Lecture 6, January 7 and 15: Sticky Wages and Prices (Galí, Chapter 6)
|
|
- Elinor Campbell
- 6 years ago
- Views:
Transcription
1 MakØk3, Fall 2012/2013 (Blok 2) Business cycles and monetary stabilization policies Henrik Jensen Department of Economics University of Copenhagen Lecture 6, January 7 and 15: Sticky Wages and Prices (Galí, Chapter 6) c 2013 Henrik Jensen. This document may be reproduced for educational and research purposes, as long as the copies contain this notice and are retained for personal use or distributed free.
2 Introductory remarks In the simple New-Keynesian model nominal rigidities takes the form of goods price rigidities A crucial break with the classical model of (Galí, 2008, Chapter 2), as monetary policy then plays a role for output determination Evidence pointed to the realism of presence of goods price rigidities The model s labor market is, however, portrayed as classical in the sense that a exible nominal wage clears the labor market Unrealistic in itself Precludes, by construction, meaningful talk about unemployment in absence of other labor market frictions The model of Chapter 6, however, does not explicitly consider unemployment, but Galí shows how it can be restated to account for unemployment in his 2011 book 1
3 Source: Knell (2010, ECB WP) 2
4 The basic model is therefore extended with nominal wage rigidity To understand the implications of nominal wage rigidity, it is introduced in a way akin to goods price rigidities This re ects how a macroeconomic research program typically develops Start with a simple model If it creates only nonsense, stop the program. If it gives some insights the profession nds valuable in terms of empirical validity and/or policy prescriptions, then continue Extend the simple model with further realistic assumptions (i.e., relax some of the simplifying assumptions) Indeed, the introduction of sticky wages came in 2000 (by Erceg, Henderson and Levin), after the basic model was developed in mid-1990s (by King and Wolman, 1996; Yun, 1996; Woodford, 1996; Rotemberg and Woodford, 1997). Made into medium-scale models by, e.g., Smets and Wouters (2003) and Christiano et al. (2005, JPE) Ex post, this gradual evolution has pedagogical advantages one learns better how each extension contributes to the model s properties A medium-scale estimated New-Keynesian model as RAMSES used for monetary policy analysis in Sweden, would be impossible to explain from scratch 3
5 The basic NK model with sticky wages Most assumptions from the basic model of Chapter 3 are retained New assumptions: Regarding the labor market: Each household supplies a distinct type of labor Each type of labor is used by the rms Each household has monopoly power in the determination of their nominal wage (or, are represented by a trade union) labour suppliers are therefore monopolistic competitors; just as good suppliers ( rms) Nominal wage setting is subject to rigidities: Independent of past wage history, a wage setter cannot reset its wage with probability w 2 [0; 1] Regarding the asset market: Complete markets are assumed (see my expository note on web) Existence of a complete set of state-contingent securities implies full income insurance, so marginal utility of income is equalized across households 4
6 Optimal behavior by rms For each rm i 2 [0; 1] (producing a unique consumption good), production function is where N t (i) Z 1 0 Y t (i) = A t N t (i) 1 (1) N t (i; j) " w 1 "w "w 1 "w dj with N t (i; j) being rm i s employment of type-j labor, j 2 [0; 1]. ; " w > 1 (2) In addition to choosing a price (if allowed by the Calvo mechanism) and production, a rm must choose the optimal composition of the labor it employs Let W t (j) be the nominal wage of type-j labor Optimization is in two stages: 1) For any choice of N t (i) choose the N t (i; j)s taking as given the nominal wages 2) Choose optimal prices as in Chapter 3 (equivalent of choosing N t (i)) Remark: This mirrors households consumption choice: First, they choose the composition of consumption goods, then it chooses the consumption aggregate 5
7 The optimal choice of N t (i; j)s follows by cost minimization as "w Wt (j) N t (i; j) = N t (i) ; all i; j 2 [0; 1] (3) where W t W t Z 1 W t (i) 1 0 " w 1 1 "w Remark the analogy, or symmetry, with the optimal consumption decisions of households derived in Chapter 3 (Appendix 3.1): "p Pt (i) C t (i) = C t (Eq.1, Chap. 3) where and where " is replaced by P t = P t Z 1 P t (i) " 1 "p p di * " p > 1, the elasticity of substitution between types of goods, distinct from * " w > 1, the elasticity of substitution between types of labor (4) We also get Z 1 W t (j) N t (i; j) dj = W t N t (i), analogy to : 0 Z 1 0 P t (i) C t (i) di = P t C t 6
8 Second step of rm s optimization: Reset price according to max k pe t Qt;t+k P Pt t Y t+kjt t+k Y t+kjt where has been replaced by s.t. Y t+kjt = P "p t C t+k (Eq. 8, Chap. 3) P t+k * p, the probability of rms not being able to reset price, distinct from * w, the probability households not being able to reset wage In Chapter 3 we saw that log-linearized around a zero-price-in ation steady state this gave the optimal (log) price as p t = p + (1 p ) ( p ) k E t mct+kjt + p t+k where p log M p = log " p " p 1 = mc is log of the desired price markup This was shown to give the following in ation-adjustment equation: p t = E t p t+1 + p cmc t ; p (1 p) (1 p ) 1 (Eq. 16, Chap. 3) p 1 + " p with p t replacing t to emphasize that it is price in ation 7
