Faculty of Economics and Business

BACHELOR IN ECONOMICS THIRD YEAR Course

Economic Policy

Code

802364

Module

Spanish, International and Sectorial Economy

Area

Monetary and Financial Economy

Nature

Compulsory 6

Attendance

3.3

Credits

Non Attendance

2.7

Year

3

Semester

5

COORDINATION DEPARTMENT Economía Aplicada III

COORDINATOR AND CONTACT Francisco Javier Casares Ripol: [email protected]

Faculty of Economics and Business

SYNOPSIS BRIEF DESCRIPTION Analysis of the targets and instruments of the Government´s economic policy framework

PRE-REQUISITES Microeconomics and Macroeconomics

OBJECTIVES 1. To identify the domain of Economic Policy within Economics. To show the desirability of combining economic theory, historical and institutional analysis to address normative issues. 2. To identify theoretical scenarios where there is a priori a potential for welfare-improving public sector intervention in a decentralized economic system. 3. To apprehend theoretical concepts aimed at supporting both logical reasoning and policy analysis about real-world problems such as unemployment, growth and inflation. 4. To learn when and how to use the policy instruments available to policy-makers by placing special emphasis in the study of their efficacy, shortcomings, and distributional implications.

COMPETENCES General: CG1, CG2, CG4 Transversal: CT1, CT2 Specific: CE1, CE2, CE3, CE9

LEARNING METHODOLOGY

Faculty of Economics and Business A mixed methodology of teaching and learning will be used in all educational activities with the aim of encouraging students to develop a collaborative and cooperative attitude in the pursuit of knowledge.

TOPICS COVERED (Syllabus) Chapter 1. The Methodology of Economic Policy (I): welfare economics 1.- The Pareto criterion and the First Fundamental Theorem of Welfare Economics 2.- Compensation criteria 3.- Arrow´s Impossibility Theorem and Condorcet´s paradox 4.- The construction of social welfare functions

Chapter 2. The Methodology of Economic Policy (II): institutions, collective action, and pressure groups 1.- The role of pressure groups: Mancur Olson´s “Logic of Collective Action” and “Rise and Decline of Nations” 2.- The role of economic and political institutions in economic growth Tutorial 1: Instructions about how to write Academic Essays

Chapter 3. The methodology of Economic Policy (III) 1.- The normative approach to Economic Policy 1.1.- Tinbergen´s approach: The Golden Rule of Economic Policy 1.2.- Theil´s optimization approach 2.- The shortcomings of the normative approach to Economic Policy

Faculty of Economics and Business Tutorial 2: Discussion about: “Economic Freedom” Index of the Wall Street Journal and the Heritage Foundation: http://www.heritage.org/Index/Ranking http://www.heritage.org/index/heatmap “Political corruption” index of Transparency international: http://cpi.transparency.org/cpi2012/ http://www.transparency.org/files/content/publication/Annual_Report_2012.pdf

Chapter 4. Unemployment and inflation 1.- Basic concepts 2.- The Beveridge curve 3.- The non-accelerating inflation rate of unemployment (NAIRU) 3.1.- The determination of the NAIRU 3.2.- Short-run and long-run Phillips curve 3.3.- Voluntary and involuntary unemployment 3.4.- Is the NAIRU an attractor for the current unemployment rate? 3.5.- The role of aggregate demand and capital accumulation in unemployment 4.- The measurement of inflation 5.- The costs of expected inflation 6.- Inflation theory 6.1.- Demand-pull inflation 6.2.- Cost-push inflation

Faculty of Economics and Business

Tutorial 3: Demand versus supply-determined rate of unemployment Reading material: De Grauwe, P. (2014); Yes, it´s the economy, stupid, but is it demand or supply?, th CEPS Commentary, 24 January.

