EC202.01 and EC202.02

Macroeconomic Theory



Fall 2005


Cushing Hall 335


EC202.01: Tuesday and Thursday, 10:30 am


EC202.02: Tuesday and Thursday, 12:00 pm





Fabio Ghironi


21 Campanella Way

Room 473



Welcome, Purpose of the Course, Prerequisites, Office Hours, Textbook, Requirements and Grading, Course Outline 


Feel free to address me as Fabio.  You can address me as Professor Ghironi if you prefer to do so.  You can find out a lot about me by visiting my web site.

Purpose of the Course:

This course covers the theory of modern macroeconomics in detail.  We will discuss several examples of macroeconomic phenomena in the real world. We will focus on the determination of macroeconomic variables in the short, medium, and long run, and we will address a number of policy issues.  A central theme will be to understand the powers and limitations of macroeconomic policy in stabilizing the business cycle and promoting growth.


There is only one formal prerequisite:  You must have successfully completed EC 131-132, Principles of Economics.  However, some familiarity with calculus will be useful.  In general, I strongly encourage you to strengthen your knowledge of math and more rigorous economics as much as possible while at Boston College.  It will help you immensely later on, whether you are looking for a job (a tougher selection of courses will be a better signal that you are hard-working candidates to prospective employers) or enrolling in graduate school (the stronger your formal training, the higher your probability to make it through grad school).

Office Hours:

I will hold office hours on Tuesdays from 2:30 to 4:30 pm (21 Campanella Way, room 473).  You are welcome to schedule appointments at other times by calling (617-552-3686) or e-mailing me ( ).

I will often use e-mail to communicate with the class, so make sure you check your e-mail frequently, and reply promptly if I am asking for a reply. However, do not e-mail me questions that I cannot answer with a “yes” or “no.” Use my office hours or schedule appointments to discuss your questions on homework or other course-related matters. It is much more efficient.


The textbook for the course is Macroeconomics, by Olivier Blanchard, Prentice Hall, Fourth Edition, 2005, available at the BC Bookstore.  The Study Guide by David Findlay is also required.  Textbook and study guide should be bundled in a "value pack" including also an Interactive CD and a subscription to the online version of The Economist.  I encourage you to explore the textbook’s web site.  Additional readings are listed in the course outline below. I also suggest that you follow current economic events by reading newspapers (Financial Times, The New York Times, The Wall Street Journal, The Washington Post) and magazines (Business Week, The Economist, Fortune ).  The IMF’s World Economic Outlook is a good source of information on recent economic developments (and you can also download figures and data).  Course materials will be posted in the teaching section of my web site.

Requirements and Grading:

Active class participation is not a formal requirement, but you should feel free to ask questions at any time during lectures.

Your grade for the course will be based on a combination of requirements:

- Weekly Homework Assignments;
- A Midterm Exam;
- A Policy Advising Exercise;
- A Final Exam.

I want you to learn how to think about macroeconomic issues and to interpret phenomena that are discussed in the media.  Homework Assignments will help you to develop the ability to "think macro."  You should work very hard on them.  The harder you work on your assignments, the more likely it is that you will do well in the exams.  You are allowed to work in groups on the homework, but each member of any group must turn in her/his own answers.  Free-riding on the work of other members of your group will not be a successful strategy.  Exams will consist mostly of homework-type questions.  If you do not work hard on the homework, you will fail the exams.  Your homework answers will be graded by my Teaching Assistant (Radostin (Rado) Djeliov,  You should rely on him as an additional resource for the class.  He will prepare homework answers that will be posted in the teaching section of my web site.  He will hold review sessions as well as office hours at times and in locations to be announced.

Important: Homework answers turned in after Rado’s answers have been posted online will receive zero credit. If you turn in your answers after the due date and time but before the answer key is available, you will be penalized with an automatic 20-point deduction from the maximum possible score of 100 per each day of delay (10 points for a half day). There are no exceptions to this rule. (I will generally post Rado’s answers online within three days of the homework’s due date.)

