Macroeconomics 1. Ali Shourideh. Final Exam

Similar documents
Suggested Solutions to Midterm Exam Econ 511b (Part I), Spring 2004

ANSWERS TO ODD NUMBERED EXERCISES IN CHAPTER

Problem Set #3: AK models

Macroeconomic Theory Ph.D. Qualifying Examination Fall 2005 ANSWER EACH PART IN A SEPARATE BLUE BOOK. PART ONE: ANSWER IN BOOK 1 WEIGHT 1/3

1. Consider a pure-exchange economy with stochastic endowments. The state of the economy

Lecture 26. Lucas and Stokey: Optimal Monetary and Fiscal Policy in an Economy without Capital (JME 1983) t t

International Business Cycle Models

Midterm Exam. Macroeconomic Theory (ECON 8105) Larry Jones. Fall September 27th, Question 1: (55 points)

Essential Microeconomics : OPTIMAL CONTROL 1. Consider the following class of optimization problems

Cooperative Ph.D. Program in School of Economic Sciences and Finance QUALIFYING EXAMINATION IN MACROECONOMICS. August 8, :45 a.m. to 1:00 p.m.

1 Answers to Final Exam, ECN 200E, Spring

CHAPTER 7: UNCERTAINTY

1 Consumption and Risky Assets

Financial Econometrics Jeffrey R. Russell Midterm Winter 2009 SOLUTIONS

Additional Methods for Solving DSGE Models

T. J. HOLMES AND T. J. KEHOE INTERNATIONAL TRADE AND PAYMENTS THEORY FALL 2011 EXAMINATION

Problem Set 5. Graduate Macro II, Spring 2017 The University of Notre Dame Professor Sims

Lecture Notes 3: Quantitative Analysis in DSGE Models: New Keynesian Model

The general Solow model

Notes on cointegration of real interest rates and real exchange rates. ρ (2)

3.1.3 INTRODUCTION TO DYNAMIC OPTIMIZATION: DISCRETE TIME PROBLEMS. A. The Hamiltonian and First-Order Conditions in a Finite Time Horizon

Investment-specific Technology Shocks, Neutral Technology Shocks and the Dunlop-Tarshis Observation: Theory and Evidence

( ) (, ) F K L = F, Y K N N N N. 8. Economic growth 8.1. Production function: Capital as production factor

Macroeconomics Qualifying Examination

E β t log (C t ) + M t M t 1. = Y t + B t 1 P t. B t 0 (3) v t = P tc t M t Question 1. Find the FOC s for an optimum in the agent s problem.

1) According to the article, what is the main reason investors in US government bonds grow less optimistic?

The Brock-Mirman Stochastic Growth Model

Economics 6130 Cornell University Fall 2016 Macroeconomics, I - Part 2

ANSWERS TO EVEN NUMBERED EXERCISES IN CHAPTER 6 SECTION 6.1: LIFE CYCLE CONSUMPTION AND WEALTH T 1. . Let ct. ) is a strictly concave function of c

Introduction to choice over time

Problem Set on Differential Equations

Intermediate Macro In-Class Problems

Final Exam Advanced Macroeconomics I

Lecture Notes 5: Investment

ARTIFICIAL INTELLIGENCE. Markov decision processes

Laplace Transform. Inverse Laplace Transform. e st f(t)dt. (2)

Economics 8105 Macroeconomic Theory Recitation 6

COMPETITIVE GROWTH MODEL

u(t) Figure 1. Open loop control system

Lecture 19. RBC and Sunspot Equilibria

The Residual Graph. 11 Augmenting Path Algorithms. Augmenting Path Algorithm. Augmenting Path Algorithm

UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS

Solutions Problem Set 3 Macro II (14.452)

The Brock-Mirman Stochastic Growth Model

Math 2142 Exam 1 Review Problems. x 2 + f (0) 3! for the 3rd Taylor polynomial at x = 0. To calculate the various quantities:

Research Article On Double Summability of Double Conjugate Fourier Series

CHAPTER 7: SECOND-ORDER CIRCUITS

CONTROL SYSTEMS. Chapter 10 : State Space Response

Simulating models with heterogeneous agents

FINM 6900 Finance Theory

Lars Nesheim. 17 January Last lecture solved the consumer choice problem.

The consumption-based determinants of the term structure of discount rates: Corrigendum. Christian Gollier 1 Toulouse School of Economics March 2012

5.1 - Logarithms and Their Properties

Reserves measures have an economic component eg. what could be extracted at current prices?

