Front matter
ADVANCED MACRO-ECONOMICS
Filipe Campante, Federico Sturzenegger and Andrés Velasco
An Easy Guide
2021
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Text © The Authors 2021
First published 2021
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Campante, F., Sturzenegger, F. and Velasco, A. 2021. Advanced Macroeconomics: An Easy Guide. London: LSE Press. DOI: https://doi.org/10.31389/lsepress.ame. License: CC-BY-NC 4.0.
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We dedicate this book to our families,
Renata, Sofia, Marina, Isabel
Josefina, Felipe, Agustín, Sofía
Consuelo, Rosa, Ema, Gaspar
because they mean everything to us.
We also dedicate this book to three dear mentors and friends whom we miss so very much. Let this be our token of appreciation for the wisdom they generously shared with us.
Alberto Alesina
Rudiger Dornbusch
Carlos Diaz Alejandro
Thanks to all of you.
Short Contents
Contents ….. vii
List of Figures ….. xvi
List of Tables ….. xix
Preface ….. xx
Acknowledgments ….. xxii
About the Authors ….. xxiii
Chapter 1 Introduction ….. 1
Growth Theory ….. 5
Chapter 2 Growth theory preliminaries ….. 7
Chapter 3 The neoclassical growth model ….. 23
Chapter 4 An application: The small open economy ….. 41
Chapter 5 Endogenous growth models I: Escaping diminishing returns ….. 51
Chapter 6 Endogenous growth models II: Technological change ….. 69
Chapter 7 Proximate and fundamental causes of growth ….. 87
Overlapping Generations Models ….. 113
Chapter 8 Overlapping generations models ….. 115
Chapter 9 An application: Pension systems and transitions ….. 135
Chapter 10 Unified growth theory ….. 147
Consumption and Investment ….. 159
Chapter 11 Consumption ….. 161
Chapter 12 Consumption under uncertainty and macro finance ….. 171
Chapter 13 Investment ….. 189
Short Term Fluctuations ….. 203
Chapter 14 Real business cycles ….. 205
Chapter 15 (New) Keynesian theories of fluctuations: A primer ….. 219
Chapter 16 Unemployment ….. 243
Monetary and Fiscal Policy ….. 259
Chapter 17 Fiscal policy I: Public debt and the effectiveness of fiscal policy ….. 261
Chapter 18 Fiscal policy II: The long-run determinants of fiscal policy ….. 279
Chapter 19 Monetary policy: An introduction ….. 295
Chapter 20 Rules vs Discretion ….. 315
Chapter 21 Recent debates in monetary policy ….. 323
Chapter 22 New developments in monetary and fiscal policy ….. 345
Appendix A Very brief mathematical appendix ….. 363
Appendix B Simulating an RBC model ….. 371
Appendix C Simulating a DSGE model ….. 381
Index ….. 387
Contents
List of Figures ….. xvi
List of Tables ….. xix
Preface ….. xx
Acknowledgments ….. xxii
About the Authors ….. xxiii
Chapter 1 Introduction ….. 1
Growth Theory ….. 5
Chapter 2 Growth theory preliminaries ….. 7
2.1 Why do we care about growth? ….. 7
2.2 The Kaldor facts ….. 10
2.3 The Solow model ….. 10
The (neoclassical) production function ….. 11
The law of motion of capital ….. 12
Finding a balanced growth path ….. 13
Transitional dynamics ….. 14
Policy experiments ….. 15
Dynamic inefficiency ….. 16
Absolute and conditional convergence ….. 17
2.4 Can the model account for income differentials? ….. 17
2.5 The Solow model with exogenous technological change ….. 19
2.6 What have we learned? ….. 20
Notes and References ….. 21
Chapter 3 The neoclassical growth model ….. 23
3.1 The Ramsey problem ….. 23
The consumer’s problem ….. 24
The resource constraint ….. 25
Solution to consumer’s problem ….. 25
The balanced growth path and the Euler equation ….. 26
A digression on inequality: Is Piketty right? ….. 29
Transitional dynamics ….. 31
The effects of shocks ….. 34
3.2 The equivalence with the decentralised equilibrium ….. 35
Integrating the budget constraint ….. 37
Back to our problem ….. 37
3.3 Do we have growth after all? ….. 38
3.4 What have we learned? ….. 38
Notes and References ….. 39
Chapter 4 An application: The small open economy ….. 41
4.1 Some basic macroeconomic identities ….. 41
4.2 The Ramsey problem for a small open economy ….. 42
A useful transformation ….. 43
Solution to consumer’s problem ….. 44