The Midterm Exam will take place in class, at our usual meeting time on Tuesday, October 18.  It will consist of homework-type questions. For this exam, you will be responsible for the material covered up to and including the last lecture before the exam date.  You should use the exercises in the Study Guide as well as the material in the Interactive CD to practice for the midterm and final exams.

The Policy Advising Exercise will be structured as follows:  You will have to form groups of four/five students.  Each group will have to give a presentation of approximately (and at most) 20 minutes in which the group will have to provide a convincing answer to the following question: Should the Federal Reserve increase, lower, or leave the Federal Funds Rate unchanged at its next policy meeting?  The group will have to make a case for its recommendation by using theory and data.  (Suggestions on data sources are in the appendix to Chapter 1 of the textbook – for instance, the Bureau of Economic Analysis.  See also the sources available through the BC Economics Department and the FRED database of the Federal Reserve Bank of St. Louis.)  The case for the recommendation made by the group will be more important than the recommendation itself.  All members of the group will have to speak during the presentation, which should rely on overhead transparencies or PowerPoint.  (To maximize effectiveness, groups should practice their presentations several times.)  Evidence that all members of the group contributed to the project will have a positive effect on the evaluation of the exercise by a commission consisting of myself, Rado, and possibly other BC doctoral students in economics.  You will have to pretend that we are the Governors of the Federal Reserve, and you are the Fed economists advising us on the course of U.S. monetary policy.  Your presentation will be followed by up to 10 minutes of questions from us.  All members of the group should be actively engaged in answering the questions.  The lists of group members must be submitted to me by Thursday, October 13.  We will schedule the presentations at times to be announced in the second half of November.  All groups will be expected to give me a preliminary presentation of their material and ideas during my office hours (or at a time to be agreed upon) by Thursday, November 10 at the latest. (The Fed Challenge competition is the model for this exercise. A list of useful readings to prepare for it can be found at the end of the syllabus.)

The Final Exam will take place on Monday, December 19, 9:00 am for EC202.01 and Tuesday, December 20, 9:00 am for EC202.02. The exam will again consist of homework-type questions.  The final exam will cover material from the entire course.

Each requirement will be graded on a scale from 0 to 100.  Your overall homework score will be the average of your scores for individual homeworks.  You should not panic if you do not score in the nineties in any of the requirements.  That does not mean that you are doing poorly.

I do not assign letter grades to intermediate tests – the only letter grade I assign is your final grade.  So, for instance, you should not ask me about a letter grade based on your midterm score, as I think about letter grades only when I have the information on how you did in all requirements.

The weights of the various requirements in your final grade will be as follows:

- Homework Assignments: 15 percent;
- Midterm Exam: 25 percent;
- Policy Advising Exercise: 15 percent;
- Final Exam: 45 percent.

There will be no makeup exam, except for well documented, acceptable excuses ahead of time, such as medical reasons or family emergencies. (I will verify your excuses.)

If I catch anyone cheating, the consequences will be drastic.  At a minimum, whoever is caught cheating will fail the test in which she or he was caught in the act.  I require that you abide by BC's standards of Academic Integrity.

Grade Complaints:  There is a standardized procedure for submission of grade complaints in the College of Arts and Sciences.  You must follow the procedure if you have complaints.

Course Outline:


Following is a list of the topics we will cover, along with the references to textbook and additional readings.



Part I. Introduction


- The Vocabulary of Macroeconomics, Blanchard, Chapter 2 (A Tour of the Book).
- The International Macroeconomic Outlook, Blanchard, Chapter 1 (A Tour of the World).


Additional Reading:

- IMF, World Economic Outlook, (read Chapter 1 of the most recent issue – the WEO is usually published in April and September).

Part II. The Core


The Short Run

- The Goods Market, Blanchard, Chapter 3.
- Financial Markets, Blanchard, Chapter 4.
- Goods and Financial Markets: The IS-LM Model, Blanchard, Chapter 5.


The Medium Run

- The Labor Market, Blanchard, Chapter 6.
- Putting All Markets Together: The AS-AD Model, Blanchard, Chapter 7.
- The Natural Rate of Unemployment and the Phillips Curve, Blanchard, Chapter 8.
- Inflation, Activity, and Nominal Money Growth, Blanchard, Chapter 9.


