Notes on Financial Frictions Under Asymmetric Information and Costly State Verification. Lawrence Christiano
|
|
- Sharyl Day
- 7 years ago
- Views:
Transcription
1 Notes on Financial Frictions Under Asymmetric Information and Costly State Verification by Lawrence Christiano
2 Incorporating Financial Frictions into a Business Cycle Model General idea: Standard model assumes borrowers and lenders are the same people..no conflict of interest Financial friction models suppose borrowers and lenders are different people, with conflicting interests Financial frictions: features of the relationship between borrowers and lenders adopted to mitigate conflict of interest.
3 Discussion of Financial Frictions Simple model to illustrate the basic costly state verification (csv) model. Original analysis of Townsend (1978), Bernanke Gertler. Integrating the csv model into a full blown dsge model. Follows the lead of Bernanke, Gertler and Gilchrist (1999). Empirical analysis of Christiano, Motto and Rostagno (23,212).
4 Simple Model There are entrepreneurs with all different levels of wealth, N. Entrepreneur have different levels of wealth because they experienced different idiosyncratic shocks in the past. For each value of N, there are many entrepreneurs. In what follows, we will consider the interaction between entrepreneurs with a specific amount of N with competitive banks. Later, will consider the whole population of entrepreneurs, with every possible level of N.
5 Simple Model, cont d Each entrepreneur has access to a project with rate of return, Here, is a unit mean, idiosyncratic shock experienced by the individual entrepreneur after the project has been started, 1 R k df 1 The shock,, is privately observed by the entrepreneur. F is lognormal cumulative distribution function.
6 Banks, Households, Entrepreneurs ~ F, df 1 entrepreneur entrepreneur Households Bank entrepreneur entrepreneur entrepreneur Standard debt contract
7 Entrepreneur receives a contract from a bank, which specifies a rate of interest, Z, and a loan amount, B. If entrepreneur cannot make the interest payments, the bank pays a monitoring cost and takes everything. Total assets acquired by the entrepreneur: total assets net worth loans A N B Entrepreneur who experiences sufficiently bad luck,, loses everything.
8 Cutoff, gross rate of return experience by entrepreneur with luck, 1 R k interest and principle owed by the entrepreneur ZB 1 R k A ZB Z 1R k B N A N Z 1R k leverage L A 1 N A N Z 1R k total assets A L 1 L Cutoff higher with: higher leverage, L higher Z/1 R k
9 Expected return to entrepreneur from operating risky technology, over return from depositing net worth in bank: Expected payoff for entrepreneur 1R k A ZBdF N1R For lower values of, entrepreneur receives nothing limited liability. gain from depositing funds in bank ( opportunity cost of funds )
10 Rewriting entrepreneur s rate of return: 1 R k A ZBdF N1 R 1 R k A 1 R k AdF N1 R df 1 R k 1 R L Z 1R k L 1 Z L L 1R k Gets smaller with L Entrepreneur s return unbounded above Larger with L Risk neutral entrepreneur would always want to borrow an infinite amount (infinite leverage).
11 Rewriting entrepreneur s rate of return: 1 R k A ZBdF N1 R 1 R k A 1 R k AdF N1 R df 1 R k 1 R L Z 1R k L 1 L L Z 1R k Entrepreneur s return unbounded above Risk neutral entrepreneur would always want to borrow an infinite amount (infinite leverage).
12 Expected entrepreneurial return, over opportunity cost, N(1+R) Equilibrium spread in numerical example developed in these notes. Entrepreneur would prefer to be a depositor for (leverage, interest rate spread), combinations that produce results below horizontal line leverage Interest rate spread, Z/(1+R), = 1.16, or.63 percent at annual rate Return spread, (1+R k )/(1+R), = 1.73, or 2.9 percent at annual rate.26
13 Expected entrepreneurial return, over opportunity cost, N(1+R) High leverage always preferred eventually linearly increasing Z/(1+R)=1.5, or 2 percent at annual rate leverage Interest rate spread, Z/(1+R), = 1.16, or.63 percent at annual rate Return spread, (1+R k )/(1+R), = 1.73, or 2.9 percent at annual rate.26
14 If given a fixed interest rate, entrepreneur with risk neutral preferences would borrow an unbounded amount. In equilibrium, bank can t lend an infinite amount. This is why a loan contract must specify both an interest rate, Z, and a loan amount, B.
15 Simplified Representation of Entrepreneur Utility Utility: Where df 1 R k 1 R L 1 Γ 1 Rk 1 R L Γ 1 F G Easy to show: G df Γ 1 Γ 1 F, Γ limγ, lim Γ limg, limg 1 Share of gross entrepreneurial earnings kept by entrepreneur
16 Banks Source of funds from households, at fixed rate, R Bank borrows B units of currency, lends proceeds to entrepreneurs. Provides entrepreneurs with standard debt contract, (Z,B)
17 Banks, cont d Monitoring cost for bankrupt entrepreneur with Bankruptcy cost parameter 1 R k A Bank zero profit condition fraction of entrepreneurs with 1 F quantity paid by each entrepreneur with ZB quantity recovered by bank from each bankrupt entrepreneur 1 df1 R k A amount owed to households by bank 1 RB
18 Zero profit condition: Banks, cont d 1 F ZB 1 df1 R k A 1 RB 1 F ZB 1 df1 R k A B 1 R The risk free interest rate here is equated to the average return on entrepreneurial projects. This is a source of inefficiency in the model. A benevolent planner would prefer that the market price savers correspond to the marginal return on projects (Christiano-Ikeda).