4.1 - Logarithms and Their Properties

The Residual Graph. 12 Augmenting Path Algorithms. Augmenting Path Algorithm. Augmenting Path Algorithm

Explicit form of global solution to stochastic logistic differential equation and related topics

This document was generated at 1:04 PM, 09/10/13 Copyright 2013 Richard T. Woodward. 4. End points and transversality conditions AGEC

LABOR MATCHING MODELS: BASIC DSGE IMPLEMENTATION APRIL 12, 2012

Seminar 5 Sustainability

Explaining Total Factor Productivity. Ulrich Kohli University of Geneva December 2015

13.3 Term structure models

Fractional Ornstein-Uhlenbeck Bridge

Algorithmic Trading: Optimal Control PIMS Summer School

What Ties Return Volatilities to Price Valuations and Fundamentals? On-Line Appendix

1. An introduction to dynamic optimization -- Optimal Control and Dynamic Programming AGEC

Introduction D P. r = constant discount rate, g = Gordon Model (1962): constant dividend growth rate.

Suggested Solutions to Assignment 4 (REQUIRED) Submisson Deadline and Location: March 27 in Class

Exponential Sawtooth

EXERCISES FOR SECTION 1.5

1. An introduction to dynamic optimization -- Optimal Control and Dynamic Programming AGEC

Problem Set If all directed edges in a network have distinct capacities, then there is a unique maximum flow.

Full file at

Selfish Routing. Tim Roughgarden Cornell University. Includes joint work with Éva Tardos

This document was generated at 7:34 PM, 07/27/09 Copyright 2009 Richard T. Woodward

Final Exam. Tuesday, December hours

NECESSARY AND SUFFICIENT CONDITIONS FOR LATENT SEPARABILITY

1 Motivation and Basic Definitions

Chapter 7: Inverse-Response Systems

pe pt dt = e pt Probabilty of death given survival till t : pe pt = p Expected life at t : pe(s t)p ds = e (s t)p t =

Policy regimes Theory

Solutions - Midterm Exam

Lecture 2D: Rank-Size Rule

! ln 2xdx = (x ln 2x - x) 3 1 = (3 ln 6-3) - (ln 2-1)

Problem 1 / 25 Problem 2 / 20 Problem 3 / 10 Problem 4 / 15 Problem 5 / 30 TOTAL / 100

Solutions to Assignment 1

IMPLICIT AND INVERSE FUNCTION THEOREMS PAUL SCHRIMPF 1 OCTOBER 25, 2013

ESTIMATES FOR THE DERIVATIVE OF DIFFUSION SEMIGROUPS

Exercises, Part IV: THE LONG RUN

Graduate Macro Theory II: Notes on Neoclassical Growth Model

Utility maximization in incomplete markets

Pricing the American Option Using Itô s Formula and Optimal Stopping Theory

Block Diagram of a DCS in 411

Unemployment and Mismatch in the UK

Examples of Dynamic Programming Problems

Stochastic Modelling in Finance - Solutions to sheet 8

News-generated dependence and optimal portfolios for n stocks in a market of Barndor -Nielsen and Shephard type.

Physics 127b: Statistical Mechanics. Fokker-Planck Equation. Time Evolution

A Risk-Averse Insider and Asset Pricing in Continuous Time

Lecture 3: Solow Model II Handout

Transcription:

4780 - Macroeconomic 1 Ali Shourideh Final Exam Problem 1. A Model of On-he-Job Search Conider he following verion of he McCall earch model ha allow for on-he-job-earch. In paricular, uppoe ha ime i coninuou and worker - employed or unemployed dicoun he fuure a rae ρ. A worker ha ha a job eparae from her job a rae η. An unemployed worker find a job a rae λ 0 - he wage i hen drawn from a diribuion F w) which i coninuou. Moreover, a worker who ha a job ge an opporuniy o draw a new wage offer a rae λ 1 - again from he ame diribuion F w). The worker hen decide wheher o accep hi new offer or no. A uual, aume ha he flow value of unemploymen i b; he worker are rik-neural and canno ave. a. Le V w) be he value of a job a hand ha pay he wage w. Le U be he value of unemploymen. Wrie he Bellman equaion for U and V w). Soluion. The value funcion are given by ρv w) = w + λ 1 max {V w ) V w), 0} df w ) + η U V w)) 1) ρu = b + λ 0 max {V w) U, 0} df w) ) b. Calculae he reervaion wage, w, for an unemployed worker a a funcion of he value funcion V w). Under wha condiion, w < b hold? Provide an inuiion for hi reul. Soluion. For w, we mu have ha U = V w ). Subracing, ) from 1) evaluaed a w, we have w = b + λ 0 λ 1 ) max {V w) V w ), 0} df w) When λ 0 < λ 1, he above how ha w < b. Inuiively, when λ 1 > λ 0, acceping a job give a beer opion value o a worker han being unemployed - a higher probabiliy of a new draw which alway increae he value for a worker. Thi implie ha an unemployed worker i willing o ake a job a a wage lower han unemploymen benefi in order o obain hi beer opion value. c. Wha i he reervaion wage for an employed worker? Soluion. Since V w) i an increaing funcion of w, he reervaion wage of an employed worker i w - he wage of he job he i currenly employed in. d. How doe an increae in unemploymen benefi, b, affec he job-o-job urnover? Show your reul and explain inuiively. 1

