Appendix E — Glossary of Macroeconomic Terms

This glossary provides brief, alphabetically ordered definitions of all major terms used in the book. For fuller treatments with mathematical content, see Appendix A (Key Terms and Reserved Concepts) and the relevant chapter.

Accelerationist Phillips curve. The version of the expectations-augmented Phillips curve assuming adaptive expectations: $\pi_t - \pi_{t-1} = -\alpha(u_t - u^*) + \epsilon_t$. Implies that maintaining unemployment below the natural rate causes inflation to continuously accelerate rather than merely being elevated.

Adaptive expectations. The assumption that agents update their forecasts as a weighted average of past observations, with geometrically declining weights: $\mathbb{E}_t^A[x_{t+1}] = \lambda\sum_{k=0}^\infty(1-\lambda)^k x_{t-k}$.

Aggregate demand (AD). The total quantity of goods and services all sectors of the economy wish to purchase at a given price level. The AD curve is downward sloping because higher prices reduce real money balances, raising interest rates and reducing spending.

Aggregate supply, long-run (LRAS). The level of output consistent with full price and wage flexibility — potential output. The LRAS curve is vertical: output is determined by supply-side fundamentals, not the price level, in the long run.

Aggregate supply, short-run (SRAS). The relationship between the price level and the quantity of output producers are willing to supply when at least one input price is predetermined. The SRAS curve is upward sloping due to nominal rigidities.

AK model. The simplest endogenous growth model, $Y_t = AK_t$, in which the absence of diminishing returns allows permanent growth at rate $g = sA - \delta$ determined by the saving rate.

Animal spirits. Keynes’s term for autonomous swings of optimism and pessimism in investment decisions, driven by genuine uncertainty rather than probability calculations. Formalized in modern economics as self-fulfilling expectational shifts or sunspot equilibria.

Automatic stabilizer. A fiscal mechanism that reduces output volatility without discretionary action — chiefly progressive income taxes and unemployment insurance.

Average inflation targeting (AIT). A monetary policy framework in which the central bank commits to keeping average inflation over a longer horizon at target, allowing temporary above-target inflation to make up for periods of below-target inflation. Adopted by the U.S. Federal Reserve in August 2020.

Balanced budget multiplier. The Haavelmo (1945) result that an equal increase in government spending and taxes raises GDP by exactly the amount of the increase ($\Delta Y = \Delta G = \Delta T$), regardless of the MPC.

Balanced growth path. A trajectory on which output per effective worker, capital per effective worker, and consumption per effective worker are all constant, and output per actual worker grows at rate $g$.

Balance of payments. The comprehensive record of a country’s transactions with the rest of the world, comprising the current account, financial account, and official reserve account, which sum to zero by construction.

Barro–Gordon model. A model of monetary policy credibility in which the central bank’s discretionary equilibrium involves a positive inflationary bias $\pi^D = b\lambda(y^*-\bar{y})$ because of the temptation to exploit the short-run Phillips curve.

Baumol–Tobin model. An inventory-theoretic model of money demand deriving $L = \sqrt{bY/(2i)}$, implying income elasticity of $1/2$ and interest elasticity of $-1/2$.

Beveridge curve. The negative empirical relationship between the unemployment rate and the vacancy rate. Outward shifts indicate reduced matching efficiency (structural unemployment increasing).

Buffer-stock saving. Precautionary wealth accumulation targeting a ratio of liquid assets to permanent income, balancing the desire to consume against the need to buffer against income shocks.

Business cycle. The irregular, recurrent fluctuation of aggregate output, employment, and spending around a long-run trend.

Calvo pricing. A model of price stickiness in which each period a randomly selected fraction $1-\theta$ of firms reset their prices optimally and fraction $\theta$ keep prices unchanged. Generates the New Keynesian Phillips Curve.

Capital account. See financial account.

CCAPM (Consumption Capital Asset Pricing Model). An asset pricing model in which the stochastic discount factor is $M_{t+1} = \beta(c_{t+1}/c_t)^{-\sigma}$ — a direct function of consumption growth.

CES production function. Constant elasticity of substitution production function: $Y = [aK^{(\sigma-1)/\sigma} + (1-a)L^{(\sigma-1)/\sigma}]^{\sigma/(\sigma-1)}$. Nests Cobb–Douglas ($\sigma=1$), Leontief ($\sigma=0$), and linear ($\sigma=\infty$).