Solving for the stock of domestic capital ….. 44
The steady state consumption and current account ….. 45
The inexistence of transitional dynamics ….. 45
Productivity shocks and the current account ….. 46
Sovereign wealth funds ….. 47
4.3 What have we learned? ….. 47
4.4 What next? ….. 48
Notes and References ….. 48
Chapter 5 Endogenous growth models I: Escaping diminishing returns ….. 51
5.1 The curse of diminishing returns ….. 51
5.2 Introducing human capital ….. 51
Laws of motion ….. 52
Balanced growth path ….. 53
Still looking for endogenous growth ….. 53
5.3 The AK model ….. 54
Solution to household’s problem ….. 55
At long last, a balanced growth path with growth ….. 56
Closing the model: The TVC and the consumption function ….. 57
The permanent effect of transitory shocks ….. 57
In sum ….. 58
5.4 Knowledge as a factor of production ….. 60
Learning by doing ….. 61
Adam Smith’s benefits to specialisation ….. 62
5.5 Increasing returns and poverty traps ….. 63
Poverty trap in the Solow model ….. 63
Policy options to overcome poverty traps ….. 65
Do poverty traps exist in practice? ….. 65
5.6 What have we learned? ….. 66
5.7 What next? ….. 66
Notes and References ….. 66
Chapter 6 Endogenous growth models II: Technological change ….. 69
6.1 Modelling innovation as product specialisation ….. 70
6.2 Modelling innovation in quality ladders ….. 73
6.3 Policy implications ….. 75
Distance to the technological frontier and innovation ….. 76
Competition and innovation ….. 77
Scale effects ….. 80
6.4 The future of growth ….. 81
6.5 What have we learned? ….. 82
6.6 What next? ….. 83
Notes and References ….. 83
Chapter 7 Proximate and fundamental causes of growth ….. 87
7.1 The proximate causes of economic growth ….. 87
Growth accounting ….. 88
Using calibration to explain income differences ….. 89
Growth regressions ….. 91
Explaining cross-country income differences, again ….. 94
Summing up ….. 98
7.2 The fundamental causes of economic growth ….. 98
Luck ….. 99
Geography ….. 99
Culture ….. 103
Institutions ….. 104
7.3 What have we learned? ….. 107
7.4 What next? ….. 108
Notes and References ….. 109
Overlapping Generations Models ….. 113
Chapter 8 Overlapping generations models ….. 115
8.1 The Samuelson-Diamond model ….. 115
The decentralized equilibrium ….. 116
Goods and factor market equilibrium ….. 118
The dynamics of the capital stock ….. 118
A workable example ….. 120
8.2 Optimality ….. 122
The steady-state marginal product of capital ….. 122
Why is there dynamic inefficiency? ….. 123
Are actual economies dynamically inefficient? ….. 124
Why is this important? ….. 124
8.3 Overlapping generations in continuous time ….. 125
The closed economy ….. 129
A simple extension ….. 129
Revisiting the current account in the open economy ….. 131
8.4 What have we learned? ….. 132
Notes and References ….. 132
Chapter 9 An application: Pension systems and transitions ….. 135
9.1 Fully funded and pay-as-you-go systems ….. 135
Fully funded pension system ….. 137
Pay-as-you-go pension system ….. 137
How do pensions affect the capital stock? ….. 138
Pensions and welfare ….. 139
9.2 Moving out of a pay-as-you-go system ….. 139
Financing the transition with taxes on the young ….. 140
Financing the transition by issuing debt ….. 141
Discussion ….. 142
Do people save enough? ….. 143
9.3 What have we learned? ….. 143
9.4 What next? ….. 144
Notes and References ….. 144
Chapter 10 Unified growth theory ….. 147
10.1 From Malthus to growth ….. 147
The post-Malthusian regime ….. 149
Sustained economic growth ….. 150
10.2 A “unified” theory ….. 151
A simple model of the demographic transition ….. 152
Investing in human capital ….. 153
The dynamics of technology, education and population ….. 155
10.3 The full picture ….. 155
10.4 What have we learned? ….. 157
10.5 What next? ….. 157
Notes and References ….. 157
Consumption and Investment ….. 159
Chapter 11 Consumption ….. 161
11.1 Consumption without uncertainty ….. 161
The consumer’s problem ….. 162
Solving for the time profile and level of consumption ….. 162
11.2 The permanent income hypothesis ….. 164
