“Macroeconomics II,” Bern, Fall 2009

MA course at the University of Bern.

Lectures and exercises follow these notes (December 1, 2009). Dates and times: Wed 10-12 and 14-16. Rooms: See university course site. Exam date, time, location: December 16, 2009; 14-16; A 003 UniS, Schanzeneckstrasse 1. Last year’s exam. Office hours arranged individually, after the lectures.

Why study this material? Some observers claim that the recent crisis points to a failure of economics and in particular, macroeconomics. It is argued that macroeconomic models are based on unrealistic assumptions and that modelers are driven by a desire to build abstract, formally appealing rather than empirically relevant models. Much of this criticism is unwarranted and reflects ignorance about the state of economic research. The modeling kit of economists far exceeds the baseline, frictionless models that are taught at the entry level of Master or PhD studies and against much of the current criticism is directed. For example, contractual or informational frictions—central to understanding the recent crisis—are the focus of a significant body of research in macroeconomics and other fields, past and present. Good Master or PhD programs teach models focusing on such frictions at the advanced level. But for students to be able to follow richer models with such “realistic” frictions, they must be familiar with the basic concepts, and these basic concepts are best taught in the context of simple, to-the-point baseline models. One may criticize the selection of models taught in advanced Master or PhD courses (as does Paul Krugman in the New York Times); the more fundamental critique against economics and in particular, macroeconomics does not make much sense.

“Debt-Maturity without Commitment,” CEPR, 2008

CEPR Discussion Paper 7093, December 2008. PDF.

We analyze how sovereign risk paired with social costs of default shapes the maturity structure of public debt. A government without commitment power balances benefits of default, due to tax savings, and costs, due to output losses. Debt issuance affects subsequent default and rollover decisions and thus, current debt prices. This induces welfare costs beyond the consumption smoothing benefits from the marginal unit of debt. The equilibrium choice of short- versus long-term debt issuance minimizes these welfare costs. Consistent with empirical evidence, closed-form solutions of the model predict an interior maturity structure with positive gross positions and a shortening of the maturity structure during times of crisis and low output. In simulations, the model replicates additional features of the data.

“Macroeconomics II,” Bern, Fall 2008

MA course at the University of Bern.

Lectures and exercises follow these notes (December 10, 2008). Dates; times; rooms (206 is in the main building, A222 is in UniS): September 17; 10-12, 14-15; 206 — September 24; 10-12, 14-15; A222 — October 1; 10-12, 13-15; A222 — October 8; 10-12, 13-15; A222 — October 15; 10-12, 13-15; A222 — October 22; 10-12, 13-15; A222 — October 29; 10-12, 14-15; 206 — November 5; 10-12, 13-15; A222 — November 26; 13-15; A222 — December 3; 10-12, 14-15; 206 — December 10; 10-12, 14-15; 206 — December 17; 10-12; 13-15; A222. Exam: Monday, January 5, 2009; 10-12; HS 205 (main building). Office hours arranged on an individual basis, after the lectures. University course site.

“The Future of Social Security,” JME, 2008

Journal of Monetary Economics 55(2), March 2008, with Martín Gonzalez-Eiras. PDF.

We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the standard OLG model with capital accumulation, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16%. Other policies that distort labor supply will become less important; labor supply therefore will rise, in contrast with frequently voiced fears.

“Starving the Beast? Intra-Generational Conflict and Balanced Budget Rules,” EER, 2007

European Economic Review 51(1), January 2007. PDF.

A balanced budget requirement does not only prevent fiscal policy makers from smoothing tax distortions but also affects their preferred choice of government spending. The paper analyzes the conditions under which groups opposed to government spending might want to implement a balanced budget requirement in order to induce the government to spend less. It shows that relaxing a balanced budget requirement need not be associated with higher government spending.

“The Stability Pact—Rationales, Problems, Alternatives,” Kyklos, 2006

Kyklos 59(4), November 2006, with Assar Lindbeck. PDF.

… the paper makes two contributions, one analytical and one substantive. On the analytical side, we apply economic theory to identify rationales for the SGP and to develop adequate policy responses in light of these rationales. … On the substantive side, we highlight the “legalistic” perspective adopted in the SGP. …