EC317: MODELING AND FORECASTING THE MACROECONOMY
Professor: Scott Fullwiler, Ph.D. Email: firstname.lastname@example.org
Time and Place: T , WBC 117 Office: WBC 109
Office Hours: MW and by appointment Phone: 352-8452
This syllabus is an implied contract between you and me. Keep it, read it, and refer to it often!
COURSE DESCRIPTION AND GOALS:
Because everyone—households and businesses alike—is affected by the economy’s performance, an understanding of macroeconomics and macroeconomic policy is a prerequisite for being an informed citizen. The contribution of economics to the business curriculum lies in the fact that economics is about the environment within which business operates. The more managers know about the structure of the economy, the nature of economic cycles, the patterns of financial stability and instability, the long- and short-term prospects for the economy, and the possible options and impacts of macroeconomic policy (to name just a few possible macro topics), the better are the chances for success.
The main goal of this course will be to learn how to think about the economy as an economist does, so that we might best understand both the environment within which business operates and how the economy and macroeconomic policies affect our world. We will achieve this goal through several objectives. First, we will gather, organize, interpret, and evaluate data and various reports on the current and projected future states of the economy. Second, we will develop a theoretical model of how the economy works and learn its characteristics and implications for policy. Third, we will analyze historical data, events, and policies within and in comparison to our model. Fourth, we will consider views that fall somewhat outside the mainstream of economics to gain a broader understanding of the economy and policy possibilities, and to see where the mainstream has left gaps (or perhaps gaping holes!). Finally, we will learn to use one of the most well-known and historically accurate large models (The Fairmodel) of the macroeconomy in order to understand the workings of the economy, run simulations, and make both predictions and policy recommendations just as an economist would.
A note on prerequisites: You are expected to have a basic understanding of EC 141. If you do not recall some of this material when it arises, then it is your responsibility to bring yourself up to date, not mine. There is a natural progression to the material covered throughout the business curriculum, and it simply must be expected that you have taken basic knowledge with you from these courses (just as in progressions through a foreign language or a math curriculum, for instance).
Gary E. Clayton and Martin Gerhard Giesbrecht. 2004. A Guide to Everyday Economic Statistics
2. The Fairmodel website (http://fairmodel.econ.yale.edu). The Fairmodel is a 130 equation model of the economy developed by well-known Yale economist Ray Fair. The Fairmodel was originally developed in the 1970s and has been regularly updated since. Fair provides the Fairmodel free to the public on this very user friendly website and also supplies (via the website) books, articles, and other items to aid us in using the model. We will make extensive use of this site.
3. The Fairmodel US Workbook and Fairmodel MCU Workbook (available at Fairmodel website). I suggest you at least download a copy of this for yourself (it is a bit lengthy, so you may want to print out only parts that we deal with in class as we do so) including the appendices and tables (the pdf versions may be the easiest to deal with).
4. Ray Fair. 2004. Estimating How the Macroeconomy Works. This is available on Fair’s website. Like the workbooks, it is good to only print out those pages that we will be covering in class.
5. There will be readings assigned from the following:
Lakshman Achuthan and Anirvan Banerji. 2004. Beating the Business Cycle.
· Olivier Blanchard. 2002. Macroeconomics. 3rd Edition. Prentice-Hall Publishers.
· Thomas R. Michl. 2002. Macroeconomic Theory: A Short Course. M.E. Sharpe. (On reserve for this course at Vogel Library.)
· Carolyn Clark. 1992. Monetary Policy in Theory and Action. Unpublished manuscript.
6. Various other articles (1) are available on the web, (2) will be handed out in class, or (3) will be placed on reserve in Vogel Library.
7. You will be expected to keep abreast of current events and data emerging relevant to the macroeconomy. Perusing daily through The Wall Street Journal (available in business dept, Vogel Library, or on the web through the account I have set up) or money.cnn.com should provide you with most of the information you need. I will provide you with other sources as they become necessary.
The following scale will be used in assigning grades:
93% and above A 80% to 82.9999% B- 67% to 69.9999% D+
90% to 92.9999% A- 77% to 79.9999% C+ 63% to 66.9999% D
87% to 89.9999% B+ 73% to 76.9999% C 60% to 62.9999% D-
83% to 86.9999% B 70% to 72.9999% C- Below 60% F
The following lists the course work and weighting for the term:
Take Home “Exams” (3) 8%, 10%, 12%
Almost Weekly Simulation Assignments 15%
Bi-Weekly Group Reports on Economic Data 15%
Article Review 8%
Reviews of Some Required
Group Presentation and Report 20%
All decimals on final grades in each category listed above will be rounded up (e.g., a score of 79.3% will be rounded up to 80%). However, your cumulative grade for the course will not be rounded up or down (e.g., a course average of 79.999% will receive a final grade of C+).
