4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land).


 Gregory Francis
 3 years ago
 Views:
Transcription
1 Chapter 3 Credit and Business Cycles Here I present a model of the interaction between credit and business cycles. In representative agent models, remember, no lending takes place! The literature on the topic has emphasized the idea that a credit market imperfections can magnify the e ects on the real economy of given technology or monetary shocks. This happens because a positive shock increases income of owners of production technology; this rise in net worth lowers the costs associated with external nancing of investment projects, allowing for increased investment. This serves to amplify and propagate the e ects of a shock through time The modelling choices We now develop a model that illustrates the role of debt, net worth and asset price uctuations on euilibrium output. You can consider this model as an extension of the real business cycle model which allows for nancial factors to play a role in business uctuations. The model has to be as simple as possible. In fact it can be made uite simple even though it features heterogenous agents by adding to it the following features:. A constant interest rate (one less variable) 2. No labor supply decision 3. No variable capital 4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land). 3.2 A basic model The reference is the paper Credit Cycles by Kiyotaki and Moore (997), JPE, 2247, available on JSTOR. We use a slightly modi ed version. 34
2 3.2. A BASIC MODEL 35 There are two types of agents, farmers (productive) and gatherers (unproductive). They both have linear preferences over consumption, but they discount the future di erently. Farmers have a discount factor of ; gatherers have a discount factor of ; where >. They produce a nal good y t using land h t. The production functions are respectively described by: y t = A t h t y 0 t = A 0 th 0 t 3.2. Gatherers The gatherers will be the unproductive agents, that is they will earn a lower return on their asset holdings in euilibrium. They solve the following problems. max h 0 t ;b0 t E 0 X t=0 t c 0 t! The Lagrangean for this problem is: s.t c 0 t + t h 0 t + Rb 0 t = y 0 t + t h 0 t + b 0 t L = E 0 X t=0 t y 0 t + t h 0 t + b 0 t t h 0 t Rb 0 t for each t; where A 0 th 0 t. The rst order conditions are, choosing b 0 t and h 0 t respectively: R = t = E t t+ + y0 t+ h 0 t Linear preferences over consumption imply that in euilibrium the gatherers must be indifferent about any path of consumption and debt, so that the interest rate will eual their rate of time preference, and R = = Farmers Farmers maximize their ows of funds is max b t;h t E 0! X t c t t=0 c t + t h t + Rb t = y t + t h t + b t
3 36 CHAPTER 3. CREDIT AND BUSINESS CYCLES where on the righthand side we have the sources of funds, on the lefthand side we have its uses. The amount of claims farmers can issue is bound by: Rb t me t ( t+ h t ) Remark 4 Why can t the farmers borrow more than the me t ( t+ h t =R)? The idea is as follows: the Gatherer lends some goods to the Farmer, who in turn promises him to pay back at some future date. The assumption here is that the farmer s input is critical for production: once the farmer starts producing, no one can replace him/her, and the farmer cannot commit to repay his debt. If the creditor tries to extract too much from the farmer, the farmer can simply walk away from the land. Current production is lost, and the farmer only recovers the value of the land. This in turn limits his/her ability to borrow. The Lagrangean for this problem is: L = E 0 X t=0 for each t; where A t h t Euilibrium t ((y t + t h t + b t t h t Rb t ) t (Rb t m t+ h t )). The rst order conditions are, choosing b t and h t respectively: = R + t R t = E t t+ + y t+ + E t ( t m t+ ) h t There are three markets: the market for loans b t ; goods y t + y 0 t and market for h. From the Euler euation for gatherers, we know that: coupled with that of farmers t = = R = R R = > 0 which implies that the borrowing constraint will be binding in steady state. Once we collect all of them, we obtain the following euations: c 0 t + t h 0 t + Rb 0 t = y 0 t + t h 0 t + b 0 t () c t + t h t + Rb t = y t + t h t + b t (2) yt+ t = (m + ( m) ) E t t+ + E t (3) h t y 0 t = E t t+ + E t+ t (4) h 0 t Rb t = me t ( t+ h t ) (5)
