Teaching Modern Macroeconomics at the Principles Level - Pre crisis

I had pointed to this interesting Blinder paper on the changes he will make to his textbook after the crisis. 

Here is a John Taylor paper on teaching Modern Macroeconomics at the Principles Level. This was written before the crisis. 

At the broadest level I think it is useful to emphasize five key components of modern macroeconomics (see Taylor (1997)).

First, the long-run real GDP trend—or potential GDP—can be understood using the growth model that was first developed by Robert Solow and that has now been extended to make “technology” explicitly endogenous.

Second, there is no long run tradeoff between inflation and unemployment, so that monetary policy affects inflation but is otherwise neutral with respect to real variables in the long run.

Third, there is a short run tradeoff between inflation and unemployment with significant implications for economic fluctuations around the trend of potential GDP; the tradeoff is due largely to temporarily sticky prices and wages.

Fourth, expectations of inflation and of future policy decisions are endogenous and quantitatively significant.

Fifth, monetary policy decisions are best thought of as rules, or reaction functions, in which the short-term nominal interest rate—the instrument of policy—is adjusted in reaction to economic events.

He explains all these in some detail and even uses a simple model which covers all 5 principles are covered. He also suggests micro should be taught before macro as certain concepts are better understood then.

What implication does teaching modern macroeconomics in this way have for how principles courses are organized? In my view it suggests that microeconomics be taught before macroeconomics. Certain concepts like treating capital and labor as factors of production, or shifting demand curves around, are probably better understood after some microeconomics. If one cannot practically require that micro be taken before macro (because of scheduling conflicts or resource constraints), then it is important for the macro course to spend some serious time covering key micro principles.

An alternative is to offer a one-term introductory course with microeconomics coming before macroeconomics. This is the way elementary economics is taught at Stanford and I think the simple approach to teaching modern macroeconomics outlined here helps make a one-term course work. But many faculty members feel that there is too much economics to teach in one term.

This is how it is even taught in India.

Though useful, you immediately notice that teaching these basic idea are bound to leave students perplexed in this crisis. There is hardly any mention of financial sector in the economy. So it is not just a know how of micro but some bit about financial sector is also important. And this is precisely what Blinder wants to add to the new syllabus. Most concepts revolve around the finance sector.

Though I had suggested to add economic history as well to the Blinder syllabus, now I think some idea on behavioral economics should also be given.

Coming back to John Taylor’s paper. He has been suggesting in many a papers (see this) that all was well with the pre-crisis framework. It was the deviation from the accepetd policy framework that led to the crisis. But this is not really the case. Central Banks (and others) could not appreciate the huge linkages between real and financial economy. So, there is a need to change basics at both principles and policymaking levels.

THough, he adds another important topic to the growing list of topics to add to economics teaching:

Of course, macroeconomists should try to improve their models in whatever ways they think can make them more useful for policymakers. Many have been working on improving our understanding of the credit channel, a worthy task. An implication of my research findings is that we need to do more work on ―political macroeconomics. In particular, we need to explain and understand why policymakers moved in such an interventionist direction despite the research that stressed predictable rule-like monetary and fiscal policy. Once we understand that, practical solutions should follow.

Political macroeconomics or political economy is another very important topic. Students are bound to ask if things are known well in advance, why aren’t they implemented? Why is it so that crisis leads to similar kind of suggestions made in the previous crisis? Why certain suggestions are ignored by politicians and certain policies accepted but in a weaker form (see this excellent article on how Volcker rule was weakened)? So if you include this you need to take a call on what all to include…but should be included as well. Otherwise students are bound to feel disconnected between the world of economics and reality.

Addendum:

Taylor titles the paper as Modern macroeconomics…..it is high time economists do away with this word modern. It actually sounds anachronistic….

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