Lecture 8: Aggregate demand and supply dynamics, closed economy case.
|
|
- Maude Booker
- 5 years ago
- Views:
Transcription
1 Lecture 8: Aggregate demand and supply dynamics, closed economy case. Ragnar Nymoen Department of Economics, University of Oslo October 20,
2 Ch 17, 19 and 20 in IAM Since our primary concern is to develop and apply the methodology of dynamic analysis we focus on the main properties of the models. This is not a course in business cycle analysis, so the book s focus on how well the AD-AS model fit the business cycle is not emphasized here. The focus is instead on the representation of the transmission mechanism of monetary policy: How changes in the monetary policy instruments affects the real economy. The transmission mechanisms resides both on the demand side and on the supply side of the economy. Ch 20: The main point here is a (simplified) discussion of the book s discussion of optimal choice of weights in the Taylor rule. 2
3 Aggregate demand theory: Private consumption and investment In the following we will use a simple representation (as in IAM): C t = C(Y t T t,r t ), C Y > 0,C r < 0, (1) where C = Private consumption in real terms (the price level of the base year). Y = GDP in real terms, T = The tax level, in real terms. r = The real interest rate: r t = i t πt+1 e (2) i = Nominal interest rate π e = The expected rate of inflation 3
4 In IDM we had a consumption function with fewer explanatory variables, essentially only Y t T t. We could have added r t, for example, but left it out for simplicity. On the other hand, IDM had lagged C t of course! The specification here (and in IAM) thus assumes that adjustment of C t to changes in Y t T t for example is all done within the period of analysis. The important extension compared to IDM is the real interest rate r t which has a negative derivative to capture intertemporal substitution. Note also the definition of the real exchange rate: it is in terms of inflation expectations. 4
5 I t = I(Y t,r t ), I Y > 0, I r < 0. (3) Investment is growing when output is increased because there are strong incentives to increase capacity in such a growth situation (with increased capacity, the expected dividends to shareholders become higher). A higher real interest rate reduces the present value of expected dividend increases, and reduces the incentive to invest. Increased r t also makes other types of investment more attractive compared to investment in physical capital (bond, bank deposits). 5
6 TheaggregatedemandfunctionandtheIScurve We define the aggregate private demand function D t as with derivatives: D t C(Y t T t,r t )+I(Y t,r t )=D(Y t,t t,r t ) 0 <D Y D t Y t C Y + I Y < 1 D r D t r t C r + I r < 0 D T D t T t C Y < 0 If we let G t denote public sector expenditure (in real terms) the equilibrium condition on the product market becomes (4) Y t = D(Y t,t t,r t )+G t (5) which defines Y t the IS-curve: the downward sloping curve between GDP and interest rate, known from the Keynesian macro model of earlier courses. 6
7 (Graph from IAM with negative relationship between interest rate and aggregate demand) 7
8 Balanced government budget We know from before that (in this model) a balanced change in the budget has an expansionary effect on GDP. For simplicity, we will impose this in the form of: T = G so that the IS curve we will use in the following is meaning that Y t = D(Y t,g t,r t )+G t (6) from the demand side. Y t G t C Y +1> 0 (7) 8
9 Steady state and linearization Our model of aggregate demand is now: and Y t = D(Y t,g t,r t )+G t (8) r t = i t π e t+1. Which, despite all the simplifications, is a dynamic model of the demand side, because of the expectations variable (remember expectations as a source of dynamics ). In the case where all the arguments in the demand function are at their long-run (steady state) values, the long-run aggregate demand function becomes: Ȳ = D(Ȳ,Ḡ, r)+ḡ the IAM textbook shows how (8) can be log-linearized around the steady state to give y t ȳ = α 1 (g t ḡ) α 2 (r t r)+v t, α 1 > 0, α 2 > 0 (9) where y t =ln(y t ), etc., and we introduce v t as random demand-shock variable. 9
10 The model of aggregate demand and supply (IAM 19.1 and 19.2) y t = α 0 + α 1 g t α 2 r t + v t,α 1 > 0,α 2 > 0 (10) r t = i t πt+1 e (11) i t = r + πt+1 e + h(π t π )+b(y t ȳ),h>0,b>0 (12) m t π t p t 1 = m 0 m 1 i t + m 2 y t,m i > 0, i =1, 2 (13) π t = πt e + γ(y t ȳ)+s t (14) (10) is linearized IS curve, supplemented with a variable v t that represents arbitrary demand disturbances ( shocks ), possibly due to shifts in private sector confidence. Compared to IAM ch 19 we collect ȳ, α 1 ḡ and α 2 r in a constant term. (11) is the definition of the real interest rate. πt+1 e is the expected rate of inflation, one period ahead. (12) is the Taylor rule of Ch 17 in IAM. 10
