macroeconomics M. R. Grasselli University of Technology Sydney, February 21, 2013

Similar documents
macroeconomics M. R. Grasselli Research in Options, December 10, 2012

macroeconomics M. R. Grasselli UMass - Amherst, April 29, 2013

Persistence theory applied to Keen s model a link between mathematical biology and mathematical economics

investment M. R. Grasselli EPOG Seminar Paris Nord, November 18, 2016

fragility M. R. Grasselli Quantitative Finance Seminar Series - Fields Institute, October 26, 2011

M. R. Grasselli. 9th World Congress of The Bachelier Finance Society New York City, July 18, 2016

M. R. Grasselli. Research Seminar, Political Economy Group Groningen, January 29, 2015

M. R. Grasselli. QMF, Sydney, December 16, Mathematics and Statistics, McMaster University Joint with Gaël Giraud (AFD, CNRS, ENPC)

M. R. Grasselli. Research in Options - IMPA, December 2, 2015

Inflation and Speculation in a Dynamic Macroeconomic Model

The macrodynamics of household debt, growth, and inequality

Eco504 Spring 2009 C. Sims MID-TERM EXAM

ECON 5118 Macroeconomic Theory

(a) Write down the Hamilton-Jacobi-Bellman (HJB) Equation in the dynamic programming

MA Advanced Macroeconomics: Solving Models with Rational Expectations

Macroeconomics II. Dynamic AD-AS model

Dynamic AD-AS model vs. AD-AS model Notes. Dynamic AD-AS model in a few words Notes. Notation to incorporate time-dimension Notes

A suggested solution to the problem set at the re-exam in Advanced Macroeconomics. February 15, 2016

Monetary Economics: Solutions Problem Set 1

+ τ t R t 1B t 1 + M t 1. = R t 1B t 1 + M t 1. = λ t (1 + γ f t + γ f t v t )

Chapter 11 The Stochastic Growth Model and Aggregate Fluctuations

Dynamics and Monetary Policy in a Fair Wage Model of the Business Cycle

Financial Frictions and Credit Spreads. Ke Pang Pierre L. Siklos Wilfrid Laurier University

Two Models of Macroeconomic Equilibrium

Introduction to Macroeconomics

problem. 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

IS-LM Analysis. Math 202. Brian D. Fitzpatrick. Duke University. February 14, 2018 MATH

Nominal Rigidities, Government Spending, and Long-Run Policy Trade-Off

MA Advanced Macroeconomics: 7. The Real Business Cycle Model

Simple New Keynesian Model without Capital

Fiscal Multipliers in a Nonlinear World

MA Advanced Macroeconomics: 6. Solving Models with Rational Expectations

Expectations, Learning and Macroeconomic Policy

Simple New Keynesian Model without Capital

"0". Doing the stuff on SVARs from the February 28 slides

Combining Macroeconomic Models for Prediction

An application of centre manifold theory to economics

Solving a Dynamic (Stochastic) General Equilibrium Model under the Discrete Time Framework

Small Open Economy RBC Model Uribe, Chapter 4

The Ramsey Model. (Lecture Note, Advanced Macroeconomics, Thomas Steger, SS 2013)

Comprehensive Exam. Macro Spring 2014 Retake. August 22, 2014

DSGE-Models. Calibration and Introduction to Dynare. Institute of Econometrics and Economic Statistics

Final Exam. You may not use calculators, notes, or aids of any kind.

A Summary of Economic Methodology

1 The Basic RBC Model

1. Money in the utility function (start)

Global compact attractors and their tripartition under persistence

Indeterminacy and Sunspots in Macroeconomics

Real Business Cycle Model (RBC)

Extended IS-LM model - construction and analysis of behavior

The Real Business Cycle Model

Dynamic stochastic general equilibrium models. December 4, 2007

Lars Svensson 2/16/06. Y t = Y. (1) Assume exogenous constant government consumption (determined by government), G t = G<Y. (2)

Lecture 4 The Centralized Economy: Extensions

Equilibrium Conditions and Algorithm for Numerical Solution of Kaplan, Moll and Violante (2017) HANK Model.

