Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35


 Lucinda McCoy
 2 years ago
 Views:
Transcription
1 Real Business Cycle Theory Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35
2 Introduction to DSGE models Dynamic Stochastic General Equilibrium (DSGE) models have become the main tool for the analysis of macroeconomic uctuations and monetary policy. The relationships between macroeconomic variables are derived by microfounding the behavior of economic agents. Rational expectations and microfoundations make such a kind of models robust to the Lucas critique. Exogenous shocks a ect the economy and are responsible of cyclical uctuations. Marco Di Pietro Advanced () Monetary Economics and Policy 2 / 35
3 Real Business Cycle (RBC) Theory A rst approach to DSGE models was designed by Kydland and Prescott (1982), who introduced the RBC theory. RBC models are characterized by the following ingredients: There is a representative agent who has rational expectations. The evolution of the aggregate variables is described by rstorder conditions of intertemporal problems solved by rms and households. Firms have no market power, i.e., perfect competition and frictionless markets. Prices are fully exible. Model evaluation relies on parameters calibration and simulation. Marco Di Pietro Advanced () Monetary Economics and Policy 3 / 35
4 RBC basic concepts Cyclical uctuations are e cient: business cycle is the results of the optimal response of the economy to exogenous shocks. Technology shock is the main driving force of the business cycle and a ects real variables. As a consequence, stabilization policies are not required and might be also counterproductive. TFP is not only the main source of longterm growth, but it now involves economic uctuations. Monetary neutrality: monetary policy is ine ective also in the shortrun, i.e., no real e ects. It only a ects nominal variables (e.g., price level). A question: are RBC assumptions and outcomes supported by the empirical evidence? Marco Di Pietro Advanced () Monetary Economics and Policy 4 / 35
5 Some empirical evidence Nominal rigidities: empirical studies based on micro data nd that prices realignments are infrequent. Monetary policy nonneutrality: evidence from SVAR suggests that monetary policy a ects real variables. Liquidity e ect is observed. Marco Di Pietro Advanced () Monetary Economics and Policy 5 / 35
6 A Classical Monetary Model Basic (strong) hypotheses: prices are fully exible and there is perfect competition in all markets. Money serves as unit of account. The economy is composed by households and rms. Households solve an intertemporal optimization problem by maximizing their utility. Firms maximize pro ts taking account of the constraint given by the production function. No capital accumulation, no scal sector, closed economy. Marco Di Pietro Advanced () Monetary Economics and Policy 6 / 35
7 Households The representative households maximizes a utility function choosing how much to consume, the quantity of labor to supply and assets purchasing: E 0 β t U (C t, N t ) t=0 Assumptions on utility function: U c,t U (C t,n t ) C t > 0, U cc,t 2 U (C t,n t ) 0, marginal utility of Ct 2 consumption is positive and nonincreasing. U n,t U (C t,n t ) N t 0, U nn,t 2 U (C t,n t ) 0, marginal utility of Nt 2 labor is negative and decreasing. Budget constraint (in nominal terms): P t C t + Q t B t B t 1 + W t N t T t NoPonzi game condition is assumed in order to prevent households from excessive borrowing. Marco Di Pietro Advanced () Monetary Economics and Policy 7 / 35
8 Households problem solution The following form is assumed for the utility function:! U = C t 1 σ N 1+γ t 1 σ 1 + γ Constrained optimization problem: max U (C t, N t ) + λ t (B t 1 + W t N t T t P t C t Q t B t ) C t,n t,b t First order conditions: W t P t = U n,t U c,t =) W t P t Q t = βe t λ t+1 λ t =) Q t = βe t = Ct σ N γ t " Ct+1 C t σ P t P t+1 # P t+1 P t = Π t+1 is the gross in ation rate Marco Di Pietro Advanced () Monetary Economics and Policy 8 / 35
9 Firms The representative rm has the following production function: Y t = A t N 1 t α The rm seeks to maximize his pro t under the constraint given by the production function, taking prices and wages as given max P t Y t W t N t + ψ Y t,n t (A t Nt 1 α Y t ) t Optimality conditions (real wage equal to marginal product of labor) P t = ψ t W t = (1 α) ψ t A t Nt α =) W t = (1 α) A t Nt α P t {z } MPL t Marco Di Pietro Advanced () Monetary Economics and Policy 9 / 35