11 The Taylor rule equation i t = r + π e t+1 + h(π t π )+b(y t ȳ),h>0,b>0 represents how a central bank that has the nominal interest rate as its policy instrument, putssomeweightoninflation stabilization, π denotes the inflation target, and some on GDP stabilization. The coefficient h and b reflect policy priorities and preferences. Note that the central bank puts separate weight on inflation expectations, so if πt+1 e goes up, the interest rate is increased (even before) actual inflation is affected. In this sense, the Taylor-rule captures forward lookingness of interest rate setting. 11
12 Equation (13) of the model represents equilibrium in the money market (13). We prefer to represent this explicitly since it is otherwise easy to forget the role of money (once the Taylor rule has been included). Note that m t p t m t π t p t 1 has been used. (14) is the Phillips curve model and represents the supply side. From the first part of the lectures we remember that this representation of wage-and price settings strongly restricts how the nominal dynamics (wage and price evolution through time) can be stabilized. Instead of unemployment, product and labour market pressure is represented by the output gap (y t ȳ), ȳ represents output at full employment, Remember that y t,g t,m t and p t are in logs. (10)-(14) represents a dynamic system of equations. 12
13 We next follow the 3-step approach to the analysis of dynamic models: 1. Define the short-run model 2. Define the long-run model (i.e., for a long-run steady state, assuming that it exists) 3. The question about dynamic stability of the long-run solution 13
14 The short-run model In the short run, in period t, the following variables are exogenous: g t, v t, s t and p t 1. If we do not specify a model for πt+1 e,inflation expectations are also exogenous However, that would leave the model incomplete since it is realistic that expectations are endogenous also in the short-run. Hence we follow the book and specify π e t+j = π t+j 1, forj =0, 1 (15) as the 6th equation of the short-run model. The 6 endogenous variables are y t, i t, r t,π t, π e t and m t. We solve the short-run model by using (10), (11), (12) and (15) to obtain the semi-reduced form equation: π t = π 1 α (y t z t ), (16) with α = α 2h 1+α 2 b and z t = α 0 + v t + α 1 g t α 2 r + α 2 bȳ. 1+α 2 b 14
15 Equation (16), and: π t = π t 1 + γ(y t ȳ)+s t (17) are 2 equations, referred to as the short-run aggregate demand (SRAD) function, and the short-run aggregate supply (SRAS) function. They define the equilibrium solutions for y t and π t as functions of the exogenous and predetermined variables:g t, v t, s t and π t 1. The solutions for y t,andπ t can be substituted back into the Taylor rule to give the solution for i t, and to in the money market equilibrium condition to give m t. In each period, the money market is equilibrated with the aid of central bank market operations, which can change the stock of money instantaneously. 15
16 The long-run model The long-run model is defined for the following definition of a steady-state situation π t = π t 1 = π (18) which implies that expectations are correct in steady state: π e t = π t The Phillips curve has to hold also in this situation, hence the steady-state value of y t has to be equal to ȳ, y =ȳ (19) which we express by saying that the long-run aggregate supply function (LRAS) is vertical, see figure 19.3 in AIR. The corresponding long-run aggregate demand (LRAD) function is π = π 1 (y z) (20) α 16
17 where z is given by z = α 0 + α 1 ḡ α 2 r + α 2 bȳ 1+α 2 b where ḡ is the constant value of g t and the two shock variables s t and v t are set to zero. (19) and (20) define the long-run model. There are two endogenous variables namely π and y. We see immediately that the long-run solution is y =ȳ (21) π = π (22) if the inflation target is to be attained. In that case a third variable is determined in the long-run, for example the equilibrium interest rate r. Remember that is a property of this model that the steady-state GDP level is given from the supply-side. Specifically, think of ȳ as ȳ = γ 0 /γ where γ 0 is the constant term in the PCM, which is implicit in the formulation in equation (14). 17