Tutorial 4: The causes of inflation and the role of monetary policy Reading material: Arestis, P. & Sawyer, M. C. (2011); “Raising interest rates is a poor tool to fight inflation”, Letter to the Financial Times, 2 February 2011. http://www.ft.com/cms/s/0/ada24894-2e59-11e0-8733-00144feabdc0.html#axzz1Cvf1oD55

Chapter 5. Growth, Aggregate Demand, and Income Distribution 1.- Personal income distribution and economic growth 2.- Functional income distribution and aggregate demand: wage-led versus profit-led regimes 3.- Functional income distribution and economic growth: the paradoxes of thrift and distribution

Tutorial 5: Does the Euro-zone exhibit a wage-led or a profit-led growth regime? Reading material: Stockhammer, E. & Onaran, O. (2012) Wage-led Growth: Theory, Evidence, Policy, PERI Working Paper, no. 300, November. http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP300.pdf

Chapter 6. Fiscal policy 1.- Basic concepts 1.1.- Total, primary, cyclical and cyclically-adjusted budget deficit 1.2.- Automatic stabilizers versus discretionary fiscal policy

Faculty of Economics and Business 2.- Fiscal policy multipliers 3.- The debt-financed budget deficit and conditions for financial solvency of a country 4.- The consolidated balance of the public sector and debt monetization

Tutorial 6: The Flaws of the European Monetary Union Reading material: Irvin, G. & Izurieta, A. (2011); “Fundamental Flaws in the European Project” Economic & Political WEEKLY, Vol. XLVI, no.32

Chapter 7. Monetary policy 1.- The institutional framework of the single monetary policy 2.- The monetary policy strategy of the European Central Bank (ECB) 3.- Monetary policy implementation of the ECB 4.- The “liquidity” effect and the “announcement” effect in monetary policy 5.- The “neutral” interest rate 6.- The “liquidity trap” 7.- Taylor´s principle 8.- Unconventional measures of monetary policy

Tutorial 7: Examples of liquidity injection auctions by the ECB

Chapter 8. Incomes policy 1.- Incomes policy in a closed economy 2.- International competitiveness and incomes policy in a currency union or in a fixed-exchange rate regime

Faculty of Economics and Business

TEACHING ACTIVITIES DISTRIBUTION Theoretical lessons

% of Total Credits

45%

% of Total Credits

10%

% of Total Credits

45%

Lectures

Practical lessons Seminars

Other Activities

Personalized & Group Tutoring, Assessment Activities, individual & Group Homework, hours to Study.

ASSESSMENT Exams

% Share of Final Grade

50%

% Share of Final Grade

40%

% Share of Final Grade

10%

Final exam

Other Activities Coursework

Other Activities Class participation

EVALUATION CRITERIA

Faculty of Economics and Business The evaluation of the exam and coursework will be based on the students´ ability to explain concepts and arguments in a reasonable, clear and rigorous way.

TIMETABLE Week

Chapter

Classroom work

Homework

1ª

Chapter 1: The methodology of Economic Policy (I): welfare economics

•

Lecture

•

Reading chapter notes and specific bibliography

2ª

Chapter 1: The methodology of Economic Policy (I): welfare economics

• •

Lecture Tutorial 1

•

Reading specific material for Tutorial 1

3ª

Chapter 2: The methodology of Economic Policy (II): the theory of institutions and collective action

•

Lecture

•

Reading chapter notes and specific bibliography

4ª

Chapter 2: The methodology of Economic Policy (II): the theory of institutions and collective action

• •

Lecture Tutorial 2 (related to chapter 2)

•

Reading chapter notes and specific bibliography Reading specific material for Tutorial 2.

•

Lecture

•

5ª

Chapter 3: The methodology of Economic Policy (III)

•

Reading chapter notes and specific bibliography

Faculty of Economics and Business 6ª

Chapter 4: Unemployment and inflation

•

Lecture Tutorial 3 (related to chapter 4)

• •

7ª

Chapter 4: Unemployment and inflation

•

Lecture

•

8ª

Chapter 4: Unemployment and inflation

• •

Lecture Tutorial 4 (related to chapter 4)

• •

Reading chapter notes and specific bibliography Reading specific material for Tutorial 3 Reading chapter notes and specific bibliography Reading chapter notes and specific bibliography Reading specific material for Tutorial 4

9ª

Chapter 5: Growth, Aggregate Demand, and Income Distribution

•

Lecture

•

Reading chapter notes and specific bibliography

10ª

Chapter 5: Growth, Aggregate Demand, and Income Distribution

• •

Lecture Tutorial 5 (related to chapter 5)

•

Reading chapter notes and specific bibliography Reading specific material for Tutorial 5 Reading chapter notes and specific bibliography

•

11ª

Chapter 6: Fiscal policy

•

Lecture

•

12ª

Chapter 7: Monetary policy

• •

Lecture Tutorial 6 (related to chapter 6)

