valuable tool for teaching macroeconomics to undergraduates, as they could help present graphs and algebra in the explanation process. Valcarcel (2013) offered a single monetary economy experiment to help boost students' participation in a semester-long macroeconomics course. By adopting this experimental approach, the author was able to work with several concepts such as income, redistribution, intertemporal substitution and banking.
Mankiw (2019) listed six useful guidelines to help instructors, especially first-timers, teach intermediate macroeconomics: (1) suppress idiosyncrasies; (2) reinforce basic principles; (3) revel in the act of model building; (4) admit our models' limitations; (5) do not go overboard; and (6) remember the real world. Croushore (2019) discussed what should be taught in intermediate macroeconomics and said that the focus was the construction and understanding of macroeconomic models. The author also mentioned that understating the concept of general equilibrium is essential at an intermediate level.
Wulwick (1991) argued that teaching the Phillips Curve as a mapping of a stable AS curve, as many principles of macroeconomics books do, could be problematic. The author showed that the stable Phillips Curve could be mapped off a stable AS curve that was double exponential in form but not a linear or exponential AS curve.
Yamaura and Thompson (2018) used the map of Japan to teach students the AD-AS model and Phillips Curve theories. The authors were able to pinpoint some Japanese regional effects which were used as a teaching toolkit to help undergraduates understand the Japanese macroeconomic experience for the period ranging from 2005 to 2017.
Box 1 also presents the prerequisites needed for each topic, assuming that undergraduates will not derive the optimal consumption function (Equation 9). Conditional on such assumption, the prerequisites for the first and the second classes are covered by initial courses in statistics, econometrics and macroeconomics. Regarding the (optional) third part of the lesson, notions of precautionary savings and liquidity constraints are required, but any gap could be covered previously by the instructor. Therefore, the roadmap presented in Box 1 enables the contextualized teaching of Lucas Critique for undergraduate students, which is a helpful toolkit to incorporate the topic in the classroom.Box 1A roadmapClassTopicsPrerequisitesFirstApply the topic to students' lives (Section 4)Geometric and arithmetic meansPresent the Keynesian Consumption Function (Section 5)Linear functionPresent the Lucas Critique and the System of Equations (Section 6)Notions of econometrics, especially estimationSecondPresent the Consumption Function and Unemployment Insurance Policy (Sections 7.1 and 7.2)Random variable, expected value, and the Law of Large NumbersThird (optional)Discuss some Extensions of the Optimal Consumption Function (Section 7.3)Notions of precautionary savings and liquidity constraintsLucas Critique: Some Empirical Results (Section 8)
The Lucas Critique had a significant impact on how macroeconomic models were built from then on. Since the 1970s, considerable research efforts have been made toward using models with microfoundations and rational expectations, as done by Hall (1978). In such cases, agents maximize an objective function, subject to restrictions, instead of following behavioral rules.
The narrative created in this work may give the false impression that historical data are not useful for macroeconomists interested in policy evaluations. This is not the case. In models built on microfoundations, the so-called deep parameters of preferences and technology would be stable or at least more stable over time. Thus, instead of estimating the marginal propensity to consume with historical data, we should estimate the deep parameters that would affect the marginal propensity to consume. In this sense, a model would be structural only if it describes preferences and technologies relevant to the proposed research question. Hall's (1978) formulation was able to enhance the development of consumption structural models. Then, a lot of research effort was made to consolidate Hall's idea and to estimate preference parameters such as the intertemporal discount factor, relative risk aversion and intertemporal elasticity of substitution (Hansen and Singleton, 1982, 1983; Hall, 1988; Epstein & Zin, 1991). This micro-based approach, with deep parameters estimated, has become the usual approach in macroeconomics research. 2b1af7f3a8