18 The dynamic analysis SRAD in (16) holds in each period, hence π t 1 = π 1 α (y t 1 z t 1 ), Substitution in the SRAS function gives π t = π 1 α (y t 1 z t 1 )+γ(y t ȳ)+s t Finally, substitution on the left hand side by the SRAD in (16) gives π 1 α (y t z t )=π 1 α (y t 1 z t 1 )+γ(y t ȳ)+s t (23) which we can write as an ADL equation for y t : y t = 1 1+γα y t γα (z t z t 1 )+ which is similar to (19) in AIR ch 19. α 1+γα γȳ α 1+γα s t (24) 18
19 Since both γ and α are positive (as long as h>0) we know from the first part of the lectures that the dynamic model for y t is dynamically stable. Specifically, since 0 < 1/(1 + γα) < 1, the autoregressive parameter of (24) satisfies the stability requirement that we know from before (i.e., the IDM part of the lectures) We also know that since π t dependsonlagsofy t 1,andy t depends on π t,we cannot have stability in y t without also stability of inflation. 19
20 Dynamic responses to demand shocks. Assume that we are in a steady-state situation initially, in period t 1, with s t 1 = v t 1 =0. Then v t =1butv t+1 = v t+2... arezero. Hencewehavea temporary demand shock. Using (24): y t = 1 z t > 0 v t 1+γα v t y t+1 = 1 y t 1 z t = 1 v t 1+γα v t 1+γα v t 1+γα ( 1 1+γα 1) z t < 0 v t y t+2 = 1 y t+1 v t 1+γα v t The first multiplier is positive, but less than one, since interest rates are increased in the period of the shock. The second multiplier is negative, since the PCM has shifted up in the same period as SRAD shifts back to its original position. All the subsequent multipliers, or impulse responses as they are called in IAM, are also negative, but they are diminishing in magnitude. 20
21 Inthecaseofapermanent demand shock, all the multipliers are positive and declining. But the long-run multiplier is zero, as can be seen directly from the long-run model. For multiplier number j + 1: δ j = 1 1+γα δ j 1. Note that you can lift the expressions for the multipliers from IDM, Table 2.1. Inflation responds more smoothly to a temporary demand shock. This due to two features of the model. 1. Demand shocks only affect inflation indirectly, through y t. 2. Movements in y t are smoothed by inflation expectations, which weights heavily in inflation dynamics. See for example figure 19.6 and 19.8 in IAM. Take care to study the examples of supply shocks as well. 21
22 The AD-AS model with adaptive expectations (Ch 19.3) Which properties of the model are dictated by the choice of static inflation expectations in the basic version of the closed economy AD-AS model? In order to investigate, consider adaptive expectation instead. In the short-run model, replace (15) by or, equivalently: πt e πt 1 e =(1 φ)(π t 1 πt 1 e ), 0 φ 1, (25) π e t = φπ e t 1 +(1 φ)π t 1. (26) Note first the SRAD is unaffected since in the Taylor rule has been specified in such at way that πt+1 e cancels out when we substitute to derive the SRAD function. 22
23 With adaptive expectations the SRAS function replaces (17). π t = φπ e t 1 +(1 φ)π t 1 + γ(y t ȳ)+s t (27) Short-run model. Since the SRAD function is unchanged, and SRAS is given by (27) we conclude that the short-run model is unaffected by changing the model of expectations. The impact multipliers are therefore unaffected. Long-run model It is also the same as with static expectations. This generic, to models with expectations: the long-run model is always unaffected by changes in the specification of how expectations are formed. The dynamic analysis This is affected, since π e t 1 enters into the model, not only π t 1. Intuitively however, dynamic stability is not endangered. 23
24 The model with a downward sloping long-run Phillips curve ThePCMaboveisaspecialcaseof π t = γ e π e t + γ(y t ȳ)+s t, 0 <γ e 1. With a non-homogeneous PCM, the case of γ e < 1, the AD-AS framework has the same short-run and dynamic properties as above. The long-run model becomes π = π 1 (ȳ z) α π = γ e π + γ(y ȳ), 0 <γ e < 1 since the LRAS function is no longer vertical but upward sloping. A main criticism of model with a downward sloping long-run Phillips curve is that it implies that there is a long-run trade off between inflation and output (or unemployment), which is now regarded as naive policy optimism. However, this conclusion is avoided in the IAM specification of the AD-AS model, since the Taylor rule for monetary policy ties down y =ȳ in any case. 24
25 Stabilization policy in the closed economy model (Ch 20 in IDM) In the model of Ch 19, with all its simplifications, nevertheless captures the gist of the standard model for policy analysis in a closed economy. Since the model economy is dynamically stable, and full employment GDP is independent of both monetary and fiscal policy, the remaining rationale for doing macroeconomic policy is to reduce the welfare losses which are due to the temporary disturbances in demand and supply, and their propagation. Welfare losses are assumed to be linked to variations in demand and in inflation. IAM, ch 20.1, formalizes this by assuming that the government seeks to minimize the sum of standard deviations in output and inflation, see equation (1) on page