10 The loglinear economy Euler equation where i t = q t and ρ = log β. Labor supply Labor demand TIP: why i t = q t? c t = E t c t+1 1 σ (i t E t π t+1 ρ) w t p t = σc t + γn t w t p t = log (1 α) + a t αn t Marco Di Pietro Advanced () Monetary Economics and Policy 10 / 35
11 Asset prices and interest rate Let assume that a riskless asset pays a gross interest equal to I t. Therefore, investing 100$ the asset will pay you 100xI t $ after one year. Let now assume that a riskless asset pays you 1$ after one year. How much should it cost? The present value of 1$ today is 1 I t. Thus, the asset price Q t = 1 I t ; in log terms q t = i t. Marco Di Pietro Advanced () Monetary Economics and Policy 11 / 35
12 Equilibrium Market clearing condition Labor market clearing y t = c t Asset market clearing Aggregate production function σy t + γn t = log (1 α) + a t αn t y t = E t y t+1 1 σ (i t E t π t+1 ρ) y t = a t + (1 α) n t Technology shock follows an AR(1) process a t = ϱ a a t 1 + ε a t Marco Di Pietro Advanced () Monetary Economics and Policy 12 / 35
13 Model solution (1) We insert the production function into the labor market clearing, obtaining where Ψ na = σ [a t + (1 α) n t ] + γn t = log (1 α) + a t αn t + σ (1 α) n t + γn t + αn t = log (1 α) + (1 σ) a t + (1 σ) σ(1 α)+γ+α, ϑ n = n t = Ψ na a t + ϑ n log(1 α) σ(1 α)+γ+α Marco Di Pietro Advanced () Monetary Economics and Policy 13 / 35
14 Model solution (2) The production function becomes y t = a t + (1 α) (Ψ na a t + ϑ n ) + y t = + (1 α) (1 σ) + σ (1 α) + γ + α a t + (1 σ (1 α) + γ + α α) ϑ n y t = Ψ ya a t + ϑ y 1+γ where Ψ ya = σ(1 α)+γ+α and ϑ y = (1 α) ϑ n. From the Euler equation the real interest rate, r t = i t E t π t+1, becomes r t = σe t f y t+1 g + ρ + r t = σψ ya E t f a t+1 g + ρ Marco Di Pietro Advanced () Monetary Economics and Policy 14 / 35
15 Model solution (3) The equilibrium real wage, ω t = w t p t, is given by: where Ψ wa = ω t = log (1 α) + a t αn t + ω t = log (1 α) + a t α (Ψ na a t + ϑ n ) + ω t = Ψ wa a t + ϑ w σ+γ σ(1 α)+γ+α and ϑ [σ(1 α)+γ] log(1 α) w =. σ(1 α)+γ+α Marco Di Pietro Advanced () Monetary Economics and Policy 15 / 35
16 Model dynamics The equilibrium dynamics of the real variables (n t, y t, r t, ω t ) is a ected ONLY by technology, which is the real driving force of the system. Thus, n t, y t, r t, ω t exhibit uctuations that are optimal response to innovations in a t. Policy neutrality: real variables are determined independently of monetary policy. Both output and real wage always increase following a positive technology shock. The real interest rate increases (decreases) if the change in technology is permanent (transitory). E ect on employment is ambigous and depends on σ: for σ < 1 substitution e ect on labor supply prevails over the negative wealth e ect generated by a smaller marginal utility of consumption (n t "). For σ > 1 the opposite happens (n t #); for σ = 1 substitution and wealth e ect exactly cancel out and employment remain unchanged. Marco Di Pietro Advanced () Monetary Economics and Policy 16 / 35
17 Nominal variables determination In order to determine the nominal variables we need to specify how the monetary policy is conducted. We consider three possible solutions: an exogenous path for the nominal interest rate; a simple in ationbased interest rate rule an exogenous path for the money supply In all cases we make use of the Fisher equation: r t = i t E t π t+1 Marco Di Pietro Advanced () Monetary Economics and Policy 17 / 35
18 1) An exogenous path for the nominal interest rate Let suppose that nominal interest rate follows an exogenous stationary process i t, where i t has a mean value equal to ρ, consistent with zero steady state in ation. Moreover, r t is determined independently of the monetary policy and E t π t+1 = i t r t. Expected in ation is determined by the Fisher equation, while current in ation is not. Thus, any path for the price level that satis es the following relation is consistent with equilibrium: p t+1 = p t + i i r t + ξ t+1 where ξ t+1 is a sunspot shock, i.e., a shock unrelated to economic fundamentals. An equilibrium where nonfundamentals factors can generate uctuations in economic variables is de ned as indeterminate equilibrium. This framework leads to price level indeterminacy. Marco Di Pietro Advanced () Monetary Economics and Policy 18 / 35
19 Source of indeterminacy Let assume that money supply evolves as m t = p t + y t ηi t As a consequence, money supply inherits the indeterminacy of p t. In other words, the central bank xes the interest rate and let money be determined endogenously. But since we have undetermined prices, money is undetermined as well. Marco Di Pietro Advanced () Monetary Economics and Policy 19 / 35