Almost Weekly Simulation Assignments:
These assignments will deal both with gathering/manipulating/charting data and comparison with our theoretical model, and with simulating the impacts of various macroeconomic events or “shocks” and interpreting results.
Bi-Weekly Group Reports on Economic Data:
The class will be divided into two groups. Each week, beginning in the third week of the semester, one of the groups will present to the class the data that have been published in the preceding week and discuss analysis of this data that occurred in the press and among economists (I’ll give you several sources to watch). The presenting group will also put together a short handout for the non-presenting group summarizing the information. I will do a report during the second week to demonstrate what the expectations are. The thirteenth week of the course neither team will be responsible for a report, but data will be discussed in class.
Take Home Exams:
These will consist of 2 questions, each of which will generally require about 500 words (in most cases, give or take) to answer correctly and completely. One of the questions will also involve simulations using the Fairmodel. You will be given one week to complete each of the assignments.
Presentation and Report:
Each group will prepare a forecast of the economy for 2003 using the Fairmodel and will prepare various alternative scenarios to anticipate the effects of possible shocks or alternative policies that might occur. For your final exam, each group will present its forecasts to a panel of local bankers and CEOs (as if hired by the panel as a consultant) and will submit a report to the panel explaining the forecasts. Much more information will be provided later in the semester.
Several articles are listed on the course outline below under the title Article Reviews. Each student must complete one review during the semester. A review involves a 5-10 minute presentation to the class on the articles main arguments, data presented, and so forth. The presenter is also required to provide a 1-2 page outline or other handout summarizing the paper to each classmate (PowerPoint handouts are sufficient if you put together a PowerPoint presentation).
If you have 1 absence during the semester, you will receive the 1% attendance portion in full. For every class beyond 1 that you miss, your final percentage will be reduce 0.5%; if you miss 0 total classes, 1% will be added to your final percentage. Excused absences are given at my discretion; in general, an excused absence will only enable you to hand assignments late without penalty but will still count toward your three allowable absences.
NOTES ON MY POLICY/VIEWS ON ASSIGNED WORK:
1. Regarding late work, it is not possible to grade consistently, or be fair to people who take trouble to do assignments on time, if I am absorbing a continual stream of late work. Therefore, late assignments will be penalized 2 points of the total possible for every day that they are late. However, once I have either provided the class with answers or have returned an assignment, late work will no longer be accepted. It is your responsibility to organize your life so work can be done on time—if you leave it until the last minute and then something breaks down, that’s your problem. Please do not tell me about malfunctioning disks, printers, and so forth.
2. All work is due in class at the moment that I choose to collect them (which could be the beginning, middle, or end of class). An assignment is considered late if it is not handed in at such time, unless other arrangements have already been made. If you have an excused absence on a day that an assignment is due, it will be accepted without penalty only on the first class you attend after the absence, unless other arrangements have already been made.
3. Exams are given in class on the day scheduled. Make-up exams will be given rarely and only in documented extreme cases such as family or medical emergency or absence due to approved Wartburg activities. Make-ups will NOT be given for virtually any other reason.
4. Anything and everything you hand in will be assessed not only for content but also writing skills such as spelling, correct language usage, and punctuation.
5. Stating in work turned in that you “do not understand” or that you were “confused” by a reading/assignment/question is unacceptable since you are expected to clear up such concerns long before handing something in. In your future job, such excuses will also not be accepted. Many assignments require thought and organization; as a result I will make time available for questions in class—take advantage of this! Of course, as in your future career, you will also be expected to put some things together yourself without needing to be hand fed every detail. Consequently, to encourage you to think for yourself, there will be some limitations on how much help I will give.
REACHING YOUR POTENTIAL IN THIS COURSE:
Your grade is your responsibility; I only assign a grade—you earn the grade yourself. Though I have substantial responsibilities as instructor of the course that I take very seriously, your success in this class is far more a function of your effort than mine. It is imperative that you honestly assess your own performance and determine where improvements can be made throughout the semester. Your performance will derive from a combination of (1) your own aptitude for the course material, and (2) the quantity and quality of effort you expend learning the course material. Regarding the latter, what follows is my best advice to you on your approach to this class.
1. Attend Class: Those who frequently miss my class almost always do poorly. Notes copied from other students are most often not a good substitute for class time missed.
