More than a decade after the publication of the critically acclaimed A Modern Guide to Macroeconomics, Brian Snowdon and Howard Vane have produced a worthy successor in the form of Modern Macroeconomics. Thoroughly extended, revised and updated, it will become the indispensable text for students and teachers of macroeconomics in the new millennium.

List of figures x List of tables xiii Preface xiv Acknowledgements xvii 1. Understanding modern macroeconomics 1(35) Macroeconomic issues and ideas 1(2) The role of economic theory and controversy 3(4) Objectives, instruments and the role of government 7(2) The Great Depression 9(4) Keynes and the birth of macroeconomics 13(2) The rise and fall of the Keynesian consensus 15(6) Theoretical schizophrenia and the neoclassical synthesis 21(3) Schools of thought in macroeconomics after Keynes 24(5) The new political macroeconomics 29(3) The renaissance of economic growth research 32(4) 2. Keynes v. the `old' classical model 36(65) Introduction 36(1) Classical macroeconomics 37(1) Employment and output determination 38(7) Say's Law 45(5) The quantity theory of money 50(4) Keynes's General Theory 54(3) Interpreting the General Theory 57(1) Keynes's main propositions 58(7) Keynes's analysis of the labour market 65(4) Keynes's rejection of Say's Law 69(1) Keynes and the quantity theory of money 69(1) Three important interpretations of Keynes 70(5) The `new' Keynes scholarship 75(1) Causes and consequences of the Great Depression 76(6) How to pay for the war 82(1) Keynes and international macroeconomics 83(2) Keynes's legacy and the classical revival 85(16) Interview with Robert Skidelsky 91(10) 3. The orthodox Keynesian school 101(62) Introduction 101(1) The orthodox Keynesian school 102(1) The IS--LM model for a closed economy 102(12) Underemployment equilibrium in the Keynesian model 114(9) The IS--LM model for an open economy 123(12) The Phillips curve and orthodox Keynesian economics 135(9) The central propositions of orthodox Keynesian economics 144(19) Interview with James Tobin 148(15) 4. The orthodox monetarist school 163(56) Introduction 163(2) The quantity theory of money approach 165(9) The expectations-augmented Phillips curve analysis 174(13) The monetary approach to balance of payments theory and exchange rate determination 187(5) The orthodox monetarist school and stabilization policy 192(27) Interview with Milton Friedman 198(21) 5. The new classical school 219(75) Introduction 219(1) The influence of Robert E. Lucas Jr 220(3) The structure of new classical models 223(13) Equilibrium business cycle theory 236(6) The policy implications of the new classical approach 242(25) An assessment 267(27) Interview with Robert E. Lucas Jr 272(22) The real business cycle school 294(63) Introduction: the demise of new classical macroeconomics mark I 294(1) The transition from monetary to real equilibrium business cycle theory 295(2) Real business cycle theory in historical perspective 297(3) Cycles versus random walks 300(3) Supply-side shocks 303(1) Business cycles: main features and stylized facts 304(3) Real business cycle theory 307(2) The structure of a real business cycle model 309(4) Technology shocks 313(2) A real business cycle aggregate demand and supply model 315(5) Calibrating the model 320(2) Real business cycle theory and the neutrality of money 322(3) Measuring technology shocks: the Solow residual 325(1) Real business cycle theory and the stylized facts 326(4) The policy implications of real business cycle theory 330(2) Criticisms of real business cycle theory 332(4) Great Depressions: a real business cycle view 336(2) An assessment 338(19) Interview with Edward C. Prescott 344(13) 7. The new Keynesian school 357(94) The fall and rise of Keynesian economics 357(1) A Keynesian resurgence 358(3) New Keynesian economics 361(2) Core propositions and features of new Keynesian economics 363(3) Nominal rigidities 366(10) Dornbusch's overshooting model 376(2) Real rigidities 378(18) New Keynesian business cycle theory 396(5) Hysteresis and the NAIRU 401(7) New Keynesian economics and the stylized facts 408(1) Policy implications 409(14) Keynesian economics without the LM curve 423(5) Criticisms of new Keynesian economics 428(3) An assessment of new Keynesian economics 431(20) Interview with N. Gregory Mankiw 433(18) 8. The Post Keynesian school 451(23) Paul Davidson Introduction 451(2) The significance of the principle of effective demand 453(1) Taxonomy 454(1) Keynes's taxonomic attack on Say's Law 455(2) Can relative price changes induce D2 to fill the gap? 457(2) Investment spending, liquidity, and the non-neutrality of money axiom 459(2) What type of an economic system is `irrational' enough to use money contracts? 461(2) Information, decisions and uncertainty 463(1) Classifying decision-making environments 464(4) Keynesian uncertainty, money and explicit money contracts 468(4) Conclusions 472(2) 9. The Austrian school 474(43) Roger W. Garrison The Mengerian vision 474(1) The intertemporal structure of capital 475(4) Saving and economic growth 479(3) The saving--investment nexus 482(7) The market for loanable funds 489(3) Full employment and the production possibilities frontier 492(4) The capital-based macroeconomic framework 496(2) Saving-induced capital restructuring 498(3) Keynes's paradox of thrift revisited 501(2) The Austrian theory of the business cycle 503(6) A Keynesian downturn in the Austrian framework 509(4) Inflation and deflation in the Austrian theory 513(2) Policy and reform 515(2) 10. The new political macroeconomics 517(62) Introduction: political distortions and macroeconomic performance 517(1) Political influences on policy choice 518(3) The role of government 521(2) Politicians and stabilization policy 523(2) Alternative approaches to the `political business cycle': an overview 525(1) The Nordhaus opportunistic model 526(6) The Hibbs partisan model 532(3) The decline and renaissance of opportunistic and partisan models 535(2) Rational political business cycles 537(1) Rational partisan theory 538(7) Opportunistic and partisan behaviour: a synthesis 545(1) Politics, time inconsistency, credibility and reputation 546(3) Policy implications of politico-economic models: an independent central bank? 549(5) The political economy of debt and deficits 554(1) Political and economic instability: are they related? 555(1) The political economy of economic growth 556(6) Political barriers to economic growth 562(2) The size of nations 564(1) Conclusion 565(14) Interview with Alberto Alesina 567(12) 11. The renaissance of economic growth research 579(116) Introduction 579(1) The `Great Divergence' 580(4) In praise of economic history 584(1) Back to the long run 585(4) Why is economic growth so important? 589(4) Modern economic growth in historical perspective 593(2) The stylized facts of growth 595(1) Proximate v. fundamental sources of growth 596(2) The Harrod--Domar model 598(4) The Solow neoclassical growth model 602(10) Accounting for the sources of economic growth 612(2) The convergence debate 614(8) Beyond the Solow model 622(3) Endogenous growth: constant returns to capital accumulation 625(2) Endogenous growth: the economics of ideas 627(5) An augmented Solow model: a neoclassical revival? 632(1) Focusing on the fundamental causes of growth 633(2) Institutions and economic growth 635(12) Trade and economic growth 647(5) Geography and growth 652(2) Growth in history: in search of a unified theory 654(3) The ideal conditions for growth and development: rediscovering old truths 657(38) Interview with Robert M. Solow 660(13) Interview with Paul M. Romer 673(22) 12. Conclusions and reflections 695(13) Introduction 695(1) Twentieth-century developments in macroeconomics: evolution or revolution? 696(7) Is there a consensus on key macroeconomic issues? 703(5) Bibliography 708(83) Author index 791(12) Subject index 803