4 3.2. A BASIC MODEL 37 To this group of euations, we add the market clearing conditions. Normalize the total supply of land H to. h t + h 0 t = (6) b t + b 0 t = 0 (7) y t = A t h t (8) y 0 t = A 0 th 0 t (9) Remember that if the bond market clears, so will the goods one, so we will not need to write down the market clearing condition for goods. A uick check: 9 euations, whereas the variables are c 0 t c t y t yt 0 h t h 0 t b t b 0 t t : We restrict our attention to perfectforesight euilibria, where, absent unanticipated shocks, the expectations of future variables realize themselves. An euilibrium can be de ned as follows: for given levels of h t and b t ; an euilibrium from date t onwards is characterized by paths for the endogenous variables fx t+s js 0g satisfying euations () to (9) at dates t; t + ; t + 2; ::. A transversality condition rules out exploding paths in asset prices, that is lim t+s t = 0 s! R s If the transversality condition is satis ed, there is a locally uniue perfectforesight euilibrium path starting from initial values of h t and b t in the neighborhood of the steady state Simplify Most of the euations are trivial. Also notice that c 0 t and c t only appear in and 2, so they will adjust so that and 2 hold. To simplify matters, Kiyotaki and Moore also assume that = ; so that the production technology of the farmers is linear. This implies that all the dynamics of the system can be analyzed with reference to two euations only. De ne = m + ( m) (you can think of as an average of the two discount factors, the higher m; the higher ) Steady state Let us look at the steady state rst. From 3 t = E t t+ + E t A t+ (3) A 0 t+ t = E t t+ + E t ( h t ) (4) = A
5 38 CHAPTER 3. CREDIT AND BUSINESS CYCLES from 4 which gives us h: ( ) = A0 ( h) h = A 0 ( ). A ( ) Clearly, restrictions of A 0 =A need to placed to ensure an euilibrium with 0 < h <. Remark 5 What is the marginal product of land used in the farming sector (de ne it as MP K)? Simply, it is A What is M P K in the gatherers sector? Simply from the optimality conditions of gatherers: ( ) ( ) = + MP K MP K = ( ) ( ) = ( ) A Given < < ; < ; so that the MPK in the gatherers sector is below that of the farmers sector. This implies that in the competitive euilibrium the allocation of land is ine cient since its marginal product is not euated across the two sectors. From 5 we can also derive: as for the other variables b = mh c = y (R ) b = Ah ( ) mh = A c 0 = y 0 + (R ) b m ( ) h The main idea here is that credit market imperfections might cause a misallocation of resources in euilibrium The dynamics e ects of an unexpected productivity shock To consider the e ects on the economy of a productivity shock, we linearize the model euations around the steady state and calculate the e ect of a % increase in productivity. We consider a proportional increase in productivity for both agents, that is A b t = A b0 t (where X b t Xt X is the percent deviation from steady state of a variable). Let us also X assume that once a technology shock occurs, it follows an AR() process of the form: ba t = b A t + be t From euation 3 we obtain:
6 3.2. A BASIC MODEL 39 t = E t t+ + E t A t+ d t = E t d t+ + E t da t+ d t d t+ da t+ = E t + E t A use = A! A = A b t = E t b t+ + ( ) E t b At+ (L) which can be solved forward to obtain: use E t b t+ = ( ) E tat+2 b + E t b t+2 b t = ( ) E tat+ b + ( ) E tat+2 b + E t b t+2 use E t b t+2 = ( ) E tat+3 b + E t b t+3 b t = ( ) E tat+ b + ( ) E tat+2 b + ( ) E tat+3 b + E t b t+3 b t = ( ) E t b At+ + ( ) E t b At ( ) E t b At+3 + ::: b t = ( ) E t b At+ + ( ) E t b At+ + 2 ( ) 2 E t b At+ + ::: b t = ( ) ::: E t b At+ + :::: b t = E t b A t+ = b A t (dr) where is the persistence of the technology shock. To linearize euation 4:
7 40 CHAPTER 3. CREDIT AND BUSINESS CYCLES A 0 t+ t = E t t+ + E t ( h t ) t = E t t+ + E t A 0 t+ ( h t ) take total di erential d t = E t (d t+ ) + ( h) de t A 0 t+ A 0 ( ) ( h) 2 dh t d t = E t (d t+ ) + ( h) de t A 0 t+ A 0 ( ) ( h) ( h) dh t use steady state result = + A 0 ( h)! ( ) = A 0 ( h) d t = E t (d t+ ) + ( ) de ta 0 t+ A 0 ( ) ( ) ( h) dh t d t divide everything by = E dt+ t + ( ) de ta 0 t+ ( ) ( ) A 0 h hdh t h de ne = h ( ) h d t = E dt+ t + ( ) de ta 0 t+ + ( ) dh t A 0 h b t = E t b t+ + ( ) E tat+ b + b h t (L2) where = h > 0 can be interpreted as an elasticity of asset demand with respect to ( )h the price (roughly speaking, it tells you by how much b h changes in the longrun for a given change in b; this is why we interpret it as an elasticity). Combining (dr) and (L2) together yield: A b t = 2 At b + ( ) A b t + b h t which can be solved for the response of b h t to a productivity shock, that is: b ht = ( ) ( ) ( ) ( ) A ( ) ( ) b t (dr2) (dr) and (dr2) are the two linearized decision rules of our problem (that is, they express the endogenous variables as a function of shocks only). (dr2) shows that h rises with A so long as 0 < < (the numerator can be shown to be positive because < ). Hence in this problem a productivity shocks raises asset prices which in turn raises asset demand of the most productive agents, who can then produce more and accumulate more: the e ects on aggregate activity are therefore ampli ed by the asset price e ect. The main idea here is that credit market imperfections might amplify the e ects of given shocks to the economy.
