Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine

Size: px
Start display at page:

Download "Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine"

Transcription

1 Quality Ladders, Competition and Endogenous Growth Michele Boldrin and David K. Levine 1

2 The Standard Schumpeterian Competition Monopolistic Competition innovation modeled as endogenous rate of movement up a quality ladder incentive to innovate comes from short-run monopoly at each rung of the ladder Romer, Aghion-Howitt, Grossman-Helpman 2

3 The Questions Does imperfect competition have anything to do with this? Does fixed cost of innovation have anything to do with this? Do models where the incentive to innovate are a short-term monopoly have a better claim to fit the data well? 3

4 Benchmark Environment: Grossman&Helpman d the consumption (demand) for goods of quality ρ be the subective interest rate λ > 1 a constant = increase in quality each step up quality ladder consumer utility ρt U = e log λ d t dt 0 One unit of output requires a unit of labor to obtain 4

5 The first to reach has monopoly until + 1 is reached R&D intensity is ι, probability of innovating is dt One unit of labor, E steady state expenditure Wage rate is numeraire and price is λ The resource constraint is a ι + E/ λ = 1 I ι at a cost of I ι adt. 5

6 Monopolist gets a share (1 1/ λ) of expenditure Cost of innovation is I a, rate of return is (1 1/ λ) E/ a I. There is a chance ι of losing the monopoly, reducing the rate of return to the interest rate (1 1/ λ) E a I ι = ρ This and the resource constraint solve for R&D intensity ι (1 1/ λ) ρ =. λ a I 6

7 The Story moving up the capital ladder is unambiguously good the limitation on the rate at which you move up the ladder is the increasing marginal cost of labor used for innovation here the increasing marginal cost of labor is because it is drawn out of the production of output this is a trick to keep the model stationary 7

8 How industries walk up a quality ladder. 8

9 Key Feature gradual switching from one technology to the next suggests that there is a trade-off between increasing use (ramping up) an old technology and introducing a new one the fact suggest an alternative theory of why there is gradual movement up the quality ladder introduce a new technology when the benefits of the old one are exhausted quite different than the Romer, AH, GH story in their setup the new technology is always better, it is ust costly to go there right away 9

10 Innovation with Knowledge Capital Retain preferences and ladder structure Ladder corresponds to qualities of knowledge capital k and consumption d One unit of labor Consumption needs labor and knowledge capital Knowledge capital can be used to produce consumption, more knowledge of the same quality (widening, imitation), new knowledge (deepening, innovation) 10

11 Widening, imitation: use knowledge capital to produce knowledge capital of the same quality level at rate b > ρ Deepening, innovation: use knowledge capital h to produce knowledge capital of the next high quality level: one unit of quality + 1 needs a > 1 units of quality Deepening is costlier than widening, λ / a < 1. Law of motion: h a 1 = ( ) +. k b k d h k k a Allow 1 = / + 11

12 This is an ordinary diminishing return economy, CE is efficient Proposition: production uses at most two adacent qualities of capital 1, Proposition: after some initial period labor is fully employed: d d =. Proposition: Consumption grows at a rate b ρ or not at all Proposition: You innovate only when necessary, that is when d = 1 Proposition: Equilibrium paths cycle between widening and deepening 12

13 Widening At the beginning of this phase 1 d = and d + 1 = 0. Consumption during widening is 1 λ d + λ + d + 1 It increases as labor shifts from old to new capital Since d (0) = 1 and c(0) = λ + 1 ( b ρ) t d() t d+ 1() t e λ + λ = λ. 13

14 Using full employment condition d () t = e ( b ρ) t 1 λ λ. This continues until 1 d ( τ ) = 0 and d + 1( τ1) = 1 At which point widening ends. Solving 1 d ( τ ) = 0 we find the length of widening τ 1 logλ =. b ρ 14

15 Deepening Step back at the end of the previous widening phase, when only old capital was used to produce consumption. How much capital of new quality should we pile up before starting the new widening phase? Until we do so, full employment implies that consumption is constant d () t = 1, 15

16 bτ A reduction in consumption now give e 0 / the end deepening. a units of + 1 capital by e ρτ 0 This future capital gives consumption worth consumption. units of current Consumption of + 1 quality is worth λ time consumption of quality At the social optimum, this shift must be neutral, λ ρτ bτ e e a ( / ) τ 0 =. = log a b logλ ρ, The same flow of consumption service can be obtained through a smooth innovation process 16