Chain-weighted index. A price or quantity index that applies the Fisher ideal formula sequentially to adjacent periods and chains the results together, minimizing substitution bias.

Classical dichotomy. The property of classical models whereby real variables (output, employment, relative prices) are determined independently of nominal variables (money supply, price level). Holds in the long run but not in the short run with nominal rigidities.

Cobb–Douglas production function. $Y = K^\alpha(AL)^{1-\alpha}$, $\alpha \in (0,1)$. Exhibits constant returns to scale, constant factor shares ($\alpha$ for capital, $1-\alpha$ for labor), and satisfies the Inada conditions.

Cointegration. The property whereby two or more unit-root series share a stable long-run relationship: a linear combination of the series is stationary.

Conditional convergence. The Solow model prediction that countries converge to their own steady states at rate $\lambda = (1-\alpha)(n+g+\delta)$, conditional on having the same steady-state characteristics.

Consumer Price Index (CPI). A Laspeyres price index measuring the cost of a fixed base-period consumption basket at current prices.

Consumption Euler equation. The first-order condition for optimal intertemporal consumption: $u'(c_t) = \beta(1+r)\mathbb{E}_t[u'(c_{t+1})]$. Implies consumption grows when the real return exceeds the rate of impatience.

CPI. See Consumer Price Index.

CRRA utility. Constant relative risk aversion utility: $u(c) = c^{1-\sigma}/(1-\sigma)$. The parameter $\sigma$ is simultaneously the coefficient of relative risk aversion and the inverse of the elasticity of intertemporal substitution.

Crowding out. The reduction in private investment caused by a fiscal expansion, via the interest-rate mechanism in the IS–LM model.

Current account. The component of the balance of payments recording goods and services trade, factor income, and transfers. Equal to national saving minus national investment.

DSGE model. Dynamic Stochastic General Equilibrium model. A macroeconomic model built from first-principles utility and profit maximization, with explicit microfoundations, stochastic shocks, and rational expectations.

Debt-deflation spiral. Fisher’s (1933) mechanism: falling prices raise real debt burdens, forcing asset sales, depressing prices further, and creating a self-reinforcing contractionary dynamic.

Dynamic efficiency. The condition $r > n+g$ ensuring the economy has not overaccumulated capital. Most advanced economies are dynamically efficient.

Dynamic programming. The method of solving dynamic optimization problems by backward induction using the Bellman equation $V(s_t) = \max_a\{F(s_t,a) + \beta V(s_{t+1})\}$.

Effective depreciation rate. In the Solow model, $\mu = n+g+\delta$: the rate at which capital per effective worker declines in the absence of net investment.

Effective lower bound (ELB). The lower bound on the nominal interest rate, approximately $-0.5\%$ to $-1\%$, below which further cuts are ineffective due to currency holdings.

Efficiency wage. A wage above the market-clearing level set by employers to deter shirking, reduce turnover, or attract higher-quality workers. Generates involuntary unemployment in equilibrium.

Elasticity of intertemporal substitution (EIS). The percentage change in consumption growth per percentage-point change in the real interest rate: $\varepsilon_{IES} = 1/\sigma$ in the CRRA model.

Endogenous growth. Growth in which the long-run per-capita growth rate is determined within the model by savings, R&D, or human capital decisions.

Equity premium puzzle. The observation that U.S. equity returns have historically exceeded the risk-free rate by ~6% p.a., far more than the CCAPM with standard parameters predicts.

EAPC. Expectations-Augmented Phillips Curve: $\pi_t = \pi_t^e - \alpha(u_t-u^*) + \epsilon_t$.

Exorbitant privilege. The benefit the United States derives from issuing the world’s reserve currency — earning higher returns on foreign assets than it pays on foreign liabilities.

Exogenous growth. Growth in which the long-run per-capita growth rate equals the exogenous rate of technological progress $g$.

External finance premium. The spread between the cost of external financing and the risk-free rate, reflecting informational asymmetries between borrowers and lenders. Decreasing in borrower net worth.

Financial accelerator. The amplification mechanism by which financial frictions (collateral constraints, external finance premia) amplify business cycle fluctuations beyond their fundamental drivers.

Fiscal multiplier. The change in equilibrium output per unit change in government spending or taxes: $\mu_G = \partial Y/\partial G$.