8 3.3. FORWARDLOOKINGNESS AND HISTORY DEPENDENCE 4 It is easy to show how aggregate output rises more than the increase in productivity: that is, in log deviations from the steady state: by t = y y + y by 0 t + y0 y + y 0 by0 t > A b t. 3.3 Forwardlookingness and history dependence The model here displays forwardlookingness; an increase in asset prices implies that the creditor will be able to recover more from selling the asset whenever the debtor defaults, therefore for each asset price increase he is willing to supply more credit. As credit increases, asset prices rise, aggregate investment rises (since the marginal productivity of debtors is higher than creditors ) and so on and so forth, in a cumulative fashion. However, it does not display historydependence (one way to see this is that the euilibrium decision rules do not depend on h t and b t explicitly). Kiyotaki and Moore say when a shock hits, it is too late to renegotiate, therefore repayments are the same, but current borrowing increases. If consumption is bound by some upper limit, all the new borrowing goes into investment, and this strongly magni es the response of output to a given productivity shock. The homework uestions asks you to analyze this in more detail.
CREDIT AND BUSINESS CYCLES
The Japanese Economic Review Vol. 49, No. 1, March 1998 CREDIT AND BUSINESS CYCLES By NOBUHIRO KIYOTAKI London School of Economics and Political Science This paper presents two dynamic models of the economy
More informationThe Real Business Cycle Model
The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the comovements in the uctuations
More informationCurrent Accounts in Open Economies Obstfeld and Rogoff, Chapter 2
Current Accounts in Open Economies Obstfeld and Rogoff, Chapter 2 1 Consumption with many periods 1.1 Finite horizon of T Optimization problem maximize U t = u (c t ) + β (c t+1 ) + β 2 u (c t+2 ) +...
More informationReal Business Cycle Models
Real Business Cycle Models Lecture 2 Nicola Viegi April 2015 Basic RBC Model Claim: Stochastic General Equlibrium Model Is Enough to Explain The Business cycle Behaviour of the Economy Money is of little
More information14.451 Lecture Notes 10
14.451 Lecture Notes 1 Guido Lorenzoni Fall 29 1 Continuous time: nite horizon Time goes from to T. Instantaneous payo : f (t; x (t) ; y (t)) ; (the time dependence includes discounting), where x (t) 2
More informationIntertemporal approach to current account: small open economy
Intertemporal approach to current account: small open economy Ester Faia Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 ster Faia (Johann Wolfgang Goethe Universität Intertemporal Frankfurt
More informationLongTerm Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge
LongTerm Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge Stefano Eusepi, Marc Giannoni and Bruce Preston The views expressed are those of the authors and are not necessarily re
More informationReal Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35
Real Business Cycle Theory Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Introduction to DSGE models Dynamic Stochastic General Equilibrium (DSGE) models have become the main tool for
More informationMidterm March 2015. (a) Consumer i s budget constraint is. c i 0 12 + b i c i H 12 (1 + r)b i c i L 12 (1 + r)b i ;
Masters in EconomicsUC3M Microeconomics II Midterm March 015 Exercise 1. In an economy that extends over two periods, today and tomorrow, there are two consumers, A and B; and a single perishable good,
More informationthe transmission channels of monetary policy the fragility of the nancial system the existence of nancial cycles
1 The macroeconomic consequences of nancial imperfections the transmission channels of monetary policy the fragility of the nancial system the existence of nancial cycles the real eects of nancial intermediation
More informationEndogenous Growth Models
Endogenous Growth Models Lorenza Rossi Goethe University 20112012 Endogenous Growth Theory Neoclassical Exogenous Growth Models technological progress is the engine of growth technological improvements
More information1 Present and Future Value
Lecture 8: Asset Markets c 2009 Je rey A. Miron Outline:. Present and Future Value 2. Bonds 3. Taxes 4. Applications Present and Future Value In the discussion of the twoperiod model with borrowing and
More informationMargin Requirements and Equilibrium Asset Prices
Margin Requirements and Equilibrium Asset Prices Daniele CoenPirani Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 152133890, USA Abstract This paper studies
More informationUniversity of Saskatchewan Department of Economics Economics 414.3 Homework #1
Homework #1 1. In 1900 GDP per capita in Japan (measured in 2000 dollars) was $1,433. In 2000 it was $26,375. (a) Calculate the growth rate of income per capita in Japan over this century. (b) Now suppose
More information14.452 Economic Growth: Lectures 6 and 7, Neoclassical Growth