17 Solve µ τ 0 0 b( τ t) bτ e dt = e 0 0 for µ, to get µ e bτ 0 = b/(1 ). Hence there is a continuum of payoff equivalent equilibria. Focus on the one in which innovation is done at end of deepening 17

18 Intensity of innovation This is ust the inverse of the length of the cycle, i.e. of the sum τ + τ of the two parts of the cycle * 0 1 b ρ loga =. Length of cycle is endogenous but does not depend on how high the step ladder is 18

19 Remarks New knowledge is costlier than old New knowledge loses the productive capacity of the old Conversion is instantaneous use the cost of conversion b ae time delay is capitalized into 19

20 Evolution of the stocks Deepening: growth rate of consumption is zero t value at 0 = τ of old capital converted to new is F conversion takes place at t = 0, hence k 0 τ ( τ ) = 1+ F b( τ t) k () t = 1+ Fe and d 1( t) 0 so 0 + = during deepening 20

21 Widening: k () t and d () t shrink from 1 at t τ 0 d = d + and c/ c = b ρ from 1 d ( b ρλ ) = + d( b ρ) 1 λ, derive which has the solution given earlier, i.e. d () t ( b ρ )( t τ ) 0 e λ = 1 λ 1 λ =, to 0 at 0 1 New capital producing consumption expands as d + 1() t = ( b ρ)( t τ ) 1 e 1 λ 1 λ 0, t = τ + τ. 21

22 Plugging the results in the law of motion for k+ 1 () t, the expanding stock, we have ( b ρ )( t τ ) 0 b e k + 1() t = bk+ 1() t + b( a 1) + 1 λ a(1 λ) t ( τ, τ + τ ]. for [ ρ] 22

23 Solving this we find that ( b ρ )( t τ ) 0 ba ( 1) + ρ e 1 k+ 1() t = + + C aρ 1 λ 1 λ k ( τ ) ( F/ a) The initial condition = can be used to eliminate the constant of integration to get ba ( 1) + ρ ( b ρ)( t τ0 ) F k+ 1() t = [1 e ] + aρ(1 λ) a. 23

24 For the cycle to repeat itself, at the end of the widening period the stock b 0 of capital of quality + 1 must equal 1+ Fe τ again. Use this to * compute F, the (pseudo) fixed cost invested in innovation along the competitive equilibrium path 24

25 Comparison of the Models Ignore technical differences, stick to substantive First, the parameterλ two offsetting effects during widening and deepening respectively Second, our model has the extra widening parameter b. In a certain sense the Grossman-Helpman model assumes that b =. Third, our model does not require a fixed cost to innovate. Move on to this issue Fixed Cost 25

26 Assume that there is a technologically determined fixed cost F that gets you k = F/ a units of new capital. Once the fixed cost is incurred, it is possible to convert additional units of old capital to new capital at the same rate a. t then + 1 cannot also be If is introduced for the first time at introduced at time t, hence the distance in time between t and t + 1 is either constant or infinity. We are interested in F * F small fixed cost, and F > F * large fixed cost. 26

27 Behavioral economics: who innovates? Competitive means no one has monopoly power. Can someone affect prices by innovating? Can he/she take this into account when choosing action? When everyone believes that nothing affects equilibrium prices competitive equilibrium with non-atomic innovators, When someone feels powerful, we have its schumpeterian perturbation: entrepreneurial competitive equilibrium 27

28 Fixed Cost: Non- Atomic Innovators viable initial stocks of knowledge capital k = ( k, k,, k ) J kj k 0 1 J feasible paths kt () = [ k(), t k(),..., t k(),...] t, t [0, ) 0 1 kt ( ) = [ k ( t ), k ( t ),..., k ( t ),...] J+ 1 J+ 1 J+ 2 J+ 2 J+ n J+ n 28

29 Definition 1. A competitive equilibrium with atomic innovators E with respect to a viable k J consists of: (i) a non-decreasing sequence of times 0 1 J and, for > J, either t > t 1, or t ( t, t, ), with t = 0 for = ; (ii) a path of capital k() t 0and capital prices q() t 0for t t, and a path of consumption ct () 0and consumption prices pt () 0 that satisfy the conditions (1) [Consumer Optimality] ct () max ρ t e log( c ( t)) dt subect to 0 ρt e ptctdt ()() e ptctdt ()() 0 0 ρt. 29