9 To facilitate comparison with upcoming equation for wage dynamics, price dynamics are written in terms of markup uctuations instead of marginal cost uctuations: p t = E t p t+1 + p cmc t = E t p t+1 + p (mc t mc) = E t p t+1 + p (mc t + p ) E t p t+1 p ( p t p ) = E t p t+1 p b p t (5) Optimal behavior by households Households, now indexed by j 2 [0; 1], has utility ( 1 ) X E 0 t U (C t (j) ; N t (j)) t=0 with the usual consumption index (already used for relative demand schedules in rms optimization): Z 1 " p C t C t (i) " p 1 "p 1 "p di 0 The new aspect is that each household supplies the unique labor type j, and sets a nominal wage taking into account the rms relative demand for labor types and the wage-calvo assumption 8
10 A household that resets its wage in period t will choose Wt to maximize ( X 1 E t ( w ) k ) U C t+kjt ; N t+kjt subject to and budget constraint: N t+kjt = W "w Z 1 t N t+k; N t+k N t+k (i) di W t+k 0 P t+k C t+kjt + E t+k Qt+k;t+k+1 D t+k+1jt D t+kjt + W t N t+kjt T t+k where D t+kjt is market value of portfolio of state-contingent claims, and Q t+k;t+k+1 is the stochastic discount factor (see expository note for details) 9
11 First-order condition for Wt : ( w ) k E t U c ( w ) k E t U c C t+kjt ; N t+kjt 1 P t+kjt C t+kjt ; N N t+kjt + W ( w ) k E t N t+kjt U c C t+kjt ; N t+kjt 1 P t+k ( w ) k E t N t+kjt U c ( w ) k E t N t+kjt U c where M w " w " w 1 Rewritten as ( w ) k E t N t+kjt U c Wt C t+kjt ; N t+kjt P t+k ( w ) k E t N t+kjt U t+kjt + U n C t+kjt ; N 1 t N t+kjt 1 t+kjtw t N t+kjt = t+kjt + U n C t+kjt ; N = t+kjt 1 + U n C t+kjt ; t+kjt + U n C t+kjt ; N W t C t+kjt ; N t+kjt (1 " w ) " w U n C t+kjt ; N t+kjt P t+k > 1 is the desired wage markup Wt C t+kjt ; N t+kjt P t+k Wt C t+kjt ; N t+kjt + M w U n P t+k 10 M w MRS t+kjt C t+kjt ; N t+kjt = 0 = 0 N t+kjt W t N t+kjt = 0 = 0 = 0; MRS t+kjt U n C t+kjt ; N t+kjt U c C t+kjt ; N t+kjt : (8)
12 In special case of full wage exibility: W t P t = W t P t = M w MRS t ; i.e., wages are set as a markup over the marginal rate of substitution (introducing an ine ciently high real wage due to the monopoly power of households) First-order condition is log-linearized around a zero-wage-in ation steady state, and one gets the (log) optimal wage: wt = w + (1 w ) ( w ) k E t mrst+kjt + p t+k (9) where w log M w : Remark the analogy with the previously stated optimal price-setting rule p t = p + (1 p ) ( p ) k E t mct+kjt + p t+k We can therefore derive an analogous wage-in ation schedule 11
13 With the assumed utility function, U (C; N) = 1 1 C ' N 1+' ; MRS = U n U c = C N ' : Hence, mrs t+kjt = c t+kjt + 'n t+kjt Due to the assumption about complete asset markets, c t+kjt = c t+k Hence mrs t+kjt = c t+k +'n t+kjt, and when the average marginal rate of substitution in the economy is de ned as mrs t+k = c t+k + 'n t+k one gets mrs t+kjt = mrs t+k + ' n t+kjt n t+k = mrs t+k " w ' (w t w t+k ) Note the analogy with the marginal cost expression used for the derivation of price dynamics mc t+kjt = mc t+k " p 1 (p t p t+k ) (Eq. 14, Chap. 3) 12
14 The optimal (log) wage then becomes wt = w + (1 w ) ( w ) k E t fmrs t+k " p ' (wt w t+k ) + p t+k g w t 1 + (1 w )! ( w ) k " p ' = w + (1 w ) w t (1 + " p ') = w + (1 w ) wt = 1 w 1 + " p ' ( w ) k E t fmrs t+k + " p 'w t+k + p t+k g ( w ) k E t fmrs t+k + " p 'w t+k + p t+k g ( w ) k E t f w + mrs t+k + " p 'w t+k + p t+k g Let w t w t p t mrs t be the economy s average wage markup. Then, wt = 1 w ( w ) k E t f w + w t+k p t+k w t+k + " p 'w t+k + p t+k g 1 + " p ' = 1 w ( w ) k E t f(1 + " p ') w t+k b w 1 + " p ' t+kg where b w t w t w. This is the unique stationary solution to the rst-order rational expectations di erence equation: wt = w E t fwt+1g + (1 w ) w t (1 + " p ') 1 b w t (10) 13
15 Combined with the log-linear dynamics for aggregate wages from wage index, w t = w w t 1 + (1 w ) w t ; (11) one gets a wage in ation equation w t = E t f w t+1g w b w t ; w (1 w) (1 w ) w (1 + " w ') where w t w t w t 1 is nominal wage in ation (12) Note the analogy with the price in ation curve Note that shocks to the economy under wage rigidity cause uctuations in the wage markup (the wedge between real wages and the marginal rate of substitution), and thus variations in wage in ation [so (12) replaces the condition w t p t = mrs t in the model with exible wages] Optimal intertemporal allocation of consumption across time is independent of wage setting and is given by c t = E t fc t+1 g 1 i t E t p t+1 (13) 14
16 Equilibrium Again, the equilibrium will be formulated in terms of gaps The output gap, ey t y t yt n is again output relative to the natural rate; but now yt n is output under exible prices and exible nominal wages The real wage gap is de ned as with the real wage being e! t =! t! n t! t w t p t The natural real wage is found from the de nition of marginal costs: which de nes! n t as mc t w t p t mpn t =! t (y t n t ) log (1 )! n t = log (1 ) + (y n t n n t ) p = log (1 ) + n yaa t 1 1 n yaa t a t = log (1 ) + n waa t p ; n wa 1 n ya 1 p 15