26 In this course we need to bypass the calculation of standard deviations. However, a discussion along the same lines can utilize the dynamic multipliers, which of course depends on the shocks, but also on the parameters of the Taylor-rule. Graphical analysis of the AD-AS model can also be used. Themainquestiontoanswerishowtheparametersb and h in the Taylor rule can be chosen to avoid unwanted variability. Policy response to demand shocks We derived the multipliers for a demand shock above. Denote them by δo,v, y δ y 1,v,etc.Thefirst multiplier: δo,v y = 1 z t,with z t 1 = (28) 1+γα v t v t 1+α 2 b If the government has a strong preference for output stabilization, then it chooses b to be sufficiently high so that the demand shock triggered by the increase in v t is very small. 26
27 Or, it can neutralize the response of y t to any given increase in z t by choosing ahighh. Thisfollowssinceα is increasing in h. α = α 2h 1+α 2 b If the government instead has a preference for inflation stabilization, we can use (17) and (28) to obtain δo,v π = γδo,v y and δ1,v π = δπ o,v + γδo,v. y Hence, a policy which stabilizes output also reduces the variability of inflation. There is no trade-off when the source of variability is demand shocks, see Table 20.2 and the associated text. 27
28 Policy response to supply shocks Using (17) and (28) again. we obtain: δo,s y = α 1+γα δ y 1,s = 1 1+γα δy o,s and δ π o,s =1+γδ y o,s Using the expression for α = α 2 h/(1 + α 2 b), we see that the absolute value of δ o,s can be reduced by choosing h as low as possible, while maintaining dynamic stability. b>0 also helps reducing. δ y o,s However, if the preference is for inflation stability, it is preferred that δ y o,s is as negative as possible, and this suggest h>0 and b<0. Hence, in the face of supply shocks, there is a trade off between inflation stabilization and output stabilization. 28
29 In theory a balanced choice of b and h values are chosen by minimize the welfare loss function. The Taylor principle In most constellations we have h>0 as a good choice of weight on the inflationterminthetaylor-rule. In the model specification with static inflation expectations this implies that the nominal interest rate increases with more than one percentage point if π t increases by one percentage point. Therefore the real interest rate increases in the period of the inflation shock. 29
30 Rulesvsdiscretion. In the AD-AS model in Ch 19 and 20, there is a Taylor-rule for monetary policy. A version with full discretion would be with i t exogenous (no Taylor rule). The interest rate can then be set on a period to period basis, or with respect to different goals (or targets) from period to period. In modern macro economic policy rules have become popular. Taylor rule and fiscal policy rules (Norway for example). There are good reasons for this: reduce influence of pressure groups, a stable framework for policy; transparency, tie oneself to the mast (Ulysses and the sirens), and time consistent policy (which we will review in the next lecture). 30
Closed economy macro dynamics: AD-AS model and RBC model.
Closed economy macro dynamics: AD-AS model and RBC model. Ragnar Nymoen Department of Economics, UiO 22 September 2009 Lecture notes on closed economy macro dynamics AD-AS model Inflation targeting regime.
More informationLecture 9: Stabilization policy with rational expecations; Limits to stabilization policy; closed economy case.
Lecture 9: Stabilization policy with rational expecations; Limits to stabilization policy; closed economy case. Ragnar Nymoen Department of Economics, University of Oslo October 17, 2008 1 Ch21andch22inIAM
More informationMacroeconomics II. Dynamic AD-AS model
Macroeconomics II Dynamic AD-AS model Vahagn Jerbashian Ch. 14 from Mankiw (2010) Spring 2018 Where we are heading to We will incorporate dynamics into the standard AD-AS model This will offer another
More informationDynamic AD-AS model vs. AD-AS model Notes. Dynamic AD-AS model in a few words Notes. Notation to incorporate time-dimension Notes
Macroeconomics II Dynamic AD-AS model Vahagn Jerbashian Ch. 14 from Mankiw (2010) Spring 2018 Where we are heading to We will incorporate dynamics into the standard AD-AS model This will offer another
More informationStabilization policy with rational expectations. IAM ch 21.