14.452 Economic Growth: Lectures 6 and 7, Neoclassical Growth Daron Acemoglu MIT November 15 and 17, 211. Daron Acemoglu (MIT) Economic Growth Lectures 6 and 7 November 15 and 17, 211. 1 / 71 Introduction
More informationOptimal Fiscal Policies. Long Bonds and Interest Rates under Incomplete Markets. Bank of Spain, February 2010
Optimal Fiscal Policies. Long Bonds and Interest Rates under Incomplete Markets Bank of Spain, February 2010 1 In dynamic models, optimal scal policy and debt management should be jointly determined. Optimality
More informationIn ation Tax and In ation Subsidies: Working Capital in a Cashinadvance model
In ation Tax and In ation Subsidies: Working Capital in a Cashinadvance model George T. McCandless March 3, 006 Abstract This paper studies the nature of monetary policy with nancial intermediaries that
More informationDynamics of current account in a small open economy
Dynamics of current account in a small open economy Ester Faia, Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 ster Faia, (Johann Wolfgang Goethe Universität Dynamics Frankfurt of current
More information10. FixedIncome Securities. Basic Concepts
0. FixedIncome Securities Fixedincome securities (FIS) are bonds that have no default risk and their payments are fully determined in advance. Sometimes corporate bonds that do not necessarily have certain
More informationRelative prices and Balassa Samuleson e ect
Relative prices and Balassa Samuleson e ect Prof. Ester Faia, Ph.D. Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 rof. Ester Faia, Ph.D. (Johann Wolfgang Goethe Relative Universität prices
More informationThe Credit Spread Cycle with Matching Friction
The Credit Spread Cycle with Matching Friction Kevin E. BeaubrunDiant and Fabien Tripier y June 8, 00 Abstract We herein advance a contribution to the theoretical literature on nancial frictions and show
More informationFinancial Development and Macroeconomic Stability
Financial Development and Macroeconomic Stability Vincenzo Quadrini University of Southern California Urban Jermann Wharton School of the University of Pennsylvania January 31, 2005 VERY PRELIMINARY AND
More informationE cient Credit Policies in a Housing Debt Crisis
Housing Credit E cient Credit Policies in a Housing Debt Crisis Janice Eberly and Arvind Krishnamurthy Kellogg School of Management, Northwestern University, and Stanford GSB May 2015 Housing Credit Introduction
More informationVI. Real Business Cycles Models
VI. Real Business Cycles Models Introduction Business cycle research studies the causes and consequences of the recurrent expansions and contractions in aggregate economic activity that occur in most industrialized
More informationCAPM, Arbitrage, and Linear Factor Models
CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, Linear Factor Models 1/ 41 Introduction We now assume all investors actually choose meanvariance e cient portfolios. By equating these investors
More informationSolutions Problem Set 2 Macro II (14.452)
Solutions Problem Set 2 Macro II (4.452) Francisco A. Gallego 4/22 We encourage you to work together, as long as you write your own solutions. Intertemporal Labor Supply Consider the following problem.
More informationUniversidad de Montevideo Macroeconomia II. The RamseyCassKoopmans Model
Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The RamseyCassKoopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous
More informationFederal Reserve Bank of New York Staff Reports
Federal Reserve Bank of New York Staff Reports Monetary Policy Implementation Frameworks: A Comparative Analysis Antoine Martin Cyril Monnet Staff Report no. 313 January 2008 Revised October 2009 This
More informationLecture Notes: Basic Concepts in Option Pricing  The Black and Scholes Model
Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Basic Concepts in Option Pricing  The Black and Scholes Model Recall that the price of an option is equal to
More informationFiscal Reform, Growth and Current Account Dynamics WORKING PAPERS IN ECONOMICS AND ECONOMETRICS
Fiscal Reform, Growth and Current Account Dynamics WORKING PAPERS IN ECONOMICS AND ECONOMETRICS Creina Day * School of Economics The Australian National University Canberra ACT 0200 Australia T: + 61 2
More informationLecture 2 Dynamic Equilibrium Models : Finite Periods
Lecture 2 Dynamic Equilibrium Models : Finite Periods 1. Introduction In macroeconomics, we study the behavior of economywide aggregates e.g. GDP, savings, investment, employment and so on  and their
More informationOverview of Model CREDIT CHAINS Many small firms owned and run by entrepreneurs. Nobuhiro Kiyotaki Entrepreneurs unable to raise outside finance. John Moore January 1997 But an entrepreneur can borrow
More informationDynamics of Small Open Economies
Dynamics of Small Open Economies Lecture 2, ECON 4330 Tord Krogh January 22, 2013 Tord Krogh () ECON 4330 January 22, 2013 1 / 68 Last lecture The models we have looked at so far are characterized by:
More informationWhy Does Consumption Lead the Business Cycle?