30 (2) [Optimal Production Plans at t ] k ( t ) = k ( t )/ a k 1 q ( t ) = aq ( t ) 1 (3) [Optimal Production Plans for t > t ] h 1( t) k () t = b( k() t d()) t h() t +, a q () t aq () t k () t max{ d (), t h ()} t, 1 and 1 q () t = aq () t if h 1( t) > 0, k (), t d () t maximize profits 30

31 (4) [Social Feasibility] ct () = λ d () t t (5) [Boundedness] for some number K > 0 k() t < K,b at all t. = 0 31

32 c( τ0) c(0) = e ( b ρτ ) a Implications of the zero profit condition 0 λ. ( k, τ, F) 0 bτ0 is a candidate for equilibrium if zero profits and ke F hold. Also ( )( ) () ( ) b ρ ct c e t τ 0 = τ. 0 1 When t = τ0 + τ1 ct () = λ +. This gives 1 ( b ρτ ) c( τ0) λ + e 1 =, and, because c(0) e ρ τ0+ τ1 =. ( b )( ) a = λ, the zero profit condition simplifies to 32

33 The Case of Small Fixed Cost Theorem 1: In the economy with a small fixed cost, for given initial conditions, there exists a unique competitive equilibrium with non-atomic innovators. This equilibrium is efficient. 33

34 The Case of Large Fixed Cost F > F * Assume now that The dates innovations take place less easy to pin down. First, the competitive equilibrium of the economy without fixed cost is no longer feasible. Second, the new competitive equilibrium is not efficient. Equilibrium exists; in fact: quite a few equilibria exist ( k, τ ) The set of equilibria is parameterized by,0 34

35 Theorem 2: - The earliest competitive equilibrium with non-atomic innovators pareto dominates all other steady state competitive equilibria with non-atomic innovators, but is not first best. - Given k F/ a least one cyclical equilibrium of period two., there is at most onestationary equilibrium and at - There are also equilibria with k = 0 for * > J, and τ * + =+ 1,0 J 35

36 Fixed Cost: Entrepreneurial Innovators Fix one competitive equilibrium Ê. A -innovation is a pair ( t, k ()) t composed of the time tˆ ˆ 1 < t < t at which a single agent purchases F units of capital of F a units of capital of quality. quality 1 and turns them into / We say that a competitive equilibrium Ẽ is a feasible continuation for if the -innovation ( tf, ) k () t = kˆ () t F, k ˆ 1() t = k 1( t'), for t < t ; (a) 1 1 k () t = kˆ () t for ' < 1 and all t. (b) ' ' 36

37 kt ( ) = kt ˆ( ˆ) and kt ( ) = kt ˆ( ˆ ). It is Markov if We say that a -innovation ( t, F ) is profitable with respect to a feasible continuation Ẽ if q ( t ) aq ( t ), and 1. q ( t ) > aqˆ ( t ) 1 37

38 Definition 2. An entrepreneurial competitive equilibrium is defined as a competitive equilibrium with non-atomic innovators that (1) does not admit innovations that are profitable with respect to feasible Markov continuations, (2) does not stop innovating, that is, t < for all. Theorem 3: There is a unique entrepreneurial competitive equilibrium: it is the earliest competitive equilibrium with non-atomic innovators. 38

ECON20310 LECTURE SYNOPSIS REAL BUSINESS CYCLE

ECON20310 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 information

Online Supplementary Material

Online Supplementary Material Online Supplementary Material The Supplementary Material includes 1. An alternative investment goal for fiscal capacity. 2. The relaxation of the monopoly assumption in favor of an oligopoly market. 3.

More information

The Real Business Cycle Model

The 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 co-movements in the uctuations

More information

Current Accounts in Open Economies Obstfeld and Rogoff, Chapter 2

Current 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 information

Implications of Intellectual Property Rights for Dynamic Gains from Trade

Implications of Intellectual Property Rights for Dynamic Gains from Trade FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Implications of Intellectual Property Rights for Dynamic Gains from Trade Michele Connolly Duke University and Diego Valderrama Federal Reserve

More information

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti)

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Kjetil Storesletten September 10, 2013 Kjetil Storesletten () Lecture 3 September 10, 2013 1 / 44 Growth