2. Be Prepared: Keep up with the coursework. Do at least two hours of study outside of class for every hour in class (this is a College-wide minimum expectation and translates to 6 hours of study per week outside of class for this course alone). The material in this course is cumulative, and most are not able to “catch up” later in the semester. Go over your notes and relevant reading shortly after each class to make sure you understand them. If you don’t understand something, then you have a good question to ask me! Do homework conscientiously and in a timely manner.
3. Learn to Solve Problems: More than just the study of the economy or businesses, economics and finance are ways of thinking that involve logical reasoning and attention to detail. This is difficult for many to pick up at first. If you are unfamiliar with this method, you will need to practice (a lot!) if you expect to be successful. It is extremely important that you practice solving problems covered in class or in the book, in addition to studying concepts and facts. Most problems have obvious variations, which you should also practice since you are more likely to see these on an exam.
4. Ask Questions Often, and Be Receptive to the Answers: You will have questions—but I don’t know if you don’t ask them. I encourage you to contribute your comments and questions during class time—they will help all of us. If you are not comfortable doing that, be sure and find some other avenue to regularly (e.g., office hours, email) have your questions answered (don’t wait until the last minute!). If you never have questions, the quantity or quality of your studying is probably lacking.
5. Be Specific When You Ask Questions: “How do I do #4?” is a passive question that implies that I should do the work for you. Take extra time preparing to be more specific in your questions—find out what part you do not understand, or tell me what you do know and work your way to what you do not know. If you are specific, my help will help more; you will retain and understand better. If you don’t prepare well enough to ask a specific question, my help won’t help as much as it could.
IMPORTANT HOUSEKEEPING ITEMS:
Integrity/Honesty: Academic integrity is one of the basic
principles of a college community. By
ALL assignments are done by you (and nobody else) with no help or collaboration whatsoever unless EXPLICITLY allowed in writing by me. This means that you cannot defend yourself after the fact by claiming that I did not explicitly prohibit such activity on any assignment.
Any form of academic dishonesty will result in one or more of the following sanctions: a) loss of points for that specific assignment or exam; b) reduction in the final course grade; c) issuance of a grade of “F” for the entire course.
Commitment to Students with Disabilities:
Harassment: Everyone in the class will conduct themselves
in a mature and professional manner. I
will not, nor will
4. Incompletes: Incompletes will be given only in rare cases of extreme personal or familial difficulties that prevent a student from completing the semester’s work, and in those cases only if the student has a passing grade (C- or better) and has completed a substantial percentage of the course.
5. Extra Credit: You should expect that there will be no opportunities for extra credit during the semester. In particular, there will be absolutely NO opportunities for extra credit on an individual basis, as this would be unfair to others in the class. Rather than hoping for extra credit opportunities, take responsibility for your performance in the course throughout the semester by following the advice provided above.
The following lists the topics, assignments, readings, and the order in which we will do each. Numbers in parentheses refer to the number of classes I expect will be necessary to cover material in that section.
Class 1: September 14
TOPIC: How Economists Look at the Macroeconomy
Ray Fair. 2004.
Ray Fair. 2004. MCU
Class 2: September 21
TOPIC: The Goods Market
Lackshman Achuthan and Anirvan Banerji. 2004.
“The Resurrection of Risk.” Beating the Business Cycle.
· Ray Fair. 2004. “The Wealth Effect.” Estimating How the Macroeconomy Works, pp. 91-96.
Class 3: September 28
TOPIC: Adding Expectations and Openness to the Goods Market
Lackshman Achuthan and Anirvan Banerji. 2004.
“Why the Economy Rises and Falls.” Beating
the Business Cycle.
q Article Reviews for Next Week:
Jonathan McCarthy. 2004. “What Investment Patterns across Equipment Industries
Tell Us about the Recent Investment Boom and Bust.” Federal Reserve Bank of
Charles P. Himmelberg, James M. Mahoney, April
Bang, and Brian Chernoff. 2004. “Recent
Revisions to Corporate Profits: What
We Know and When We Knew It.” Federal Reserve Bank of
Class 4: October 5
TOPIC: Adding Interest Rate Determination
· Ben Bernanke. 2003. “The Jobless Recovery.” Speech given November 6. http://www.federalreserve.gov/boarddocs/speeches/2003/200311062/default.htm. Read the section on the payroll survey and the household survey only for a key discussion of two different measures of job creation.
Tao Wu. 2004. “Two Measures of Employment: How Different Are They?” Federal Reserve Bank of
Ray Fair. 2004.
