Michele Boldrin Spring 2018 A Prime on Money and Growth Scope The purpose of this course is to introduce you to the current state of research on two topics: the theory of economic growth and the theory of money. The course is mostly theoretical but there will be abundant references to facts, data and historical evidence. Organization of the course We will meet eight times, for three hours each (first class will be shorter, 1.5 hours). We will dedicate each meeting to a specific topic or issue. I assume you will do quite a bit of reading before each meeting and I will assign you specific suggestions about what to read (the reading list below is a starting point but it contains mostly classical papers). I like to organize the class as follows: I teach an argument in the second 1.5 hours of lecture n, for n=1,2, …7 and assign some reading to the class. In the first 1.5 hours of lecture n+1 you illustrate and discuss the content of the assigned readings and I try to put them in the proper perspective. This works well as the lecture n=1 is only 1.5 hours, hence I will discuss what we know about economic growth from data and history. I will use the last half of lecture n=8 to wrap up the course and take some final questions. It is therefore ESSENTIAL that you read and make an effort to understand the assigned materials. Grading I will give you a take-home exam at the end of the course. Topics 1. Growth and Cycles, data and historical facts. The theory of growth and the theory of cycles. Understanding the aggregate neoclassical growth model and the origin of the so-called “new growth theory”. Schumpeter vs the Classics. 2. What growth theory had learned before new growth theory came around (i.e. before Lucas (1988)). What was known to macroeconomists (e.g. variants of the Solow model) and what was known to economic theorists (e.g. from Von Neumman to the Turnpike literature). 1 3. Equilibrium growth under perfect competition and a constant technology. Balanced growth without technological progress. Equilibrium growth under perfect competition and a non- constant technology. The possibility of growth cycles. 4. Factor-saving innovations and biased technological change. A smorgasbord of endogenous growth model. 5. Money and Banking: the historical facts from anthropology and history. The dominant economic view of the role of money. Barter or not? Should money be explained within a “quasi-Walrasian” model? From Patinkin to Wallace: the never-ending quest for the micro- foundations of monetary theory. 6. The search theory of money: the most successful example of “micro foundations of money”. Its findings, its diffusion in the profession and its intellectual failure to explain anything that was not already perfectly clear. 7. Fiscal theory of price level determination and the new-“Keynesian” paradigm in central banking. Phillips curves all over again, and again, and again. 8. The so called “Chartalist” theory of money (better: money as an expression of political power) and its current relevance. Assorted Reading Material Andolfatto, D. and E. Nosal (2003) "A Theory of Money and Banking," Federal Reserve Bank of Cleveland Working Paper 03-10 Andolfatto, D. (2009), “ Essential Interest-bearing Money ” Athreya, B.K. (2013), Big Ideas in Macroeconomics , MIT Press Bell, S. (2001), “The Role of the State and the Hierarchy of Money”, Cambridge Journal of Economics , Vol. 25, 149-163. Berenstein, A. et al. (2007), “ Money, Credit and Banking ” Boldrin, M. (2008, 2016), “The Theory of Business Cycles: A Personal Perspective”, mimeo Boldrin, M. (2009), “Growth and Cycles, in the Mode of Marx and Schumpeter”, Scottish Journal of Political Economy 56 , 416-442 Boldrin, M. and D.K. Levine (2002), “Factor Saving Innovation”, Journal of Economic Theory 105, 18-41. Boldrin, M. and A. Rustichini, ``Growth and Indeterminacy in Dynamic Models with Externalities'', Econometrica 62 , 323-342. 