17 We now express the price Phillips curve in terms of gaps We again use mc t w t p t mpn t but expressed as average markup (mc t = p t): p t = mpn t! t Since! n t = log (1 ) + (y n t n n t ) p we get b p t = mpn t! t p b p t = y t n t! t p + log (1 ) b p t = (ey t en t ) e! t = 1 ey t e! t (14) Inserted into price in ation equation (5): p t = E t p t+1 + p ey t + p e! t ; p p 1 (15) 16
18 Similarly, to express the wage Phillips curve in terms of gaps, we use that and thus w t = w t p t mrs t b w t =! t mrs t w = e! t (ey t + 'en t ) = e! t + ' ey t : (16) 1 Inserted into the wage-in ation curve (12): w t = E t f w t+1g + w ey t + w e! t ; w w + ' 1 (17) 17
19 In addition to the two Phillips curves we have the usual Euler-equation written in terms of the output gap: ey t = E t fey t+1 g 1 i t E t p t+1 rt n (19) where is the natural rate of interest r n t + E t fy n t+1g The model is closed by a speci cation of monetary policy in the form of a generalized Taylor rule: i t = + p p t + w w t + y ey t + v t and a de nition equation linking real wages and price and nominal wage in ation: e! t = e! t 1 + w t p t! n t We now have ve equations to solve for the ve endogenous variables ey t, p t, w t, e! t, i t as functions of the exogenous shocks (a t and v t ), and given e! t 1 18
20 To simplify slightly, the nominal interest rate rule is inserted into the Euler-equation, and the system of four equilibrium conditions are written in matrix form as A w;0 x t = A w;1 E t fx t+1 g + B w z t x t [ey t ; p t; w t ; e! t 1 ] 0 ; z t [r n t v t ;! n t ] 0 To examine uniqueness of equilibrium, the relevant matrix is A w A 1 w;0 A w;1 There are three endogenous variables ey t ; p t; w t and one predetermined variable e! t 1. The system of di erence equations should thus have three unstable roots and one stable root This corresponds to A w having three characteristic roots within the unit circle, and one root outside the unit circle (or, had we written the system as E t fx t+1 g = A 1 w x t ::::, then the Blanchard and Kahn criterion would state that there should be three roots outside the unit circle; cf. the note on web) No analytical solution is available, but numerical analysis indicates that p + w > 1 is a su cient condition for equilibrium determinacy a generalized Taylor principle Immediate policy insight: Closing all gaps and having zero in ation rates are not generally feasible: Even if rt n = v t, ey t = p t = w t in real wages So, only if! n t = 0, is a gapless equilibrium possible = 0 will not be possible, as productivity shocks will require changes 19
21 Dynamic responses following a contractionary monetary policy shock (with simple Taylor rule based only on price in ation to facilitate comparison with Chapter 3): 20
22 Welfare-relevant objective for monetary policy Given that all gaps generally cannot be closed, what are the objectives of monetary policy? Social planner problem: s.t. (1), (2) and (6) Solution is max Z 1 0 U (C t (j) ; N t (j)) dj, all t C t (i; j) = C t ; all i; j 2 [0; 1] N t (i; j) = N t (j) = N t (i) = N t ; all i; j 2 [0; 1] U n;t = MP N t U c;t Note with monopoly price and wage setting under exible prices, where is an employment subsidy W t P t = U n;t U c;t M w ; P t = M p (1 ) W t MP N t Let 1 = (M w M p ) 1 then U n;t U c;t = MP N t and the ex-price allocation is e cient. This is assumed in the remainder 21
23 By the same method of deriving the approximated welfare under price rigidities only, the welfare loss can be written as a second-order approximation under both price and wage rigidities: W = 1 2 E 0 t + ' + ey t 2 + " p ( p 1 t) 2 + " w (1 ) ( w t ) 2 + t.i.p. (25) p w t=0 (Measured as a fraction of steady-state consumption.) Hence, a trade-o is present between output gap stability, price in ation stability, and wage in ation stability The relative weights on each objective have immediate intuition: Price in ation is more costly if the elasticity of substitution between goods are higher (as consumption dispersion will be large) Wage in ation is more costly if the elasticity of substitution between labor types are higher (as labor dispersion will be large) More price (wage) rigidity makes price (wage) in ation more costly as it rises price (wage) dispersion Note how the special case of exible wages ( w! 1) makes the wage in ation term vanish (and vice versa for the price in ation term in the special case of exible prices) 22
24 Optimal commitment policy Optimal monetary policy is computed under the assumption that commitment is possible (to derive a benchmark against which simple rules are to be compared) Following the approach of Chapter 5, one nds the optimal sequences of ey t, p t, w t, e! t to minimize W subject to the two Phillips curves and the dynamic de nition of the real wage gap From the four rst-order conditions and the three equilibrium condition, one solves for the endogenous variables and the three Lagrange multipliers (we need not set up the system here) Only in a special case can an analytical solution be attained: When substitution elasticities are proportional and the output gap a ects wage and price in ation identically: The optimal policy involves " p = " w (1 ), and p = w t = 0; which always implies ey t = 0 irrespective of parameters where t w p t + p w t p + w p + w I.e., a weighted average of in ation rates are fully stabilized; highest weight to price with highest degree of nominal rigidity (lowest z, z = p; w) 23