Why Does Consumption Lead the Business Cycle? Yi Wen Department of Economics Cornell University, Ithaca, N.Y. yw57@cornell.edu Abstract Consumption in the US leads output at the business cycle frequency.
More informationMonetary policy strategy: Old issues and new challenges
Monetary policy strategy: Old issues and new challenges Joint Deutsche Bundesbank/Federal Reserve Bank of Cleveland Conference Frankfurt am Main, 67 June 2007 Fiorella de Fiore European Central Bank Discussion
More informationChapter 1. Vector autoregressions. 1.1 VARs and the identi cation problem
Chapter Vector autoregressions We begin by taking a look at the data of macroeconomics. A way to summarize the dynamics of macroeconomic data is to make use of vector autoregressions. VAR models have become
More informationGROWTH, INCOME TAXES AND CONSUMPTION ASPIRATIONS
GROWTH, INCOME TAXES AND CONSUMPTION ASPIRATIONS Gustavo A. Marrero Alfonso Novales y July 13, 2011 ABSTRACT: In a Barrotype economy with exogenous consumption aspirations, raising income taxes favors
More informationTopic 5: Stochastic Growth and Real Business Cycles
Topic 5: Stochastic Growth and Real Business Cycles Yulei Luo SEF of HKU October 1, 2015 Luo, Y. (SEF of HKU) Macro Theory October 1, 2015 1 / 45 Lag Operators The lag operator (L) is de ned as Similar
More informationECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation
ECO 4368 Instructor: Saltuk Ozerturk Bonds and Their Valuation A bond is a long term contract under which a borrower (the issuer) agrees to make payments of interest and principal on speci c dates, to
More informationOptimal Consumption with Stochastic Income: Deviations from Certainty Equivalence
Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence Zeldes, QJE 1989 Background (Not in Paper) Income Uncertainty dates back to even earlier years, with the seminal work of
More informationFinancial Intermediation and Credit Policy in Business Cycle Analysis. Mark Gertler and Nobuhiro Kiyotaki NYU and Princeton
Financial Intermediation and Credit Policy in Business Cycle Analysis Mark Gertler and Nobuhiro Kiyotaki NYU and Princeton Motivation Present a canonical framework to think about the current  nancial
More informationc 2009 Je rey A. Miron
Lecture : Euilibrium c Je rey A. Miron Outline. Introduction. upply. Market Euilibrium. pecial Cases. Inverse emand and upply Curves. Comparative tatics. Taxes. The Incidence of a Tax. The eadweight Loss
More informationCreating Business Cycles Through Credit Constraints
Federal Reserve Bank of Minneapolis Quarterly Review Vol. 24, No. 3, Summer 2000, pp. 2 10 Creating Business Cycles Through Credit Constraints Narayana R. Kocherlakota Adviser Research Department Federal
More informationOn the Optimality of Financial Repression
Discussion of On the Optimality of Financial Repression V.V. Chari Alessandro Dovis Patrick Kehoe Alberto Martin CREI, Universitat Pompeu Fabra and Barcelona GSE, IMF July 2014 Motivation Recent years
More informationMargin Calls, Trading Costs and Asset Prices in Emerging Markets: The Financial Mechanics of the Sudden Stop Phenomenon
Discussion of Margin Calls, Trading Costs and Asset Prices in Emerging Markets: The Financial Mechanics of the Sudden Stop Phenomenon by Enrique Mendoza and Katherine Smith Fabrizio Perri NYUStern,NBERandCEPR
More informationCredit Lectures 26 and 27
Lectures 26 and 27 24 and 29 April 2014 Operation of the Market may not function smoothly 1. Costly/impossible to monitor exactly what s done with loan. Consumption? Production? Risky investment? Involuntary
More informationQUIZ 3 14.02 Principles of Macroeconomics May 19, 2005. I. True/False (30 points)
QUIZ 3 14.02 Principles of Macroeconomics May 19, 2005 I. True/False (30 points) 1. A decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without
More informationECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE
ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE YUAN TIAN This synopsis is designed merely for keep a record of the materials covered in lectures. Please refer to your own lecture notes for all proofs.