More information

6. Budget Deficits and Fiscal Policy

6. 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 information

The Welfare Implication of Lifting the No Surcharge Rule in. Credit Card Markets

The Welfare Implication of Lifting the No Surcharge Rule in. Credit Card Markets The Welfare Implication of Lifting the No Surcharge Rule in Credit Card Markets Hongru Tan November 5, 015 Abstract This paper investigates the welfare implications of banning the no surcharge rule (NSR)

More information

14.452 Economic Growth: Lecture 11, Technology Diffusion, Trade and World Growth

14.452 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 information

The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to:

The Golden Rule. Where investment I is equal to the savings rate s times total production Y: So consumption per worker C/L is equal to: The Golden Rule Choosing a National Savings Rate What can we say about economic policy and long-run growth? To keep matters simple, let us assume that the government can by proper fiscal and monetary policies

More information

Introduction to Money

Introduction 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 information

14.452 Economic Growth: Lectures 6 and 7, Neoclassical Growth

14.452 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 information

Advanced Macroeconomics (2)

Advanced Macroeconomics (2) Advanced Macroeconomics (2) Real-Business-Cycle Theory Alessio Moneta Institute of Economics Scuola Superiore Sant Anna, Pisa amoneta@sssup.it March-April 2015 LM in Economics Scuola Superiore Sant Anna

More information

Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey

Towards 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 information

Financial Development and Macroeconomic Stability

Financial 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 information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

A Theory of Capital Controls As Dynamic Terms of Trade Manipulation

A Theory of Capital Controls As Dynamic Terms of Trade Manipulation A Theory of Capital Controls As Dynamic Terms of Trade Manipulation Arnaud Costinot Guido Lorenzoni Iván Werning Central Bank of Chile, November 2013 Tariffs and capital controls Tariffs: Intratemporal

More information

. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved.

. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved. Chapter 4 Review Questions. Explain how an increase in government spending and an equal increase in lump sum taxes can generate an increase in equilibrium output. Under what conditions will a balanced

More information

2. Real Business Cycle Theory (June 25, 2013)

2. 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 information

Lecture 14 More on Real Business Cycles. Noah Williams

Lecture 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 information

Real 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 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 information

2007/8. The problem of non-renewable energy resources in the production of physical capital. Agustin Pérez-Barahona

2007/8. The problem of non-renewable energy resources in the production of physical capital. Agustin Pérez-Barahona 2007/8 The problem of non-renewable energy resources in the production of physical capital Agustin Pérez-Barahona CORE DISCUSSION PAPER 2007/8 The problem of non-renewable energy resources in the production

More information

Cournot s model of oligopoly

Cournot s model of oligopoly Cournot s model of oligopoly Single good produced by n firms Cost to firm i of producing q i units: C i (q i ), where C i is nonnegative and increasing If firms total output is Q then market price is P(Q),

More information

Zero Nominal Interest Rates: Why They re Good and How to Get Them

Zero Nominal Interest Rates: Why They re Good and How to Get Them Federal Reserve Bank of Minneapolis Quarterly Review Vol. 22, No. 2, Spring 1998, pp. 2 10 Zero Nominal Interest Rates: Why They re Good and How to Get Them Harold L. Cole Senior Economist Research Department

More information

Cash-in-Advance Model

Cash-in-Advance Model Cash-in-Advance Model Prof. Lutz Hendricks Econ720 September 21, 2015 1 / 33 Cash-in-advance Models We study a second model of money. Models where money is a bubble (such as the OLG model we studied) have

More information

CS 522 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options

CS 522 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options CS 5 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options 1. Definitions Equity. The common stock of a corporation. Traded on organized exchanges (NYSE, AMEX, NASDAQ). A common

More information

EXHAUSTIBLE RESOURCES

EXHAUSTIBLE RESOURCES T O U L O U S E S C H O O L O F E C O N O M I C S NATURAL RESOURCES ECONOMICS CHAPTER III EXHAUSTIBLE RESOURCES CHAPTER THREE : EXHAUSTIBLE RESOURCES Natural resources economics M1- TSE INTRODUCTION The

More information

Inflation. Chapter 8. 8.1 Money Supply and Demand

Inflation. 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 information

Practice Problems on the Capital Market

Practice Problems on the Capital Market Practice Problems on the Capital Market 1- Define marginal product of capital (i.e., MPK). How can the MPK be shown graphically? The marginal product of capital (MPK) is the output produced per unit of