Stabilization policy with rational expectations. IAM ch 21. Ragnar Nymoen Department of Economics, UiO Revised 20 October 2009 Backward-looking expectations (IAM 21.1) I From the notes to IAM Ch 20, we
More informationIdentifying the Monetary Policy Shock Christiano et al. (1999)
Identifying the Monetary Policy Shock Christiano et al. (1999) The question we are asking is: What are the consequences of a monetary policy shock a shock which is purely related to monetary conditions
More informationWage and price setting. Slides for 26. August 2003 lecture
1 B&W s derivation of the Phillips curve Wage and price setting. Slides for 26. August 2003 lecture Ragnar Nymoen University of Oslo, Department of Economics Ch 12.3: The Battle of the mark-ups as a framework
More informationSlides to Lecture 3 of Introductory Dynamic Macroeconomics. Linear Dynamic Models (Ch 2 of IDM)
Partial recap of lecture 2 1. We used the ADL model to make precise the concept of dynamic multiplier. Slides to Lecture 3 of Introductory Dynamic Macroeconomics. Linear Dynamic Models (Ch 2 of IDM) Ragnar
More informationQueen s University Department of Economics Instructor: Kevin Andrew
Queen s University Department of Economics Instructor: Kevin Andrew Econ 320: Assignment 4 Section A (100%): Long Answer Due: April 2nd 2014 3pm All questions of Equal Value 1. Consider the following version
More informationTwo Models of Macroeconomic Equilibrium
Two Models of Macroeconomic Equilibrium 1 The Static IS-LM Model The model equations are given as C η +γ(y T) (1) T τy (2) I α r (3) G T (4) L φy θr (5) M µ (6) Y C +I +G (7) L M (8) where η,α,,φ,θ,µ >
More informationECON 4160: Econometrics-Modelling and Systems Estimation Lecture 9: Multiple equation models II
ECON 4160: Econometrics-Modelling and Systems Estimation Lecture 9: Multiple equation models II Ragnar Nymoen Department of Economics University of Oslo 9 October 2018 The reference to this lecture is:
More informationKeynesian Macroeconomic Theory
2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The Keynesian-Cross Model 2.4. The IS-LM Model 2.5. The Keynesian AD-AS Model 2.6. Conclusion
More informationMonetary Policy in a Macro Model
Monetary Policy in a Macro Model ECON 40364: Monetary Theory & Policy Eric Sims University of Notre Dame Fall 2017 1 / 67 Readings Mishkin Ch. 20 Mishkin Ch. 21 Mishkin Ch. 22 Mishkin Ch. 23, pg. 553-569
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 informationMA Macroeconomics 3. Introducing the IS-MP-PC Model
MA Macroeconomics 3. Introducing the IS-MP-PC Model Karl Whelan School of Economics, UCD Autumn 2014 Karl Whelan (UCD) Introducing the IS-MP-PC Model Autumn 2014 1 / 38 Beyond IS-LM We have reviewed the
More informationA Dynamic Model of Aggregate Demand and Aggregate Supply
A Dynamic Model of Aggregate Demand and Aggregate Supply 1 Introduction Theoritical Backround 2 3 4 I Introduction Theoritical Backround The model emphasizes the dynamic nature of economic fluctuations.
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 informationThe transmission mechanism How the monetary-policy instrument affects the economy and the target variables
Eco 200, part 3, Fall 2004 200L2.tex Lars Svensson 11/18/04 The transmission mechanism How the monetary-policy instrument affects the economy and the target variables Variables t =..., 1, 0, 1,... denotes
More informationToulouse School of Economics, Macroeconomics II Franck Portier. Homework 1. Problem I An AD-AS Model
Toulouse School of Economics, 2009-2010 Macroeconomics II Franck Portier Homework 1 Problem I An AD-AS Model Let us consider an economy with three agents (a firm, a household and a government) and four
More informationSource: US. Bureau of Economic Analysis Shaded areas indicate US recessions research.stlouisfed.org
Business Cycles 0 Real Gross Domestic Product 18,000 16,000 (Billions of Chained 2009 Dollars) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1940 1960 1980 2000 Source: US. Bureau of Economic Analysis Shaded
More informationFoundations of Modern Macroeconomics Second Edition
Foundations of Modern Macroeconomics Second Edition Chapter 4: Anticipation effects and economic policy BJ Heijdra Department of Economics, Econometrics & Finance University of Groningen 1 September 2009
More informationSuggested Solutions to Problem Set 8
Suggested Solutions to Problem Set 8 Problem 1: a: The average unemployment rate from 1959 to 2002 is 5.9136% 5.9%. b/c: 27 out of 43 years have a strictly negative sign for the product (π t π t 1 )(u
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 informationPart A: Answer question A1 (required), plus either question A2 or A3.