Relationships between phases of business cycles in two large open economies

Keynesian Macroeconomic Theory

Macroeconomics Theory II

Financialization and Distribution in a Kaleckian Model with Firms Debt Accumulation

Foundations of Modern Macroeconomics B. J. Heijdra & F. van der Ploeg Chapter 2: Dynamics in Aggregate Demand and Supply

Fiscal and Monetary Policy Rules In an Unstable Economy

ADVANCED MACROECONOMICS I

Toulouse School of Economics, Macroeconomics II Franck Portier. Homework 1 Solutions. Problem I An AD-AS Model

Y t = log (employment t )

The New Keynesian Model: Introduction

Signaling Effects of Monetary Policy

Closed economy macro dynamics: AD-AS model and RBC model.

Open Market Operations and Money Supply. at Zero Nominal Interest Rates

Graduate Macroeconomics - Econ 551

General Examination in Macroeconomic Theory SPRING 2013

Chap. II: Fiscal Multipliers. L3 TSE: Macroeconomics 2014

Optimal Simple And Implementable Monetary and Fiscal Rules

Stagnation Traps. Gianluca Benigno and Luca Fornaro

Learning and Global Dynamics

Sticky Leverage. João Gomes, Urban Jermann & Lukas Schmid Wharton School and UCLA/Duke. September 28, 2013

Monetary Economics: Problem Set #4 Solutions

Chapter 4. Applications/Variations

MA Macroeconomics 3. Introducing the IS-MP-PC Model

Financial Factors in Economic Fluctuations. Lawrence Christiano Roberto Motto Massimo Rostagno

1 Overlapping Generations

Analysis of the Government Expenditure Multiplier under Zero Lower Bound: the Role of Public Investment 1

Lecture 15. Dynamic Stochastic General Equilibrium Model. Randall Romero Aguilar, PhD I Semestre 2017 Last updated: July 3, 2017

DSGE Models in a Liquidity Trap and Japan s Lost Decade

New Keynesian Model Walsh Chapter 8

The TransPacific agreement A good thing for VietNam?

Deviant Behavior in Monetary Economics

Learning, Expectations, and Endogenous Business Cycles

Assignment #5. 1 Keynesian Cross. Econ 302: Intermediate Macroeconomics. December 2, 2009

Pricing To Habits and the Law of One Price

Problem 1 (30 points)

h Edition Money in Search Equilibrium

MAGYAR NEMZETI BANK MINI-COURSE

Schumpeterian Growth Models

Monetary Economics. Lecture 15: unemployment in the new Keynesian model, part one. Chris Edmond. 2nd Semester 2014

Economics 232c Spring 2003 International Macroeconomics. Problem Set 3. May 15, 2003

Interest Rate Liberalization and Capital Misallocation 1

Source: US. Bureau of Economic Analysis Shaded areas indicate US recessions research.stlouisfed.org

Problem Set 4. Graduate Macro II, Spring 2011 The University of Notre Dame Professor Sims

Mankiw Chapter 11. Aggregate Demand I. Building the IS-LM Model

Global Value Chain Participation and Current Account Imbalances

Transcription:

of of Sharcnet Chair in Financial Mathematics Mathematics and Statistics - McMaster University Joint work with B. Costa Lima, X.-S. Wang, J. Wu University of Technology Sydney, February 2, 23

What is wrong with this picture? of Figure: http://www.washingtonpost.com/wpsrv/special/politics/fiscal-cliff-questions/

What is the fiscal cliff? of

Why is this a problem? of

In other words: Keynes roolz! of

Really bad economics: hardcore (freshwater) DSGE of The strand of DSGE economists affiliated with RBC made the following predictions after 28: Increases borrowing would lead to higher interest rates on debt because of crowding out. 2 Increases in the money supply would lead to inflation. 3 Fiscal stimulus has zero effect in an ideal world and negative effect in practice (because of decreased confidence).

