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Imperfections, Institutions and Policies

Wendy Carlin and David Soskice

Publication Date - February 2006

ISBN: 9780198776222

852 pages

In Stock

Provides a unified framework for short- and medium-run macroeconomics, giving students a model that they can use themselves to understand a wide range of real-world macroeconomic behavior and policy issues.


The distinctive feature of this book is that it provides a unified framework for the analysis of short- and medium-run macroeconomics. This gives students a model that they can use themselves to understand a wide range of real-world macroeconomic behavior and policy issues. The authors introduce a new graphical model (IS/PC/MR) based on the 3-equation New Keynesian model used in modern macroeconomics. The three equations are the IS curve, the Phillips curve, and an interest rate-based monetary policy rule. The use of a common framework throughout for closed and open economies helps students develop the economic intuition with which to address a diversity of macroeconomic problems.
Applied chapters show how models can be used to analyze performance in OECD economies over the past 25 years. The chapters on growth present in-depth coverage of the Solow-Swan, endogenous, and Schumpeterian models that allow students to understand how these approaches can be used to anser the big questions of growth: why some countries are rich and other are poor; why some catch up and others do not. Because the book is based on the mainstream 3-equation model used at the research frontier, the book gives students the economics background necessary for accessing advanced macroeconomics. It is also designed to appeal to graduate students, non-specialists in maacroeconomics, professional economists, and those from related disciplines who want a guide to the complexities of modern macroecnomics and to understand contemporary policy debates.
Online Resource Center: The companion website will provide exercises and checklist questions for students as well as password-protected solutions and diagrams from the text for instructors.


  • Develops a core New Keynesian macro model based on imperfect competition and nominal rigidities and shows how this compares with alternatives, making it easier for students to apply this to economic events.
  • Uses a unified framework and a new graphical model throughout to meet the common complaint of students of intermediate macroeconomics that they have learnt many models but don't know which one to use when they want to understand a major economic event.
  • Makes extensive use of a set of core diagrams. Includes maths for clarity when necessary but emphasizes diagrammatic and verbal explanations, helping students to better understand difficult topics.
  • Provides comprehesive coverage of aggregate demand and supply sides of the closed and open economy within an integrated model, giving students a better understanding of all economies.
  • End-of-chapter questions are of two types: check-list questions focus on common confusions and misunderstandings; problems and open-ended questions help students develop deeper understanding and greater confidence.
  • Is unique in providing a self-contained introduction to the growing field of political economy.
  • Companion web site with exercises and checklist questions for students and password-protected solutions and diagrams from the text for lecturers.

Table of Contents

    Note: Each chapter ends with Conclusions.
    List of Figures
    List of Tables
    1. Motivation for Macroeconomic Models
    Output, Unemployment, and Inflation
    Economic Growth
    2. Aggregate Demand, Aggregate Supply, and Business Cycles
    Aggregate Demand
    The Good Market: The IS Curve
    The Money Market: The LM Curve
    Putting Together the IS and the LM
    Aggregate Supply
    Supply Side in the Imperfect Competition Model
    Aggregate Demand and Aggregate Supply
    3. Inflation, Unemployment, and Monetary Rules
    Inflation and Phillips Curves
    Monetary Rules and the 3-equation IS-PC-MR Model
    Inflation at the Medium-run Equilibrium
    Inflation in the IS/LM Model
    4. Labour Markets and Supply-side Policies
    Supply-side Structures, Policies, and Shocks
    Factors that Shift the WS and PS Curves
    Unions, Wage-setting Arrangements, and the ERU
    Introduction to Hysteresis: Actual U Affects the ERU
    The Beveridge Curve Approach to Unemployment
    5. Monetary Policy
    Inflation, Disinflation, and Deflation
    Monetary Policy Paradigms
    The Monetary Policy Rule in the 3-Equation Model
    A Taylor Rule in the IS-PC-MR Model
    Problems with Using an Interest Rate Rule
    Credibility, Time Inconsistency, and Rules Versus Discretion
    6. Fiscal Policy
    The Automatic Stabilizers
    Discretionary Fiscal Policy
    Deficits and Debt
    Monetizing the Debt: Seignorage and Hyperinflation
    Fiscal Policy Rules
    7. Consumption and Investment
    Conclusions on Consumption and Investment
    8. Money and Finance
    Information Problems
    Money Supply and Demand
    Money Transmission Mechanisms and the Role of Finance in Propagating Shocks
    9. The Open Economy in the Short Run
    Opening the Goods Market
    Opening Financial Markets
    Fixed and Flexible Exchange Rate Regimes
    Trade Balance and Balance of Payments
    The Mundell-Fleming Model for the Short Run
    10. Inflation and Unemployment in the Open Economy
    Inflation and Unemployment in the Open Economy
    Supply Side in the Open Economy
    Demand Side and Trade Balance
    The Open Economy Model
    Long-run Equilibrium
    11. Shocks and Policy Responses in the Open Economy
    Fiscal, Monetary, Exchange Rate, and Supply-side Policies
    Aggregate Demand Shocks
    Domestic Supply Shocks
    External Trade and Supply Shocks
    Real Wages in Open and Closed Economies
    Introduction to the Economics of Currency Unions
    Monetary Rules in the Open Economy
    12. Interdependent Economies
    The 2-bloc Model
    International Spillovers in the Medium Run
    Interdependence in the Short and Medium Run: A Simple Model
    EMU: A Common Currency Area
    13. Exogenous Growth Theory
    Growth and the Growth Rate
    The Solow-Swan Model
    Solow Growth Accounting: Measuring the Impact of Technology
    Technological Progress in the Solow-Swan Model
    Economic Convergence
    Welfare and the Golden Rule
    14. Endogenous and Schumpeterian Growth
    Endogenous Growth Theory
    Schumpeterian Growth Models
    15. New Keynesian Microfoundations
    Summary of the Argument
    The Neoclassical Benchmark Model (NCBM)
    Equilibrium Output and Involuntary Unemployment
    Disequilibrium (1): Demand Shocks and Output Response
    Disequilibrium (2): Amplification and Dampening of Demand Shocks
    Disequilibrium (3): Sustained Disequilibrium and Microfoundations of Phillips Curves
    Multiple Equilibria
    Fairness and a Range of Equilibria
    16. Political Economy
    Monetary Policy and Time Inconsistency: The Problem of Overambitious Governments
    Fiscal and Monetary Policy Conflicts
    *Reputation: Introduction to Games of Incomplete Information
    Games between Interdependent Economies
    17. Performance and Policy in Europe, the USA, and Japan
    German Unification, The Collapse of ERM, and Its Aftermath
    Macroeconomic Policy within EMU
    USA: The New Economy Boom and Its Aftermath
    Japan: More Than a Decade of Stagnation
    18. Unemployment: Institutions, Shocks, and Policies
    Labour Market Outcomes
    Trends and Cross-country Variation in European Unemployment
    Trade, Technology, and Unemployment
    Unemployment and EMU
    Why is Reform so Difficult?

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