More information

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

4. 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 information

Practice Problems on Current Account

Practice Problems on Current Account Practice Problems on Current Account 1- List de categories of credit items and debit items that appear in a country s current account. What is the current account balance? What is the relationship between

More information

Friedman Redux: Restricting Monetary Policy Rules to Support Flexible Exchange Rates

Friedman Redux: Restricting Monetary Policy Rules to Support Flexible Exchange Rates Friedman Redux: Restricting Monetary Policy Rules to Support Flexible Exchange Rates Michael B. Devereux Department of Economics, University of British Columbia and CEPR Kang Shi Department of Economics,

More information

The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model

The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model The Short-Run Macro Model In the short run, spending depends on income, and income depends on spending. The Short-Run Macro Model Short-Run Macro Model A macroeconomic model that explains how changes in

More information

Increasing Returns and Economic Geography

Increasing Returns and Economic Geography Increasing Returns and Economic Geography Paul Krugman JPE,1991 March 4, 2010 Paul Krugman (JPE,1991) Increasing Returns March 4, 2010 1 / 18 Introduction Krugman claims that the study of economic outcomes

More information

Graduate Macroeconomics 2

Graduate Macroeconomics 2 Graduate Macroeconomics 2 Lecture 1 - Introduction to Real Business Cycles Zsófia L. Bárány Sciences Po 2014 January About the course I. 2-hour lecture every week, Tuesdays from 10:15-12:15 2 big topics

More information

The Optimal Growth Problem

The Optimal Growth Problem LECTURE NOTES ON ECONOMIC GROWTH The Optimal Growth Problem Todd Keister Centro de Investigación Económica, ITAM keister@itam.mx January 2005 These notes provide an introduction to the study of optimal

More information

Schooling, Political Participation, and the Economy. (Online Supplementary Appendix: Not for Publication)

Schooling, Political Participation, and the Economy. (Online Supplementary Appendix: Not for Publication) Schooling, Political Participation, and the Economy Online Supplementary Appendix: Not for Publication) Filipe R. Campante Davin Chor July 200 Abstract In this online appendix, we present the proofs for

More information

Chapter 4 Technological Progress and Economic Growth

Chapter 4 Technological Progress and Economic Growth Chapter 4 Technological Progress and Economic Growth 4.1 Introduction Technical progress is defined as new, and better ways of doing things, and new techniques for using scarce resources more productively.

More information

15 Kuhn -Tucker conditions

15 Kuhn -Tucker conditions 5 Kuhn -Tucker conditions Consider a version of the consumer problem in which quasilinear utility x 2 + 4 x 2 is maximised subject to x +x 2 =. Mechanically applying the Lagrange multiplier/common slopes

More information

Macroeconomic Effects of Financial Shocks Online Appendix

Macroeconomic 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 information

Prices versus Exams as Strategic Instruments for Competing Universities

Prices versus Exams as Strategic Instruments for Competing Universities Prices versus Exams as Strategic Instruments for Competing Universities Elena Del Rey and Laura Romero October 004 Abstract In this paper we investigate the optimal choice of prices and/or exams by universities

More information

Technology and Economic Growth

Technology and Economic Growth Technology and Economic Growth Chapter 5 slide 0 Outline The Growth Accounting Formula Endogenous Growth Theory Policies to Stimulate Growth The Neoclassical Growth Revival Real wages and Labor Productivity

More information

Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth

Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth Long Run Economic Growth Agenda Long-run economic growth. Determinants of long-run growth. Production functions. Long-run Economic Growth Output is measured by real GDP per capita. This measures our (material)

More information

Final. 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?

Final. 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, 1103-1st Semester 2013-2014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.

More information

Graduate Macro Theory II: Notes on Investment

Graduate Macro Theory II: Notes on Investment Graduate Macro Theory II: Notes on Investment Eric Sims University of Notre Dame Spring 2011 1 Introduction These notes introduce and discuss modern theories of firm investment. While much of this is done

More information

Bailouts and Financial Innovation: Market Completion Versus Rent Extraction

Bailouts and Financial Innovation: Market Completion Versus Rent Extraction Bailouts and Financial Innovation: Market Completion Versus Rent Extraction Anton Korinek University of Maryland Presentation at the Cowles GE Conference New Haven, CT April 2012 Anton Korinek (UMD) Bailouts