Wrong prediction number of Figure: Government borrowing and interest rates.

Wrong prediction number 2 of Figure: Monetary base and inflation.

Wrong prediction number 3 of Figure: Fiscal tightening and GDP.

Better (but still bad) economics: soft core (saltwater) DSGE of The strand of DSGE economists affiliated with New Keynesian got all these predictions right. They did so by augmented DSGE with imperfections (wage stickiness, asymmetric information, imperfect competition, etc). Still DSGE at core - analogous to adding epicycles to Ptolemaic planetary system. For example: Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth one person s liability is another person s asset. (Paul Krugman and Gauti B. Eggertsson, 2, pp. 2-3)

Then we can safely ignore this... of Figure: Private and public debt ratios.

Really? of Figure: Change in debt and unemployment.

Much better economics: SFC models of Stock-flow consistent models emerged in the last decade as a common language for many heterodox schools of thought in economics. Consider both real and monetary factors from the start Specify the balance sheet and transactions between sectors Accommodate a number of behavioural assumptions in a way that is consistent with the underlying accounting structure. Reject silly (and mathematically unsound!) hypotheses such as the RARE individual (representative agent with rational expectations). See Godley and Lavoie (27) for the full framework.

An example of a (fairly general) Godley table of

Godley table for monetary of

Accounting relations for monetary of From the first, second and third columns of the transactions and flow of funds matrices we obtain that W + r M M h C = S h = Ṁ h, () C W + r M M f r L L = F fu I = Ṁ f L (2) r L L r M M = S b = L Ṁ. (3) An example of firm behaviour satisfying () (3) is L = I R (4) Ṁ f = I R + C W + r M M f r L L (5) for chosen levels of investment I and repayment R.

Behavioral relationships of Investment and repayment can then be modelled as a function of any firm-related variable: I = κ(ω, L, M f ), (6) R = ρ(ω, L, M f ). (7) Consumption is a function of household-related variables: Wage changes are given by C = ξ(ω, M h ). (8) ẇ = Φ(ω, λ, p). (9) Finally, the price level evolves according to ṗ = P(ω, λ, p). ()

Differential Equations of Collecting these definitions and that K R = νy R for a constant ν, we arrive at the following closed 6-dimensional system ẇ =Φ(ω, λ, p) [ κ(ω, L, Mf ) λ =λ ν ] α β δ ṗ =P(ω, λ, p) L =κ(ω, L, M f )Y ρ(ω, L, M f ) Ṁ f =κ(ω, L, M f )Y ρ(ω, L, M f ) + ξ(ω, M h ) wl + r M M f r L L Ṁ h =wl + r M M h ξ(ω, M h ), () where l = λn and Y = al, for total population N and productivity a.

Special case: Keen (995) of Let D = L M f and assume that p = p, r M = r F = r. Supposing further that Φ = Φ(λ) and I = κ(π)y, where π = ω rd, leads to ω = ω [Φ(λ) α] [ κ( ω rd) λ = λ ν ḋ = d ] α β δ ] [ κ( ω rd) r + δ ν (2) + κ( ω rd) ( ω) Observe that the equation for M h separates as Ṁ h = wl + r M M h ξ(ω, M h ), (3) and only depends on the rest of the system through w.

Equilibria of The system (2) has a good equilibrium at with ν(α + β + δ) π ω = π r α + β λ = Φ (α) d = ν(α + β + δ) π α + β π = κ (ν(α + β + δ)), which is stable for a large range of parameters It also has a bad equilibrium at (,, + ), which is stable if κ( ) δ < r (4) ν

Example : convergence to the good equilibrium in a of ω λ Y d Y 8 x 7 7 6 5 4 3 2 ω.3.2..9.8.7 ω =.75, λ =.75, d =., Y = λ d ω Y.95.9.85.8.75 λ 2.8.6.4.2.8.6.4.2 d.7 5 5 2 25 3 time