Ph.D. Core Exam -- Macroeconomics 5 January 2015 -- 8:00 am to 3:00 pm Part A: Answer question A1 (required), plus either question A2 or A3. A1 (required): Ending Quantitative Easing Now that the U.S.
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 informationFinal Exam. You may not use calculators, notes, or aids of any kind.
Professor Christiano Economics 311, Winter 2005 Final Exam IMPORTANT: read the following notes You may not use calculators, notes, or aids of any kind. A total of 100 points is possible, with the distribution
More informationV. The Speed of adjustment of Endogenous Variables and Overshooting
V. The Speed of adjustment of Endogenous Variables and Overshooting The second section of Chapter 11 of Dornbusch (1980) draws on Dornbusch (1976) Expectations and Exchange Rate Dynamics, Journal of Political
More informationADVANCED MACROECONOMICS I
Name: Students ID: ADVANCED MACROECONOMICS I I. Short Questions (21/2 points each) Mark the following statements as True (T) or False (F) and give a brief explanation of your answer in each case. 1. 2.
More informationMonetary Economics: Problem Set #4 Solutions
Monetary Economics Problem Set #4 Monetary Economics: Problem Set #4 Solutions This problem set is marked out of 100 points. The weight given to each part is indicated below. Please contact me asap if
More informationSignaling Effects of Monetary Policy
Signaling Effects of Monetary Policy Leonardo Melosi London Business School 24 May 2012 Motivation Disperse information about aggregate fundamentals Morris and Shin (2003), Sims (2003), and Woodford (2002)
More informationBusiness Cycles: The Classical Approach
San Francisco State University ECON 302 Business Cycles: The Classical Approach Introduction Michael Bar Recall from the introduction that the output per capita in the U.S. is groing steady, but there
More informationChapter 11 The Stochastic Growth Model and Aggregate Fluctuations
George Alogoskoufis, Dynamic Macroeconomics, 2016 Chapter 11 The Stochastic Growth Model and Aggregate Fluctuations In previous chapters we studied the long run evolution of output and consumption, real
More informationA Summary of Economic Methodology
A Summary of Economic Methodology I. The Methodology of Theoretical Economics All economic analysis begins with theory, based in part on intuitive insights that naturally spring from certain stylized facts,
More informationFoundations of Modern Macroeconomics B. J. Heijdra & F. van der Ploeg Chapter 2: Dynamics in Aggregate Demand and Supply
Foundations of Modern Macroeconomics: Chapter 2 1 Foundations of Modern Macroeconomics B. J. Heijdra & F. van der Ploeg Chapter 2: Dynamics in Aggregate Demand and Supply Foundations of Modern Macroeconomics:
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 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 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 informationFoundations of Modern Macroeconomics Second Edition
Foundations of Modern Macroeconomics Second Edition Chapter 5: The government budget deficit Ben J. Heijdra Department of Economics & Econometrics University of Groningen 1 September 2009 Foundations of
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 informationMankiw Chapter 11. Aggregate Demand I. Building the IS-LM Model
Mankiw Chapter 11 Building the IS-LM Model 0 IN THIS CHAPTER, WE WILL COVER: the IS curve and its relation to: the Keynesian cross the LM curve and its relation to: the theory of liquidity preference how
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 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: Solutions Problem Set 1
Monetary Economics: Solutions Problem Set 1 December 14, 2006 Exercise 1 A Households Households maximise their intertemporal utility function by optimally choosing consumption, savings, and the mix of
More informationFoundations of Modern Macroeconomics B. J. Heijdra & F. van der Ploeg Chapter 6: The Government Budget Deficit
Foundations of Modern Macroeconomics: Chapter 6 1 Foundations of Modern Macroeconomics B. J. Heijdra & F. van der Ploeg Chapter 6: The Government Budget Deficit Foundations of Modern Macroeconomics: Chapter
More informationExpectations, Learning and Macroeconomic Policy
Expectations, Learning and Macroeconomic Policy George W. Evans (Univ. of Oregon and Univ. of St. Andrews) Lecture 4 Liquidity traps, learning and stagnation Evans, Guse & Honkapohja (EER, 2008), Evans
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 informationChapter 4 AD AS. O. Afonso, P. B. Vasconcelos. Computational Economics: a concise introduction
Chapter 4 AD AS O. Afonso, P. B. Vasconcelos Computational Economics: a concise introduction O. Afonso, P. B. Vasconcelos Computational Economics 1 / 32 Overview 1 Introduction 2 Economic model 3 Numerical
More informationThe TransPacific agreement A good thing for VietNam?