2 Boldrin, M. and J. Scheinkman. (1988) “Learning by Doing, International Trade and Growth: A Note” in P.Anderson et al. (eds.) The Economy as an Evolving Complex System , New York, Addison Wesley, 1988. Brunnermeier, M. and Y. Sannikov (2011), “The I Theory of Money” , Working paper, Princeton. Calvo, G. (2016), Macroeconomics in Times of Liquidity Crises , MIT Press Cass, D., (1965), “Optimum Growth in an Aggregative Model of Capital Accumulation,” Review of Economic Studies 32 , 233-240. Clower, R. W. (1984), Money and Markets. Essays . Cambridge University Press. Diamond, D. and R. Rajan (2006), “Money in a Theory of Banking” , mimeo, University of Chicago. Dolmas, J. (1996), ``Endogenous Growth in Multisector Models'', International Economic Review 37 , 403-421. Gale, D. (1960), The Theory of Linear Economic Models , New York: McGraw-Hill. Harberger, A.C. (1998), “A Vision of the Growth Process”, American Economic Review 88 , 1- 32. Hayek, F. A. (1941), The Pure Theory of Capital , The Univ. of Chicago Press, Chicago IL, reprinted by Midway Reprint, 1975. (Part III, Chapters XIX-XXV only). Gabriel Jimenez, Steven Ongena, Jose-Luis Peydro, Jesus Saurina [2014], "Hazardous Times for Monetary Policy: What do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-Taking?", Econometrica , Vol. 82, No. 2, 463-505 Graeber, D. (2011), Debt. The First 5000 years . Melville House Publishing. Holmstrom, B. and J. Tirole (2011), Inside and Outside Liquidity , MIT Press. Kehoe, T., D. Levine and P. Romer (1990), ``Determinacy of Equilibria in Dynamic Models with Finitely Many Consumers'', Journal of Economic Theory 50 , 1-20. Kiyotaki, N. and J. Moore (2012), “ Liquidity, Business Cycles and Monetary Policy ” ( Older version ) Koopmans, T. C., (1965), “On the Concept of Optimal Economic Growth,” In The Econometric Approach to Development Planning , Amsterdam: North-Holland. 3 Krusell, P. and A. A. Smith Jr (2015), “Is Piketty’s “Second Law of Capitalism” Fundamental?” Journal of Political Economy 123 , 725-748 Lagos, R. (2006), “Inside and Outside Money”, FRB Minneapolis Staff Report No. 374. Lane, J.S. (1972), “The Implications of Steady State Growth for Endogenous and Embodied Technological Change,” International Economic Review 13 , 342-358 Leamer, E. (1983 ), “ Let's Take the Con Out of Econometrics ,” The American Economic Review 73 , 31-43. Lucas, R. E. Jr. (1984), “Money in a Theory of Finance” , Carnegie-Rochester Conference Series , Vol. 21. Lucas, R. E., Jr., (1988), “On the Mechanics of Economic Development,” Journal of Monetary Economics 22 , 3-42. Lucas, R. E. Jr., (2002), “Industrial Revolution: Past and Future,” in Lectures on Economic Growth , Cambridge: Harvard University Press. Mattesini F., C. Monnet, and R. Wright (2011) "Banking: A Mechanism Design Approach" , mimeo McKenzie, L.W., ``Optimal Economic Growth, Turnpike Theorems and Competitive Dynamics'', in K.J. Arrow and M.D. Intriligator (eds.) Handbook of Mathematical Economics , vol III, North Holland Publ. C., Amsterdam--New York, 1984. McKenzie, L.W. (1998), “The Richard Ely Lecture. Turnpikes,” American Economic Review Papers and Proceedings 88 , (May 1998), 1–14. Mises (von), L. (1934), The Theory of Money and Credit , Signalman Publishing, 2009. Neumann, J. von (1945), ‘A model of general economic equilibrium’, Review of Economic Studies , 13 , 1–9. English translation of ‘Über ein ökonomisches Gleichungssystem und eine Verallgemeinerung des Brouwerschen Fixpunktsatzes’, in Ergebnisse eines mathematischen Kolloquiums 8 (1937), 73–83. Palley, T.I. (2015), “Money, Fiscal Policy and Interest Rates: A Critique of Modern Monetary Theory”, Review of Political Economy , Vol. 27 Pasinetti, L., Structural Change and Economic Growth, Cambridge Univ. Press, Cambridge, 1981. Phelps, E. (1985), Political Economy. An Introductory Text , W.W. Norton & Co. 4 Rocheteau, G. and R. Wright (2005), “ Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium ” Romer, P. M., (2016), "The Trouble with Macroeconomics”, mimeo, Stern, NYU, April. Sargent, T. and N. Wallace (1981), “Some Unpleasant Monetarist Arithmetic”, Fed Mpls Quarterly Review , 531. Sargent, T. and N. Wallace (1982), “The Real Bills Doctrine versus the Quantity Theory: A Reconsideration”, Journal of Political Economy , Vol. 90, 1212-1236. Schumpeter, J.(1911), The Theory of Economic Development , Harvard Univ. Press 1934, (1st German edition: 1911). Solow, R. M., (1956), “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70 , 65-94. Solow, R. M., (1957), “Technical Change and the Aggregate Production Function,” The Review of Economics and Statistics 39 , 312-320 Solow, R.M., (1960), “Investment and Technical Progress,” in K.J. Arrow et al. (eds.) Mathematical Methods in the Social Sciences , Stanford Univ. Press, Stanford, CA. Solow, R.M. et al., (1966), “Neoclassical Growth with Fixed Factor Proportions”, Review of Economic Studies 33 , 79-115. Williamson, S. and R. Wright (2010), “ New Monetarist Economics: Models ” Williamson, S. (2011), “Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach ” 5 .