25 Dynamic responses following a positive technology shock: Optimal policies (commitment): General case 24
26 The performance of simple interest-rate rules Following the optimal commitment policies may be complicated Simple rules could be a substitute, and their performance are analyzed numerically Three strict in ation targeting rules: p t = 0, or w t = 0, or t = 0 (which implies ey t = 0) Three Taylor-type rules, called exible rules of the following kind i t = + 1:5 p t; i t = + 1:5 w t ; i t = + 1:5 t ; In each case, the model is numerically solved, and the s.d.s of the three welfare-relevant macrovariables are listed along with the welfare losses 25
27 26
Lecture 3, November 30: The Basic New Keynesian Model (Galí, Chapter 3)
MakØk3, Fall 2 (blok 2) Business cycles and monetary stabilization policies Henrik Jensen Department of Economics University of Copenhagen Lecture 3, November 3: The Basic New Keynesian Model (Galí, Chapter
More informationThe Basic New Keynesian Model. Jordi Galí. June 2008
The Basic New Keynesian Model by Jordi Galí June 28 Motivation and Outline Evidence on Money, Output, and Prices: Short Run E ects of Monetary Policy Shocks (i) persistent e ects on real variables (ii)
More informationThe Basic New Keynesian Model. Jordi Galí. November 2010
The Basic New Keynesian Model by Jordi Galí November 2 Motivation and Outline Evidence on Money, Output, and Prices: Short Run E ects of Monetary Policy Shocks (i) persistent e ects on real variables (ii)
More informationAdvanced Macroeconomics II. Monetary Models with Nominal Rigidities. Jordi Galí Universitat Pompeu Fabra April 2018
Advanced Macroeconomics II Monetary Models with Nominal Rigidities Jordi Galí Universitat Pompeu Fabra April 208 Motivation Empirical Evidence Macro evidence on the e ects of monetary policy shocks (i)
More informationMonetary Policy and Unemployment: A New Keynesian Perspective
Monetary Policy and Unemployment: A New Keynesian Perspective Jordi Galí CREI, UPF and Barcelona GSE May 218 Jordi Galí (CREI, UPF and Barcelona GSE) Monetary Policy and Unemployment May 218 1 / 18 Introducing
More informationMonetary Policy and Exchange Rate Volatility in a Small Open Economy. Jordi Galí and Tommaso Monacelli. March 2005
Monetary Policy and Exchange Rate Volatility in a Small Open Economy by Jordi Galí and Tommaso Monacelli March 2005 Motivation The new Keynesian model for the closed economy - equilibrium dynamics: simple
More informationMonetary Economics. Lecture 15: unemployment in the new Keynesian model, part one. Chris Edmond. 2nd Semester 2014
Monetary Economics Lecture 15: unemployment in the new Keynesian model, part one Chris Edmond 2nd Semester 214 1 This class Unemployment fluctuations in the new Keynesian model, part one Main reading:
More informationThe New Keynesian Model
The New Keynesian Model Basic Issues Roberto Chang Rutgers January 2013 R. Chang (Rutgers) New Keynesian Model January 2013 1 / 22 Basic Ingredients of the New Keynesian Paradigm Representative agent paradigm
More informationMonetary Policy and Unemployment: A New Keynesian Perspective
Monetary Policy and Unemployment: A New Keynesian Perspective Jordi Galí CREI, UPF and Barcelona GSE April 215 Jordi Galí (CREI, UPF and Barcelona GSE) Monetary Policy and Unemployment April 215 1 / 16
More informationMonetary Policy Design in the Basic New Keynesian Model. Jordi Galí. October 2015
Monetary Policy Design in the Basic New Keynesian Model by Jordi Galí October 2015 The E cient Allocation where C t R 1 0 C t(i) 1 1 1 di Optimality conditions: max U (C t ; N t ; Z t ) subject to: C t
More informationThe Basic New Keynesian Model, the Labor Market and Sticky Wages
The Basic New Keynesian Model, the Labor Market and Sticky Wages Lawrence J. Christiano August 25, 203 Baseline NK model with no capital and with a competitive labor market. private sector equilibrium
More informationThe Labor Market in the New Keynesian Model: Foundations of the Sticky Wage Approach and a Critical Commentary
The Labor Market in the New Keynesian Model: Foundations of the Sticky Wage Approach and a Critical Commentary Lawrence J. Christiano March 30, 2013 Baseline developed earlier: NK model with no capital
More informationAdvanced Macroeconomics II. Real Business Cycle Models. Jordi Galí. Universitat Pompeu Fabra Spring 2018
Advanced Macroeconomics II Real Business Cycle Models Jordi Galí Universitat Pompeu Fabra Spring 2018 Assumptions Optimization by consumers and rms Perfect competition General equilibrium Absence of a
More informationMacroeconomics Theory II
Macroeconomics Theory II Francesco Franco Novasbe February 2016 Francesco Franco (Novasbe) Macroeconomics Theory II February 2016 1 / 8 The Social Planner Solution Notice no intertemporal issues (Y t =
More informationSimple New Keynesian Model without Capital
Simple New Keynesian Model without Capital Lawrence J. Christiano January 5, 2018 Objective Review the foundations of the basic New Keynesian model without capital. Clarify the role of money supply/demand.
More informationMonetary Economics Notes
Monetary Economics Notes Nicola Viegi 2 University of Pretoria - School of Economics Contents New Keynesian Models. Readings...............................2 Basic New Keynesian Model...................