20 2) A simple in ationbased interest rate rule The monetary authority sets nominal interest rate according to i t = ρ + π t where 0 measures the response of the nominal interest rate to in ation. This interest rate rule determines the nominal variables and tells that the Central Bank responds to in ation pressure by raising the nominal interest rate. Plugging the interest rate rule into the Fisher equation, we obtain r t ρ = br t = π t E t π t+1 + π t = E t π t+1 + br t This is a stochastic di erence equation: We have two cases: > 1 (Taylor principle) < 1 Marco Di Pietro Advanced () Monetary Economics and Policy 20 / 35
21 Forward solution (1) Actual in ation is determined by π t = E t π t+1 At time t br t At time t + 2 π t+1 = E t+1π t+2 + E tbr t+1 + π t = 1 E t π t+2 = E t+2π t+3 + E t+1br t+2 + π t = 1 E t Et+1 π t+2 + E tbr t+1 + br t 1 Et+2 π t+3 E t+1 + E t+1br t+2 + E tbr t+1 + br t Marco Di Pietro Advanced () Monetary Economics and Policy 21 / 35
22 Forward solution (2) By the Law of Iterated Expectations (LIE) E t [E t+1 (x)] = E t (x) h i π t = 1 φ E 1 t π φ E Et+2 π t+3 t+1 π φ + E t+1br t+2 π φ + E tbr t+1 π φ + br t π φ can be π rewritten as π t = 1 φ 3 E t π t+3 + E t π t+3 π φ 3 + E tbr t+1 π φ 2 + br t π Continuing the forward solutions π t = 1 φ j+1 π E t π t+j and continuing nally we get π t = k=0 j k=0 1 φ k+1 π 1 φ k+1 E t br t+k π E t br t+k Marco Di Pietro Advanced () Monetary Economics and Policy 22 / 35
23 Model solution If > 1 the di erence equation π t = E t π t+1 + br t has only one stationary solution obtained from forward solution π t = 1 k=0 φ k+1 E t br t+k π In ation and, consequently, price level are fully determined by the real interest rate, which, in turn, is a function of fundamentals. The Central Bank, by choosing the value of, can determines the degree of in ation volatility. For < 1 the stationary solution of π t = E t π t+1 + br t takes the following form π t+1 = π t br t + ξ t+1 where ξ t+1 is a sunspot shock. Thus, any process π t satisfying the previous equation is consistent with a stationary equilibrium. Price level, in ation and nominal interest rate are undetermined. Marco Di Pietro Advanced () Monetary Economics and Policy 23 / 35
24 3) An exogenous path for the money supply We suppose that the monetary authority sets an exogenous path for the money supply m t. By combining the money demand m t = p t + y t equation r t = i t E t π t+1 we get ηi t and the Fisher r t = p t + y t η m t E t π t+1 Writing E t π t+1 as E t p t+1 η p t = 1 + η y t p t and rearranging 1 E t p t η m t + u t where u t = ηr t 1+η evolves independently of monetary policy (they are real variables). Marco Di Pietro Advanced () Monetary Economics and Policy 24 / 35
25 Price level determination Assuming η > 0 and solving forward we obtain p t = η 1 + η k=0 η 1 + η k E t m t+k + u 0 t where ut 0 = η k 1+η Et u t+k does not depend on monetary policy. k=0 The previous equation can be rewritten in terms of expected growth rate of money: p t = m t + k=1 η k E t m t+k + ut η Thus, an arbitrary exogenous path for money supply always determines the price level uniquely. Marco Di Pietro Advanced () Monetary Economics and Policy 25 / 35
26 Interest rate determination Plugging price level equation into money supply we get y t ηi t = m t m t + k=1 + i t = 1 η k=1 η 1 + η η k E t m t+k + ut η k E t m t+k + y t + u 0 t η This implies that also the nominal interest rate is determined uniquely. Marco Di Pietro Advanced () Monetary Economics and Policy 26 / 35
27 An example Let assume that money growth evolves according to an AR(1) process: m t = ϱ m m t 1 + ε m t Moreover, we assume no real shock and y t = 0, r t = 0. The price level becomes ηϱ p t = m t + m 1 + η(1 ϱ m ) m t Following a monetary shock, given ϱ m > 0 as empirically observed, the price level response is greater than the money supply increase. Nominal interest rate goes up in response to a monetary shock i t = ϱ m 1 + η(1 ϱ m ) m t Shortcomings: these results contrast with empirical evidence (slow response of prices to monetary shocks and presence of liquidity e ect). Marco Di Pietro Advanced () Monetary Economics and Policy 27 / 35