19 Banks, cont d Simplifying zero profit condition: 1 F ZB 1 df1 R k A 1 RB 1 F 1 R k A 1 df1 R k A 1 RB share of gross return, 1R k A, (net of monitoring costs) given to bank 1 F 1 df 1 R k A 1 RB 1 F 1 df Expressed naturally in terms of Expressed naturally in terms of,l,l 1 R B/N 1 R k A/N 1 R L 1 1 R k L
20 Bank zero profit condition, in (leverage, - bar) space parameters: 1 Rk 1 R 1.73,. 21,.26 - bar leverage Our value of 1 1 Rk, 29 basis points at an annual rate, is a little higher than the 2 basis point value adopted in R BGG (1999, p. 1368); the value of is higher than the one adopted by BGG, but within the range, defended by Carlstrom and Fuerst (AER, 1997) as empirically relevant; the value of Varlog is nearly the same as the.28 value assumed by BGG (1999,p.1368).
21 Bank zero profit condition, in (leverage, - bar) space Free entry of banks ensures zero profits zero profit curve represents a menu of contracts,,l, that can be offered in equilibrium. - bar Only the upward sloped portion of the curve is relevant, because entrepreneurs would never select a high value of if a lower one was available at the same leverage leverage
22 Expressing Zero Profit Condition In Terms of New Notation share of entrepreneurial profits (net of monitoring costs) given to bank 1 F 1 df 1 R L 1 1 R k L Γ G 1 R L 1 1 R k L L 1 1 1Rk Γ G 1R
23 Equilibrium Contract Entrepreneur selects the contract is optimal, given the available menu of contracts. The solution to the entrepreneur problem is the that maximizes, over the relevant domain (i.e.,,1.13 in the example): profits, per unit of leverage, earned by entrepreneur, given leverage offered by bank, conditional on log df 1 R k 1 R 1 1Rk 1R 1 Γ G higer drives share of profits to entrepreneur down (bad!) higher drives leverage up (good!) log 1 Γ log 1 Rk 1 R log 1 1 Rk 1 R Γ G
24 Entrepreneur Objective entrepreneurial utility entrepreneurial objective as a function of bar entrepreneurial utility entrepreneurial objective as a function of bar bar bar derivative of log entrepreneurial objective -.5 derivative of log entrepreneurial objective relevant range of s bar bar
25 Computing the Equilibrium Contract Solve first order optimality condition uniquely for the cutoff, : elasticity of entrepreneur s expected return w.r.t. 1 F 1 Γ elasticity of leverage w.r.t. 1R k 1 F 1R F 1 1Rk Γ G 1R Given the cutoff, solve for leverage: L 1 1 1Rk 1R Γ G Given leverage and cutoff, solve for risk spread: risk spread Z 1R 1Rk 1R L L 1
26 Result Leverage, L, and entrepreneurial rate of interest, Z, not a function of net worth, N. Quantity of loans proportional to net worth: L A N N B N B L 1N 1 B N To compute L, Z/(1+R), must make assumptions about F and parameters. 1 R k 1 R,, F
27 Formulas Needed to do the Computations Need: G df, F Can get these from the pdf and the cdf of the standard normal distribution. These are available in most computational software, like MATLAB. Also, they have simple analytic representations.
28 Numerical Example Parameters: 1 R k 1 R Percent of average product of entrepreneurial Projects, absorbed by monitoring costs:.6% 1.73,. 26,.21 (Micro) equilibrium quantities: cutoff fraction of gross entrepreneurial earnings going to lender bankruptcy rate:.56% average among bankrupt entrepreneurs.5, Γ.58, F.56, G.26, leverage L 2.2, interest rate spread ZR.62 (APR) 1.15, avg earnings of entrepreneur, divided by opportunity cost 1 Γ 1 Rk 1 R L Note: on average, entrepreneur better off leveraging net worth and investing in project, rather than depositing net worth in bank.
29 Effect of Increase in Risk, Keep df 1 But, double standard deviation of Normal underlying F. Impact on log normal density of doubling standard deviation density.5.4 Doubled standard deviation Increasing standard deviation raises density in the tails
30 Jump in Risk replaced by 3 cutoff fraction of gross entrepreneurial earnings going to lender bankruptcy rate: 1.8% average among bankrupt entrepreneurs. 12, Γ. 12, F.18, G.11, leverage L , interest rate spread ZR 1.66 (APR) 1. 41, avg earnings of entrepreneur, per unit of net worth 1 Γ 1 Rk 1 R L Comparison with benchmark: cutoff fraction of gross entrepreneurial earnings going to lender bankruptcy rate:.56% average among bankrupt entrepreneurs.5, Γ.58, F.56, G.26, leverage L 2.2, interest rate spread ZR.62 (APR) 1.15, avg earnings of entrepreneur, divided by opportunity cost 1 Γ 1 Rk 1 R L
31 1 Impact on standard debt contract of a 5% jump in risk spread, 4(Z/R-1) Risk spread = 4 Z, Leverage = (B+N)/N 1 R 1 Zero profit curve Risk spread=.635 Leverage = 1.95 Risk spread=.616 Leverage = 2.2 Entrepreneur Indifference curve leverage, L = (B+N)/N
32 Leverage and interest rate spread, for alternative parameter settings leverage *(Z/R-1) bankruptcy rate (%) leverage *(Z/R-1) bankruptcy rate (%) *(Rk/R-1) *(Rk/R-1) *(Rk/R-1) 14 leverage *(Z/R-1) bankruptcy rate (%) Higher monitoring costs: shifts the menu of contracts up; entrepreneurs choose contracts with lower leverage and lower interest rate; bankruptcy rate falls. Higher return projects: shifts menu of contracts down; entrepreneurs choose contracts with higher leverage, higher interest rate and higher bankruptcy rates. Higher risk: shifts menu of contracts up; entrepreneurs choose contracts with lower leverage, higher interest rate, higher bankruptcy rates.