More informationResolving the Missing Deflation Puzzle. June 7, 2018
Resolving the Missing Deflation Puzzle Jesper Lindé Sveriges Riksbank Mathias Trabandt Freie Universität Berlin June 7, 218 Motivation Key observations during the Great Recession: Extraordinary contraction
More informationThe New Keynesian Model: Introduction
The New Keynesian Model: Introduction Vivaldo M. Mendes ISCTE Lisbon University Institute 13 November 2017 (Vivaldo M. Mendes) The New Keynesian Model: Introduction 13 November 2013 1 / 39 Summary 1 What
More informationGetting to page 31 in Galí (2008)
Getting to page 31 in Galí 2008) H J Department of Economics University of Copenhagen December 4 2012 Abstract This note shows in detail how to compute the solutions for output inflation and the nominal
More informationDynamic stochastic general equilibrium models. December 4, 2007
Dynamic stochastic general equilibrium models December 4, 2007 Dynamic stochastic general equilibrium models Random shocks to generate trajectories that look like the observed national accounts. Rational
More informationFiscal Multipliers in a Nonlinear World
Fiscal Multipliers in a Nonlinear World Jesper Lindé Sveriges Riksbank Mathias Trabandt Freie Universität Berlin November 28, 2016 Lindé and Trabandt Multipliers () in Nonlinear Models November 28, 2016
More informationSimple New Keynesian Model without Capital
Simple New Keynesian Model without Capital Lawrence J. Christiano March, 28 Objective Review the foundations of the basic New Keynesian model without capital. Clarify the role of money supply/demand. Derive
More informationStagnation Traps. Gianluca Benigno and Luca Fornaro
Stagnation Traps Gianluca Benigno and Luca Fornaro May 2015 Research question and motivation Can insu cient aggregate demand lead to economic stagnation? This question goes back, at least, to the Great
More informationProblem 1 (30 points)
Problem (30 points) Prof. Robert King Consider an economy in which there is one period and there are many, identical households. Each household derives utility from consumption (c), leisure (l) and a public
More informationAggregate Supply. A Nonvertical AS Curve. implications for unemployment, rms pricing behavior, the real wage and the markup
A Nonvertical AS Curve nominal wage rigidity nominal price rigidity labor and goods markets implications for unemployment, rms pricing behavior, the real wage and the markup Case 1: Sticky W, Flexible
More informationSimple New Keynesian Model without Capital. Lawrence J. Christiano
Simple New Keynesian Model without Capital Lawrence J. Christiano Outline Formulate the nonlinear equilibrium conditions of the model. Need actual nonlinear conditions to study Ramsey optimal policy, even
More informationSimple New Keynesian Model without Capital
Simple New Keynesian Model without Capital Lawrence J. Christiano Gerzensee, August 27 Objective Review the foundations of the basic New Keynesian model without capital. Clarify the role of money supply/demand.
More informationRBC Model with Indivisible Labor. Advanced Macroeconomic Theory
RBC Model with Indivisible Labor Advanced Macroeconomic Theory 1 Last Class What are business cycles? Using HP- lter to decompose data into trend and cyclical components Business cycle facts Standard RBC
More informationThe Return of the Wage Phillips Curve
The Return of the Wage Phillips Curve Jordi Galí CREI, UPF and Barcelona GSE March 2010 Jordi Galí (CREI, UPF and Barcelona GSE) The Return of the Wage Phillips Curve March 2010 1 / 15 Introduction Two
More informationResearch Division Federal Reserve Bank of St. Louis Working Paper Series
Research Division Federal Reserve Bank of St. Louis Working Paper Series Imperfect Competition and Sunspots Pengfei Wang and Yi Wen Working Paper 2006-05A http://research.stlouisfed.org/wp/2006/2006-05.pdf
More informationOptimal Simple And Implementable Monetary and Fiscal Rules
Optimal Simple And Implementable Monetary and Fiscal Rules Stephanie Schmitt-Grohé Martín Uribe Duke University September 2007 1 Welfare-Based Policy Evaluation: Related Literature (ex: Rotemberg and Woodford,
More informationTopic 9. Monetary policy. Notes.
14.452. Topic 9. Monetary policy. Notes. Olivier Blanchard May 12, 2007 Nr. 1 Look at three issues: Time consistency. The inflation bias. The trade-off between inflation and activity. Implementation and
More informationA Modern Equilibrium Model. Jesús Fernández-Villaverde University of Pennsylvania
A Modern Equilibrium Model Jesús Fernández-Villaverde University of Pennsylvania 1 Household Problem Preferences: max E X β t t=0 c 1 σ t 1 σ ψ l1+γ t 1+γ Budget constraint: c t + k t+1 = w t l t + r t
More informationFoundations for the New Keynesian Model. Lawrence J. Christiano
Foundations for the New Keynesian Model Lawrence J. Christiano Objective Describe a very simple model economy with no monetary frictions. Describe its properties. markets work well Modify the model to
More informationEquilibrium Conditions (symmetric across all differentiated goods)
MONOPOLISTIC COMPETITION IN A DSGE MODEL: PART II SEPTEMBER 30, 200 Canonical Dixit-Stiglitz Model MONOPOLISTICALLY-COMPETITIVE EQUILIBRIUM Equilibrium Conditions (symmetric across all differentiated goods)
More informationToulouse School of Economics, M2 Macroeconomics 1 Professor Franck Portier. Exam Solution
Toulouse School of Economics, 2013-2014 M2 Macroeconomics 1 Professor Franck Portier Exam Solution This is a 3 hours exam. Class slides and any handwritten material are allowed. You must write legibly.
More informationSolutions to Problem Set 4 Macro II (14.452)
Solutions to Problem Set 4 Macro II (14.452) Francisco A. Gallego 05/11 1 Money as a Factor of Production (Dornbusch and Frenkel, 1973) The shortcut used by Dornbusch and Frenkel to introduce money in
More informationChapter 6. Maximum Likelihood Analysis of Dynamic Stochastic General Equilibrium (DSGE) Models
Chapter 6. Maximum Likelihood Analysis of Dynamic Stochastic General Equilibrium (DSGE) Models Fall 22 Contents Introduction 2. An illustrative example........................... 2.2 Discussion...................................