28 Money in the utility function (MIU) We assume that real money provides utility to the agents (Hint: money facilitates transactions on the market). The households problem under MIU becomes E 0 β t U C t, M t, N t t=0 P t Budget constraint P t C t + Q t B t + M t B t 1 + M t 1 + W t N t T t We de ne Λ t = B t 1 + M t 1 as the total nancial wealth. Budget constraint can be rewritten as P t C t + Q t Λ t+1 + (1 Q t ) M t Λ t + W t N t T t Interpretation: (1 Q t ) = 1 exp ( i t ) ' i t =) opportunity cost of holding money. (Remeber i t = log(q t ) =) exp (i t ) = Q t ) Marco Di Pietro Advanced () Monetary Economics and Policy 28 / 35
29 MIU optimality conditions Maximizing the utility function under the budget constraint yield the following FOCs W t P t = U n,t U c,t P t U c,t+1 Q t = βe t U c,t U m,t = 1 exp( i t ) U c,t P t+1 Model properties depend on the speci cation of the utility function. Two cases: separable in real balances nonseparable in realbalances Marco Di Pietro Advanced () Monetary Economics and Policy 29 / 35
30 Separable utility The utility functional form is U C t, M t, N t = C t 1 σ P t 1 σ + (M t /P t ) 1 ν 1 ν! N 1+γ t 1 + γ Given the separability, U c,t and U n,t continue to be independent of real balances. The equilibrium level for output, employment, real interest rate and real wage is the same of a cashless economy. The money demand equation is In loglinear terms M t P t = C σ ν t [1 exp ( i t )] m t p t = σ ν c t ηi t 1 ν Money demand serves only at determining the quantity of money that the Central Bank supplies. Moreover, money has only nominal e ects. Marco Di Pietro Advanced () Monetary Economics and Policy 30 / 35
31 Nonseparable utility The utility functional form is U C t, M t, N t = X t 1 σ P t 1 σ! N 1+γ t 1 + γ X t is a composite index of consumption and real balances having the following form X t = " X t = C 1 ϑ t (1 ϑ) C 1 ν t Mt P t # 1 1 ν 1 ν Mt + ϑ P t ϑ for ν = 1 for ν 6= 1 where ν denotes the elasticity of substitution between consumption and real balances and ϑ the relative weight of real balances in utility. Marco Di Pietro Advanced () Monetary Economics and Policy 31 / 35
32 New optimality conditions Being the utility function nonseparable the marginal utilities of consumption and real balances are U c,t = (1 ϑ) X ν σ U m,t = ϑx ν σ t The optimality conditions now become t Ct ν ν Mt W t = Nγ t X σ ν t Ct ν P t (1 ϑ) " Ct+1 ν ν σ Xt+1 P t Q t = βe t C t M t P t = C t [1 exp( i t )] P t X t 1 ν ϑ 1 ϑ 1 ν P t+1 Implications: monetary policy nonneutral as both labor supply and Euler equation are a ected by real balances. Marco Di Pietro Advanced () Monetary Economics and Policy 32 / 35 #
33 Optimal monetary policy in a MIU context The policymaker aims to maximize the utility of the representative household subject to the resource constraint C t = A t Nt 1 α. Formally, max U C t, M t, N t P t Optimality conditions: U n,t U c,t = (1 α)a t Nt α U m,t = 0 Condition U m,t = 0 equals the marginal utility of real balances with the social marginal cost of producing real balances. Remember that households choose their optimal real money balances according to U m,t U c,t = 1 exp( i t ) Marco Di Pietro Advanced () Monetary Economics and Policy 33 / 35
34 Friedman rule U m,t = 0 is satis ed only in the case i t = 0 =) Friedman rule. The opportunity cost of holding money is given by the nominal interest rate and the latter must be zero in order to equate the social cost of holding money. Policy implication: π = ρ < 0 =) moderate de ation in the longrun. Nonetheless, Friedman rule involves that price level is not determined. Central Bank can avoid undeterminacy implementing the Taylor principle in the following rule: i t = (r t 1 + π t ) Plugging the previous rule into the Fisherian equation leads to the following di erence equation i t = E t i t+1 whose only stationary solution is i t = 0. Equilibrium in ation is π t = r t. Marco Di Pietro Advanced () Monetary Economics and Policy 34 / 35
35 References  Christiano, L.J., M. Eichenbaum and C.L. Evans (1999), Monetary policy shocks: What have we learned and to what end?, Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), volume 1, chapter 2: Galí, J. (2008), Monetary Policy, In ation and the Business Cycle. An Introduction to the New Keynesian Framework, (Chapters 1 and 2).  King R. e S. Rebelo, (2000), Resuscitating Real Business Cycles, in Woodford, M. and Taylor, J., (eds.), Handbook of Macroeconomics, vol. 1B NorthHolland (NBER Working Paper 7534).  Kydland, F.E. and E.C. Prescott (1982), Time to Build and Aggregate Fluctuations, Econometrica, 50(6): Marco Di Pietro Advanced () Monetary Economics and Policy 35 / 35
A Classical Monetary Model  Money in the Utility Function
A Classical Monetary Model  Money in the Utility Function Jarek Hurnik Department of Economics Lecture III Jarek Hurnik (Department of Economics) Monetary Economics 2012 1 / 24 Basic Facts So far, the