Example 2: explosive debt in a of 6 5 35 3 ω =.75, λ =.7, d =., Y = ω λ Y d.9.8 x 6 2.5 2 4 25.7 Y 3 ω 2 λ Y d.6.5 λ.5 d 2 5 5 ω.4.3.2..5 5 5 2 25 3 time

Basin of convergence for of d 8 6 4 2.4.5.6.7.8.9 λ..5 ω.5

on mathematical biology of Which species, in a mathematical model of interacting species, will survive over the long term? In a mathematical model of an epidemic, will the disease drive a host population to extinction or will the host persist? Can a disease remain endemic in a population? Reference: H. Smith and H. R. Thieme, Dynamical Systems and Population, Graduate Studies in Mathematics, 8. AMS, 2.

definitions of Let Φ(t, x) : R + X X be the semiflow generated by a differential system with initial values x X. For a nonnegative functional ρ from X to R +, we say Φ is ρ strongly persistent (SP) if lim inf ρ(φ(t, x)) > for any x X with ρ(x) >. t Φ is ρ weakly persistent (WP) if lim sup ρ(φ(t, x)) > for any x X with ρ(x) >. t Φ is ρ uniformly strongly persistent (USP) if lim inf ρ(φ(t, x)) > ε for any x X with ρ(x) >. t Φ is ρ uniformly weakly persistent (UWP) if lim sup ρ(φ(t, x)) > ε for any x X with ρ(x) >. t

Example: Goodwin model of (Goodwin 967) Predator-prey system of wage share (ω) and employment rate (λ), with π = ω: ω = ω[φ(λ) α] λ = λ[π/ν α β δ]. This is e π SP and e π UWP, but not e π USP. employment.95.9.85.8.75.7.7.8.9..2 wage

a sector of Following Keen (and echoing Minsky) we add discretionary spending and taxation into the original system in the form where G b = η b (λ)y T b = Θ b (π)y G = G b + G s T = T b + T s G s = η s (λ)g s T s = Θ s (π)t s Defining g = G/Y and τ = T /Y, the net profit share is now π = ω rd + g τ, and debt evolves according to Ḃ = rb + G T.

Differential equations - full system of Denoting γ(π) = κ(π)/ν δ, a bit of algebra leads to the following eight dimensional system: ω = ω[φ(λ) α] λ = λ[γ(π) α β] ḋ = κ(π) π dγ(π) ġ b = η (λ) g b γ(π) (5) ġ s = g s [η s (λ) γ(π)] τ b = Θ b (π) g Tb γ(π) τ s = τ s [Θ s (π) γ(π)] ḃ = b[r γ(π)] + g b + g s τ b τ s

Differential equations - reduced system of Notice that π does not depend on b, so that the last equation in (5) can be solved separately. Observe further that we can write π = ω rḋ + ġ τ (6) leading to the five-dimensional system ω =ω [Φ(λ) α], λ =λ [γ(π) α β] ġ s =g s [η s (λ) γ(π)] (7) τ s =τ s [Θ s (π) γ(π)] π = ω(φ(λ) α) r(κ(π) π) + ( ω π)γ(π) + η b (λ) + g s η s (λ) Θ s (π) τ s Θ s (π)

Good equilibrium of The system (7) has a good equilibrium at ν(α + β + δ) π ω = π r + η b(λ) Θ b (π) α + β α + β λ = Φ (α) π = κ (ν(α + β + δ)) g s = τ s = and this is locally stable for a large range of parameters. The other variables then converge exponentially fast to d = ν(α + β + δ) π α + β g b = η b(λ) α + β τ b = Θ b(π) α + β

Bad equilibria - destabilizing a stable crisis of Recall that π = ω rd + g τ. The system (7) has bad equilibria of the form (ω, λ, g s, τ s, π) = (,,,, ) (ω, λ, g s, τ s, π) = (,, ±,, ) If g s () >, then any equilibria with π is locally unstable provided η s () > r. On the other hand, if g s () < (austerity), then these equilibria are all locally stable.

e π persistence of Proposition : Assume g s () >, then the system (7) is e π -UWP if either λη b (λ) is bounded below as λ, or 2 η s () > r.