Additional Readings:

- Ball, Laurence, and N. Gregory Mankiw (2002): “The NAIRU in Theory and Practice,” Journal of Economic Perspectives 16(4): 115-136. (Link: NBER Working Paper version.)

- Barsky, Robert B., and Lutz Kilian (2004): “Oil and the Macroeconomy since the 1970s,” Journal of Economic Perspectives 18(4): 115-134. (Link: NBER Working Paper version.)

- Romer, David (2000): “Keynesian Macroeconomics without the LM Curve,” Journal of Economic Perspectives 14(2): 149-169. (Link: NBER Working Paper version.)

- Taylor, John B. (2000): “Reassessing Discretionary Fiscal Policy,” Journal of Economic Perspectives 14(3): 21-36. (Link: John Taylor’s web site.)


Note: You should be able to access the published versions of these papers in JSTOR from BC computers. You will also need to use a BC computer to access NBER Working papers.


The Long Run

- The Facts of Growth, Blanchard, Chapter 10.
- Saving, Capital Accumulation, and Output, Blanchard, Chapter 11.
- Technological Progress and Growth, Blanchard, Chapter 12.
- Technological Progress, Wages, and Unemployment, Blanchard, Chapter 13.


Additional Readings:

- Ball, Laurence, and Robert Moffitt (2001): “Productivity Growth and the Phillips Curve,” NBER Working Paper 8421.

- Oliner, Stephen D., and Daniel E. Sichel (2000): “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Journal of Economic Perspectives 14(4): 3-22. (Available in JSTOR.)



Time permitting, we will cover some material from the following parts (even if time does not permit covering them, you will be exposed to discussion of some material in these parts during my treatment of the core):



Part III. The Role of Expectations


- Basic Tools, Blanchard, Chapter 14 (Expectations:  The Basic Tools).
- Financial Markets and Expectations, Blanchard, Chapter 15.
- Expectations, Consumption, and Investment, Blanchard, Chapter 16.
- Expectations, Output, and Policy, Blanchard, Chapter 17.


Part IV. The Open Economy


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


Part V. Policy

- Should Policy Makers Be Restrained? Blanchard, Chapter 24.
- Monetary Policy, Blanchard, Chapter 25 (Monetary Policy:  A Summing Up).
- Fiscal Policy, Blanchard, Chapter 26 (Fiscal Policy: A Summing Up).


Readings for the Policy Advising Exercise:

Following is a list of readings that will help you develop a deeper understanding of issues in monetary policymaking in the U.S. and elsewhere.  I recommend that you do as many as possible of these readings in preparation for the Policy Advising Exercise.  For instance, you could allocate the readings to different members of a group and then have group discussions on them. (The bold number after each reference indicates a suggested order in which to do the readings.)


- Ball, Laurence, and Niamh Sheridan (2003): “Does Inflation Targeting Matter?” NBER Working Paper 9577. 8

- Ball, Laurence, and Robert Tchaidze (2002): “The Fed and the New Economy,” NBER Working Paper 8785. 9

- Blinder, Alan S. (2000): Central Banking in Theory and PracticeCambridge: MIT Press. 2

- Friedman, Benjamin M. (2004): "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance 7(1): 129:136. 7

- Friedman, Milton (1968): "The Role of Monetary Policy," American Economic Review 58(1): 1-17.  (Available in JSTOR.) 1

- King, Mervyn (1999): "Challenges for Monetary Policy: New and Old," in New Challenges for Monetary Policy, proceedings of a symposium organized by the Federal Reserve Bank of Kansas City. 3

- Mishkin, Frederic S. (2002): “The Role of Output Stabilization in the Conduct of Monetary Policy,” NBER Working Paper 9291. 5

- Mishkin, Frederic S. (2004): "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance 7(1): 117-127. 6

- Taylor, John B. (1993): "Discretion vs. Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy 39: 195-214. (Link: John Taylors web site.) 4



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