· Ray Fair. 2004. “Nominal vs. Real Interest Rate Effects.” Estimating How the Macroeconomy Works, 71-76. (Give this a shot, see how much you understand.)
Class 5: October 12
TOPIC: Adding Stock and Bond Markets
· Ray Fair. 2004. “Testing for a New Economy in the 1990s.” Estimating How the Macroeconomy Works, 97-109 only.
Arturo Estrella and Frederic S. Mishkin. 1996. “The Yield Curve as a Predictor of
q Article Reviews for Next Time:
· Ben Bernanke. 2003. “Monetary Policy and the Stock Market.” Speech delivered October 2. http://www.federalreserve.gov/boarddocs/speeches/2003/20031002/default.htm (on how much the Fed should consider the stock market in setting interest rates)
· Dean Baker. 2002. “Dangerous Minds? The Track Record of Economic and Financial Analysts.” Center for Economic and Policy Research Briefing Paper (December 2). www.cepr.net (Very interesting discussion of how so many forecasters—government and private alike—made simple mistakes and missed the bubble of the 1990s.)
Class 6: October 19
TOPIC: Flexible vs. Fixed Exchange Rates
Michael Kouparitsas. 2004.
“How Worrisome is the U.S. Net Foreign Debt Position?”
· Roger Ferguson. 2004. “Global Imbalances.” Speech delivered April 23. http://www.federalreserve.gov/boarddocs/speeches/2004/20040423/default.htm
· Warren Mosler and Thomas Nugent. 2004. “Debtor Nation, Without the Rhetoric.” www.warrenmosler.com (index of papers).
· Warren Mosler and Philip Arestis. “The Missing Piece of the Euro Model.” www.warrenmosler.com (index of papers; not really on trade deficits, but relevant nonetheless.)
· Paul McCulley. 2004. “Twice Blessed.” Fed Focus (March). www.pimco.com (Go to Fed Focus archive to find this.)
q Article Review for Next Week:
· Stephanie Bell. 2003. “Convergence Going In, Divergence Going Out.” Center for Full Employment and Price Stability Working Paper No. 24 (April). www.cfeps.org
Class 7: October 26
TOPIC: AS-AD and The Phillips Curve
Lackshman Achuthan and Anirvan Banerji. 2004.
“The Boom and Bust of the 1990s.”
Beating the Business Cycle.
· Ray Fair. 2004. “Evaluating Policy Rules.” Estimating How the Macroeconomy Works, 155-159 only. (On comparing the Fairmodel to the Fed’s model.)
· David Reifschneider, Robert Tetlow, and John Williams. 1999. “Aggregate Disturbances, Monetary Policy, and the Macroeconomy: The FRB/US Perspective.” Federal Reserve Bulletin (January): 1-19. (Look at pages 2, 8-9, 13-15 only; compare to Fairmodel and Fair’s paper above.) www.federalreserve.gov
q Article Reviews for Next Week:
· Ray Fair. 2004. “Testing the NAIRU Model.” Estimating How the Macroeconomy Works, 77-90. (This is technical; must have good math skills to understand.)
· Douglas Staiger, James H. Stock, and Mark W. Watson. 1997. “The NAIRU, Unemployment, and Monetary Policy.” Journal of Economic Perspectives (Winter): 33-51. (Available via EbscoHost.)
· James K. Galbraith. 1997. “Time to Ditch the NAIRU.” Journal of Economic Perspectives (Winter): 93-108. (Available via EbscoHost.)
Class 8: November 2
TOPIC: The Current Theory of Monetary Policy: Inflation Targeting
· Carolyn Clark. 1992. “The War Against Inflation: 1980-1992.” (Handout)
· Ben Bernanke. 2003. “Inflation Targeting: Prospects and Problems.” Speech delivered on October 17. http://www.federalreserve.gov/boarddocs/speeches/2003/20031017/default.htm
Laurence Meyer. 2004. “Practical Problems and Obstacles to
Inflation Targeting.” Federal Reserve
· Ray Fair. 2004. “Estimated European Inflation Costs from Expansionary Policies.” Estimating How the Macroeconomy Works, 123-129.
q Article Reviews for Next Week:
Todd Clark. 1999. “A Comparison of the CPI and the CPE Price
Index.” Federal Reserve Bank of
Roy H. Webb. 2004.
“Which Price Index Should a Central Bank Employ?” Federal Reserve Bank of
· Dimitri Papadimitriou and L. Randall Wray. 1996. “The Consumer Price Index as a Target of Monetary Policy.” Challenge (September-October): 18-25. (Available via EbscoHost.)