More informationCredit Decomposition and Business Cycles in Emerging Market Economies
Credit Decomposition and Business Cycles in Emerging Market Economies Berrak Bahadir y University of Georgia Inci Gumus z Sabanci University July 24, 214 Abstract This paper analyzes di erent types of
More informationChapter 7: The Costs of Production QUESTIONS FOR REVIEW
HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?
More informationInterlinkages between Payment and Securities. Settlement Systems
Interlinkages between Payment and Securities Settlement Systems David C. Mills, Jr. y Federal Reserve Board Samia Y. Husain Washington University in Saint Louis September 4, 2009 Abstract Payments systems
More informationGraduate Macro Theory II: The Real Business Cycle Model
Graduate Macro Theory II: The Real Business Cycle Model Eric Sims University of Notre Dame Spring 2011 1 Introduction This note describes the canonical real business cycle model. A couple of classic references
More informationInterest Rates and Real Business Cycles in Emerging Markets
CENTRAL BANK OF THE REPUBLIC OF TURKEY WORKING PAPER NO: 0/08 Interest Rates and Real Business Cycles in Emerging Markets May 200 S. Tolga TİRYAKİ Central Bank of the Republic of Turkey 200 Address: Central
More information14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model
14.452 Economic Growth: Lectures 2 and 3: The Solow Growth Model Daron Acemoglu MIT November 1 and 3, 2011. Daron Acemoglu (MIT) Economic Growth Lectures 2 and 3 November 1 and 3, 2011. 1 / 96 Solow Growth
More informationFederal Reserve Bank of New York Staff Reports. Deficits, Public Debt Dynamics, and Tax and Spending Multipliers
Federal Reserve Bank of New York Staff Reports Deficits, Public Debt Dynamics, and Tax and Spending Multipliers Matthew Denes Gauti B. Eggertsson Sophia Gilbukh Staff Report No. 551 February 2012 Revised
More informationThe Budget Deficit, Public Debt and Endogenous Growth
The Budget Deficit, Public Debt and Endogenous Growth Michael Bräuninger October 2002 Abstract This paper analyzes the effects of public debt on endogenous growth in an overlapping generations model. The
More informationEmployment Protection and Business Cycles in Emerging Economies
Employment Protection and Business Cycles in Emerging Economies Ruy Lama IMF Carlos Urrutia ITAM August, 2011 Lama and Urrutia () Employment Protection August, 2011 1 / 38 Motivation Business cycles in
More informationChapter 1: The ModiglianiMiller Propositions, Taxes and Bankruptcy Costs
Chapter 1: The ModiglianiMiller Propositions, Taxes and Bankruptcy Costs Corporate Finance  MSc in Finance (BGSE) Albert BanalEstañol Universitat Pompeu Fabra and Barcelona GSE Albert BanalEstañol
More informationInflation. Chapter 8. 8.1 Money Supply and Demand
Chapter 8 Inflation This chapter examines the causes and consequences of inflation. Sections 8.1 and 8.2 relate inflation to money supply and demand. Although the presentation differs somewhat from that
More informationThis is a simple guide to optimal control theory. In what follows, I borrow freely from Kamien and Shwartz (1981) and King (1986).
ECON72: MACROECONOMIC THEORY I Martin Boileau A CHILD'S GUIDE TO OPTIMAL CONTROL THEORY 1. Introduction This is a simple guide to optimal control theory. In what follows, I borrow freely from Kamien and
More informationMarket Power, Forward Trading and Supply Function. Competition
Market Power, Forward Trading and Supply Function Competition Matías Herrera Dappe University of Maryland May, 2008 Abstract When rms can produce any level of output, strategic forward trading can enhance
More informationA Model of the Current Account
A Model of the Current Account Costas Arkolakis teaching assistant: Yijia Lu Economics 407, Yale January 2011 Model Assumptions 2 periods. A small open economy Consumers: Representative consumer Period
More informationLesson 1. Net Present Value. Prof. Beatriz de Blas
Lesson 1. Net Present Value Prof. Beatriz de Blas April 2006 1. Net Present Value 1 1. Introduction When deciding to invest or not, a rm or an individual has to decide what to do with the money today.
