APPLIES TO ACADEMIC YEAR 2014/2015

SØK 1366 Macroeconomics II

Responsible for the course
Jørgen Juel Andersen

Department
Department of Economics

Term
According to study plan

ECTS Credits
7,5

Language of instruction
Norwegian

Introduction
The main theme of this intermediate course is monetary and fiscal policy in a small open economy like the Norwegian. Participants will also learn about the macroeconomic development of the Norwegian economy after 1980, economic effects of spending government petroleum revenues, the flexible inflation targeting framework of monetary policy, as well as long-term fiscal policy issues related to population ageing, pension reforms and the fiscal sustainability of welfare states.

Other related themes which are important in this course are financial instability and government debt crises.

Learning outcome
Acquired knowledge
After completed course students shall know:

• How foreign exchange rates are formed under full international capital mobility and how monetary policy affects exchange rates.
• How monetary policy affects the demand for private consumption, gross fixed investment and net exports in the short run.
• Short and long-run Phillips curves and the effects of demand and supply shocks on the rate of inflation.
• Nominal anchors, monetary unions such as EMU, as well as advantages and disadvantages of joining EMU compared to retaining a national currency.
• Monetary policy trade-offs when inflation-targeting Central Banks set policy interest rates, based on theories of optimal monetary policy rules derived from minimization of loss functions.
• Fiscal policy goals and instruments. Effects of spending of government petroleum revenues on the real exchange rate and industrial structure, and the economic effects of tax wedges in labor and capital markets.
• Long run effects of public debt and pension reforms.

• Understand macroeconomic contexts in mathematical form and to analyze policy effects in mathematical models in addition to the graphical shape considerations.
• Be able to analyze how exchange rates are determined under uncovered interest parity. They will master the so-called IS-MP model for a small open economy with a flexible exchange rate. Be able to analyze how different factors affect inflation by means of short-term and long-term macro offers functions and logic of so-called inflationary and deflationary spirals.
• Understand the difference between inflation and price level for monetary policy.
• Have an insight to the logic behind the optimal monetary policy based on the minimization of a loss function.
• Be able to see the link between objectives and instruments of fiscal policy and conflict of goals between wealth creation and income distribution. It is also required that the students put into the model-based analysis of how the state's use of petroleum revenue will impact on the real exchange rate and industry structure.
• Be able to analyze how the tax wedge in the labor and capital markets will affect the incentives to offer work and save.
• Ba ble to explain the macroeconomic effects of the government builds public debt or capital. Such issues are also related to the expected effects of population aging in the long term, as well as challenges related to pension reforms, the Government Pension Fund - Global and the financing of the welfare state in the long term. It is required that students master the intertemporal budget counter to the general government sector and can use it to calculate the requirements that must be set to a sustainable fiscal policy in the long term.
• Have an overview of the historical macroeconomic developments in the Norwegian economy since 1980, and can explain what caused the large cyclical movements before and after the banking crisis in the early 1990s, as well as the challenges of the financial crisis and debt crisis in Europe in the period 2007-2011.

1. Model based analysis of short-term effects of monetary and fiscal policy on aggregate employment and output.
2. Monetary and fiscal policy under fixed and flexible exchange rates.
3. Short and long run macro supply functions and Phillips curves.
4. Nominal anchoring of an economy.
5. The European Monetary Union.
6. Monetary policy under flexible inflation targeting.
7. Fiscal policy: Goals and policy instruments.
8. Spending of petroleum revenues and the real exchange rate.
9. Macroeconomic effects of tax wedges.
10. Government debt.
11. Population ageing, pension systems and fiscal policy
12. Macroeconomic development of the Norwegian economy after 1980. Asset bubbles, financial and government debt crises