Macroeconomics and Monetary Economics

Macroeconomics studies the economy as a whole — the determinants of aggregate output, employment, inflation, and growth — and monetary economics analyses money, interest rates, and the conduct of monetary policy.

Scope

The field (JEL category E) covers aggregate demand and supply, consumption and investment, money and banking, business cycles, inflation and unemployment, monetary and fiscal policy, and long-run growth, increasingly built on explicit microfoundations.

Sub-topics

• General
• General Aggregative Models
• Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
• Prices, Business Fluctuations, and Cycles
• Money and Interest Rates
• Monetary Policy, Central Banking, and the Supply of Money and Credit
• Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
• Macro-Based Behavioral Economics

Core questions

• What determines a nation's output, employment, and income?
• What causes inflation, and how is it controlled?
• What drives business cycles, and can policy stabilize them?
• How do money and interest rates affect the economy?
• What determines long-run economic growth?

Key concepts

• Aggregate demand and supply
• GDP and the multiplier
• Inflation and the Phillips curve
• Money and interest rates
• Business cycles
• Economic growth
• Rational expectations
• Monetary policy rules

Key theories

Keynesian aggregate demand

Keynes argued that aggregate demand determines output in the short run and that economies can settle at under-employment equilibria, justifying stabilization policy.

The Phillips curve

Phillips documented an empirical inverse relation between unemployment and wage inflation, central to (and later much revised in) stabilization debates.

Neoclassical growth theory

Solow's growth model explained long-run growth via capital accumulation and exogenous technical change, with diminishing returns implying conditional convergence.

Rational expectations and time inconsistency

Lucas showed expectations undercut systematic policy effects, and Kydland and Prescott demonstrated the time-inconsistency case for rules over discretion.

History

Macroeconomics was founded by Keynes's General Theory (1936) and the neoclassical synthesis that followed. The Phillips curve and Solow growth model shaped the 1950s-60s. Monetarism (Friedman) and then the rational-expectations revolution (Lucas) and real-business-cycle and time-inconsistency work (Kydland-Prescott) reshaped it from the 1970s, leading to the modern New Keynesian DSGE consensus and its post-2008 critiques.

Debates

Rules versus discretion in policy

Whether monetary and fiscal policy should follow fixed rules or respond discretionarily turns on expectations and time inconsistency.

How effective is stabilization policy?

Keynesian activism contends with new-classical skepticism about systematic policy's real effects.

Key figures

• John Maynard Keynes
• A. W. Phillips
• Robert Solow
• Robert Lucas
• Finn Kydland
• Edward Prescott
• Milton Friedman

Seminal works

• keynes-1936
• phillips-1958
• solow-1956
• lucas-1972
• kydland-prescott-1977

Frequently asked questions

What is the difference between fiscal and monetary policy?

Fiscal policy uses government spending and taxation; monetary policy uses interest rates and the money supply, typically set by a central bank.

Why is macroeconomics built on microfoundations?

To make aggregate predictions robust to policy changes (the Lucas critique), modern macro derives aggregate behaviour from the optimizing decisions of households and firms.