Fisher equation. The quantity theory identity: $MV = PY$, or in growth rates: $\hat{m}+\hat{v} = \pi+\hat{y}$.

Forward guidance. A monetary policy tool communicating intended future interest rate paths to anchor long-term expectations and influence long-term rates.

Forward-guidance puzzle. The New Keynesian model implication that expected future policy changes have implausibly large effects on current output — attenuated in behavioral NK models with $M < 1$.

Frisch elasticity. Labor supply elasticity with respect to a temporary wage change holding marginal utility of wealth constant. The key parameter for business cycle labor supply analysis.

GDP deflator. The ratio of nominal to real GDP, measuring price changes for the whole economy’s output rather than just consumption.

Golden Rule. The saving rate or capital stock maximizing steady-state consumption per effective worker: $f'(\tilde{k}^{GR}) = n+g+\delta$.

HANK. Heterogeneous-Agent New Keynesian model. Combines incomplete-markets household heterogeneity with New Keynesian nominal rigidities.

Hamiltonian. The function used in continuous-time optimal control: $\mathcal{H} = F(x,u,t) + \mu\,g(x,u,t)$, where $\mu$ is the costate (shadow price) of the state variable $x$.

HP filter. See Hodrick–Prescott filter.

Hodrick–Prescott filter. A smoothing filter that decomposes a time series into trend and cycle by minimizing the sum of squared deviations from trend plus a penalty on trend acceleration, controlled by smoothing parameter $\lambda$.

Hosios condition. The condition for efficient matching equilibrium: worker bargaining power $\eta$ equals the elasticity of the matching function with respect to unemployment $\alpha$. When it holds, frictional unemployment equals the socially optimal level.

Hyperinflation. Monthly inflation exceeding 50% (Cagan’s definition). Associated with fiscal dominance and the use of seigniorage as the government’s primary revenue source.

Hysteresis. The property by which temporary shocks have permanent effects on the natural rate, most commonly through the effect of cyclical unemployment on structural unemployment.

IGBC. Intertemporal Government Budget Constraint: $b_0 = \int_0^\infty e^{-\int_0^t(r_s-g_s)\mathrm{d}s}s_t\,\mathrm{d}t$. Requires the PV of future primary surpluses to equal current debt.

Impulse response function (IRF). The dynamic response of a variable to a one-unit innovation in a structural shock, holding all other shocks at zero.

Inada conditions. Regularity conditions on a production function ensuring interior solutions: $F_K\to\infty$ as $K\to 0$ and $F_K\to 0$ as $K\to\infty$.

Inflation tax. The real revenue earned by the government from money creation, equal to $\pi\cdot(M/P)$ in steady state.

Inflationary bias. The positive equilibrium inflation under monetary policy discretion: $\pi^D = b\lambda(y^*-\bar{y}) > 0$.

IS curve. Goods-market equilibrium locus in $(Y,r)$ space: downward sloping.

IS–LM model. The short-run macroeconomic model determining output and the interest rate from the intersection of the IS curve (goods market) and LM curve (money market).

Keynesian cross. The simplest model of goods-market equilibrium with fixed prices and exogenous investment, yielding the spending multiplier $\kappa = 1/(1-b)$.

Keynesian multiplier. $\kappa_G = 1/(1-b)$: the amplification of autonomous spending on equilibrium income through the circular flow.

Kaldor stylized facts. Six empirical regularities of long-run growth observed by Kaldor (1961) that growth models are designed to replicate.

Labor market tightness. $\theta = V/U$, the ratio of vacancies to unemployed workers. The key state variable in search models.

Laspeyres index. A fixed-base-period-weight price or quantity index; overstates inflation due to substitution bias.

Leontief inverse. $(I-A)^{-1}$ in input-output analysis, giving total (direct plus indirect) output requirements per unit of final demand.

Lewis turning point. The point in development at which surplus agricultural labor is exhausted, after which wages begin to rise in the modern sector.

Liquidity preference. Keynes’s term for the demand for money — the preference for holding liquid assets (money) over illiquid interest-bearing assets.

Liquidity trap. The situation in which the nominal interest rate is at its lower bound and money demand is perfectly interest-elastic. Conventional monetary policy is ineffective.

LM curve. Money-market equilibrium locus in $(Y,i)$ space: upward sloping.

Lucas critique. The observation that reduced-form policy multipliers are not structural and will shift when the policy regime changes. Requires structural models for valid policy analysis.

