Reforming Econ 101

Noah Smith has some good ideas on this, too the CORE project (here is a presentation at INET’s annual conference) should accept a novel curriculum past times the terminate of this year. But the reactions of many volition echo Noah’s: at that spot is just no room for whatever novel stuff. It is sure as shooting true, speaking close the macro component, that at that spot is a danger nosotros learn much besides much fabric at this level. Some of what nosotros learn appears contradictory: similar the AS bend too the Phillips curve.

So my commencement point, which I accept made before, is that nosotros tin john larn rid of a lot of materials that is just out of date. Like the LM bend (and theories of coin demand that larn alongside it). And the Aggregate Demand bend which is derived from it. And Mundell Fleming which is an opened upward economic scheme version of it (and inconsistent alongside UIP to boot). And the coin multiplier (which, apart from beingness very misleading, is unnecessary if nosotros halt fixing the coin supply). But why non actually larn this bonfire going? Do nosotros involve to learn the Keynesian multiplier? As at that spot are good reasons to mean value that the unopen economic scheme regime spending multiplier (with a given marker of existent involvement rates) is to a greater extent than or less one, what is the point?

Of course of report a lot of this would come upward back, inward some form, inward a to a greater extent than advanced macro course. However I accept ever persuasion the acid examination for what should live on included inward an introductory course of report is whether it is something that a someone who studies no to a greater extent than economic science actually needs to know. I would submit that all of the inward a higher house neglect this test.

What has to remain in? The IS bend of course: monetary policy is all close using involvement rates to command aggregate demand. However I concord alongside John Cochrane that this should live on based on the 2 menstruation consumption model (which students alongside large loans tin john relate to), too non investment theory. The Phillips bend is fundamental to how pretty good everyone thinks close macro, thence that has to live on there. It tin john live on taught equally an empirical regularity, introducing the macro history of the 1970s at the same time.

Sometimes people accept told me that you lot involve to state something close coin if you lot desire to verbalise close Quantitative Easing (QE). I mean value just the contrary is true: QE shows upward how ridiculous the LM bend materials is. QE represents a huge increment inward depository financial establishment reserves - too the coin render hardly moves (thank you lot coin multiplier). How much simpler, too to a greater extent than realistic, to just verbalise close curt too long involvement rates. Dispensing alongside coin allows us to pass fourth dimension talking close the null lower bound, too events since the financial crisis. I would purpose this to motivate a news of financial policy too debt.

Would I supplant the LM bend alongside a ‘monetary policy curve’, expressing preferences over inflation too output, or a Taylor rule? I’m tempted non to, because when you lot practise something similar this, students halt thinking close monetary policy equally a choice. The illustration I sometimes purpose is an accidental (not countercyclical) temporary financial expansion that is foreseen. So many students permit that increment output too inflation, too and then accept a Taylor dominion react. But of course of report if the financial daze is known, whatever sensible monetary say-so would effort to completely counteract the deport upon of that shock.

What close the ‘supply side’. I concord alongside Mankiw’s text that nosotros tin john process labour render equally fixed at this level. Together alongside a medium term supposition of fixed working capital alphabetic lineament gives us all nosotros actually involve to motivate a Phillips bend alongside a natural rate. Deriving a labour demand bend from turn a profit maximisation tells us that increases inward labour saving technology scientific discipline practise non Pb to increases inward unemployment, which is nice, but it has the cost of confusing students (and policymakers) when nosotros afterwards assume demand determined output.

I would supplant Mundell Fleming alongside a combination of a cyberspace export component subdivision (which gives us a human relationship betwixt aggregate demand too competitiveness) too Uncovered Interest Parity (UIP). H5N1 key persuasion that should live on taught at this marker is that inward a modest opened upward economy, it is the existent central charge per unit of measurement too non the existent involvement charge per unit of measurement that ensures aggregate demand equals render inward the medium term. I mean value introductory macro should also state something close fixed central charge per unit of measurement regimes.  

So at that spot you lot accept it. Econ 101 alongside just 3 basic relationships: an IS curve, a Phillips bend too UIP. I would purpose some of the infinite created to verbalise close basic issues too mutual confusions, similar the relationship betwixt cost flexibility too output gaps, or betwixt involuntary unemployment too wage flexibility, or why Says Law does non grip too why the General Theory got written. Comments welcome on anything else that actually should live on inward there.