λ persistence of Proposition 2: Assume g s () >, then the system (7) is λ-uwp if either of the following conditions is satisfied: τ s () and λη b (λ) is bounded below as λ, or 2 τ s () and η s () > max{r, α + β}, or 3 τ s (), r < η s () α + β and r(κ(x) x) + ( x)γ(x) + η () Θ (x) > for γ(x) [η s (), α + β]. 4 η s () > max{r, α + β}, Θ s ( ) <, Θ s (π) < α + β, and Θ s is convex.

Example 3: Good initial conditions of d K d g.5.4.3.2. 8 6 4 2 g B +g S ω() =.9, λ() =.9, d k () =., g b () =.5, g s () =.5, τ b () =.5, τ s () =.5, d g () =, r =.3, η s () =.2 ω.8.6.4.2 Keen Model + Unified Government 5 5 2 25 3 time.25.2.5..5 5 5 2 25 3 time.8.6.4.2..9.8.7.6.5 λ τ B +τ S

Example 4: Bad initial conditions of d K d g 2.5.5 8 6 4 2 ω() =.7, λ() =.7, d k () =.5, g b () =.5, g s () =.5, τ b () =.5, τ s () =.5, d g () =, r =.3, η s () =.2 ω g B +g S 3 25 2 5 5 Keen Model + Unified Government 5 5 2 25 3 time.4.3.2. 5 5 2 25 3 time.8.6.4.2..9.8.7.6.5.4 λ τ B +τ S

Example 5: Really bad initial conditions with timid of d K d g 2.5 x ω() =.5, λ() =.3, d k () = 5, g b () =.5, g s () =.5, τ b () =.5, τ s () =.5, d g () =, r =.3, η s () =.2 5 25 2.5.5 6 x 7 5 4 3 2 g B +g S ω 2 5 5 Keen Model + Unified Government 5 5 2 25 3 time 6 5 4 3 2 5 5 2 25 3 time.8.6.4.2 λ 2 3 4 τ B +τ S

Example 6: Really bad initial conditions with responsive of d K d g 5 5 5 4 3 2 ω g B +g S ω() =.5, λ() =.3, d k () = 5, g b () =.5, g s () =.5, τ b () =.5, τ s () =.5, d g () =, r =.3, η s () =.2 4 3 2 Keen Model + Unified Government 5 5 2 25 3 time 3 25 2 5 5 5 5 2 25 3 time.8.6.4.2 2 2 4 6 8 λ τ B +τ S

Example 7: in good times: harmless of d K d g.5.5 8 6 4 2 ω() =.9, λ() =.9, d k () =.5, g b () =.5, g s () = ±.5, τ b () =.5, τ s () =.5, d g () =, r =.3, η s () =.2 ω g B +g S.5 g s ()> g s ()< 5 5 2 25 3 time.4.3.2. 5 5 2 25 3 time.8.6.4.2..9.8.7.6.5 λ τ B +τ S

Example 8: in bad times: a really bad idea of d K x 26 ω() =.6, λ() =.6, d k () =.5, g b () =.5, g s () = ±.5, τ b () =.5, τ s () =.5, d g () =, r =.3, η s () =.2 4 2.8 3 g s ()>.5 g.6 s ()< 2.4 ω λ d g.5 2 2 g B +g S 5 5 2 25 3 time 2 3 x 25 4 5 5 2 25 3 time.2 2 2 4 6 τ B +τ S

Hopft bifurcation with respect to spending. of OMEGA.692.69.688.686.684.682.68.28.285.29.295.3.35.3.35.32.325 eta_max

Next steps of Introduce equities and household wealth effects in the consumption function (portfolio choices, etc) Extend to a stochastic model (stochastic interest rates, monetary policy, correlated market sectors, etc) Extend to an open economy model (exchange rates, capital flows, etc) Calibrate to macroeconomic time series

Jedi economics of