More information

Review of Basic Options Concepts and Terminology

Review of Basic Options Concepts and Terminology Review of Basic Options Concepts and Terminology March 24, 2005 1 Introduction The purchase of an options contract gives the buyer the right to buy call options contract or sell put options contract some

More information

VI. Real Business Cycles Models

VI. 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 information

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output. Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

More information

3 The Standard Real Business Cycle (RBC) Model. Optimal growth model + Labor decisions

3 The Standard Real Business Cycle (RBC) Model. Optimal growth model + Labor decisions Franck Portier TSE Macro II 29-21 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 information

Online Appendix to Stochastic Imitative Game Dynamics with Committed Agents

Online Appendix to Stochastic Imitative Game Dynamics with Committed Agents Online Appendix to Stochastic Imitative Game Dynamics with Committed Agents William H. Sandholm January 6, 22 O.. Imitative protocols, mean dynamics, and equilibrium selection In this section, we consider

More information

Second degree price discrimination

Second degree price discrimination Bergals School of Economics Fall 1997/8 Tel Aviv University Second degree price discrimination Yossi Spiegel 1. Introduction Second degree price discrimination refers to cases where a firm does not have

More information

Lecture 1: OLG Models

Lecture 1: OLG Models Lecture : OLG Models J. Knowles February 28, 202 Over-Lapping Generations What the heck is OLG? Infinite succession of agents who live for two periods Each period there N t old agents and N t young agents

More information

Probabilistic Models for Big Data. Alex Davies and Roger Frigola University of Cambridge 13th February 2014

Probabilistic Models for Big Data. Alex Davies and Roger Frigola University of Cambridge 13th February 2014 Probabilistic Models for Big Data Alex Davies and Roger Frigola University of Cambridge 13th February 2014 The State of Big Data Why probabilistic models for Big Data? 1. If you don t have to worry about

More information

Moral Hazard. Itay Goldstein. Wharton School, University of Pennsylvania

Moral Hazard. Itay Goldstein. Wharton School, University of Pennsylvania Moral Hazard Itay Goldstein Wharton School, University of Pennsylvania 1 Principal-Agent Problem Basic problem in corporate finance: separation of ownership and control: o The owners of the firm are typically

More information

Brownian Motion and Stochastic Flow Systems. J.M Harrison

Brownian Motion and Stochastic Flow Systems. J.M Harrison Brownian Motion and Stochastic Flow Systems 1 J.M Harrison Report written by Siva K. Gorantla I. INTRODUCTION Brownian motion is the seemingly random movement of particles suspended in a fluid or a mathematical

More information

Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model

Universidad de Montevideo Macroeconomia II. The Ramsey-Cass-Koopmans Model Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The Ramsey-Cass-Koopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous

More information

Optimal Taxation in a Limited Commitment Economy

Optimal Taxation in a Limited Commitment Economy Optimal Taxation in a Limited Commitment Economy forthcoming in the Review of Economic Studies Yena Park University of Pennsylvania JOB MARKET PAPER Abstract This paper studies optimal Ramsey taxation

More information

Graduate Macro Theory II: The Real Business Cycle Model

Graduate 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 information

Lecture Notes on Elasticity of Substitution

Lecture Notes on Elasticity of Substitution Lecture Notes on Elasticity of Substitution Ted Bergstrom, UCSB Economics 210A March 3, 2011 Today s featured guest is the elasticity of substitution. Elasticity of a function of a single variable Before

More information

Decentralization and Private Information with Mutual Organizations

Decentralization and Private Information with Mutual Organizations Decentralization and Private Information with Mutual Organizations Edward C. Prescott and Adam Blandin Arizona State University 09 April 2014 1 Motivation Invisible hand works in standard environments

More information

14.74 Lecture 12 Inside the household: Is the household an efficient unit?

14.74 Lecture 12 Inside the household: Is the household an efficient unit? 14.74 Lecture 12 Inside the household: Is the household an efficient unit? Prof. Esther Duflo March 17, 2004 Last lecture, we saw that if we test the unitary model against a slightly more general model

More information

Market Supply in the Short Run

Market Supply in the Short Run Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short

More information

A Classical Monetary Model - Money in the Utility Function

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 information

Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics

Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics Dr. Markus Thomas Münter Collège des Ingénieurs Stuttgart, June, 03 SNORKELING