33 Possible Issues With the Model Strictly speaking, applies only to mom and pop grocery stores : entities run by entrepreneurs who are bank dependent for outside finance. Not clear how to apply this to actual firms with access to equity markets. Assume no long run connections with banks. Entrepreneurial returns independent of scale. Overly simple representation of entrepreneurial utility function (assumes entrepreneurs behave as though they are risk neutral) Ignores alternative sources of risk spread (risk aversion, liquidity) Seems not to allow for bankruptcies in banks.
34 The issue about bankruptcies in banks We have referred to the sources of funds for the entrepreneur as banks. Banking is risk free in the model. Real world banks seem risky. Could assume some entrepreneurs in the model are actually banks (like banks, entrepreneurs have assets, net worth and debt). The assets could be the investment projects of borrowers from the banks. Next slide illustrates the relationship between entrepreneurs and households, intermediated through mutual funds.
35 Flow of Funds Through Financial Markets entrepreneur Househol ds households Mutual Mutual funds Funds entrepreneur entrepreneur Some of these could be real-world banks.. entrepreneur
36 Incorporating CSV Financial Frictions into Neoclassical Model Bernanke, Gertler and Gilchrist, 1999 Handbook of Macroeconomics Chapter. Outline Broad overview of model. Details of entrepreneur Must take into account the heterogeneity of entrepreneurs by net worth, N. Describe relationship of entrepreneur to household Describe household and general equilibrium.
37 Standard, Neoclassical Model max c t,b t1,l t t subject to: t t uc t, uc t logc t c t B t1 K t1 1 K t w t l t r t K t 1 R t 1 B t l t 1 Optimization: u c t u c t1 r t1 1, u c t u c t1 1 R t l t 1 Firms and market clearing: c t I t K t l 1 t, B t1, w t 1 K 1 t, r t K t
38 Standard Model L Firms K Labor market C I Market for Physical Capital household K 1 K I
39 Standard Model with CSV L Firms K K, ~ F Labor market Observed by entrepreneur, but supplier of funds must pay monitoring cost to see it. Entrepreneurs household
40 Standard Model with CSV L Firms K K, ~ F Labor market C I Capital Producers Entrepreneurs K 1 K I household Entrepreneurs sell their K to capital producers
41 Standard Model with CSV L Firms K K, ~F, t Labor market C I Capital Producers Entrepreneurs household Entrepreneurial net worth now established. = value of capital + earnings from capital - repayment of bank loans
42 Standard Model with CSV Firms K K, ~F, t Labor market Capital Producers K Entrepreneurs household banks Entrepreneur receives standard debt contract.
43 Details About the Entrepreneur Begin after period t production, when entrepreneurial net worth is known, and they go to banks for loans. End at the point in t+1 when net worth in t+1 is determined.
44 Entrepreneur at end of t Let f t N denote the number (density, actually) of entrepreneurs with net worth, N, N. An entrepreneur with net worth, N, goes to the bank, receives a loan, B N t+1, and buys raw, physical capital: N K t1 N N B t1 After purchasing the capital, the entrepreneur experiences an idiosyncratic shock, ω, so that physical capital is transformed into effective capital as follows: K N t1, ~ F, t
45 Entrepreneur in t+1 The entrepreneur with net worth N in t rents in a competitive capital rental market for rental rate, r t+1. After goods production, entrepreneur sells undepreciated capital, K N t1 1, at price unity. So, rate of return on capital for entrepreneur is: k 1 R t1 N K t1 k, 1 R t1 Constant rate of return project, just like in micro example r t1 1
46 Entrepreneur in t+1, cnt d Period t+1 net worth of entrepreneur with net worth N in period t and who experiences shock ω: Gross rate of interest on loan N k max,1 R t1 K N t1 Z t1 B N t1
47 Entrepreneurial loan contract in t The banking system in period t is competitive. The zero profit condition must be satisfied: Leverage K N t1 Here: k 1 R t1 1 N k Γ t1 G t1 1 1R t1 1R t K N t1 t1 Z t1 B N t1, Entrepreneurs treat the zero profit condition as a menu of contracts. They select the contract at time t that maximizes expected N given N. Entrepreneurial efficiency condition: 1 F t1 1 Γ t1 k 1R t1 1R t 1 F t1 t1 F t1 k 1 1R t1 1R t Γ t1 G t1
48 Aggregate Net Worth, Loans and Capital The total amount of net worth held by all entrepreneurs at the end of time t: N t1 Nf t NdN Total effective capital supplied by all entrepreneurs during t+1: N Kt1 f t NdFdN total effective capital of all entrepreneurs with net worth, N N Kt1 df f t NdN Must aggregate over all N types and all ω types total effective capital for all entrepreneurs N Kt1 f t NdN
49 Aggregate Net Worth, Loans and Capital The total amount of net worth held by all entrepreneurs at the end of time t: N t1 Nf t NdN Total effective capital supplied by all entrepreneurs during t+1: N Kt1 f t NdFdN total effective capital of all entrepreneurs with net worth, N N Kt1 df f t NdN This is just K N t+1 because total effective an entrepreneur capital for all entrepreneurs with net worth, N, N Kt1 observes f t NdNω after selecting the loan contract, and, hence, the quantity of capital purchased.