The TransPacific agreement A good thing for VietNam? Jean Louis Brillet, France For presentation at the LINK 2014 Conference New York, 22nd 24th October, 2014 Advertisement!!! The model uses EViews The
More informationPROBLEM SET 1 (Solutions) (MACROECONOMICS cl. 15)
PROBLEM SET (Solutions) (MACROECONOMICS cl. 5) Exercise Calculating GDP In an economic system there are two sectors A and B. The sector A: - produces value added or a value o 50; - pays wages or a value
More informationOptimal Inflation Stabilization in a Medium-Scale Macroeconomic Model
Optimal Inflation Stabilization in a Medium-Scale Macroeconomic Model Stephanie Schmitt-Grohé Martín Uribe Duke University 1 Objective of the Paper: Within a mediumscale estimated model of the macroeconomy
More informationCitation Working Paper Series, F-39:
Equilibrium Indeterminacy under F Title Interest Rate Rules Author(s) NAKAGAWA, Ryuichi Citation Working Paper Series, F-39: 1-14 Issue Date 2009-06 URL http://hdl.handle.net/10112/2641 Rights Type Technical
More informationECON 4160: Econometrics-Modelling and Systems Estimation Lecture 7: Single equation models
ECON 4160: Econometrics-Modelling and Systems Estimation Lecture 7: Single equation models Ragnar Nymoen Department of Economics University of Oslo 25 September 2018 The reference to this lecture is: Chapter
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 informationThe Dornbusch overshooting model
4330 Lecture 8 Ragnar Nymoen 12 March 2012 References I Lecture 7: Portfolio model of the FEX market extended by money. Important concepts: monetary policy regimes degree of sterilization Monetary model
More informationThis PDF is a selection from an out-of-print volume from the National Bureau of Economic Research
This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: A Theoretical Framework for Monetary Analysis Volume Author/Editor: Milton Friedman Volume
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 informationGeneral Equilibrium and Welfare
and Welfare Lectures 2 and 3, ECON 4240 Spring 2017 University of Oslo 24.01.2017 and 31.01.2017 1/37 Outline General equilibrium: look at many markets at the same time. Here all prices determined in the
More informationRelationships between phases of business cycles in two large open economies
Journal of Regional Development Studies2010 131 Relationships between phases of business cycles in two large open economies Ken-ichi ISHIYAMA 1. Introduction We have observed large increases in trade and
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 informationY t = log (employment t )
Advanced Macroeconomics, Christiano Econ 416 Homework #7 Due: November 21 1. Consider the linearized equilibrium conditions of the New Keynesian model, on the slide, The Equilibrium Conditions in the handout,
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 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 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 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 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 informationThe Zero Lower Bound
The Zero Lower Bound Eric Sims University of Notre Dame Spring 7 Introduction In the standard New Keynesian model, monetary policy is often described by an interest rate rule (e.g. a Taylor rule) that
More informationMacroeconomics Theory II
Macroeconomics Theory II Francesco Franco Nova SBE February 2012 Francesco Franco Macroeconomics Theory II 1/31 Housekeeping Website TA: none No "Mas-Collel" in macro One midterm, one final, problem sets
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 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 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 informationLars Svensson 10/2/05. Liquidity traps, the zero lower bound for interest rates, and deflation
Eco 00, part, Fall 005 00L5_F05.tex Lars Svensson 0//05 Liquidity traps, the zero lower bound for interest rates, and deflation Japan: recession, low growth since early 90s, deflation in GDP deflator and
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 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 informationSimultaneous (and Recursive) Equation Systems. Robert Dixon Department of Economics at the University of Melbourne
Simultaneous (and Recursive) Equation Systems Robert Dixon Department of Economics at the University of Melbourne In their History of Macroeconometric Model-Building, Bodkin, Klein and Marwah give "pride