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 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 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 informationReal Business Cycle Theory
Real Business Cycle Theory Barbara Annicchiarico Università degli Studi di Roma "Tor Vergata" April 202 General Features I Theory of uctuations (persistence, output does not show a strong tendency to return
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 informationReal Business Cycle Models
Phd Macro, 2007 (Karl Whelan) 1 Real Business Cycle Models The Real Business Cycle (RBC) model introduced in a famous 1982 paper by Finn Kydland and Edward Prescott is the original DSGE model. 1 The early
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 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 informationLecture 14 More on Real Business Cycles. Noah Williams
Lecture 14 More on Real Business Cycles Noah Williams University of Wisconsin  Madison Economics 312 Optimality Conditions Euler equation under uncertainty: u C (C t, 1 N t) = βe t [u C (C t+1, 1 N t+1)
More informationThe Real Business Cycle model
The Real Business Cycle model Spring 2013 1 Historical introduction Modern business cycle theory really got started with Great Depression Keynes: The General Theory of Employment, Interest and Money Keynesian
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 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 informationMonetary Policy, Labor Market Rigidities and Oil Price Shocks. A Research Proposal by. Olivier J. Blanchard and Jordi Galí
Monetary Policy, Labor Market Rigidities and Oil Price Shocks A Research Proposal by Olivier J. Blanchard and Jordi Galí Banque de France May 11, 2006 Motivation Oil Prices Large, persistent uctuations
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 Cycles. Federal Reserve Bank of Minneapolis Research Department Staff Report 370. February 2006. Ellen R. McGrattan
Federal Reserve Bank of Minneapolis Research Department Staff Report 370 February 2006 Real Business Cycles Ellen R. McGrattan Federal Reserve Bank of Minneapolis and University of Minnesota Abstract:
More informationGraduate Macroeconomics 2
Graduate Macroeconomics 2 Lecture 1  Introduction to Real Business Cycles Zsófia L. Bárány Sciences Po 2014 January About the course I. 2hour lecture every week, Tuesdays from 10:1512:15 2 big topics
More information2. Real Business Cycle Theory (June 25, 2013)
Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 13 2. Real Business Cycle Theory (June 25, 2013) Introduction Simplistic RBC Model Simple stochastic growth model Baseline RBC model Introduction
More informationECON 5110 Class Notes Overview of New Keynesian Economics
ECON 5110 Class Notes Overview of New Keynesian Economics 1 Introduction The primary distinction between Keynesian and classical macroeconomics is the flexibility of prices and wages. In classical models
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 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 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 informationLecture 9: Keynesian Models
Lecture 9: Keynesian Models Professor Eric Sims University of Notre Dame Fall 2009 Sims (Notre Dame) Keynesian Fall 2009 1 / 23 Keynesian Models The de ning features of RBC models are: Markets clear Money
More informationTowards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey
Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey MURAT ÜNGÖR Central Bank of the Republic of Turkey http://www.muratungor.com/ April 2012 We live in the age of
More informationMacroeconomic Effects of Financial Shocks Online Appendix
Macroeconomic Effects of Financial Shocks Online Appendix By Urban Jermann and Vincenzo Quadrini Data sources Financial data is from the Flow of Funds Accounts of the Federal Reserve Board. We report the
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 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 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 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 informationNew Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36
New Keynesian model Marcin Kolasa Warsaw School of Economics Department of Quantitative Economics Marcin Kolasa (WSE) NK model 1 / 36 Flexible vs. sticky prices Central assumption in the (neo)classical
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 information4. Only one asset that can be used for production, and is available in xed supply in the aggregate (call it land).