50 Aggregate Net Worth, Loans and Capital The total amount of net worth held by all entrepreneurs at the end of time t: N t1 Nf t NdN Total effective capital supplied by all entrepreneurs during t+1: N Kt1 f t NdFdN total effective capital of all entrepreneurs with net worth, N N Kt1 df f t NdN total effective capital for all entrepreneurs N Kt1 f t NdN
51 Aggregate capital: K t1 N Kt1 Aggregates, cont d Aggregate net worth in t+1: max,1 k Rt1 f t NdFdN N Kt1 f t NdN 1 1 1R k t1 Γ t1 G t1 1R t 1 1 1R k t1 Γ t1 G t1 1R t Nft NdN N t1 K N t1 Z t1 B N t1 df f t NdN k 1 Γ t1 1 R t1 K t1
52 Relationship of Entrepreneur to Household Simplest assumption, which avoids a lot of complications, is the large family assumption. There are many identical households Each has a worker. Each has many entrepreneurs.enough so that average net worth in the representative family is always equal to average net worth in the economy as a whole. Entrepreneurs receive perfect consumption insurance from the household: Entrepreneurs and the worker all consume the same amount, C t.
53 Large Family Assumption household household worker mass of entrepreneurs worker mass of entrepreneurs Competitive market for capital services Competitive labor market
54 Entrepreneurs and Households, cnt d Aggregate net worth of all entrepreneurs, after accounting for all their income in t+1. k 1 Γ t1 1 R t1 Then, a fraction, 1 ϒ, of each entrepreneur s net worth is transferred to the household as a lump sum. the household transfers resources, W e t+1, as a lump sum to each entrepreneur. So, net worth of all entrepreneurs at the end of t+1 is: k N t2 1 Γ t1 1 R t1 K t1 e K t1 W t1 The entrepreneurs as a whole take this net worth to the bank in t+1, get loans and buy capital, and so on.
55 One day in life of entrepreneur Period t Entrepreneur supplies capital to capital rental market Period t+1 Entrepreneur pays off debt to bank, determines current net worth. Fraction, 1-γ, of each entrepreneurs net worth transferred to households. Each entrepreneur receives a lump-sum transfer, W e, from household. * End of period t: Using net worth, N t+1, and loans, entrepreneur purchases new, end-of-period stock of capital from capital goods producers. Entrepreneur observes idiosyncratic disturbance to its newly purchased capital. Entrepreneur sells undepreciated capital to capital producers Density of entrepreneurs having net worth, N: f t1 N Entrepreneurs go to *.
56 Other Equations of the Model Goods market clearing (resource constraint): goods bought by households to feed their entrepreneurs and workers ct investment goods bought by capital producers It goods bought for monitoring by banks t df1 Rt k K t Capital producers technology: K t1 1 K t I t production function Kt
57 Other Equations Household problem: max c t,b t1,l t t subject to: t t uc t, uc t logc t 1 1 Γ t 1R t k K t W t e c t B t1 w t l t 1 R t 1 B t l t 1 transfers from entrepreneurs Optimization: u c t u c t1 1 R t, l t 1 Bond market clearing: borrowing by entrepreneurs K t1 N t1 lending by households Bt1
58 Result There are seven aggregate variables among the unknowns: c t,i t, t,r t k,k t, N t,r t There are seven dynamic equilibrium conditions that can be used to pin the down (see next slide). Solution does not require knowing f t N Reflects constant returns to scale in entrepreneurial projects and entrepreneurial objective. Otherwise, leverage and interest rate in standard debt contract would be a function of N. In that case, what entrepreneurs as a group do depends on the distribution of N. Constant return to scale assumptions massively simplify the analysis. Whether this entails significant distortions in conclusions is an interesting issue to explore.
59 In practice, monitoring costs small Summary of Equations Equilibrium conditions familiar from standard neoclassical model resource constraint: c t I t t df1 R t k K t K t household fonc: Capital accumulation: u c t u c t1 1 R t K t1 1 K t I t Rate of return on capital: 1 R k t K 1 t 1 a wedge. Equilibrium conditions specific to financial frictions entrepreneur fonc: 1 F t1 1 Γ t1 zero profit condition: K t 1 1 1R t k Aggregate Net Worth: 1Rk t1 1R t 1 1R k t1 1R t 1 F t1 t1 F t1 N t Γ 1R t G t t 1 Γ t1 G t1 N t1 1 Γ t 1 R t k K t W t e In neoclassical model these are the same. Financial frictions introduce Large family assumption has consequence that model focuses exclusively on the implications of financial frictions for distortions in the intertemporal margin, abstracting from all other implications, such as for distribution of income between entrepreneurs and others.
60 Financial Friction as Intertemporal Wedge Equilibrium conditions familiar from standard neoclassical model resource constraint: c t I t t df1 R t k K t K t household fonc: Capital accumulation: Rate of return on capital: entrepreneur fonc: u c t u k c t1 1 R t1 1 t1 K t1 1 K t I t 1 R t k K t 1 1 Equilibrium conditions specific to financial frictions 1 F t1 1 Γ t1 wedge t1 1 1R t k 1R t1 zero profit condition: K t 1 1 1R t k Aggregate Net Worth: 1R k t1 1R t 1 1R k t1 1R t 1 F t1 t1 F t1 Γ t1 G t1 1 1 F t1 t1 F t1 1 F t1 N t Γ 1R t G t t 1 1 Γ t1 N t1 1 Γ t 1 R t k K t W t e Γ t1 G t1 Looks just like neoclassical model with a particular tax on capital income.