More informationEconomics Discussion Paper Series EDP Measuring monetary policy deviations from the Taylor rule
Economics Discussion Paper Series EDP-1803 Measuring monetary policy deviations from the Taylor rule João Madeira Nuno Palma February 2018 Economics School of Social Sciences The University of Manchester
More informationAggregate Supply. Econ 208. April 3, Lecture 16. Econ 208 (Lecture 16) Aggregate Supply April 3, / 12
Aggregate Supply Econ 208 Lecture 16 April 3, 2007 Econ 208 (Lecture 16) Aggregate Supply April 3, 2007 1 / 12 Introduction rices might be xed for a brief period, but we need to look beyond this The di
More informationMacroeconomics Theory II
Macroeconomics Theory II Francesco Franco Nova SBE March 9, 216 Francesco Franco Macroeconomics Theory II 1/29 The Open Economy Two main paradigms Small Open Economy: the economy trades with the ROW but
More informationLecture 4 The Centralized Economy: Extensions
Lecture 4 The Centralized Economy: Extensions Leopold von Thadden University of Mainz and ECB (on leave) Advanced Macroeconomics, Winter Term 2013 1 / 36 I Motivation This Lecture considers some applications
More informationThe Labor Market in the New Keynesian Model: Incorporating a Simple DMP Version of the Labor Market and Rediscovering the Shimer Puzzle
The Labor Market in the New Keynesian Model: Incorporating a Simple DMP Version of the Labor Market and Rediscovering the Shimer Puzzle Lawrence J. Christiano April 1, 2013 Outline We present baseline
More information1 The social planner problem
The social planner problem max C t;k t+ U t = E t X t C t () that can be written as: s.t.: Y t = A t K t (2) Y t = C t + I t (3) I t = K t+ (4) A t = A A t (5) et t i:i:d: 0; 2 max C t;k t+ U t = E t "
More informationSophisticated Monetary Policies
Federal Reserve Bank of Minneapolis Research Department Sta Report 419 January 2008 Sophisticated Monetary Policies Andrew Atkeson University of California, Los Angeles, Federal Reserve Bank of Minneapolis,
More information1. Constant-elasticity-of-substitution (CES) or Dixit-Stiglitz aggregators. Consider the following function J: J(x) = a(j)x(j) ρ dj
Macro II (UC3M, MA/PhD Econ) Professor: Matthias Kredler Problem Set 1 Due: 29 April 216 You are encouraged to work in groups; however, every student has to hand in his/her own version of the solution.
More informationThe Design of Monetary and Fiscal Policy: A Global Perspective
The Design of Monetary and Fiscal Policy: A Global Perspective Jess Benhabib New York University Stefano Eusepi Federal Reseve Bank of New York Very Preliminary-Comments Welcome November 6, 004 Abstract
More informationECON 5118 Macroeconomic Theory
ECON 5118 Macroeconomic Theory Winter 013 Test 1 February 1, 013 Answer ALL Questions Time Allowed: 1 hour 0 min Attention: Please write your answers on the answer book provided Use the right-side pages
More informationDynamics and Monetary Policy in a Fair Wage Model of the Business Cycle
Dynamics and Monetary Policy in a Fair Wage Model of the Business Cycle David de la Croix 1,3 Gregory de Walque 2 Rafael Wouters 2,1 1 dept. of economics, Univ. cath. Louvain 2 National Bank of Belgium
More informationOnline Appendix for Investment Hangover and the Great Recession
ONLINE APPENDIX INVESTMENT HANGOVER A1 Online Appendix for Investment Hangover and the Great Recession By MATTHEW ROGNLIE, ANDREI SHLEIFER, AND ALP SIMSEK APPENDIX A: CALIBRATION This appendix describes
More informationFoundations for the New Keynesian Model. Lawrence J. Christiano
Foundations for the New Keynesian Model Lawrence J. Christiano Objective Describe a very simple model economy with no monetary frictions. Describe its properties. markets work well Modify the model dlto
More informationComments on A Model of Secular Stagnation by Gauti Eggertsson and Neil Mehrotra
Comments on A Model of Secular Stagnation by Gauti Eggertsson and Neil Mehrotra John H. Cochrane Univeristy of Chicago Booth School of Business, NBER, Hoover, Cato. Percent, 2007=100 Important paper background
More informationNew Keynesian DSGE Models: Building Blocks
New Keynesian DSGE Models: Building Blocks Satya P. Das @ NIPFP Satya P. Das (@ NIPFP) New Keynesian DSGE Models: Building Blocks 1 / 20 1 Blanchard-Kiyotaki Model 2 New Keynesian Phillips Curve 3 Utility
More informationDSGE-Models. Calibration and Introduction to Dynare. Institute of Econometrics and Economic Statistics
DSGE-Models Calibration and Introduction to Dynare Dr. Andrea Beccarini Willi Mutschler, M.Sc. Institute of Econometrics and Economic Statistics willi.mutschler@uni-muenster.de Summer 2012 Willi Mutschler
More informationEquilibrium Conditions for the Simple New Keynesian Model
Equilibrium Conditions for the Simple New Keynesian Model Lawrence J. Christiano August 4, 04 Baseline NK model with no capital and with a competitive labor market. private sector equilibrium conditions
More informationThe Design of Monetary and Fiscal Policy: A Global Perspective
The Design of Monetary and Fiscal Policy: A Global Perspective Jess Benhabib New York University Stefano Eusepi Federal Reseve Bank of New York January 4, 005 Abstract We study the the emergence of multiple
More informationAdvanced Economic Growth: Lecture 8, Technology Di usion, Trade and Interdependencies: Di usion of Technology
Advanced Economic Growth: Lecture 8, Technology Di usion, Trade and Interdependencies: Di usion of Technology Daron Acemoglu MIT October 3, 2007 Daron Acemoglu (MIT) Advanced Growth Lecture 8 October 3,
More informationThe Smets-Wouters Model
The Smets-Wouters Model Monetary and Fiscal Policy 1 1 Humboldt Universität zu Berlin uhlig@wiwi.hu-berlin.de Winter 2006/07 Outline 1 2 3 s Intermediate goods firms 4 A list of equations Calibration Source
More informationPublic Economics The Macroeconomic Perspective Chapter 2: The Ramsey Model. Burkhard Heer University of Augsburg, Germany
Public Economics The Macroeconomic Perspective Chapter 2: The Ramsey Model Burkhard Heer University of Augsburg, Germany October 3, 2018 Contents I 1 Central Planner 2 3 B. Heer c Public Economics: Chapter
More informationTaylor Rules and Technology Shocks
Taylor Rules and Technology Shocks Eric R. Sims University of Notre Dame and NBER January 17, 2012 Abstract In a standard New Keynesian model, a Taylor-type interest rate rule moves the equilibrium real
More informationLecture 9: The monetary theory of the exchange rate