• •

13ª

Chapter 7: Monetary policy

•

Lecture

• •

Reading chapter notes and specific bibliography ECB (2011, ch. 4) and ECB (2009, ch. 3, 4 and 5) Reading specific material for Tutorial 6 Reading chapter notes and specific bibliography ECB (2011, ch. 4) and ECB (2009, ch. 3, 4 and 5)

Faculty of Economics and Business 14ª

Chapter 8: Incomes policy

• •

Lecture Tutorial 7 (related to chapter 7)

• •

Reading chapter notes and specific bibliography Reading specific material for Tutorial 7

School of Economics and Business

RESOURCES BASIC BIBLIOGRAPHY Unfortunately, there is not a textbook written in English language that is appropriate for this module. Consequently, we will provide Power Point presentations that contain most of the information needed to prepare the topics covered in the module. Notwithstanding it, we should like to encourage students to complement the slides with some of the references shown below which include textbooks and papers. Some of these references are available in the Virtual Campus. Those references which are not available in the Virtual Campus can easily be downloaded from the Website of our Library or from the Internet.

Acemoglu, D., Jonhson, S. & Robinson, J. (2004); “Institutions as the Fundamental Cause of Long-run Growth”, Documento CEDE 2004-33 (electronic edition). Carlin, W. & Soskice, D. (2006); Macroeconomics: imperfections, institutions, and policies, Oxford: Oxford University Press. European Central Bank (2011); The monetary policy of the ECB, chapter 4. http://www.ecb.int/pub/pdf/other/monetarypolicy2011en.pdf?76168a67d7c5145fb68dcdf05cdae663 European Central Bank (2011); Price stability: Why is it important? chapters 3, 4 and 5. http://www.ecb.int/pub/pdf/other/price_stability_web_2011en.pdf?5876d70767d44edd2ec4ffde480cd36e Johansson, P-O. (1991); An Introduction to Modern Welfare Economics, Cambridge University Press, chapters 1, 2 & 3.

COMPLEMENTARY BIBLIOGRAPHY Acemoglu, D., Gallego, F. A. & Robinson, J. A. (2014) Institutions, Human Capital and Development, Instituto de Economía, Working Paper no. 449. Acemoglu, D., Gallego, F. A. & Robinson, J. A. (2014) Institutions, Human Capital and Development, Instituto de Economía, Working Paper no. 449. Barro, R. J. (2013) Inflation and Economic Growth, Annals of Economics and Finance, 14(1), págs. 121144. Bhaduri, A. & Marglin, S. (1990). Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies, Cambridge Journal of Economics, 14, pp. 375-93. Carlin, W. & Soskice, D. (2005). The 3-Equation New Keynesian Model ― A Graphical Exposition, Contributions to Macroeconomics, 5(1), Article 13. Hall, P. A. & Soskice, D. (eds.) (2001); Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press. Landes, D. S. (1998); The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor, Abacus. Okun, A. M. (1975); Equality and Efficiency: The Big Trade-off, Brookings Institution, Washington D.C. Olson, M. (1965); The Logic of Collective Action: Public Goods and the Theory of Groups, New York: Schocken Books. Olson, M. (1982); The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities, London: Yale University Press, ch.1-4. Polanyi, K. (1971) [1944]; The Great Transformation. The Political and Economic Origins of our Time.

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School of Economics and Business

Boston: Beacon Press. Preston, A. J. & Pagan, A. R. (1982); The Theory of Economic Policy: Statics and Dynamics, Cambridge (UK): Cambridge University Press. Sen, A. (1995); Rationality and Social Choice, American Economic Review, 85(1), pp. 1-24. Stockhammer, E. (2011); Wage norms, capital accumulation, and unemployment: a post-Keynesian view, Oxford Review of Economic Policy, 27(2), pp. 295-311. Taylor, L. (2004). Reconstructing Macroeconomics, Harvard University Press.