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
More informationTeaching modern general equilibrium macroeconomics to undergraduates: using the same t. advanced research. Gillman (Cardi Business School)
Teaching modern general equilibrium macroeconomics to undergraduates: using the same theory required for advanced research Max Gillman Cardi Business School pments in Economics Education (DEE) Conference
More informationThe real business cycle theory
Chapter 29 The real business cycle theory Since the middle of the 1970s two quite different approaches to the explanation of business cycle fluctuations have been pursued. We may broadly classify them
More information3 The Standard Real Business Cycle (RBC) Model. Optimal growth model + Labor decisions
Franck Portier TSE Macro II 2921 Chapter 3 Real Business Cycles 36 3 The Standard Real Business Cycle (RBC) Model Perfectly competitive economy Optimal growth model + Labor decisions 2 types of agents
More informationReal Business Cycle Theory
Chapter 4 Real Business Cycle Theory This section of the textbook focuses on explaining the behavior of the business cycle. The terms business cycle, shortrun macroeconomics, and economic fluctuations
More informationAdvanced Macroeconomics (ECON 402) Lecture 8 Real Business Cycle Theory
Advanced Macroeconomics (ECON 402) Lecture 8 Real Business Cycle Theory Teng Wah Leo Some Stylized Facts Regarding Economic Fluctuations Having now understood various growth models, we will now delve into
More informationMacroeconomics 2. In ation, unemployment and aggregate supply. Mirko Wiederholt. Goethe University Frankfurt. Lecture 10
Macroeconomics 2 In ation, unemployment and aggregate supply Mirko Wiederholt Goethe University Frankfurt Lecture 10 irko Wiederholt (Goethe University Frankfurt) Macroeconomics 2 Lecture 10 1 / 22 1.
More informationMoney and Public Finance
Money and Public Finance By Mr. Letlet August 1 In this anxious market environment, people lose their rationality with some even spreading false information to create trading opportunities. The tales about
More informationSovereign Defaults. Iskander Karibzhanov. October 14, 2014
Sovereign Defaults Iskander Karibzhanov October 14, 214 1 Motivation Two recent papers advance frontiers of sovereign default modeling. First, Aguiar and Gopinath (26) highlight the importance of fluctuations
More informationAdvanced Macroeconomics (2)
Advanced Macroeconomics (2) RealBusinessCycle Theory Alessio Moneta Institute of Economics Scuola Superiore Sant Anna, Pisa amoneta@sssup.it MarchApril 2015 LM in Economics Scuola Superiore Sant Anna
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 informationIfo Institute for Economic Research at the University of Munich. 6. The New Keynesian Model
6. The New Keynesian Model 1 6.1 The Baseline Model 2 Basic Concepts of the New Keynesian Model Markets are imperfect: Price and wage adjustments: contract duration, adjustment costs, imperfect expectations
More informationA Comparison of 2 popular models of monetary policy
A Comparison of 2 popular models of monetary policy Petros Varthalitis Athens University of Economics & Business June 2011 Varthalitis (AUEB) Calvo vs Rotemberg June 2011 1 / 45 Aim of this work Obviously,
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 informationUNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS
UNIVERSITY OF OSLO DEPARTMENT OF ECONOMICS Exam: ECON4310 Intertemporal macroeconomics Date of exam: Thursday, November 27, 2008 Grades are given: December 19, 2008 Time for exam: 09:00 a.m. 12:00 noon
More informationDebt Maturity Management, Monetary and Fiscal Policy Interactions
Debt Maturity Management, Monetary and Fiscal Policy Interactions Hao Jin April 22, 23 Abstract This paper examines the interactions of debt maturity management, monetary and fiscal policy in a DSGE model.
More informationREAL BUSINESS CYCLE THEORY METHODOLOGY AND TOOLS
Jakub Gazda 42 Jakub Gazda, Real Business Cycle Theory Methodology and Tools, Economics & Sociology, Vol. 3, No 1, 2010, pp. 4248. Jakub Gazda Department of Microeconomics Poznan University of Economics
More informationLabor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics
Labor Market Search and Real Business Cycles: Reconciling Nash Bargaining with the Real Wage Dynamics A. CHERON F. LANGOT CEPREMAP CEPREMAP GAINSUniversité du Maine GAINSUniversité du Maine acheron@univlemans.fr
More informationBusiness Cycle Accounting for South Africa
Business Cycle Accounting for South Africa May 20 Albert Touna Mama University of Cape Town albert.tounamama@uct.ac.za Nicola Viegi University of Pretoria and ERSA nicola.viegi@up.ac.za Abstract Quantitative
More informationINVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER
INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY Susanto Basu and Miles S. Kimball University of Michigan and NBER MAIN RESULTS. Show that a model with capital accumulation and sticky
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 informationGovernment Debt Management: the Long and the Short of it
Government Debt Management: the Long and the Short of it E. Faraglia (U. of Cambridge and CEPR) A. Marcet (IAE, UAB, ICREA, BGSE, MOVE and CEPR), R. Oikonomou (U.C. Louvain) A. Scott (LBS and CEPR) ()
More informationIntermediate Macroeconomics: The Real Business Cycle Model
