Studying Macroeconomics

I major in macroeconomics. So, it may be a good idea to share my experience, i.e. how I studied (and am studying!) macroeconomics.

If you are new to macroeconomics, you are highly recommended to begin with Mankiw's principles of macroeconomics. You don't see any mathematics in this text, so don't have to worry about math!

After reading principles of macro, you should go either Blanchard's Macroeconomics or Mankiw's intermediate Macroeconomics (I read both, by the way). At this stage, you can say that you are familiar with undergraduate macro and see the world through the lens of macro! Read blogs by macroeconomists: you can understand now. (I read Mankiw and Cochrane every day.)

If you want to continue (i.e. graduate macro), you cannot escape from mathematics. But there are many good textbooks on math for economists. I recommend Dowling's Introduction to Mathematical Economics. This is wonderful and very easy to follow, but covers most math tools you'll need (if time allows, also read Chiang and Wainwright's Fundamental Methods of Mathematical Economics and Chiang's Elements of Dynamic Optimization). I didn't study Math III and Math C at high school, but after reading these three books, I'm really equipped with math tools for (macro)economics.

After mastering most math tools, you want to try either Benassy's Macroeconomic Theory or David Romer's Advanced Macroeconomics. And if time allows, read the classic: Lectures on Macroeconomics by Blanchard and Fischer (mathematically speaking, Benassy is very friendly, Romer is not that diffiicult, and Blanchard-Fischer is very technical). At this stage, you know what macroeconomics is (almost) all about.

Actually, three textbooks above present collection of various macro models. If you want to specialize in one specific topic, you have to look for other materials. In my case, I major in New Keynesian DSGE models. So, I study lecture notes by leaders in this field, Gali, Christiano, and Moll.

FYI:

Leaders in Growth Theory - Acemoglu and Charles Jones (Jones has excellent data on standard of livings across countries!).

Leaders in Computational Macroeconomics - Jesus Fernandez-Villaverde.

Leaders in Macroeconomics - Chris Edmond, Ivan Werning, Michael Woodford, and John Cochrane.

Sorry, but I cannot introduce all...(Google yourself!)

Poverty and Economic Growth

Why are some countries rich and other are poor? Economic growth theory has been developed to answer this question. In this post I provide useful sources to know about growth and poverty.

First, you have to start with Banerjee and Duflo's Poor Economics. Building schools in poor countries? Okay, it's definitely important. But is it the end of the story? No. You have to think, think, and think. Build schools, then what? Build schools, then hire teachers. Okay, then if you suppose that they will work hard for children, read this book. The book let you think radically. The problem is not easy.

Then, read non-technical books - Acemoglu and Robinson's Why Nations Fail, Jeffrey Sachs' The End of Poverty, and Robert Allen's Global Economic History. You may also enjoy Michael Spence (Nobel Prize Winner in Economics)'s The Next Convergence.

After reading non-technical books and being interested in more, then read textbooks on economics. Many intermediate textbooks on macroeconomics, such as Mankiw and Blanchard, have chapters on economic growth. More specialized (yet accessible) books are Charles Jones and David Weil.

At this stage, you are advised to see data. The best data is provided in the Penn World Table, which is widely used by professional economists. Plus, Charles Jones has a kind of dictionary of economic growth. If you read this, you are done.

But if you want to pursue more, try graduate-level textbooks on economic growth. Barro and Martin is still easy to follow, so is Aghion and Howitt. The most challenging one - Introduction to Modern Economic Growth - is written by one of the leaders in the field, Daron Acemoglu. If you can read this book, you must be a researcher of poverty and economic growth!

Dynamic Programming

Dynamic programming is the very powerful mathematical tool. When applied to economics, we can use that method to solve, well, (almost) all problems (even if the model is stochastic!). The problem is that many books on this method are too technical for economists and it's hard to understand it.

The most accessible introduction to dynamic programming is, in my opinion, George McCandless's "ABCs of RBCs" (his lecture notes are also nice). The second best is Klaus Walde's Applied Intertemporal Optimization (AIO for short, available for free!). McCandless doesn't explain the continuous-time dynamic programming, so if you work with continuous-time models, you should read AIO as well. The final book on dynamic programming is the bible - Recursive Methods in Economic Dynamics. However, this classic is too technical. Unless you are familiar with abstract mathematics, this book cannot be recommended.

By the way, dynamic programming is developed by Richard E. Bellman. That's why you have Bellman equation when solving problems using dynamic programming.

Hodrick-Prescott Filter

In 1997, Robert J. Hodrick and Edward C. Prescott proposed a new procedure to decompose a time series into its trend and cyclical components. Rather than understanding mathematically, I think you should first see how it works.

I H-P filtered Japanese output growth rate (see the figure below). You can see three lines, actual data (blue), cyclical component of data (green), and "trend" of data (red). The point: we see ups and downs of growth rate (that's the business cycle!) if H-P filter is not used. When H-P filter is used, we can see the "trend" of output growth rate. So, this filtering is useful when one wants to see the data in the long run (of course, H-P filter is not complete device. When using, you have to be careful). We see that Japan's trend growth rate in the 21st century has been, roughly saying, between 0% and 1%...very weak growth.

Below I applied H-P filtering to Japanese inflation rate:

to U.S. output growth rate:

and to U.S. inflation rate:

Most macroeconomic variables are not stationary. Applying H-P filtering to unemployment rate (or anything else) turns out to be meaningful, I think.

U.S. Economy and VARs

In the previous post, I created the figure of Japanese macroeconomic data and of impulse response functions (IRFs). I have done the same for the U.S. economy. I don't repeat my explanation and will let you think what the figures below tell us.

BTW, it's very hot today here in Japan! Be careful when going out!

Macro Data for the U.S.

IRFs

FYI: John Cochrane has very accessible lecture notes on time series analysis. Lag operator is of great importance in studying econometrics.

Japanese Economy and VARs

I have created the figures below using Eviews (data are taken from IMF World Economic Outlook). Thanks to various statistical packages, we can now do a lot without knowing much about econometric theory!

The first figure shows inflation rate, real GDP growth rate, and unemployment rate for the period 1980 - 2015 in Japan. In recent years, we have low growth and low inflation...how to overturn these?

Macro Data for Japan

Now, what would happen if we have shocks to the Japanese economy? The answer is in the second figure (created using vector autoregressions, or VARs). It shows four selected impulse response functions (IRFs). What can you see? Well, here's the point: computers help us create beautiful figures and calculate for us, but we cannot interpret the output without being familiar with statistic/econometrics! So, it's time to study them! (This is a very good textbook on econometrics. I read it a few years ago.)

Impulse Response Functions

FYI: Lawrence Christiano has excellent lecture notes on VARs (you need a little mathematics, though). Here's the interesting paper on VARs. IMF comments on Abenomics.

DSGE Models

I major in macroeconomics. Though there are many kinds of macroeconomic models, in my research, I use the Dynamic Stochastic General Equilibrium (DSGE) model. If you want to know about that, this video is a good place to start.

The speaker, Lawrence J. Christiano, is one of the leading authorities in the field. His web page contains many good materials for you (and me!) to study modern macroeconomics.