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 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 informationLecture 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 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 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 informationGeneral Examination in Macroeconomic Theory SPRING 2013
HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS General Examination in Macroeconomic Theory SPRING 203 You have FOUR hours. Answer all questions Part A (Prof. Laibson): 48 minutes Part B (Prof. Aghion): 48
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 informationEquilibrium in a Production Economy
Equilibrium in a Production Economy Prof. Eric Sims University of Notre Dame Fall 2012 Sims (ND) Equilibrium in a Production Economy Fall 2012 1 / 23 Production Economy Last time: studied equilibrium in
More informationIntroductory Dynamic Macroeconomics
ii Introductory Dynamic Macroeconomics Ragnar Nymoen 10 January 2005 iv CONTENTS 2.5.1 APhillipscurvemodel... 60 2.5.2 An error correction model that integrates the main-course.. 64 A Variables and relationships
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 informationSupplementary Notes on Chapter 6 of D. Romer s Advanced Macroeconomics Textbook (4th Edition)
Supplementary Notes on Chapter 6 of D. Romer s Advanced Macroeconomics Textbook (4th Edition) Changsheng Xu & Ming Yi School of Economics, Huazhong University of Science and Technology This version: June
More informationEco 200, part 3, Fall 2004 Lars Svensson 12/6/04. Liquidity traps, the zero lower bound for interest rates, and deflation
Eco 00, part 3, Fall 004 00L5.tex Lars Svensson /6/04 Liquidity traps, the zero lower bound for interest rates, and deflation The zero lower bound for interest rates (ZLB) A forward-looking aggregate-demand
More informationDATABASE AND METHODOLOGY
CHAPTER 3 DATABASE AND METHODOLOGY In the present chapter, sources of database used and methodology applied for the empirical analysis has been presented The whole chapter has been divided into three sections
More informationForecasting. Simultaneous equations bias (Lect 16)
Forecasting. Simultaneous equations bias (Lect 16) Ragnar Nymoen University of Oslo 11 April 2013 1 / 20 References Same as to Lecture 15 (as a background to the forecasting part) HGL, Ch 9.7.2 (forecasting
More informationMacroeconomics Theory II
Macroeconomics Theory II Francesco Franco FEUNL February 2011 Francesco Franco Macroeconomics Theory II 1/34 The log-linear plain vanilla RBC and ν(σ n )= ĉ t = Y C ẑt +(1 α) Y C ˆn t + K βc ˆk t 1 + K
More informationLecture 2 The Centralized Economy: Basic features
Lecture 2 The Centralized Economy: Basic features Leopold von Thadden University of Mainz and ECB (on leave) Advanced Macroeconomics, Winter Term 2013 1 / 41 I Motivation This Lecture introduces the basic
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 informationInflation traps, and rules vs. discretion
14.05 Lecture Notes Inflation traps, and rules vs. discretion A large number of private agents play against a government. Government objective. The government objective is given by the following loss function:
More informationLecture 2 The Centralized Economy
Lecture 2 The Centralized Economy Economics 5118 Macroeconomic Theory Kam Yu Winter 2013 Outline 1 Introduction 2 The Basic DGE Closed Economy 3 Golden Rule Solution 4 Optimal Solution The Euler Equation
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 informationThe New-Keynesian Liquidity Trap
The New-Keynesian Liquidity Trap John H. Cochrane Univeristy of Chicago Booth School of Business, NBER, Hoover, Cato New Keynesian models: Diagnosis I Consensus NK diagnosis: Natural rate r
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 informationTheoretical premises of the Keynesian approach
origin of Keynesian approach to Growth can be traced back to an article written after the General Theory (1936) Roy Harrod, An Essay in Dynamic Theory, Economic Journal, 1939 Theoretical premises of the
More informationLecture 6, January 7 and 15: Sticky Wages and Prices (Galí, Chapter 6)
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,
More informationSolution for Problem Set 3
Solution for Problem Set 3 Q. Heterogeneous Expectations. Consider following dynamic IS-LM economy in Lecture Notes 8: IS curve: y t = ar t + u t (.) where y t is output, r t is the real interest rate,
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 information