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Olivier Blanchard
Alessia Amighini
Francesco Giavazzi

Macroeconomics
A E u r o p ea n p e r s p e c t i v e

“This is a truly outstanding textbook that beautifully
marries theory, empirics and policy. It is surely
destined to become the gold standard against which
all other texts must be measured.”
Charles Bean, Deputy Governor, Bank of England

MACROECONOMICS
Visit the Macroeconomics: A European Perspective Companion
Website at www.pearsoned.co.uk/blanchard to find valuable
student learning material including:
● Multiple choice questions to help to test learning.
● Active graphs which allow students to manipulate and
interact with key graphs to develop their understanding of
macroeconomics.
● Glossary explaining key terms.
● A new Macroeconomics in the News blog site, updated
monthly with the latest news stories related to chapters in
the book.
There is also material for instructors:
● Instructor’s Manual including a motivating question and
summaries section of key material for each chapter.
● PowerPoint slides that can be downloaded and used for
presentations, containing diagrams and tables that offer you
flexibility in your teaching.
● Testbank of question material providing hundreds of
questions grouped by chapter.

Refreshingly original for an undergraduate text. Relevant applications to European
economies and elsewhere are plentiful, and the breadth of topics covered is truly
impressive. Unlike many texts at this level, the authors do not avoid potentially tricky, yet
important topics; they do their utmost to relate textbook theory to real-world economics.
Relative to competing texts, I think students would find this more engaging.
Paul Scanlon, Trinity College Dublin
Up-to-date material on the euro, especially in light of the current crisis; strong open
economy emphasis; and lots of examples from European countries. There is so much new
material on the monetary union that there is much less need for supplementary reading.
Pekka Ilmakunnas, Aalto University School of Economics
The European adaptation keeps the structure of the original book, already appreciated
by lecturers. It integrates specific analysis of recent economic events (in particular the
sub-prime crisis), illustrates study cases with European examples and proposes extended
theoretical developments. It is sure to become even more popular than its famous ancestor
among European students.
Bertrand Candelon, Maastricht University School of Business and Economics
This edition has clear exposition and keeps the analytical level simple, but still at a detailed
level. The chapter on the credit crunch is particularly interesting and well written, and the
use of the IS–LM model to describe the effects of the crisis is well presented. Given the
level of the maths explanation in the text, all students should find it easy to follow the
analysis in the book.
Gianluigi Vernasca, University of Essex
This is a truly outstanding textbook that beautifully marries theory, empirics and
policy. It is surely destined to become the gold standard against which
all other texts must be measured.
Charles Bean, Deputy Governor, Bank of England
This book succeeds in explaining complex economic questions with simple language
whilst always referring to the data. The chapters on Europe are a welcome feature
and will help students to understand the challenges and potentials of the
European project.
Lucrezia Reichlin, London Business School

MACROECONOMICS
A EUROPEAN PERSPECTIVE

Olivier Blanchard, Alessia Amighini
and Francesco Giavazzi

Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:
www.pearsoned.co.uk
First published 2010
© Pearson Education Limited 2010
The rights of Olivier Blanchard, Alessia Amighini and Francesco Giavazzi
to be identified as authors of this work have been asserted by them in
accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without either the prior
written permission of the publisher or a licence permitting restricted copying
in the United Kingdom issued by the Copyright Licensing Agency Ltd,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
ISBN: 978-0-273-72800-9
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1
13 12 11 10
Typeset in 9.5/12.5 pt Charter by 35
Printed and bound by Rotolito Lombarda, Italy

BRIEF CONTENTS
List of figures
List of tables
List of Focus boxes
About the authors
Publisher’s acknowledgements
Guided tour
Preface
Author acknowledgements

Introduction
1 A tour of the world
2 A tour of the book

xii
xv
xvi
xvii
xviii
xx
xxii
xxv
1
2
15

EXTENSIONS
Expectations
14 Expectations: the basic tools
15 Financial markets and expectations
16 Expectations, consumption and investment
17 Expectations, output and policy
The open economy: exchange rates
and policy choices
18 Economic policy in an open economy
19 Exchange rate regimes

289
290
306
326
348

365
366
392

THE CORE
The short run
3 The goods market
4 Financial markets
5 Goods and financial markets: the IS–LM
model
6 The IS–LM model in an open economy

39
40
58
80
107

The medium run
7 The labour market
8 Putting all markets together:
the AS–AD model
9 The natural rate of unemployment and
the Phillips curve
10 Inflation, activity and nominal money growth

135

The long run
11 The facts of growth
12 Saving, capital accumulation and output
13 Technological progress and growth

227

136
161
187
205

228
245
268

Pathologies
20 The crisis of 2007–2010
21 High debt
22 High inflation

415

Should policy makers be restrained?
23 Policy and policy makers: what do
we know?
24 Monetary and fiscal policy rules and
constraints

475

Europe in progress
25 European economic and monetary
integration
26 The euro: the ins and the outs

517

Appendix 1 A maths refresher
Appendix 2 An introduction to econometrics
Glossary
Symbols used in this book
Index

552
557
562
572
574

416
436
456

476
491

518
539

CONTENTS
List of figures
List of tables
List of Focus boxes
About the authors
Publisher’s acknowledgements
Guided tour
Preface
Author acknowledgements

INTRODUCTION
Chapter 1
A tour of the world
1.1 Europe and the euro
1.2 The economic outlook in the USA
1.3 BRIC countries
1.4 Looking ahead
Key terms
Questions and problems
Further reading
Appendix Where to find the numbers?

Chapter 2
A tour of the book
2.1 Aggregate output
2.2 The other major macroeconomic
variables
2.3 The short run, the medium run and
the long run
2.4 A tour of the book
Summary
Key terms
Questions and problems
Further reading
Appendix The construction of real GDP and
chain-type indexes

xii
xv
xvi

xvii
xviii
xx
xxii
xxv

1

2
3
6
10
11
12
12
13
14

15
16
22
27
28
30
31
31
33
34

THE CORE
THE SHORT RUN

39

Chapter 3
The goods market

40

3.1 The composition of GDP

41

3.2 The demand for goods
3.3 The determination of equilibrium output
3.4 Investment equals saving: an alternative
way of thinking about the goods–market
equilibrium
3.5 Is the government omnipotent? A warning
Summary
Key terms
Questions and problems

Chapter 4
Financial markets
4.1
4.2
4.3
4.4

The demand for money
Determining the interest Rate: Part I
Determining the interest Rate: Part II
Two alternative ways of looking at the
equilibrium
Summary
Key terms
Questions and problems
Further reading

Chapter 5
Goods and financial markets:
the IS–LM model

42
45

51
53
54
55
55

58
59
62
69
74
77
77
78
79

80

5.1 The goods market and the IS relation
5.2 Financial markets and the LM relation
5.3 Putting the IS and the LM relations
together
5.4 Using a policy mix
5.5 IS–LM and the liquidity trap
5.6 An analytical version of the IS–LM model
5.7 How does the IS–LM model fit the facts?
Summary
Key terms
Questions and problems
Further reading

88
94
94
96
102
104
104
104
106

Chapter 6
The IS–LM model in an open economy

107

6.1
6.2
6.3
6.4
6.5

Openness in goods markets
Openness in financial markets
The IS relation in an open economy
Equilibrium in financial markets
Putting goods and financial markets
together

81
85

108
115
121
127
129


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