More informationDiscussion of Capital Injection, Monetary Policy, and Financial Accelerators
Discussion of Capital Injection, Monetary Policy, and Financial Accelerators Karl Walentin Sveriges Riksbank 1. Background This paper is part of the large literature that takes as its starting point the
More information1) Firm value and stock value We demonstrate that maximizing the value of the rm s equity is equivalent tomaximizing the value
Financial Leverage and Capital Structure Policy A) Introduction The objective of the capital structure decision, like any corporate objective, should be to maximize the value of the rm s equity. In this
More informationECON 5010 Class Notes Business Cycles and the Environment
ECON 5010 Class Notes Business Cycles and the Environment Here, I outline a forthcoming paper by Garth Heutel in the Review of Economic Dynamics. The title is "How Should Environmental Policy Respond to
More informationThe RBC methodology also comes down to two principles:
Chapter 5 Real business cycles 5.1 Real business cycles The most well known paper in the Real Business Cycles (RBC) literature is Kydland and Prescott (1982). That paper introduces both a specific theory
More informationCentral Bank Lending and Money Market Discipline
Central Bank Lending and Money Market Discipline Marie Hoerova European Central Bank Cyril Monnet FRB Philadelphia November 2010 PRELIMINARY Abstract This paper provides a theory for the joint existence
More informationFinance 350: Problem Set 6 Alternative Solutions
Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas
More informationReal Business Cycle Theory
Real Business Cycle Theory Guido Ascari University of Pavia () Real Business Cycle Theory 1 / 50 Outline Introduction: Lucas methodological proposal The application to the analysis of business cycle uctuations:
More informationFour Derivations of the Black Scholes PDE by Fabrice Douglas Rouah www.frouah.com www.volopta.com
Four Derivations of the Black Scholes PDE by Fabrice Douglas Rouah www.frouah.com www.volopta.com In this Note we derive the Black Scholes PDE for an option V, given by @t + 1 + rs @S2 @S We derive the
More informationAnother Example in which LumpSum Money Creation is Bene cial
Another Example in which LumpSum Money Creation is Bene cial Alexei Deviatov and Neil Wallace y October 10th, 2000 Abstract A probabilistic version of lumpsum money creation is studied in a random matching
More informationTRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.
TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)
More informationThe Time Value of Money
The Time Value of Money This handout is an overview of the basic tools and concepts needed for this corporate nance course. Proofs and explanations are given in order to facilitate your understanding and
More informationFinancial Intermediation and Credit Policy in Business Cycle Analysis
Financial Intermediation and Credit Policy in Business Cycle Analysis Mark Gertler and Nobuhiro Kiyotaki N.Y.U. and Princeton October 29 This version: September 21 Abstract We develop a canonical framework
More informationFor a closed economy, the national income identity is written as Y = F (K; L)
A CLOSED ECONOMY IN THE LONG (MEDIUM) RUN For a closed economy, the national income identity is written as Y = C(Y T ) + I(r) + G the left hand side of the equation is the total supply of goods and services
More informationClass Notes, Econ 8801 Lump Sum Taxes are Awesome
Class Notes, Econ 8801 Lump Sum Taxes are Awesome Larry E. Jones 1 Exchange Economies with Taxes and Spending 1.1 Basics 1) Assume that there are n goods which can be consumed in any nonnegative amounts;
More informationPractice Problems on Money and Monetary Policy
Practice Problems on Money and Monetary Policy 1 Define money. How does the economist s use of this term differ from its everyday meaning? Money is the economist s term for assets that can be used in
More informationDiscussion of Faia "Optimal Monetary Policy with Credit Augmented Liquidity Cycles"
Discussion of Faia "Optimal Monetary Policy with Credit Augmented Liquidity Cycles" Ander Perez (U Pompeu Fabra) November 2008 Ander Perez (U Pompeu Fabra) () Discussion: Faia November 2008 1 / 11 (Related)
More informationConditional InvestmentCash Flow Sensitivities and Financing Constraints
WORING PAPERS IN ECONOMICS No 448 Conditional InvestmentCash Flow Sensitivities and Financing Constraints Stephen R. Bond and Måns Söderbom May 2010 ISSN 14032473 (print) ISSN 14032465 (online) Department
More informationOptimal insurance contracts with adverse selection and comonotonic background risk
Optimal insurance contracts with adverse selection and comonotonic background risk Alary D. Bien F. TSE (LERNA) University Paris Dauphine Abstract In this note, we consider an adverse selection problem
More informationAt t = 0, a generic intermediary j solves the optimization problem:
Internet Appendix for A Model of hadow Banking * At t = 0, a generic intermediary j solves the optimization problem: max ( D, I H, I L, H, L, TH, TL ) [R (I H + T H H ) + p H ( H T H )] + [E ω (π ω ) A
