Growth Macro

about this course

This course continues the study of economic growth and fluctuations that we undertook in the introductory course. We will discuss models of economic growth and the role that capital investment plays in increasing worker productivity. And we will explore the role of inflationary expectations in the formation of monetary policy.

what you will learn

All else equal, countries that save more for investment in their capital stock converge to higher steady-state levels of output per worker. But what factors determine a country's saving rate? And why do some countries save more than others?

In the Solow model, the savings rate is exogenously determined. But in the Ramsey model, it is endogenously determined, so we will explore the Ramsey model to understand why every country's savings rate is almost always below the rate which would yield the highest steady-state level of consumption per worker.

The growth models that we will discuss pay no attention to monetary policy. Instead they assume that the money supply does not affect real economic variables, like the level of output and the rate of unemployment. In the long run, that may be true, but in the short run, a surprise increase in the price level might boost output.

However if the public begins to expect those inflation surprises, then the central bank's efforts to boost output might not be successful. Nonetheless, at the conclusion of the course, we will see that a moderate inflation rate helps prevent a "liquidity trap," in which output and prices spiral downward.