Soluion. We have ρ + η) V w) = w + λ 1 ρ + η) V w) = 1 λ 1 V w) 1 F w)) V 1 w) = ρ + η + λ 1 1 F w)) w V w ) V w) df w ) + ηu Therefore, w = b + λ 0 λ 1 ) V w) V w ) df w) w = b λ 0 λ 1 ) V w) V w ) d 1 F w)) w = b + λ 0 λ 1 ) 1 F w)) V w) dw w = b + λ 0 λ 1 ) w 1 F w) ρ + η + λ 1 1 F w)) dw We have w b w b = 1 λ 0 λ 1 ) w b 1 + λ 0 λ 1 ) 1 F w )) = 1 ρ + η + λ 1 1 F w )) w ρ + η + λ0 1 F w )) = 1 b ρ + η + λ 1 1 F w )) 1 F w ) ρ + η + λ 1 1 F w )) Thi implie ha w > 0. A rie in he reervaion wage lead o a lower urnover a le people b accep job and herefore le people move beween job a well.

Problem. A Sochaic AK economy Conider an economy in which producion i done only wih capial and oupu i given by Y = A K where A i an i.i.d. ochaic proce and i diribued according o he c.d.f. F A). Capial depreciae a rae δ. Suppoe ha he economy exhibi a repreenaive agen and ha preference of uch hypoheical agen i given by β u C ) where u ) i a CRRA uiliy funcion given by { c 1 γ γ 1 1 γ u c) = log c γ = 1 =0 a. Define a Compeiive Equilibrium for hi economy auming ha rading occur in equenial ae marke. { Soluion. A compeiive equilibrium for hi economy i a equence of allocaion C ), X ), K +1 ), B a well a price {p ), r ), q +1 +1 )} where = A and: 1. Houehold olve: ubjec o p ) C ) + X ) + max β π ) u C )) =0 +1 q +1 +1 ) B +1 +1 ) r ) K 1 ) + p ) B ) 1 δ) K 1 ) + X ) = K +1 ). Firm olve 3. Marke clear max p ) A ) k r ) k k B ) = 0 ) = K ) 1 K f C ) + X ) = A ) K 1 ) Noe ha if A ha a coninuou diribuion, he above really hould be re-wrien wih inegral over inead of um. 3

b. Sae he Fir Welfare Theorem and ue i o formulae a compeiive equilibrium a a oluion o a planning problem. Soluion. According o he FWT, a compeiive equilibrium mu be pareo opimal. A a reul, i mu olve he following planning problem max β π ) u C )) ubjec o =0 C ) + K +1 ) = A ) K 1 ) + 1 δ) K 1 ) c. Formulae he planning problem problem recurively. You are required o ue only one ae variable. Soluion. Bellman equaion i given by V Y ) = max u C) + β ubjec o V A + 1 δ) K ) df A ) C + K = Y d. Solve he funcional equaion aociaed wih hi recurive problem and find he value funcion and policy funcion uing a gue and verify mehod. Wha aumpion on he fundamenal hould be made o ha he oluion o hi problem exi and i unique? Soluion. We gue ha V Y ) = B Y 1 γ. Wih hi gue, he opimizaion in he FE above 1 γ become Y K ) 1 γ A + 1 δ) K ) 1 γ max + βb df A ) K If we le x = K /Y, hen olving he above opimizaion i equivalen o 1 x) 1 γ A + 1 δ) x) 1 γ max + βb df A ) x Taking FOC, we have 1 x) γ = βbx γ E A + 1 δ) 1 γ ) γ x = βbe A + 1 δ) 1 γ 1 x For each B he above ha a unique oluion. We can herefore, replacing in he objecive in he FE and have v Y ) = C)1 γ A + βb + 1 δ) K ) 1 γ df A ) = Y 1 γ 1 x) 1 γ + βbx 1 γ E A + 1 δ) 1 γ = Y 1 γ 1 x) 1 γ + x 1 x) γ = Y 1 γ 1 x) γ = βbx γ E A + 1 δ) 1 γ Y 1 γ 4