Intermediate Macroeconomics: The Real Business Cycle Model Eric Sims University of Notre Dame Fall 2012 1 Introduction Having developed an operational model of the economy, we want to ask ourselves the
More informationDynamic Macroeconomics I Introduction to Real Business Cycle Theory
Dynamic Macroeconomics I Introduction to Real Business Cycle Theory Lorenza Rossi University of Pavia these slides are based on my Course of Advanced Macroeconomics II held at UPF and bene t of the work
More informationChapter 11. MarketClearing Models of the Business Cycle
Chapter 11 MarketClearing Models of the Business Cycle Goal of This Chapter In this chapter, we study three models of business cycle, which were each developed as explicit equilibrium (marketclearing)
More informationGreat Depressions from a Neoclassical Perspective. Advanced Macroeconomic Theory
Great Depressions from a Neoclassical Perspective Advanced Macroeconomic Theory 1 Review of Last Class Model with indivisible labor, either working for xed hours or not. allow social planner to choose
More informationThe Real Business Cycle School
Major Currents in Contemporary Economics The Real Business Cycle School Mariusz Próchniak Department of Economics II Warsaw School of Economics 1 Background During 197282,the dominant new classical theory
More informationThe Basic New Keynesian Model
The Basic New Keynesian Model January 11 th 2012 Lecture notes by Drago Bergholt, Norwegian Business School Drago.Bergholt@bi.no I Contents 1. Introduction... 1 1.1 Prologue... 1 1.2 The New Keynesian
More informationFinal. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect?
Name: Number: Nova School of Business and Economics Macroeconomics, 11031st Semester 20132014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.
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 informationTopic 2. Incorporating Financial Frictions in DSGE Models
Topic 2 Incorporating Financial Frictions in DSGE Models Mark Gertler NYU April 2009 0 Overview Conventional Model with Perfect Capital Markets: 1. Arbitrage between return to capital and riskless rate
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 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 informationOptimal Investment. Government policy is typically targeted heavily on investment; most tax codes favor it.
Douglas Hibbs L, L3: AAU Macro Theory 009/4 Optimal Investment Why Care About Investment? Investment drives capital formation, and the stock of capital is a key determinant of output and consequently
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 informationDiscrete Dynamic Optimization: Six Examples
Discrete Dynamic Optimization: Six Examples Dr. Taikuang Ho Associate Professor. Department of Quantitative Finance, National Tsing Hua University, No. 101, Section 2, KuangFu Road, Hsinchu, Taiwan 30013,
More informationInstability of Sunspot Equilibria in Real Business Cycle Models Under Adaptive Learning
Instability of Sunspot Equilibria in Real Business Cycle Models Under Adaptive Learning John Duffy Department of Economics University of Pittsburgh 230 S. Bouquet Street Pittsburgh, PA 15260 USA E mail:
More informationLecture 1: Asset pricing and the equity premium puzzle
Lecture 1: Asset pricing and the equity premium puzzle Simon Gilchrist Boston Univerity and NBER EC 745 Fall, 2013 Overview Some basic facts. Study the asset pricing implications of household portfolio
More informationINVESTMENT DECISIONS and PROFIT MAXIMIZATION
Lecture 6 Investment Decisions The Digital Economist Investment is the act of acquiring incomeproducing assets, known as physical capital, either as additions to existing assets or to replace assets that
More informationEconomic Growth: Lecture 9, Neoclassical Endogenous Growth
14.452 Economic Growth: Lecture 9, Neoclassical Endogenous Growth Daron Acemoglu MIT November 29, 2011. Daron Acemoglu (MIT) Economic Growth Lecture 9 November 29, 2011. 1 / 41 FirstGeneration Models
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 informationNew Keynesian Dynamics in a Low Interest Rate Environment.
New Keynesian Dynamics in a Low Interest Rate Environment. R. Anton Braun University of Tokyo Lena Mareen Körber German Institute for Economic Research July 14, 2010 Abstract Recent research has found
More informationCashinAdvance Model
CashinAdvance Model Prof. Lutz Hendricks Econ720 September 21, 2015 1 / 33 Cashinadvance Models We study a second model of money. Models where money is a bubble (such as the OLG model we studied) have
More information7. Real business cycle
7. Real business cycle We have argued that a change in fundamentals, modifies the longrun solution of the system, while a temporary change not permanently affecting fundamentals leads to a shortrun dynamics
More informationCash in advance model
Chapter 4 Cash in advance model 4.1 Motivation In this lecture we will look at ways of introducing money into a neoclassical model and how these methods can be developed in an effort to try and explain
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 informationA Review of the Literature of Real Business Cycle theory. By Student E XXXXXXX
A Review of the Literature of Real Business Cycle theory By Student E XXXXXXX Abstract: The following paper reviews five articles concerning Real Business Cycle theory. First, the review compares the various
More informationNew Keynesian Economics: Sticky Prices Copyright 2014 Pearson Education, Inc.