Andrew Bauer, Nicholas Haltom, and William Peterman. 2004.
“Decomposing Inflation.” Federal
Reserve Bank of
Class 9: November 9
TOPIC: The Current Theory of Monetary Policy: Interest Rate Rules
· Edward Gramlich. 1998. “Monetary Rules.” Speech delivered February 28. http://www.federalreserve.gov/boarddocs/speeches/1998/199802272.htm
Charles T. Carlstrom and Timothy S. Fuerst. 2003. “The Taylor Rule: A Guidepost for Monetary Policy?” Federal Reserve Bank of
· Ray Fair. 2004. “Interest Rate Rule.” Estimating How the Macroeconomy Works, 49-51 only.
· Ray Fair. 2004. “Evaluating a ‘Modern’ View of Macroeconomics.” Estimating How the Macroeconomy Works, 115-121.
Class 10: November 16
TOPIC: Monetary Policy in the Current “Recovery”
· Ray Fair. 2004. “Testing for a New Economy in the 1990s.” Estimating How the Macroeconomy Works, 110-114 only.
· Ben Bernanke 2003. “The Economic Outlook.” Speech given September 4. http://www.federalreserve.gov/boarddocs/speeches/2003/200309042/default.htm
· Paul McCulley. 2003. “Needed: Central Bankers with Far Away Eyes.” Fed Focus (August). www.pimco.com
· Various policy statements by the FOMC (http://www.federalreserve.gov)
· Criticisms of the Fed in 2004 (to be handed out in class).
q Article Reviews for Next Week:
Spencer Krane. 2003.
“An Evaluation of Real GDP Forecasts:
1996-2001.” Federal Reserve Bank
Class 11: November 23
TOPIC: The Sector Financial Balances
· Dmitri Papadimitriou and L. Randall Wray. 1998. “What to Do with the Surplus: Fiscal Policy and the Coming Recession.” Jerome Levy Economics Institute Policy Note 1998/6. Website: www.levy.org
· Wynne Godley. 2000. “Drowning in Debt.” Jerome Levy Economics Institute Policy Note 2000/6. Website: www.levy.org
Wynne Godley, Alex Izurieta, and Gennaro Zezza. 2004.
“Prospects and Policies for the
Class 12: November 30
TOPIC: Functional Finance and the Employer of Last Resort
· Stephanie Bell. 1999. “Functional Finance: What, Why, and How?” Jerome Levy Institute of Economics Working Paper No. 287. (www.levy.org)
· L. Randall Wray. 2000. "The Employer of Last Resort Approach to Full Employment." Center for Full Employment and Price Stability Working Paper No. 9. (http://www.cfeps.org)
· Scott T. Fullwiler. 2005. “Macroeconomic Stabilization through an Employer of Last Resort.” To be presented at the annual meetings of the Association of Social Economists (January).
· (if previous is not yet finished) Scott T. Fullwiler. 2004. “A Fairmodel Simulation of Functional Finance.” Presented at the annual meetings of the Easter Economics Association (February).
· Warren Mosler. 1997-8. “Full Employment and Price Stability.” Journal of Post Keynesian Economics. Available via EbscoHost. (Classic and one of the first to put all the pieces together.)
· Mathew Forstater. 1999. “Functional Finance and Full Employment: Lessons from Lerner for Today.” Jerome Levy Institute of Economics Working Paper No. 272 (http://www.levy.org).
· Mathew Forstater. 2003. “Public Employment and Environmental Sustainability.” Journal of Post Keynesian Economics (Spring): 385-406. Available via EbscoHost.
Scott T. Fullwiler. 2003. “Further Simulations of an Employer of Last
Resort Policy.” Center for Full
Employment and Price Stability Working Paper No. 27 (July). (www.cfeps.org;
theory section written by former Wartburg students Greg Dewey and Amy (
Class 13: December 7
TOPIC: Putting the Sector Balances and Functional Finance Together
· L. Randall Wray. 2002. “Friedmanian Approach to Restoring Growth.” Center for Full Employment and Price Stability Working Paper No. 22 (September). www.cfeps.org.
· Stephanie A. Bell and L. Randall Wray. 2004. “The War on Poverty after 40 Years: A Minskyan Analysis.” Jerome Levy Institute of Economics Working Paper No. 404 (www.levy.org)
· L. Randall Wray. 2003. “Let’s Create a Real Job Czar for the Jobless.” Center for Full Employment and Price Stability Policy Note No. 03/01. (www.cfeps.org)
Class 14: December 14
FINAL EXAM: PRESENTATION OF 2005