More informationCapital Constraints, Lending over the Cycle and the Precautionary Motive: A Quantitative Exploration (Working Paper)
Capital Constraints, Lending over the Cycle and the Precautionary Motive: A Quantitative Exploration (Working Paper) Angus Armstrong and Monique Ebell National Institute of Economic and Social Research
More informationFiscal Stimulus Improves Solvency in a Depressed Economy
Fiscal Stimulus Improves Solvency in a Depressed Economy Dennis Leech Economics Department and Centre for Competitive Advantage in the Global Economy University of Warwick d.leech@warwick.ac.uk Published
More informationA New Perspective on The New Rule of the Current Account
A New Perspective on The New Rule of the Current Account Cedric Tille Graduate Institute of International and Development Studies, Geneva CEPR 1 Eric van Wincoop University of Virginia NBER 2 1 Corresponding
More informationFund Managers, Career Concerns, and Asset Price Volatility
Fund Managers, Career Concerns, and Asset Price Volatility Veronica Guerrieri University of Chicago Péter Kondor Central European University June 2011 Abstract We propose a model of delegated portfolio
More informationMargin Regulation and Volatility
Margin Regulation and Volatility Johannes Brumm 1 Michael Grill 2 Felix Kubler 3 Karl Schmedders 3 1 University of Zurich 2 Deutsche Bundesbank 3 University of Zurich and Swiss Finance Institute Workshop:
More informationChapter 5: The Cointegrated VAR model
Chapter 5: The Cointegrated VAR model Katarina Juselius July 1, 2012 Katarina Juselius () Chapter 5: The Cointegrated VAR model July 1, 2012 1 / 41 An intuitive interpretation of the Pi matrix Consider
More informationTheroleof constructioninthe housingboom and bustinspain. CarlosGarriga
Theroleof constructioninthe housingboom and bustinspain CarlosGarriga The Role of Construction in the Housing Boom and Bust in Spain Carlos Garriga Federal Reserve Bank of St. Louis February 8th, 2010
More informationQuality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine
Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine 1 The Standard Schumpeterian Competition Monopolistic Competition innovation modeled as endogenous rate of movement
More informationProblem 1 (Issuance and Repurchase in a ModiglianiMiller World)
Problem 1 (Issuance and Repurchase in a ModiglianiMiller World) A rm has outstanding debt with a market value of $100 million. The rm also has 15 million shares outstanding with a market value of $10
More information6. Budget Deficits and Fiscal Policy
Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 2012 6. Budget Deficits and Fiscal Policy Introduction Ricardian equivalence Distorting taxes Debt crises Introduction (1) Ricardian equivalence
More informationEstimating baseline real business cycle models of the Australian economy
Estimating baseline real business cycle models of the Australian economy Don Harding and Siwage Negara y University of Melbourne February 26, 2008 1 Introduction This paper is concerned with the issues
More informationLeveraged purchases of government debt and deflation
Leveraged purchases of government debt and deflation R. Anton Braun Federal Reserve Bank of Atlanta Tomoyuki Nakajima Kyoto University October 5, 2011 Abstract We consider a model in which individuals
More informationFrom Pawn Shops to Banks: The Impact of Banco Azteca on Households Credit and Saving Decisions
From Pawn Shops to Banks: The Impact of Banco Azteca on Households Credit and Saving Decisions Claudia Ruiz UCLA January 2010 Abstract This research examines the e ects of relaxing credit constraints on
More informationDiscussion of Gertler and Kiyotaki: Financial intermediation and credit policy in business cycle analysis
Discussion of Gertler and Kiyotaki: Financial intermediation and credit policy in business cycle analysis Harris Dellas Department of Economics University of Bern June 10, 2010 Figure: Ramon s reaction
More informationIntroduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by
Introduction General equilibrium analysis looks at how multiple markets come into equilibrium simultaneously. With many markets, equilibrium analysis must take explicit account of the fact that changes
More informationCorporate Income Taxation
Corporate Income Taxation We have stressed that tax incidence must be traced to people, since corporations cannot bear the burden of a tax. Why then tax corporations at all? There are several possible
More informationMA Advanced Macroeconomics: 7. The Real Business Cycle Model
MA Advanced Macroeconomics: 7. The Real Business Cycle Model Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Real Business Cycles Spring 2015 1 / 38 Working Through A DSGE Model We have
More informationReal Wage and Nominal Price Stickiness in Keynesian Models
Real Wage and Nominal Price Stickiness in Keynesian Models 1. Real wage stickiness and involuntary unemployment 2. Price stickiness 3. Keynesian ISLMFE and demand shocks 4. Keynesian SRAS, LRAS, FE and
More information