Chapter 14 New Keynesian Economics: Sticky Prices Copyright Chapter 14 Topics Construction of the New Keynesian Sticky Price Model extending the Monetary Intertemporal Model. The Role of Government Policy
More informationSimple Analytics of the Government Expenditure Multiplier
Simple Analytics of the Government Expenditure Multiplier Michael Woodford Columbia University June 13, 2010 Abstract This paper explains the key factors that determine the output multiplier of government
More information14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth
14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth Daron Acemoglu MIT December 2, 2014. Daron Acemoglu (MIT) Economic Growth Lecture 11 December 2, 2014. 1 / 43 Introduction
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 informationTwo examples of structural modelling. Notes for "Structural modelling".
Two examples of structural modelling. Notes for "Structural modelling". Martin Browning Department of Economics, University of Oxford Revised, February 3 2012 1 Introduction. Structural models are models
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 informationIntroduction to Money
Introduction to Money (3f)P.1 How does money fit into modern macro models?  Money M = = nominal units issued by the government. Price level p. Purchasing power 1/p.  Consider discrete periods: Household
More informationIndeterminacy, Aggregate Demand, and the Real Business Cycle
Indeterminacy, Aggregate Demand, and the Real Business Cycle Jess Benhabib Department of Economics New York University jess.benhabib@nyu.edu Yi Wen Department of Economics Cornell University Yw57@cornell.edu
More informationWORKING PAPER SERIES
DEPARTMENT OF ECONOMICS UNIVERSITY OF MILAN  BICOCCA WORKING PAPER SERIES Real Business Cycles with Cournot Competition and Endogenous Entry Andrea Colciago, Federico Etro No. 35 February 28 Dipartimento
More informationEndogenous Growth Theory
Chapter 3 Endogenous Growth Theory 3.1 OneSector Endogenous Growth Models 3.2 Twosector Endogenous Growth Model 3.3 Technological Change: Horizontal Innovations References: Aghion, P./ Howitt, P. (1992),
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 informationCapital Trading, StockTrading, andthe In ationtaxon Equity
Capital Trading, StockTrading, andthe In ationtaxon Equity Ralph Chami y IMF Institute Thomas F. Cosimano z University of Notre Dame and Connel Fullenkamp x Duke University May 1998; Revision October 2000
More informationA Note on Optimal Fiscal Policy in an Economy with Private Borrowing Limits
A Note on Optimal Fiscal Policy in an Economy with Private Borrowing Limits Marina Azzimonti y Pierre Yared z October 28, 206 Abstract This note considers the implications for optimal scal policy when
More informationInstability of Sunspot Equilibria in Real Business Cycle Models Under Adaptive Learning
Instability of Sunspot Equilibria in Real Business Cycle Models Under Adaptive Learning John Duffy Department of Economics University of Pittsburgh 230 S. Bouquet Street Pittsburgh, PA 15260 USA E mail:
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 informationEXOGENOUS GROWTH MODELS
EXOGENOUS GROWTH MODELS Lorenza Rossi Goethe University 20112012 Course Outline FIRST PART  GROWTH THEORIES Exogenous Growth The Solow Model The Ramsey model and the Golden Rule Introduction to Endogenous
More informationChapter 9. The ISLM/ADAS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson AddisonWesley. All rights reserved
Chapter 9 The ISLM/ADAS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:
More informationEconomics 702 Macroeconomic Theory Practice Examination #1 October 2008
Economics 702 Macroeconomic Theory Practice Examination #1 October 2008 Instructions: There are a total of 60 points on this examination and you will have 60 minutes to complete it. The rst 10 minutes
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 informationReal Business Cycle TheoryA Systematic Review
MPRA Munich Personal RePEc Archive Real Business Cycle TheoryA Systematic Review Binbin Deng Department of Economics, Hong Kong University of Science and Technology 27. July 2009 Online at http://mpra.ub.unimuenchen.de/17932/
More informationWhy Is the Government Spending Multiplier Larger at the Zero Lower Bound? Not (Only) Because of the Zero Lower Bound
Why Is the Government Spending Multiplier Larger at the Zero Lower Bound? Not (Only) Because of the Zero Lower Bound Jordan RoulleauPasdeloup CREST and Paris School of Economics November 2013 Abstract
More informationFederal Reserve Bank of New York Staff Reports. Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts
Federal Reserve Bank of New York Staff Reports Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts John B. Donaldson Natalia Gershun Marc P. Giannoni Staff Report
More information