Introduction to Dynamic Macroeconomics

This chapter offers an introduction to the methods and main models used in dynamic macroeconomics. After reviewing key concepts such as lifetime utility maximization and the period-by-period and intertemporal budget constraints, first-order conditions for intertemporal optimization (the Euler equation and the labour-leisure choice) are developed. These methods are applied in developing the workhorse Ramsey model, with discussion of related concepts such as dynamic efficiency and market equilibrium versus the command optimum. An extension of the Ramsey model incorporates adjustment costs in investment and develops the user cost of capital. Furthermore, the Sidrauski model, with its implications for monetary economies, is reviewed. Finally, the discussion turns to another workhorse dynamic model, the overlapping-generations model and its implications. As an application of this model, the properties of various methods of funding social insurance are discussed.

A GENERALIZED STEADY-STATE GROWTH THEOREM

Is there an economic justification for why technical change is by assumption labor-augmenting in dynamic macroeconomics? The literature on the endogenous choice of capital- and labor-augmenting technical change finds that technical change is purely labor-augmenting in steady state. The present paper shows that this finding is mainly an artifact of the underlying mathematical models. To make this point, Uzawa's steady-state growth theorem is generalized to a neoclassical economy that, besides consumption and capital accumulation, uses current output to create technical progress or to manufacture intermediates. The generalized steady-state growth theorem is shown to encompass four models of endogenous capital- and labor-augmenting technical change and the typical model of the induced innovations literature of the 1960s.