61 Solving the Model Perturbation methods can be applied. First, require steady state of the model. Then, linearize equilibrium conditions about the steady state and solve. Parameterization: uc logc,.26,.21,.97, 1/3,.2, 1.3 1/4, w e.1 log t /.97log t 1 / t Cross sectional dispersion evolves according to a first order autoregressive process.
62 Solving the Model Endogenous variables in steady state:.5286, G.49, F.1, Γ.5282, n Γ G.5271, c.77, k n 4.6, k c i c i n 2.14, k 8.62 c i 4 Z 1 R , 1 Γ 1 Rk n k.9991, wedge.114 Financial distortion: without financial frictions: K , c 2.64 with financial frictions: K 1 1 wedge , c 2.42 steady state welfare cost of the financial frictions: 8.9 percent of consumption (1( )/2.42)
63 Finding the steady state Delete time subscripts from equations. Use household fonc to set 1 R 1/ Fix an initial guess, R k R Compute (and, hence, G, F and Γ from entrepreneur fonc Compute K from rate of return on capital 1 expression: K 1 R k 1 Compute N from net worth equation. Adjust R k until zero profit condition is satisfied. Compute c from the resource constraint. 1.
64 1% jump Response to.1 jump in t, where log t /. 97 log t 1 / t model parameters:.26,. 21,. 97, 1/3,. 2, 1.3 1/4, 1. % deviation from ss GDP (c + i) % deviation from ss investment % deviation from ss consumption dev from ss (APR) risk free rate interest rate spread return on capital net worth x 1-3 wedge, 1-(1+R)/(1+Rk(+1)) dev from ss (APR) dev from ss (APR).1.5 % deviation from ss deviation from ss bankruptcy rate credit 1 sigma capital stock deviation * deviation from ss % deviation from ss % deviation from ss
65 1% jump Response to.1 jump in t, where log t /. 97 log t 1 / t model parameters:.26,. 21,. 97, 1/3,. 2, 1.3 1/4, 1. Suggests (but see later slide) that risk not likely to be important in business cycles % deviation from ss GDP (c + i) % deviation from ss investment % deviation from ss consumption dev from ss (APR) risk free rate interest rate spread return on capital net worth x 1-3 wedge, 1-(1+R)/(1+Rk(+1)) dev from ss (APR) dev from ss (APR).1.5 % deviation from ss Stock market deviation from ss bankruptcy rate credit 1 sigma capital stock deviation * deviation from ss % deviation from ss % deviation from ss
66 % deviation from ss GDP (c + i) % deviation from ss investment % deviation from ss % jump Response to.1 jump in t, where log t /. 97 log t 1 / t model parameters:.26,. 21,. 97, 1/3,. 2, 1.3 1/4, 1. The mechanism by which the shock moves economic variables operates through the intertemporal wedge. consumption dev from ss (APR) risk free rate interest rate spread return on capital net worth x 1-3 wedge, 1-(1+R)/(1+Rk(+1)) dev from ss (APR) dev from ss (APR).1.5 % deviation from ss Stock market deviation from ss In steady state = bankruptcy rate credit 1 sigma capital stock deviation * deviation from ss % deviation from ss % deviation from ss
67 Comparison of results to Monetary Models that Fit the Data Well The model incorporates the neoclassical model s property that the price of capital is fixed at unity. In more elaborate models, there is curvature in production function for capital, and this causes its price to drop when less is produced. In those models, net worth falls with a jump in risk. Rise in consumption. This is induced in part by the sharp drop in the risk free interest rate, which reduces the household s incentive to save. In more elaborate models, the risk free interest rate does not fall so much. 1 R 1 R$ 1 e Expected inflation sluggish because empirical representations of monetary policy assume central bank committed to low inflation Monetary policy controls nominal rate, and does not move it much (actually, not at all when it is stuck at zero) in empirical representations of monetary policy.
68 Conclusion We ve reviewed one interesting model of financial frictions. There are others!
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 informationInflation. Chapter 8. 8.1 Money Supply and Demand
Chapter 8 Inflation This chapter examines the causes and consequences of inflation. Sections 8.1 and 8.2 relate inflation to money supply and demand. Although the presentation differs somewhat from that
More informationIn ation Tax and In ation Subsidies: Working Capital in a Cash-in-advance model
In ation Tax and In ation Subsidies: Working Capital in a Cash-in-advance model George T. McCandless March 3, 006 Abstract This paper studies the nature of monetary policy with nancial intermediaries that
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 informationMoney. 1 What is money? Spring 2013. 3 functions of money: Store of value Unit of account Medium of exchange
Money Spring 2013 1 What is money? 3 functions of money: Store of value Unit of account Medium of exchange Whether something is money is not always so clear: Physical bills and coins Balances on checking
More informationUniversidad 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 informationDiscussion of Capital Injection, Monetary Policy, and Financial Accelerators
Discussion of Capital Injection, Monetary Policy, and Financial Accelerators Karl Walentin Sveriges Riksbank 1. Background This paper is part of the large literature that takes as its starting point the
More informationChapter 12. Aggregate Expenditure and Output in the Short Run
Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)
More informationCHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY
CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How
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 information1 Interest rates, and risk-free investments
Interest rates, and risk-free investments Copyright c 2005 by Karl Sigman. Interest and compounded interest Suppose that you place x 0 ($) in an account that offers a fixed (never to change over time)
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 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 informationMonetary policy strategy: Old issues and new challenges
Monetary policy strategy: Old issues and new challenges Joint Deutsche Bundesbank/Federal Reserve Bank of Cleveland Conference Frankfurt am Main, 6-7 June 2007 Fiorella de Fiore European Central Bank Discussion
More informationCapital Structure. Itay Goldstein. Wharton School, University of Pennsylvania
Capital Structure Itay Goldstein Wharton School, University of Pennsylvania 1 Debt and Equity There are two main types of financing: debt and equity. Consider a two-period world with dates 0 and 1. At
More informationScreening by the Company You Keep: Joint Liability Lending and the Peer Selection Maitreesh Ghatak presented by Chi Wan
Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Maitreesh Ghatak presented by Chi Wan 1. Introduction The paper looks at an economic environment where borrowers have some
More informationFINANCIAL FRICTIONS AND BUSINESS CYCLES IN A MONETARY MARCO-MODEL Imen Benmohamed
Université Paris 1 PANTHEON-SORBONNE UFR 02 Sciences Economiques FINANCIAL FRICTIONS AND BUSINESS CYCLES IN A MONETARY MARCO-MODEL Imen Benmohamed Paris, September 2009 1 Introduction
More informationOne Period Binomial Model
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing
More informationChapter 13. Aggregate Demand and Aggregate Supply Analysis
Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and
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.