Lecture 9: The monetary theory of the exchange rate Open Economy Macroeconomics, Fall 2006 Ida Wolden Bache October 24, 2006 Macroeconomic models of exchange rate determination Useful reference: Chapter
More informationproblem. max Both k (0) and h (0) are given at time 0. (a) Write down the Hamilton-Jacobi-Bellman (HJB) Equation in the dynamic programming
1. Endogenous Growth with Human Capital Consider the following endogenous growth model with both physical capital (k (t)) and human capital (h (t)) in continuous time. The representative household solves
More informationLecture 7. The Dynamics of Market Equilibrium. ECON 5118 Macroeconomic Theory Winter Kam Yu Department of Economics Lakehead University
Lecture 7 The Dynamics of Market Equilibrium ECON 5118 Macroeconomic Theory Winter 2013 Phillips Department of Economics Lakehead University 7.1 Outline 1 2 3 4 5 Phillips Phillips 7.2 Market Equilibrium:
More informationReal Wage Rigidities and the Cost of Disin ations: A Comment on Blanchard and Galí
Real Wage Rigidities and the Cost of Disin ations: A Comment on Blanchard and Galí Guido Ascari University of Pavia Christian Merkl y IfW and University of Kiel January 29, 27 Abstract This paper analyzes
More informationDemand Shocks with Dispersed Information
Demand Shocks with Dispersed Information Guido Lorenzoni (MIT) Class notes, 06 March 2007 Nominal rigidities: imperfect information How to model demand shocks in a baseline environment with imperfect info?
More information4- Current Method of Explaining Business Cycles: DSGE Models. Basic Economic Models
4- Current Method of Explaining Business Cycles: DSGE Models Basic Economic Models In Economics, we use theoretical models to explain the economic processes in the real world. These models de ne a relation
More informationCentral Bank Communication and the Liquidity Trap
Central Bank Communication and the Liquidity Trap Stefano Eusepi y Federal Reserve Bank of New York October 8, 2009 Abstract Central bank communication plays an important role in shaping market participants
More informationGali (2008), Chapter 3
Set 4 - The Basic New Keynesian Model Gali (28), Chapter 3 Introduction There are several key elements of the baseline model that are a departure from the assumptions of the classical monetary economy.
More informationInference. Jesús Fernández-Villaverde University of Pennsylvania
Inference Jesús Fernández-Villaverde University of Pennsylvania 1 A Model with Sticky Price and Sticky Wage Household j [0, 1] maximizes utility function: X E 0 β t t=0 G t ³ C j t 1 1 σ 1 1 σ ³ N j t
More informationFiscal Multipliers in a Nonlinear World
Fiscal Multipliers in a Nonlinear World Jesper Lindé and Mathias Trabandt ECB-EABCN-Atlanta Nonlinearities Conference, December 15-16, 2014 Sveriges Riksbank and Federal Reserve Board December 16, 2014
More informationDiscussion of Riccardo DiCecio \Comovement: It's not a Puzzle" Matteo Iacoviello Boston College
Discussion of Riccardo DiCecio \Comovement: It's not a Puzzle" Matteo Iacoviello Boston College THE QUESTION Question: can we construct a coherent DSGE macro model that explains the comovement puzzle?
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 202 Answer Key to Section 2 Questions Section. (Suggested Time: 45 Minutes) For 3 of
More informationNew Keynesian Model Walsh Chapter 8
New Keynesian Model Walsh Chapter 8 1 General Assumptions Ignore variations in the capital stock There are differentiated goods with Calvo price stickiness Wages are not sticky Monetary policy is a choice
More information1. Money in the utility function (start)
Monetary Economics: Macro Aspects, 1/3 2012 Henrik Jensen Department of Economics University of Copenhagen 1. Money in the utility function (start) a. The basic money-in-the-utility function model b. Optimal
More informationAre Uncertainty Shocks Aggregate Demand Shocks?
Are Uncertainty Shocks Aggregate Demand Shocks? Stefano Fasani University of Milan Bicocca Lorenza Rossi y University of Pavia December 24 27 Abstract This note considers the Leduc and Liu (JME 26) model
More informationFEDERAL RESERVE BANK of ATLANTA
FEDERAL RESERVE BANK of ATLANTA On the Solution of the Growth Model with Investment-Specific Technological Change Jesús Fernández-Villaverde and Juan Francisco Rubio-Ramírez Working Paper 2004-39 December
More informationDeviant Behavior in Monetary Economics
Deviant Behavior in Monetary Economics Lawrence Christiano and Yuta Takahashi July 26, 2018 Multiple Equilibria Standard NK Model Standard, New Keynesian (NK) Monetary Model: Taylor rule satisfying Taylor
More informationLars Svensson 2/16/06. Y t = Y. (1) Assume exogenous constant government consumption (determined by government), G t = G<Y. (2)
Eco 504, part 1, Spring 2006 504_L3_S06.tex Lars Svensson 2/16/06 Specify equilibrium under perfect foresight in model in L2 Assume M 0 and B 0 given. Determine {C t,g t,y t,m t,b t,t t,r t,i t,p t } that
More information1 The Basic RBC Model
IHS 2016, Macroeconomics III Michael Reiter Ch. 1: Notes on RBC Model 1 1 The Basic RBC Model 1.1 Description of Model Variables y z k L c I w r output level of technology (exogenous) capital at end of
More informationProblem Set 2: Sketch of Answers
Problem Set 2: Sketch of Answers HEC Lausanne, Département d économie politique Business Cycles 2003 Prof. Aude Pommeret Ivan Jaccard April 30, 2004 Part I: Open questions 1. Explain why the consensus
More informationOpenness, imported commodities and the Phillips curve
Openness, imported commodities and the Phillips curve Andrew Pickering Héctor Valle Discussion Paper No. 08/608 October 2008 Department of Economics University of Bristol 8 Woodland Road Bristol BS8 TN
More informationReal Business Cycle Model (RBC)
Real Business Cycle Model (RBC) Seyed Ali Madanizadeh November 2013 RBC Model Lucas 1980: One of the functions of theoretical economics is to provide fully articulated, artificial economic systems that
More informationInflation Stabilization and Welfare: The Case of a Distorted Steady State
Inflation Stabilization and Welfare: The Case of a Distorted Steady State Pierpaolo Benigno New York University Michael Woodford Princeton University February 10, 2005 Abstract This paper considers the
More informationCEP Discussion Paper No 666 December 2004
CEP Discussion Paper No 666 December 2004 Designing Targeting Rules for International Monetary Policy Cooperation Gianluca Benigno and Pierpaolo Benigno Abstract This study analyzes a two-country dynamic
More informationCan News be a Major Source of Aggregate Fluctuations?
