Macroeconomics and Policy
Course infoSchedule
Course moduleMAN-MEC010
Credits (ECTS)6
CategoryMA (Master)
Language of instructionEnglish
Offered byRadboud University; Nijmegen School of Management; Master Economics;
dr. F. Bohn
Other course modules lecturer
dr. F. Bohn
Other course modules lecturer
Contactperson for the course
dr. F. Bohn
Other course modules lecturer
dr. F. Bohn
Other course modules lecturer
Academic year2022
2  (07/11/2022 to 29/01/2023)
Starting block
Course mode
Registration using OSIRISYes
Course open to students from other facultiesNo
Waiting listNo
Placement procedure-
After completing the course Macroeconomics and Policy the student is able to:
  • Describe and critically assess the effects of non-economic factors like political instability, debt conditionality, rent-seeking, or electioneering on monetary and fiscal policy decisions;
  • Critically discuss monetary policy and public finance decisions and their implications in intertemporal frameworks;
  • Describe and explain individual optimization in an intertemporal framework;
  • Critically assess economic models and/or research articles (this includes evaluating the conceptual and technical limitations, deriving policy implications and formulating own research questions).
Recent macroeconomic developments are centre stage in Europe and elsewhere. What's happening is often caused by political considerations of policymakers. This course discusses very different topics which have in common that they help us understand some of the underlying mechanism. To accomplish this task, several fairly advanced techniques will be introduced (e.g. intertemporal optimisation and Bayesian Updating). Nonetheless, it will be possible for everybody to master the material, because new content and techniques are introduced step by step with plenty of time for asking questions. Furthermore, the limitations of, and potential extensions to, the presented papers will be discussed.

To acquaint you with recent developments in macroeconomics and political economy the course comprises 3 topics. Topic 1 (4 meetings) addresses implications of political instability in empirical and theoretical fiscal and monetary policy models. The unequivocal claim by Cukierman et al. (1992) that political instability leads to inflationary finance is challenged by Bohn (2016a, 2006), who argues that including debt finance and debt conditionality may significantly affect the results. On the basis of another paper by Bohn (2013), we then discuss the impact of political instability on the choice of the exchange rate regime. The aforementioned papers show that political instability has important policy implications.

Topic 2 (4 meetings) focuses on intertemporal optimisation and its policy implications. First, we study a government's budget decision in a 2-period model (as, for instance, in de Grauwe, 1996), then we allow for individual utility maximisation in an infinite horizon model (based on Obstfeld and Rogoff, 1996). We obtain important results such as the Euler equation, i.e. that consumers' optimal choice implies that they cannot gain from feasible shifts in consumption across periods. In an international economy context, the fundamental current account equation is another key result which is used for discussing policy implications of economic shocks. You will also become acquainted with important technical/methodological issues such as the formal solution of an intertemporal optimisation problem.

Topic 3 is shorter (2 meetings) and could be on one of two things. Option 1 starts out with the empirical observation that governments manipulate economic policy to their own political advantage. According to the literature, this is particularly relevant in developing countries (Schuknecht, 1996) and/or new democracies (Brender and Drazen, 2005), but also plays a role in the euro zone (De Haan and Mink, 2006). Furthermore, governments' forecasts are manipulated to facilitate fiscal expansions, even if there is a constitutional budget constraint (Boylan, 2008). Motivated by the original (monetary) political business cycle model by Nordhaus (1975), we focus on political budget cycles, i.e. government budget expansions used for increasing the government's re-election chances. Asymmetric information allows the government to either signal higher competence (signalling model by Rogoff, 1990) or, simply, to appear more competent (moral hazard models by Shi and Svensson (2006), Bohn (2018 and 2019), Bohn and Veiga (2019a and b) and Bohn and Veiga (2019c) who incorporate political forecast cycles). Techniques for solving different types of models are presented. Understanding the mechanisms for political manipulations allows us to discuss policy implications.

Students may a get a change to choose a second (more experimental) option for Topic 3. Benedict Anderson (1983) talks about imagined communities, i.e. the human desire to find a sense of belonging. Wintrobe (2019) argues that essentially "all" causes for the decline of democracy can be traced back to a lack of such a sense of belonging. By the end of the course, I might have been able to work on a paper on that topic. Conceptually, the idea is to model the decline of democracy in a setting with right and left wing radicals who amplify a lacking sense of belonging (stemming from, for instance, globalization or a migration shock). In a stereotypical setting the left promotes internationalism and welcomes immigrants; the right insists on nationalistic identity and rejects diversity. This may undercut the core functioning of a democracy for several reasons. First, the radicalization of the political discourse may reduce the sense of belonging and lead, for instance, to less participation in elections or more egoistic behavior (Ehrlich and Lui, 1999, capture this by allowing individuals to shift resources from productive to rent-seeking behavior). Second, the radicalization may raise the chances of radical and populist politicians who have no respect for democratic institutions (Albertus and Gay, 2018, model the uncertainty of the pool of politicians in autocracies, but this could probably be adapted to democracies). Overall, the role of (and changes in) various groups of voters could probably be modelled along the lines of Svolik (2018).

Presumed foreknowledge
Mathematics (Calculus), Macroeconomics, International Economics. Bachelor's degree in Economics or equivalent.
Test information
Written exam + group presentations for bonus points. There will also be an opportunity to work on assignments on a voluntary basis. Grades for presentations from last year may count, if the student asks for it in the first week of the course.

Ma 1

Required materials
Articles to be downloaded from the internet.

Instructional modes

Classes are interactive. Students get the opportunity for doing a presentation based on individual work and consultation with the lecturer. Presentations are on limited aspects of the course material, for instance the setup of a model, some model results, an overview, the policy relevance of a model, etc. Each students will also be asked to lead the discussion on one of the selected empirical articles.

no web lectures

Test weight1
Test typeExam
OpportunitiesBlock 2, Block 3