The case of constant labour income ….. 164
The effects of non-constant labour income ….. 165
11.3 The life-cycle hypothesis ….. 167
Notes and References ….. 169
Chapter 12 Consumption under uncertainty and macro finance ….. 171
12.1 Consumption with uncertainty ….. 171
The random walk hypothesis ….. 173
Testing the random walk hypothesis ….. 173
The value function ….. 174
Precautionary savings ….. 176
12.2 New frontiers in consumption theory ….. 178
Present bias ….. 179
12.3 Macroeconomics and finance ….. 182
The consumption-CAPM ….. 183
Equity premium puzzle ….. 184
12.4 What next? ….. 186
Notes and References ….. 187
Chapter 13 Investment ….. 189
13.1 Net present value and the WACC ….. 189
Pindyck’s option value critique ….. 190
13.2 The adjustment cost model ….. 192
Firm’s problem ….. 192
Tobin’s q ….. 194
The dynamics of investment ….. 195
The role of \(\chi\) ….. 197
13.3 Investment in the open economy ….. 197
The consumer’s problem ….. 198
Bringing in the firm ….. 199
Initial steady state ….. 199
The surprising effects of productivity shocks ….. 200
13.4 What next? ….. 201
Notes and References ….. 201
Short Term Fluctuations ….. 203
Chapter 14 Real business cycles ….. 205
14.1 The basic RBC model ….. 206
The importance of labour supply ….. 207
The indivisible labour solution ….. 209
14.2 RBC model at work ….. 211
Calibration: An example ….. 211
Does it work? ….. 212
14.3 Assessing the RBC contribution ….. 215
14.4 What have we learned? ….. 217
14.5 What next? ….. 218
Notes and References ….. 218
Chapter 15 (New) Keynesian theories of fluctuations: A primer ….. 219
15.1 Keynesianism 101: IS-LM ….. 220
Classical version of the IS-LM model ….. 221
The Keynesian version of the IS-LM model ….. 222
An interpretation: The Fed ….. 222
From IS-LM to AS-AD ….. 223
15.2 Microfoundations of incomplete nominal adjustment ….. 224
The Lucas island model ….. 225
The model with perfect information ….. 225
Lucas’ supply curve ….. 227
15.3 Imperfect competition and nominal and real rigidities ….. 229
15.4 New Keynesian DSGE models ….. 230
The canonical New Keynesian model ….. 231
A Taylor rule in the canonical New Keynesian model ….. 234
Back to discrete time ….. 237
15.5 What have we learned? ….. 240
15.6 What next? ….. 240
Notes and References ….. 240
Chapter 16 Unemployment ….. 243
16.1 Theories of unemployment ….. 243
16.2 A model of job search ….. 244
Introducing labour turnover ….. 246
16.3 Diamond-Mortensen-Pissarides model ….. 247
Nash bargaining ….. 248
Unemployment over the cycle ….. 250
16.4 Efficiency wages ….. 250
Wages and effort: The Shapiro-Stiglitz model ….. 251
16.5 Insider-outsider models of unemployment ….. 255
Unemployment and rural-urban migration ….. 256
16.6 What next? ….. 257
Notes and References ….. 257
Monetary and Fiscal Policy ….. 259
Chapter 17 Fiscal policy I: Public debt and the effectiveness of fiscal policy ….. 261
17.1 The government budget constraint ….. 262
17.2 Ricardian equivalence ….. 263
The effects of debt vs tax financing ….. 264
Caveats to Ricardian equivalence ….. 265
17.3 Effects of changes in government spending ….. 265
The initial steady state ….. 266
Permanent increase in government spending ….. 266
Temporary increase in spending ….. 266
17.4 Fiscal policy in a Keynesian world ….. 268
The current (empirical) debate: Fiscal stimulus and fiscal adjustment ….. 270
17.5 What have we learned? ….. 271
17.6 What next? ….. 273
17.7 Appendix ….. 273
Debt sustainability ….. 273
A simplified framework ….. 273
17.8 Measurement issues ….. 274
The role of inflation ….. 275
Asset sales ….. 276
Contingent liabilities ….. 276
The balance sheet approach ….. 277
Notes and References ….. 278
Chapter 18 Fiscal policy II: The long-run determinants of fiscal policy ….. 279
18.1 Tax smoothing ….. 280
The government objective function ….. 280
Solving the government’s problem ….. 281
The time profile of tax distortions ….. 281
The level of tax distortions ….. 282
The steady state ….. 282
Changes in government expenditures ….. 283
Countercyclical fiscal policy ….. 284
Smoothing government spending ….. 285
Summing up ….. 286