which ha he form a he gueed value. If we e he above equal o B Y 1 γ, we have 1 γ βx γ E A + 1 δ) 1 γ = 1 x = βe A + 1 δ) 1 γ) 1 γ and B = 1 x) γ = 1 βe A + 1 δ) 1 γ) 1 ) γ γ Therefore, in order for hi oluion o be meaningful, we mu have ha βe A + 1 δ) 1 γ < 1. The policy funcion ha he form K = xy = x A + 1 δ) K e. Uing he policy funcion calculaed above, calculae he average growh rae of hi economy - auming ha he daa come from he aionary diribuion of he model. The reul hould be expreed in erm of he fundamenal parameer of he model a well a variou momen of he diribuion F ). Soluion. The growh rae of he economy i given by 1 + g +1 = A +1K +1 A K = A +1x A + 1 δ) K A K = x A +1 A + 1 δ) A Since hock are i.i.d., hi average growh rae i given by A + 1 δ 1 + g = xe A E A = βe A + 1 δ) 1 γ) 1 γ A + 1 δ E A E A In wha follow, aume ha δ = 1 and ha F A) = A 0 1 e log x+σ σx π / log A) Tha i, A i diribued ) according o a log-normal diribuion whoe mean i A and i variance i e σ 1 A. f. Wha i he average growh rae of he economy? How doe growh inerac wih rik, i.e., how doe he average growh rae of he economy depend on σ? Explain your anwer inuiively. σ dx 5

Soluion. From above, we have Noe ha log A N Therefore, 1 + g = βe A 1 γ) 1 γ E A log A σ, σ ). Therefore, E A 1 γ = E e 1 γ) log A 1 γ)γ 1 γ) log A+ σ = e 1 + g = β 1 1 γ A γ e 1 γ)σ Therefore, an increae in rik σ lead o an increae in growh when γ < 1 and a decreae in growh when γ > 1. The inuiion for hi reul can be een by rewriing he Euler equaion a follow: u C ) = βe A +1 u C +1 ) = β {E A +1 E u C +1 ) + Cov A +1, u C +1 ))} An increae in rik, ha wo effec: 1. i increae he average marginal uiliy E u C +1 ). Thi i becaue marginal uiliy i a convex funcion of conumpion and an increae in rik raie i average value - i increae he probabiliy of ail even. The conumer would like o inve more o inure hemelve again he rik of uch even a a precauion.. i decreae he correlaion beween marginal uiliy and reurn; ha i, i make i more negaive - uual rikaverion. When γ < 1, he precauionary moive dominae while when γ > 1, he rik-averion moive dominae. Thu for low value of γ, an increae in rik lead o higher invemen and higher growh while for high value of γ an increae in rik lead o low invemen and growh. g. Calculae he price of a rik-free real bond, P f. Wha i he rik-free rae in hi economy. Soluion. The price of a rik-free bond i given by The reurn on he ae i given by P f = βe u C +1 ) u C ) = βe 1 x) xa +1 A K ) γ 1 x) A K ) γ = βx γ E A γ +1 = β βe A 1 γ) γ γ E A γ = E A γ E A 1 γ R f = 1 P f = E A1 γ E A γ 6

h. Calculae he price, P, of holding a firm ha own he phyical capial and inve from he oupu ha i produce and how ha P = K ; Hin: Thi i an ae wih a dividend proce given by D = A K K +1. Wha i he reurn on uch an ae? Soluion. We have u C +1 ) P = βe u C ) D +1 + P +1 1 C γ = βe β D =+1 = βe =+1 +1 = βe A +1 K +1 + βe =+ +1 = βe A +1 K +1 + β 1 = βe 1 C γ β A K K +1 ) 1 C γ β A K 1 β 1 C γ K ) ) E β 1 β C γ A K K =+ 1 +1 A +1 K +1 + β 1 E β C 1K γ By he Euler equaion, we have E 1 β C γ 1 =+ A = 1 E 1 E =+ β C γ 1 β C γ 1 A 1 = 0 β 1K E 1 β C γ 1 A 1 = 0 β C γ 1 ) A 1 where he la equaliy follow from law of ieraed expecaion. We herefore have P = K +1 + β 1 ) E A 1 = K +1 which complee he claim. The reurn on he capial i given by R k +1 = P +1 + D +1 P = A +1K +1 K + + K + K +1 = A +1 7

i. Calculae he equiy premium a he difference beween average reurn on phyical capial and he rik-free rae. How doe hi depend on rik-averion, γ, and variance of he hock, σ. Explain inuiively. Soluion. The equiy premium i defined a E R k R = EA E A 1 γ E A γ = EAE A γ E A 1 γ E A γ = Ae γ log A σ )+ γ σ e 1 γ) e γ log A σ ) + γ σ = A1 γ e γ1+γ)σ A 1 γ e 1 γ)γσ A 1 γ e γ1+γ)σ = A 1 e γσ log A )+ σ 1 γ) σ Thi i an increaing funcion of γ and σ. A σ rie, he rik inheren in holding phyical capial increae and a a reul inveor will require a higher rae of reurn. The ame logic hold for γ; a houehold become more rik-avere hey demand a higher average rae of reurn in order o hold he capial ock. 8