Macroeconomics: A Modern Approach

Macroeconomics is the branch of economics that deals with the big stuff: growth, productivity, unemployment and inflation at the national or even global level. It is also the field that gives the subject as a whole its reputation for controversy. The heat has died down in recent years but in rather an odd way: the consensus in the research community is quite different from that in the undergraduate textbooks and the popular media. We seem to have reached the stage at the end of the Thirty Years' War when the treaties of Osnabruck and Munster had yet to be reconciled.

What I shall call the "old version" of macroeconomics is a sort of synthesis of Keynes and Friedman. The economy is analysed using three time frames: a short run in which output is determined by aggregate demand and prices depend on past events and supply shocks; a medium run over which output tends to return to trend and monetary policy determines the price level; and the long run (decades), for which the trend itself is the focus of interest.

The alternative, now preferred by the learned journals, is dynamic general equilibrium (DGE) analysis. This models the economy as a collection of interacting markets, with consumers and firms using informed expectations of future events to guide their actions and plans. The advantages over the old version are that an explicitly dynamic analysis dispenses with the rather artificial division of time into "runs", and the methodology is much closer to that in all other branches of economics. The disadvantages are a lack of contact with debate in the media and among politicians, and (though not everyone agrees this is a bad thing) a tendency to treat the key short-run issues of the old version as relatively minor frictions.

The book under review, by an extremely distinguished American macroeconomist, is (I think) the third attempt to present DGE to the undergraduate. The first, also by Robert Barro, ran to five editions between 1984 and 1998; the second, by Stephen Williamson, is now in its third edition. The new contender is the most accessible, the best written and the most radical; the Phillips curve, the crucial link between the short and medium runs in the old version, is not even mentioned. This affords space to cover topics such as capital utilisation that have hitherto been downplayed in textbooks. Barro's book is particularly strong in areas such as economic growth and public debt, where he has made major contributions. The chapter on sticky wages and prices struck me as highly enlightening, though many varieties of Keynesian will not like it. There are points (for example the discussion of worldwide inequality) where Barro is open to the criticism of presenting only one side of a controversy, but this is not a major failing and will help to stimulate class discussion.

To lapse into old-version language, this is a book that will revolutionise the teaching of macroeconomics in the short run, educate the media in the medium run and may even lead to better policymaking in the long run.

Who is it for? Economics undergraduates. Probably most suitable for second-years, though it could work for an ambitious first-year course. Also excellent background for masters students with no previous exposure to "the modern approach".

Presentation: Masterly.

Would you recommend it? Absolutely.