More information

Auctioning Keywords in Online Search

Auctioning Keywords in Online Search Auctioning Keywords in Online Search Jianqing Chen The Uniersity of Calgary iachen@ucalgary.ca De Liu Uniersity of Kentucky de.liu@uky.edu Andrew B. Whinston Uniersity of Texas at Austin abw@uts.cc.utexas.edu

More information

Problem Set 9 Solutions

Problem Set 9 Solutions Problem Set 9 s 1. A monopoly insurance company provides accident insurance to two types of customers: low risk customers, for whom the probability of an accident is 0.25, and high risk customers, for

More information

U = x 1 2. 1 x 1 4. 2 x 1 4. What are the equilibrium relative prices of the three goods? traders has members who are best off?

U = x 1 2. 1 x 1 4. 2 x 1 4. What are the equilibrium relative prices of the three goods? traders has members who are best off? Chapter 7 General Equilibrium Exercise 7. Suppose there are 00 traders in a market all of whom behave as price takers. Suppose there are three goods and the traders own initially the following quantities:

More information

Monitoring and the acceptability of bank money

Monitoring and the acceptability of bank money Régis Breton Conference Bank liquidity, transparency and regulation Paris, 20/12/2013 The views expressed here are my own and should not necessarily be interpreted as those of the Banque de France or the

More information

The Real Business Cycle School

The 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 1972-82,the dominant new classical theory

More information

Real Business Cycle Theory

Real 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 information

A New Interpretation of Information Rate

A New Interpretation of Information Rate A New Interpretation of Information Rate reproduced with permission of AT&T By J. L. Kelly, jr. (Manuscript received March 2, 956) If the input symbols to a communication channel represent the outcomes

More information

Economics 1011a: Intermediate Microeconomics

Economics 1011a: Intermediate Microeconomics Lecture 11: Choice Under Uncertainty Economics 1011a: Intermediate Microeconomics Lecture 11: Choice Under Uncertainty Tuesday, October 21, 2008 Last class we wrapped up consumption over time. Today we

More information

The Specific-Factors Model: HO Model in the Short Run

The Specific-Factors Model: HO Model in the Short Run The Specific-Factors Model: HO Model in the Short Run Rahul Giri Contact Address: Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico (ITAM). E-mail: rahul.giri@itam.mx In this

More information

Consumption, Saving, and Investment, Part 1

Consumption, Saving, and Investment, Part 1 Agenda Consumption, Saving, and, Part 1 Determinants of National Saving 5-1 5-2 Consumption and saving decisions : Desired consumption is the consumption amount desired by households Desired national saving

More information

Adverse Selection and the Market for Health Insurance in the U.S. James Marton

Adverse Selection and the Market for Health Insurance in the U.S. James Marton Preliminary and Incomplete Please do not Quote Adverse Selection and the Market for Health Insurance in the U.S. James Marton Washington University, Department of Economics Date: 4/24/01 Abstract Several

More information

For a closed economy, the national income identity is written as Y = F (K; L)

For 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 information

MA Advanced Macroeconomics: 7. The Real Business Cycle Model

MA 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 information

Real Business Cycle Models

Real 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 information

The Budget Deficit, Public Debt and Endogenous Growth

The 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 information

Social Insurance with Private Insurance Markets. 2 Social Insurance with Endogenous Private Insurance

Social Insurance with Private Insurance Markets. 2 Social Insurance with Endogenous Private Insurance Florian Scheuer 4/22/2014 Social Insurance with Private Insurance Markets 1 Overview in many insurance applications, public and private insurance co-exist even when private insurance markets may not be

More information

THE ECONOMICS OF IDEAS AND INTELLECTUAL PROPERTY

THE ECONOMICS OF IDEAS AND INTELLECTUAL PROPERTY JOINT USC ECONOMICS DEPT. and USC FBE MACROECONOMICS AND INTERNATIONAL FINANCE WORKSHOP presented by David Levine FRIDAY, October 8, 2004 3:30 pm 5:00 pm, Room: HOH-601K THE ECONOMICS OF IDEAS AND INTELLECTUAL

More information

Managerial Economics. 1 is the application of Economic theory to managerial practice.