18.2 Other determinants of fiscal policy ….. 286
The political economy approach ….. 287
Fiscal rules and institutions ….. 288
18.3 Optimal taxation of capital in the NGM ….. 289
18.4 What have we learned? ….. 291
18.5 What next? ….. 292
Notes and References ….. 292
Chapter 19 Monetary policy: An introduction ….. 295
19.1 The conundrum of money ….. 295
Introducing money into the model ….. 296
19.2 The Sidrauski model ….. 298
Finding the rate of inflation ….. 299
The optimal rate of inflation ….. 300
Multiple equilibria in the Sidrauski model ….. 301
Currency substitution ….. 302
Superneutrality ….. 303
19.3 The relation between fiscal and monetary policy ….. 304
The inflation-tax Laffer curve ….. 304
The inflation-tax and inflation dynamics ….. 305
Unpleasant monetary arithmetic ….. 305
Pleasant monetary arithmetic ….. 308
19.4 The costs of inflation ….. 309
The Tommasi model: Inflation and competition ….. 312
Taking stock ….. 313
Notes and References ….. 313
Chapter 20 Rules vs Discretion ….. 315
20.1 A basic framework ….. 315
Time inconsistency ….. 315
A brief history of monetary policy ….. 317
20.2 The emergence of inflation targeting ….. 319
A rigid inflation rule ….. 319
Which regime is better? ….. 320
The argument for inflation targeting ….. 320
In sum ….. 321
Notes and References ….. 321
Chapter 21 Recent debates in monetary policy ….. 323
21.1 The liquidity trap and the zero lower bound ….. 324
21.2 Reserves and the central bank balance sheet ….. 328
Introducing the financial sector ….. 328
A model of quantitative easing ….. 330
Effects of monetary policy shocks ….. 334
21.3 Policy implications and extensions ….. 337
Quantitative easing ….. 337
Money and banking ….. 339
Credit easing ….. 340
21.4 Appendix ….. 341
Notes and References ….. 342
Chapter 22 New developments in monetary and fiscal policy ….. 345
22.1 Secular stagnation ….. 346
22.2 The fiscal theory of the price level ….. 349
Interest rate policy in the FTPL ….. 350
22.3 Rational asset bubbles ….. 352
The basic model ….. 354
Government debt as a bubble ….. 356
Implications for fiscal, financial and monetary policy ….. 358
22.4 Appendix 1 ….. 359
22.5 Appendix 2 ….. 360
22.6 Appendix 3 ….. 360
Notes and References ….. 361
Appendix A Very brief mathematical appendix ….. 363
A. 1 Dynamic optimisation in continuous time ….. 363
A. 2 Dynamic optimisation in discrete time ….. 365
A. 3 First-order differential equations ….. 367
Integrating factors ….. 367
Eigenvalues and dynamics ….. 368
Notes ….. 369
Appendix B Simulating an RBC model ….. 371
Appendix C Simulating a DSGE model ….. 381
Index ….. 387
List of Figures
2.1 The evolution of the world GDP per capita over the years 1-2008 ….. 8
2.2 Log GDP per capita of selected countries (1820-2018) ….. 8
2.3 Log GDP per capita of selected countries (1960-2018) ….. 9
2.4 Dynamics in the Solow model ….. 13
2.5 Dynamics in the Solow model again ….. 14
2.6 The effects of an increase in the savings rate ….. 15
2.7 Feasible consumption ….. 16
3.1 Dynamics of capital ….. 28
3.2 Dynamics of consumption ….. 28
3.3 Steady state ….. 29
3.4 Real rates 1317-2018, from Schmelzing (2019) ….. 31
3.5 The phase diagram ….. 33
3.6 Divergent trajectories ….. 34
3.7 A permanent fall in the discount rate ….. 35
3.8 A transitory increase in the discount rate ….. 35
5.1 Endogenous growth ….. 54
5.2 Transitory increase in discount rate ….. 58
5.3 Comparison with Solow model ….. 59
5.4 U.S. real GDP and extrapolated trends ….. 59
5.5 Multiple equilibria in the Solow model ….. 64
6.1 Entry effects, from Aghion et al. (2009) ….. 79
7.1 Productivity differences, from Acemoglu (2009) ….. 90
7.2 Distance from the equator and income, from Acemoglu (2009) ….. 100
7.3 Reversal of fortunes - urbanization, from Acemoglu (2009) ….. 101
7.4 Reversal of fortunes -pop. density, from Acemoglu (2009) ….. 102
7.5 Border between Bolivia (left) and Brazil ….. 105
7.6 The Korean Peninsula at night ….. 106
7.7 Weak, despotic and inclusive states, from Acemoglu and Robinson (2017) ….. 108
8.1 Time structure of overlapping generations model ….. 116
8.2 The steady-state capital stock ….. 119