Lucas supply curve. $y_t = \bar{y}_t + b(P_t - \mathbb{E}_{t-1}[P_t])$: output deviates from potential only when the price level surprises agents.

Marginal propensity to consume (MPC). The fraction of an additional dollar of disposable income spent on consumption: $b = \partial C/\partial(Y-T) \in (0,1)$.

Martingale. A stochastic process $\{c_t\}$ for which $\mathbb{E}_t[c_{t+1}] = c_t$ — the expected change is zero.

Matching function. $m(U,V)$: the flow of new employment relationships as a function of unemployment and vacancies. Exhibits constant returns to scale.

NAIRU. Non-Accelerating Inflation Rate of Unemployment — the unemployment rate consistent with stable inflation; equivalently, the natural rate $u^*$.

Nash bargaining. The solution concept maximizing the weighted product of bargaining parties’ surpluses: $\max_w (w-b)^\eta(J-V)^{1-\eta}$.

Natural rate of interest. The Wicksellian real rate $r^n$ consistent with output at potential and stable inflation.

Natural rate of output ($\bar{Y}$). Potential output: the level of real GDP consistent with full price and wage flexibility.

Natural rate of unemployment ($u^*$). The unemployment rate consistent with stable, non-accelerating inflation; comprising frictional and structural but not cyclical unemployment.

New Keynesian IS curve. $\hat{x}_t = \mathbb{E}_t[\hat{x}_{t+1}] - \sigma(i_t - \mathbb{E}_t[\pi_{t+1}] - r_t^n)$.

New Keynesian Phillips Curve (NKPC). $\hat{\pi}_t = \beta\mathbb{E}_t[\hat{\pi}_{t+1}] + \kappa\hat{x}_t$, derived from Calvo pricing with $\kappa = (1-\theta)(1-\beta\theta)/\theta$.

Nominal rigidity. Any friction preventing nominal prices or wages from adjusting immediately to demand or money supply changes.

OCA. Optimal Currency Area: a region for which a single currency is optimal, characterized by labor mobility, trade integration, synchronized cycles, and fiscal transfers.

Okun’s Law. The empirical relationship $Y_t - \bar{Y}_t = -\psi(u_t - u^*)$, $\psi \approx 2$ for the U.S.

Open market operation. A central bank purchase or sale of government securities that expands or contracts the monetary base.

Optimal control. The mathematical framework for solving dynamic optimization problems with state variables and control variables, using Hamiltonians and Pontryagin’s maximum principle.

Original sin. The inability of most emerging-market economies to borrow internationally in their own currency, exposing them to currency-debt traps.

Output gap. $\hat{x}_t = Y_t - \bar{Y}_t$: the difference between actual and potential output.

Paasche index. A current-period-weight price or quantity index; understates inflation due to substitution bias.

Permanent income. Friedman’s concept of the constant annuity equivalent of expected lifetime income — the income level that, if constant forever, would give the same present value as the actual expected income stream.

Phillips curve. The negative relationship between inflation and unemployment (or the output gap). The original curve (Phillips, 1958) was a static correlation; the expectations-augmented version (Friedman, Phelps, 1968) added inflation expectations; the NKPC is forward-looking.

Policy ineffectiveness proposition. The Sargent–Wallace (1975) result that systematic monetary policy cannot affect real output under rational expectations and flexible prices.

Pontryagin maximum principle. The necessary conditions for optimal control: the Hamiltonian is maximized with respect to the control; the costate variable evolves according to $\dot{\mu} = r\mu - \partial\mathcal{H}/\partial x$; and the transversality condition holds.

Potential output. See natural rate of output.

PPP. Purchasing power parity: exchange rates that equalize the cost of a reference basket across countries.

Prudence. The property $u''' > 0$ generating precautionary saving: risk-averse agents save more when facing uncertainty even if their expected income is unchanged.

QE. Quantitative easing: central bank purchases of long-duration assets to reduce term premia and stimulate the economy when the policy rate is at the ELB.

Quantity theory of money. $MV = PY$: the proposition that the price level is proportional to the money supply under stable velocity.

RANK. Representative-Agent New Keynesian model — the standard NK model without household heterogeneity.

Rational expectations. $\mathbb{E}_t[x_{t+1}] = \mathbb{E}[x_{t+1}|\mathcal{F}_t]$: forecasts equal conditional mathematical expectations, ruling out systematic errors.