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 informationFinancing Constraints and Investment: Evidence from US Business Credit Contracts
Financing Constraints and Investment: Evidence from US Business Credit Contracts Ralf R. Meisenzahl JOB MARKET PAPER Abstract Standard models of financial market imperfections limit the ability to borrow
More informationThe Financial Accelerator and the Optimal Lending Contract
The Financial Accelerator and the Optimal Lending Contract Mikhail Dmitriev and Jonathan Hoddenbagh First Draft: August 23 This Version: February 24 Job Market Paper In the financial accelerator literature
More informationFinancial Intermediation and Credit Policy in Business Cycle Analysis. Mark Gertler and Nobuhiro Kiyotaki NYU and Princeton
Financial Intermediation and Credit Policy in Business Cycle Analysis Mark Gertler and Nobuhiro Kiyotaki NYU and Princeton Motivation Present a canonical framework to think about the current - nancial
More informationAgenda. The IS LM Model, Part 2. The Demand for Money. The Demand for Money. The Demand for Money. Asset Market Equilibrium.
Agenda The IS LM Model, Part 2 Asset Market Equilibrium The LM Curve 13-1 13-2 The demand for money is the quantity of money people want to hold in their portfolios. The demand for money depends on expected
More information12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve
Chapter 12 Monetary Policy and the Phillips Curve By Charles I. Jones Media Slides Created By Dave Brown Penn State University The short-run model summary: Through the MP curve the nominal interest rate
More informationLecture 1. Financial Market Frictions and Real Activity: Basic Concepts
Lecture 1 Financial Market Frictions and Real Activity: Basic Concepts Mark Gertler NYU June 2009 0 First Some Background Motivation... 1 Old Macro Analyzes pre versus post 1984:Q4. 1 New Macro Analyzes
More informationNoah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions
Noah Williams Economics 31 Department of Economics Macroeconomics University of Wisconsin Spring 013 Midterm Examination Solutions Instructions: This is a 75 minute examination worth 100 total points.
More informationMidterm Exam 1. 1. (20 points) Determine whether each of the statements below is True or False:
Econ 353 Money, Banking, and Financial Institutions Spring 2006 Midterm Exam 1 Name The duration of the exam is 1 hour 20 minutes. The exam consists of 11 problems and it is worth 100 points. Please write
More informationPrep. 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 informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from
More informationMEASURING GDP AND ECONOMIC GROWTH CHAPTER
MEASURING GDP AND ECONOMIC GROWTH CHAPTER Objectives After studying this chapter, you will able to Define GDP and use the circular flow model to explain why GDP equals aggregate expenditure and aggregate
More informationNotes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002).
Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.
More informationThe global financial crisis which began in the
What is responsible for the easing of credit standards before the crisis: monetary policy or the savings glut? Adrian Penalver Monetary and Financial Analysis Directorate This letter presents the findings
More informationHomework 5: The Monetary System and Inflation
Homework 5: The Monetary System and Inflation Solutions 1. Be sure to read your copy of the Wall Street Journal every weekday, looking especially for items related to the material in this course. Find
More information7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange
Econ 20B- Additional Problem Set 4 I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1. Institutions in the economy that help to match one person's
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 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 informationPRACTICE- Unit 6 AP Economics
PRACTICE- Unit 6 AP Economics Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The term liquid asset means: A. that the asset is used in a barter exchange.
More informationSince 1960's, U.S. personal savings rate (fraction of income saved) averaged 7%, lower than 15% OECD average. Why? Why do we care?
Taxation and Personal Saving, G 22 Since 1960's, U.S. personal savings rate (fraction of income saved) averaged 7%, lower than 15% OECD average. Why? Why do we care? Efficiency issues 1. Negative consumption
More informationPractice Problems on Money and Monetary Policy
Practice Problems on Money and Monetary Policy 1- Define money. How does the economist s use of this term differ from its everyday meaning? Money is the economist s term for assets that can be used in
More 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 informationthe transmission channels of monetary policy the fragility of the nancial system the existence of nancial cycles
1 The macroeconomic consequences of nancial imperfections the transmission channels of monetary policy the fragility of the nancial system the existence of nancial cycles the real eects of nancial intermediation
More informationGraduate 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 information13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000.