8.3 Convergence to the steady state ….. 121
8.4 Fall in the discount rate ….. 122
8.5 Capital accumulation in the continuous time OLG model ….. 130
8.6 Capital accumulation with retirement ….. 131
8.7 The current account in the continuous time OLG model ….. 132
9.1 Introduction of pay-as-you-go social security ….. 139
10.1 The evolution of regional income per capita over the years 1-2008 ….. 148
10.2 The differential timing of the take-off across regions ….. 149
10.3 Regional growth of GDP per capita (green line) and population (red line) 1500-2000 ….. 150
10.4 The differential timing of the demographic transition across regions ….. 151
10.5 Dynamics of the model ….. 156
11.1 Bondholdings with constant income ….. 165
11.2 Saving when income is high ….. 167
11.3 The life-cycle hypothesis ….. 169
12.1 Precautionary savings ….. 177
12.2 Equity premium puzzle, from Jorion and Goetzmann (1999) ….. 185
13.1 Adjustment costs ….. 193
13.2 The dynamics of investment ….. 196
13.3 The adjustment of investment ….. 197
13.4 The effect on the current account ….. 200
14.1 The Hansen labour supply ….. 210
14.2 The U.S. output ….. 213
14.3 The cycle in the U.S. ….. 213
14.4 The correlation of output and hours in the Hansen model ….. 215
14.5 Trajectories of macro variables in response to Covid-19 ….. 217
15.1 The classical model ….. 221
15.2 The IS-LM model ….. 222
15.3 The IS-LM model with an exogenous interest rate ….. 223
15.4 AS-AD model ….. 224
15.5 Welfare effects of imperfect competition ….. 230
15.6 Indeterminacy in the NK model ….. 235
15.7 Active interest rule in the NK model ….. 236
15.8 A reduction in the natural rate ….. 237
16.1 Equilibrium employment in the search model ….. 249
16.2 Shapiro-Stiglitz model ….. 254
16.3 A decrease in labor demand ….. 254
16.4 The distortion created by the insider ….. 256
17.1 A fiscal expansion in the IS-LM model ….. 262
17.2 Response to a transitory increase in government spending ….. 267
17.3 Net worth: Argentina vs Chile, from Levy-Yeyati and Sturzenegger (2007) ….. 277
18.1 Response to an increase in government spending ….. 284
19.1 The Sidrauski model ….. 299
19.2 An anticipated increase in the money growth ….. 300
19.3 Multiple equilibria in the Sidrauski model ….. 302
19.4 The dynamics of \(m\) and \(b\) ….. 306
19.5 Unpleasant monetarist arithmetic ….. 307
19.6 Recent disinflations (floating and fixed exchange rate regimes) ….. 310
19.7 GDP growth during disinflations ….. 311
20.1 Inflation: advanced economies (blue line) and emerging markets (red line) ….. 318
21.1 Monetary policy in the ZLB ….. 326
21.2 Effects of a disruption of credit supply ….. 329
21.3 Assets held by FED, ECB, BOE and BOJ ….. 330
21.4 A model of central bank reserves ….. 334
21.5 Reducing the rate on reserves ….. 334
21.6 Increasing money growth ….. 335
21.7 The dynamics of the interest rate spread ….. 336
21.8 A temporary decline in the rate on reserves ….. 337
22.1 Shift in the AD-AS model ….. 348
22.2 Solutions of the bubble paths ….. 353
22.3 Bubbles in the Blanchard model ….. 356
22.4 Government debt as a bubble ….. 358
List of Tables
7.1 Estimates of the basic Solow model ….. 96
7.2 Estimates of the augmented Solow model ….. 97
14.1 The data for the U.S. cycle, from Prescott (1986) ….. 214
14.2 The variables in the Prescott model, from Prescott (1986) ….. 214
17.1 Estimating the multiplier for the 2009 U.S. fiscal stimulus ….. 272
17.2 Required primary surpluses ….. 275
Preface
Over many years, at different points in time, the three of us taught one of the core macroeconomics courses at the Harvard Kennedy School’s Masters in Public Administration, in the International Development (MPA-ID) program. Initially, this was Andrés (the Chilean), who left to become Michelle Bachelet’s Finance Minister during her first presidential term. Then came Federico (the Argentine), who left for public service in Argentina, eventually becoming the Governor of its Central Bank. Last was Filipe (the Brazilian), until he left and became Vice Dean at the School of Advanced International Studies (SAIS) at Johns Hopkins.