OTHER RESOURCES Essay 1 topic: What are the links between economic institutions and long-run economic growth? Please, answer the question in a reasonable way. Recommended bibliography for Essay 1 Acemoglu, D., Jonhson, S. & Robinson, J. (2004); “Institutions as the Fundamental Cause of Long-run Growth”, Documento CEDE 2004-33 (electronic edition). Acemoglu, D., Jonhson, S. & Robinson, J. (2002); The Rise of Europe: Atlantic Trade, Institutional Change and Economic Growth, NBER Working Paper no. 9378. Coates, D. (2000); Models of Capitalism: Growth and Stagnation in the Modern Era, Oxford: Blackwell. Commander, S. & Nikoloski, Z. (2011); Institutions and Economic Performance: What Can be Explained? Review of Economics and Institutions, 2(2), Spring, Article 3. Hall, P. A. & Soskice, D. (2001); Varieties of Capitalism: The Institutional Founda-tions of Comparative Advantage, Oxford University Press. IMF (2003); “Growth and Institutions”, World Economic Outlook, April, ch. 3, pp. 95-128. IMF (2005); “Building Institutions”, World Economic Outlook, September, ch. 3, pp. 125-160. Landes, D. S. (1998); The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor, Abacus. Landes, D.S. (2006) Why Europe and the West? Why not China? Journal of Economic Perspectives, 20(2), pp. 3-22. North, D.C. (1990); Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. North, D.C. (1991); “Institutions”, Journal of Economic Perspectives, 5(1), pp. 97-121. North, D. C. (1994) Economic performance through time, American Economic Review, 84(3), pp. 359567. Olson, M. (1965); The Logic of Collective Action: Public Goods and the Theory of Groups, New York: Schocken Books. Olson, M. (1982); The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities, London: Yale University Press, ch.1-4. Polanyi, K. (1971) [1944] The Great Transformation. The Political and Economic Origins of our Time. Boston: Beacon Press. Essay 2 topic: Does the current institutional framework of the Euro-zone favour macroeconomic stability and economic growth? Please, answer this question in a reasonable way. Recommended bibliography for Essay 2

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School of Economics and Business

Amable, B. (2009); “Structural reforms in Europe and the (in)coherence of institutions”, Oxford Review of Economic Policy, 25(1), pp. 17-39. Bell, S. (2001); “The role of the state and the hierarchy of money”, Cambridge Journal of Economics, 25, pp. 149-63. Bell, S. (2003); Neglected costs of monetary union: The loss of sovereignty in the sphere of public policy, in S.A. Bell & E.J. Nell (eds.), The State, the Market and the Euro: Chartalism versus Metallism in the Theory of Money, pp. 160-183, Edward Elgar: Cheltenham (UK). Bordo, M. D., Markiewicz, A. & Jonung, L. (2011); A Fiscal Union for the Euro: Some Lessons from History, NBER Working Paper no. 17380. Daianu, D. (2012); Euro Zone Crisis and EU Governance: Tackling a Flawed Design and Inadequate Policy Arrangements, CASE Network Studies & Analyses, nº 433/2012. De Grauwe, P. (1997); The Economics of Monetary Integration, 3rd edition, Oxford: Oxford University Press. De Grauwe, P. & Mongelli, F. P. (2005); Endogeneities of Optimum Currency Areas. What Brings Countries Sharing a Single Currency Closer Together? European Central Bank Working Paper Series, nº 468, April. De Grauwe, P. (2011); The Governance of a Fragile Eurozone, Center for European Policy Studies Working Document No. 346, May. De Grauwe, P. (2013) Design Failures in the Eurozone — Can they by fixed? Economic Papers, European Commission, no. 491, April. Fitoussi, J-P. & Saraceno, F. (2013); European economic governance: the Berlin-Washington Consensus, Cambridge Journal of Economics, 37, pp. 479-496. Frankel, J.A. & Rose, A.K. Rose (1998); The Endogeneity of the Optimum Currency Area Criteria, Economic Journal, 108(449), pp. 1009-1025. Godley, W. & Lavoie, M. (2006); A simple model of three economies with two currencies: the Euro-zone and the USA, Cambridge Journal of Economics, 31(1), pp. 1-23. Goodhart, C.A.E. (1998); The two concepts of money: implications for the analysis of optimal currency areas, European Journal of Political Economy, 14, pp. 407-432. Kregel, J.A. (1999); Currency Stabilization Through Full Employment: Can EMU Combine Price Stability With Employment and Income Growth? Eastern Economic Journal, 25(1), pp. 35-47. Lapavitsas, C., Kaltenbrunner, A., Lindo, D., Michell, J., Painceira, J.P., Pires, E., Powell, J., Stenfors, A. & Teles, N. (2010); Eurozone Crisis: Beggar Thyself and Thy Neighbour, Research on Money and Finance occasional report, March. Mundell, R. A. (1961); A Theory of Optimum Currency Areas, American Economic Review, 51(4), pp. 657-664.

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