Name: Date: 1. In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget
More informationTHE ROLE OF DEBT AND EQUITY FINANCING OVER THE BUSINESS CYCLE
THE ROLE OF DEBT AND EQUITY FINANCING OVER THE BUSINESS CYCLE Francisco Covas and Wouter J. den Haan November 14, 2005 d Key Words: S JEL Classification: E Abstract Covas, Bank of Canada, den Haan: London
More information3. a. If all money is held as currency, then the money supply is equal to the monetary base. The money supply will be $1,000.
Macroeconomics ECON 2204 Prof. Murphy Problem Set 2 Answers Chapter 4 #2, 3, 4, 5, 6, 7, and 9 (on pages 102-103) 2. a. When the Fed buys bonds, the dollars that it pays to the public for the bonds increase
More informationLecture 7: Savings, Investment and Government Debt
Lecture 7: Savings, Investment and Government Debt September 18, 2014 Prof. Wyatt Brooks Problem Set 1 returned Announcements Groups for in-class presentations will be announced today SAVING, INVESTMENT,
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, 1103-1st Semester 2013-2014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.
More informationBUSINESS ECONOMICS CEC2 532-751 & 761
BUSINESS ECONOMICS CEC2 532-751 & 761 PRACTICE MACROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format
More informationCHAPTER 5: MEASURING GDP AND ECONOMIC GROWTH
CHAPTER 5: MEASURING GDP AND ECONOMIC GROWTH Learning Goals for this Chapter: To know what we mean by GDP and to use the circular flow model to explain why GDP equals aggregate expenditure and aggregate
More informationOn the Optimality of Financial Repression
Discussion of On the Optimality of Financial Repression V.V. Chari Alessandro Dovis Patrick Kehoe Alberto Martin CREI, Universitat Pompeu Fabra and Barcelona GSE, IMF July 2014 Motivation Recent years
More 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 informationThe Money Market and the Interest Rate. 2003 South-Western/Thomson Learning
The Money Market and the Interest Rate 2003 South-Western/Thomson Learning Individuals Demand for Money An individual s quantity of money demanded is the amount of wealth that the individual chooses to
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 informationMargin Calls, Trading Costs and Asset Prices in Emerging Markets: The Financial Mechanics of the Sudden Stop Phenomenon
Discussion of Margin Calls, Trading Costs and Asset Prices in Emerging Markets: The Financial Mechanics of the Sudden Stop Phenomenon by Enrique Mendoza and Katherine Smith Fabrizio Perri NYUStern,NBERandCEPR
More informationFinancial Intermediation and Credit Policy. Business Cycle Analysis
Financial Intermediation and Credit Policy In Business Cycle Analysis Mark Gertler and Nobuhiro Kiyotaki NYU and Princeton October 29 Old Motivation (for BGG 1999) Great Depression Emerging market crises
More informationPractice 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 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 informationQUIZ IV Version 1. March 24, 2004. 4:35 p.m. 5:40 p.m. BA 2-210
NAME: Student ID: College of Business Administration Department of Economics Principles of Macroeconomics O. Mikhail ECO 2013-0008 Spring 2004 QUIZ IV Version 1 This closed book QUIZ is worth 100 points.
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Survey of Macroeconomics, MBA 641 Fall 2006, Quiz 4 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The central bank for the United States
More informationCapital Allocation Between The Risky And The Risk- Free Asset. Chapter 7
Capital Allocation Between The Risky And The Risk- Free Asset Chapter 7 Investment Decisions capital allocation decision = choice of proportion to be invested in risk-free versus risky assets asset allocation
More informationThe Basics of Interest Theory
Contents Preface 3 The Basics of Interest Theory 9 1 The Meaning of Interest................................... 10 2 Accumulation and Amount Functions............................ 14 3 Effective Interest
More informationChapter 3: The effect of taxation on behaviour. Alain Trannoy AMSE & EHESS
Chapter 3: The effect of taxation on behaviour Alain Trannoy AMSE & EHESS Introduction The most important empirical question for economics: the behavorial response to taxes Calibration of macro models
More informationThe central question: Does the bankruptcy process make sure that firms in bankruptcy are inefficient, and that inefficient firms end up in bankruptcy?
Bankruptcy White (1989) Bankruptcy the closing down of firms that are inefficient, use outdated technologies, or produce products that are in excess supply. The central question: Does the bankruptcy process
More information2.5 Monetary policy: Interest rates
2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible
More informationFinance, Saving, and Investment
23 Finance, Saving, and Investment Learning Objectives The flows of funds through financial markets and the financial institutions Borrowing and lending decisions in financial markets Effects of government
More informationCharles I. Jones Maroeconomics Economic Crisis Update (2010 års upplaga) Kurs 407 Makroekonomi och ekonomisk- politisk analys
HHS Kurs 407 Makroekonomi och ekonomisk- politisk analys VT2011 Charles I. Jones Maroeconomics Economic Crisis Update Sebastian Krakowski Kurs 407 Makroekonomi och ekonomisk- politisk analys Contents Overview...
More informationChapter 13 Money and Banking
Chapter 13 Money and Banking Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. The most important function of money is (a) as a store of
More information= C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market
Intermediate Macroeconomics Lecture 4: Introduction to the Goods Market Review of the Aggregate Expenditures model and the Keynesian Cross ECON 302 Professor Yamin Ahmad Components of Aggregate Demand
More information(a) Using an MPC of.5, the impact of $100 spent the government will be as follows: 1 100 100 2 50 150 3 25 175 4 12.5 187.5 5 6.25 193.