The MPA-ID is a program that teaches graduate-level economics, but for students with a (very) heavy policy bent. From the start, the macro course required tailor-made notes, trying to go over advanced macroeconomic theory with the requisite level of rigor, but translating it directly for an audience interested in the policy implications, and not in macro theory per se. Over the years, the three of us shared our class notes, each adding our specific view to the topics at hand. Throughout the process we received enthusiastic feedback from students who kept urging us to turn those notes into a book.
This is it. We like to think that the end result of this process is an agile text - an ’Easy Guide’ - focused on what we believe are the main tools in macroeconomics, with a direct application to what we believe are the main policy topics in macroeconomics. For this reason, we do not pretend to offer an encyclopedic approach (for this you may consult other texts such as Ljungqvist and Sargent (2018), Acemoglu (2009), or the by now classic Blanchard and Fischer (1989)) but a more ’curated’ one, where we have selected the main issues that we believe any policy-oriented macroeconomic student should grasp.
The book does not shy away from technical inputs, but nor does it focus on them or make them the objective. For instance, we talk about the overlapping generations model, one of the key tools in macroeconomic analysis, but we do so because we are interested in seeing the impact of different pension systems on capital accumulation. In other words, the objective is understanding real-world problems that policymakers in macroeconomics face all the time, and developing a way of thinking that helps students think through these (and many other) problems. Students need to learn the tools, because they allow them to think systematically about dynamic policy problems. As befits an easy/introductory guide, we have complemented each chapter with a selection of further readings for those that want to go deeper in any specific topic.
We are excited to share this material with our colleagues around the world. We believe it can be useful for an advanced course in macroeconomics at the graduate level, or for a core course in macroeconomics at a master level. We have tried to get to the point on every issue, though we have also shared different perspectives and opened the window to current debates in the different fields of macroeconomics. Students and teachers will also find additional material on a
companion website (https://doi.org/10.31389/lsepress.ame) including teaching slides and additional appendices.
Enjoy,
Filipe Campante, Johns Hopkins University Federico Sturzenegger, Universidad de San Andrés Andrés Velasco, London School of Economics
Acknowledgments
We are indebted to a number of people who helped in the writing of this manuscript.
Santiago Mosquera helped by drafting the appendices for estimating the RBC and DSGE models. Can Soylu checked independently that the appendices were complete and provided useful inputs. Nicolas Der Meguerditchian took the task of doing all the graphs and tables of the paper, as well as helping with the references and proof editing. Delfina Imbrosciano went over all the text and math to help find typos and improve clarity. Francisco Guerrero and Hernán Lacunza were kind enough to point out to us a few remaining typos. All of their work has been terrific and greatly improved the final product. Any and all remaining mistakes are certainly our fault.
Daron Acemoglu, Philippe Aghion, Richard Blundell, Rachel Griffith, Peter Howitt, Susanne Prantl, Philippe Jorion, William Goetzmann, and Paul Schmelzing all graciously accepted to have their graphs reproduced in this book. Sebastian Galiani, helped with useful references. Jeffrey Frankel and Gonzalo Huertas suggested additional material that we have incorporated into the companion website to the book. We are very grateful to all of them.
The team at LSE Press have also been superb. In particular, our gratitude to Lucy Lambe for her great partnership throughout the process, and to Patrick Dunleavy, who believed in this text from day one, and was supportive of the effort all along. Last, but not least, we are most grateful to Paige MacKay, and the team at Ubiquity Press, who worked tirelessly in the final stages of production.
We also owe special thanks to the generations of MPA-ID students at the Harvard Kennedy School who helped us develop, test, and hone the material in this book. They are an extraordinary group of brilliant individuals - many of whom have gone on to become high-level macroeconomic policymakers around the world. They kept us on our toes, pushed us forward, and made it all a very exciting endeavour.
Filipe Campante, Federico Sturzenegger, Andrés Velasco