Managerial Economics. 1 is the application of Economic theory to managerial practice. Managerial Economics 1 is the application of Economic theory to managerial practice. 1. Economic Management 2. Managerial Economics 3. Economic Practice 4. Managerial Theory 2 Managerial Economics relates

More information

Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory

Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is $200 per

More information

2. Information Economics

2. Information Economics 2. Information Economics In General Equilibrium Theory all agents had full information regarding any variable of interest (prices, commodities, state of nature, cost function, preferences, etc.) In many

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Nontradables, real exchange rate and pricing-to-market

Nontradables, real exchange rate and pricing-to-market Nontradables, real exchange rate and pricing-to-market Lecture 4, ECON 4330 Tord Krogh February 5, 2013 Tord Krogh () ECON 4330 February 5, 2013 1 / 48 Motivation The models developed so far have helped

More information

Insurance. Michael Peters. December 27, 2013

Insurance. Michael Peters. December 27, 2013 Insurance Michael Peters December 27, 2013 1 Introduction In this chapter, we study a very simple model of insurance using the ideas and concepts developed in the chapter on risk aversion. You may recall

More information

ECON 459 Game Theory. Lecture Notes Auctions. Luca Anderlini Spring 2015

ECON 459 Game Theory. Lecture Notes Auctions. Luca Anderlini Spring 2015 ECON 459 Game Theory Lecture Notes Auctions Luca Anderlini Spring 2015 These notes have been used before. If you can still spot any errors or have any suggestions for improvement, please let me know. 1

More information

Prep. Course Macroeconomics

Prep. Course Macroeconomics Prep. Course Macroeconomics Intertemporal consumption and saving decision; Ramsey model Tom-Reiel Heggedal tom-reiel.heggedal@bi.no BI 2014 Heggedal (BI) Savings & Ramsey 2014 1 / 30 Overview this lecture

More information

2.4 Multiproduct Monopoly. 2.4 Multiproduct Monopoly

2.4 Multiproduct Monopoly. 2.4 Multiproduct Monopoly .4 Multiproduct Monopoly Matilde Machado Slides available from: http://www.eco.uc3m.es/oi-i-mei/.4 Multiproduct Monopoly The firm is a monopoly in all markets where it operates i=,.n goods sold by the

More information

CE2451 Engineering Economics & Cost Analysis. Objectives of this course

CE2451 Engineering Economics & Cost Analysis. Objectives of this course CE2451 Engineering Economics & Cost Analysis Dr. M. Selvakumar Associate Professor Department of Civil Engineering Sri Venkateswara College of Engineering Objectives of this course The main objective of

More information

Envelope Theorem. Kevin Wainwright. Mar 22, 2004

Envelope Theorem. Kevin Wainwright. Mar 22, 2004 Envelope Theorem Kevin Wainwright Mar 22, 2004 1 Maximum Value Functions A maximum (or minimum) value function is an objective function where the choice variables have been assigned their optimal values.

More information

Money and Capital in an OLG Model

Money and Capital in an OLG Model Money and Capital in an OLG Model D. Andolfatto June 2011 Environment Time is discrete and the horizon is infinite ( =1 2 ) At the beginning of time, there is an initial old population that lives (participates)

More information

1 Introduction. Linear Programming. Questions. A general optimization problem is of the form: choose x to. max f(x) subject to x S. where.

1 Introduction. Linear Programming. Questions. A general optimization problem is of the form: choose x to. max f(x) subject to x S. where. Introduction Linear Programming Neil Laws TT 00 A general optimization problem is of the form: choose x to maximise f(x) subject to x S where x = (x,..., x n ) T, f : R n R is the objective function, S

More information

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost: Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

More information

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

More information

TAXATION AND SAVINGS. Robin Boadway Queen s University Kingston, Canada. Day Six

TAXATION AND SAVINGS. Robin Boadway Queen s University Kingston, Canada. Day Six TAXATION AND SAVINGS by Robin Boadway Queen s University Kingston, Canada April, 2004 Day Six Overview TAXATION AND SAVINGS We will first summarize the two-period life cycle savings model and derive some

More information

Climate-Change Treaties: A Game-Theoretic Approach Roy Radner Stern School, New York University

Climate-Change Treaties: A Game-Theoretic Approach Roy Radner Stern School, New York University Climate-Change Treaties: A Game-Theoretic Approach Roy Radner Stern School, New York University A Project Progress Report in collaboration with Prajit K. Dutta, Columbia University Sangwon Park, Korea

More information

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 General Equilibrium and welfare with production Wednesday, January 24 th and Monday, January 29 th Reading:

More information