RBC model. Real Business Cycle model: a DSGE model with flexible prices in which business cycles are driven by technology shocks.

Real exchange rate. $q = eP^*/P$: the relative price of foreign goods in terms of domestic goods.

Ricardian equivalence. The proposition that deficit financing is equivalent to tax financing: rational forward-looking households fully anticipate and save against future tax increases implied by current deficits.

Sacrifice ratio. The cumulative output loss per percentage-point reduction in inflation.

Saddle path. The stable manifold of a saddle-point equilibrium: the unique trajectory that converges to the steady state and satisfies the transversality condition.

Say’s Law. The classical proposition that supply creates its own demand: aggregate excess supply is impossible.

SDF. Stochastic discount factor (pricing kernel): $M_{t+1} = \beta u'(c_{t+1})/u'(c_t)$.

Seigniorage. Real revenue from money creation: $S = (\dot{M}/P) = \pi\cdot(M/P)$ in steady state.

Signal extraction. The statistical problem of inferring an unobserved signal from an observed noisy measurement. In Lucas (1973): firms use their observed price to infer the true demand shock versus the aggregate price level.

Solow residual. The portion of output growth not explained by growth in capital and labor: $\hat{A}_t = \hat{Y}_t - \alpha\hat{K}_t - (1-\alpha)\hat{L}_t$. Used as a proxy for TFP growth.

Stagflation. The simultaneous occurrence of high unemployment and high inflation, as observed during the 1970s oil shocks. Cannot be explained by a demand-only framework.

Static expectations. $\mathbb{E}_t^S[x_{t+1}] = x_t$: agents expect no change.

Stochastic discount factor. See SDF.

Structural unemployment. Unemployment arising from persistent skill mismatches between workers and available jobs, not cyclical demand deficiency.

Sunspot equilibrium. A self-fulfilling equilibrium selected by a payoff-irrelevant signal (sunspot), possible when the economy has multiple fundamental equilibria.

Supply shock. An exogenous change in production costs or productivity that shifts the AS curve — as opposed to a demand shock that shifts the AD curve.

Taylor principle. The requirement that the Taylor rule coefficient on inflation satisfies $\phi_\pi > 1$, so that the real interest rate rises when inflation rises.

Taylor rule. $i_t = r^n + \pi^* + \phi_\pi(\pi_t-\pi^*) + \phi_y\hat{x}_t$: the monetary policy rule matching U.S. Federal Reserve behavior (Taylor, 1993).

TFP. Total factor productivity: the level of technology $A_t$ in the production function $Y = F(K, AL)$.

Time inconsistency. The property that optimal policy announced at $t$ is not optimal to implement at $s>t$ once expectations have adjusted.

Tobin’s q. The ratio of market value to replacement cost of capital. Investment is positive (negative) when $q > 1$ ($< 1$).

Transversality condition. The terminal condition in an infinite-horizon optimization problem ruling out Ponzi schemes: $\lim_{t\to\infty}e^{-rt}\mu_t k_t = 0$.

Trilemma. The Mundell–Fleming observation that a country cannot simultaneously maintain a fixed exchange rate, free capital mobility, and an independent monetary policy.

UIP. Uncovered interest parity: $i_t = i_t^* + \mathbb{E}_t[\hat{e}_{t+1}]$.

Unit root. A stochastic process in which shocks have permanent effects; $\phi = 1$ in AR(1): $x_t = x_{t-1} + \epsilon_t$.

User cost of capital. $c^K = r+\delta$: the implicit rental cost of owning one unit of capital for one period.

VAR. Vector autoregression: $\mathbf{y}_t = \mathbf{c} + \sum_{j=1}^p A_j\mathbf{y}_{t-j} + \mathbf{u}_t$.

Walras’ Law. The accounting identity that the sum of the values of excess demands across all markets equals zero: $\sum_i p_i z_i = 0$.

Washington Consensus. The set of ten economic policy reforms prescribed for developing countries by the IMF and World Bank in the 1980s–90s, emphasizing fiscal discipline, liberalization, and privatization.

Wicksell’s natural rate. See natural rate of interest.

Zero lower bound (ZLB). The (approximate) lower bound of zero on nominal interest rates arising from the option to hold cash at zero nominal return. Superseded in modern usage by the effective lower bound (ELB).

For notation, see Appendix A. For empirical methods, see Appendix B. For further reading, see Appendix H.