Can News be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach Ippei Fujiwara 1 Yasuo Hirose 1 Mototsugu 2 1 Bank of Japan 2 Vanderbilt University August 4, 2009 Contributions of this paper
More informationPolicy Inertia and Equilibrium Determinacy in a New. Keynesian Model with Investment
Policy Inertia and Equilibrium Determinacy in a New Keynesian Model with Investment Wei Xiao State University of New York at Binghamton June, 2007 Abstract Carlstrom and Fuerst (2005) demonstrate that
More informationMonetary Policy with Heterogeneous Agents: Insights from Tank Models
Monetary Policy with Heterogeneous Agents: Insights from Tank Models Davide Debortoli Jordi Galí October 2017 Davide Debortoli, Jordi Galí () Insights from TANK October 2017 1 / 23 Motivation Heterogeneity
More information(a) Write down the Hamilton-Jacobi-Bellman (HJB) Equation in the dynamic programming
1. Government Purchases and Endogenous Growth Consider the following endogenous growth model with government purchases (G) in continuous time. Government purchases enhance production, and the production
More informationAdvanced Macroeconomics II The RBC model with Capital
Advanced Macroeconomics II The RBC model with Capital Lorenza Rossi (Spring 2014) University of Pavia Part of these slides are based on Jordi Galì slides for Macroeconomia Avanzada II. Outline Real business
More informationDeep Habits, Nominal Rigidities and Interest Rate Rules
Deep Habits, Nominal Rigidities and Interest Rate Rules Sarah Zubairy August 18, 21 Abstract This paper explores how the introduction of deep habits in a standard new-keynesian model affects the properties
More informationNew Keynesian Macroeconomics
New Keynesian Macroeconomics Chapter 4: The New Keynesian Baseline Model (continued) Prof. Dr. Kai Carstensen Ifo Institute for Economic Research and LMU Munich May 21, 212 Prof. Dr. Kai Carstensen (LMU
More informationCompetitive Equilibrium and the Welfare Theorems
Competitive Equilibrium and the Welfare Theorems Craig Burnside Duke University September 2010 Craig Burnside (Duke University) Competitive Equilibrium September 2010 1 / 32 Competitive Equilibrium and
More informationOptimal Trend In ation
Optimal Trend In ation Klaus Adam University of Mannheim Henning Weber Deutsche Bundesbank September 2017 Adam & Weber () Trend In ation September 2017 1 / 46 Introduction Add rm heterogeneity (productivity)
More informationImperfect Information and Optimal Monetary Policy
Imperfect Information and Optimal Monetary Policy Luigi Paciello Einaudi Institute for Economics and Finance Mirko Wiederholt Northwestern University March 200 Abstract Should the central bank care whether
More informationNeoclassical Business Cycle Model
Neoclassical Business Cycle Model Prof. Eric Sims University of Notre Dame Fall 2015 1 / 36 Production Economy Last time: studied equilibrium in an endowment economy Now: study equilibrium in an economy
More informationAdvanced Macroeconomics
Advanced Macroeconomics The Ramsey Model Marcin Kolasa Warsaw School of Economics Marcin Kolasa (WSE) Ad. Macro - Ramsey model 1 / 30 Introduction Authors: Frank Ramsey (1928), David Cass (1965) and Tjalling
More informationOn the International Dimension of Fiscal Policy
On the International Dimension of Fiscal Policy Gianluca Benigno London School of Economics, CEP and CEPR Bianca De Paoli y Bank of England and London School of Economics December 008 Abstract This paper
More informationForward Guidance without Common Knowledge
Forward Guidance without Common Knowledge George-Marios Angeletos 1 Chen Lian 2 1 MIT and NBER 2 MIT November 17, 2017 Outline 1 Introduction 2 Environment 3 GE Attenuation and Horizon Effects 4 Forward
More informationDemand Shocks, Monetary Policy, and the Optimal Use of Dispersed Information
Demand Shocks, Monetary Policy, and the Optimal Use of Dispersed Information Guido Lorenzoni (MIT) WEL-MIT-Central Banks, December 2006 Motivation Central bank observes an increase in spending Is it driven
More informationModelling Czech and Slovak labour markets: A DSGE model with labour frictions
Modelling Czech and Slovak labour markets: A DSGE model with labour frictions Daniel Němec Faculty of Economics and Administrations Masaryk University Brno, Czech Republic nemecd@econ.muni.cz ESF MU (Brno)
More information