S5 Solutions 24 points Chapter 2: Fiscal policy. If the marginal propensity to save is.5, how large is the multiplier? If the marginal propensity to save doubles to., what happens to the multiplier? With
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 information380.760: Corporate Finance. Financial Decision Making
380.760: Corporate Finance Lecture 2: Time Value of Money and Net Present Value Gordon Bodnar, 2009 Professor Gordon Bodnar 2009 Financial Decision Making Finance decision making is about evaluating costs
More informationFinancial Institutions I: The Economics of Banking
Financial Institutions I: The Economics of Banking Prof. Dr. Isabel Schnabel Gutenberg School of Management and Economics Johannes Gutenberg University Mainz Summer term 2011 V4 1/30 I. Introduction II.
More informationVALUE 11.125%. $100,000 2003 (=MATURITY
NOTES H IX. How to Read Financial Bond Pages Understanding of the previously discussed interest rate measures will permit you to make sense out of the tables found in the financial sections of newspapers
More informationHow To Understand The Relationship Between A Country And The Rest Of The World
Lecture 1: current account - measurement and theory What is international finance (as opposed to international trade)? International trade: microeconomic approach (many goods and factors). How cross country
More informationKeynesian Macroeconomic Theory
2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The Keynesian-Cross Model 2.4. The IS-LM Model 2.5. The Keynesian AD-AS Model 2.6. Conclusion
More informationHow To Understand How A Crisis In Financial Intermediation Can Be Resolved
Financial Intermediation and Credit Policy in Business Cycle Analysis Mark Gertler and Nobuhiro Kiyotaki N.Y.U. and Princeton October 29 This version: March 21 Abstract We develop a canonical framework
More informationMoney 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 informationName: Date: 3. Variables that a model tries to explain are called: A. endogenous. B. exogenous. C. market clearing. D. fixed.
Name: Date: 1 A measure of how fast prices are rising is called the: A growth rate of real GDP B inflation rate C unemployment rate D market-clearing rate 2 Compared with a recession, real GDP during a
More informationThe financial crisis that developed starting in the summer of 2007 has
Economic Quarterly Volume 97, Number 3 Third Quarter 2011 Pages 209 254 Financial Frictions in Macroeconomic Fluctuations Vincenzo Quadrini The financial crisis that developed starting in the summer of
More informationEcon 202 Section 4 Final Exam
Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that
More information4. The minimum amount of owners' equity in a bank mandated by regulators is called a requirement. A) reserve B) margin C) liquidity D) capital
Chapter 4 - Sample Questions 1. Quantitative easing is most closely akin to: A) discount lending. B) open-market operations. C) fractional-reserve banking. D) capital requirements. 2. Money market mutual
More informationOptimal fiscal policy under commitment
Abstract Optimal Fiscal and Monetary Policy with Commitment Mikhail Golosov and Aleh Tsyvinski 1 May 31, 2006 Forthcoming in New Palgrave Dictionary of Economics and Law Optimal fiscal and monetary policy
More informationFormulas for the Current Account Balance
Formulas for the Current Account Balance By Leigh Harkness Abstract This paper uses dynamic models to explain the current account balance in a range of situations. It starts with simple economies with
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Econ 111 Summer 2007 Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The classical dichotomy allows us to explore economic growth
More informationA Model of Financial Crises
A Model of Financial Crises Coordination Failure due to Bad Assets Keiichiro Kobayashi Research Institute of Economy, Trade and Industry (RIETI) Canon Institute for Global Studies (CIGS) Septempber 16,
More informationBusiness Cycle Accounting
Federal Reserve Bank of Minneapolis Research Department Staff Report 328 Revised December 2006 Business Cycle Accounting V. V. Chari University of Minnesota and Federal Reserve Bank of Minneapolis Patrick
More informationWhat three main functions do they have? Reducing transaction costs, reducing financial risk, providing liquidity
Unit 4 Test Review KEY Savings, Investment and the Financial System 1. What is a financial intermediary? Explain how each of the following fulfills that role: Financial Intermediary: Transforms funds into
More informationFinancial Intermediation and Credit Policy in Business Cycle Analysis
Financial Intermediation and Credit Policy in Business Cycle Analysis Mark Gertler and Nobuhiro Kiyotaki N.Y.U. and Princeton October 29 This version: September 21 Abstract We develop a canonical framework
More informationTRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class.
TRADE AND INVESTMENT IN THE NATIONAL ACCOUNTS This text accompanies the material covered in class. 1 Definition of some core variables Imports (flow): Q t Exports (flow): X t Net exports (or Trade balance)
More informationThe 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 informationMark-to-Market Accounting and Cash-in-the-Market Pricing
Mark-to-Market Accounting and Cash-in-the-Market Pricing Franklin Allen Wharton School University of Pennsylvania allenf@wharton.upenn.edu Elena Carletti Center for Financial Studies University of Frankfurt
More informationReal Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35
Real Business Cycle Theory Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Introduction to DSGE models Dynamic Stochastic General Equilibrium (DSGE) models have become the main tool for
More 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 informationMacroeconomics, Fall 2007 Exam 3, TTh classes, various versions
Name: _ Days/Times Class Meets: Today s Date: Macroeconomics, Fall 2007 Exam 3, TTh classes, various versions Read these Instructions carefully! You must follow them exactly! I) On your Scantron card you
More informationMacroeconomics Series 2: Money Demand, Money Supply and Quantity Theory of Money
Macroeconomics Series 2: Money Demand, Money Supply and Quantity Theory of Money by Dr. Charles Kwong School of Arts and Social Sciences The Open University of Hong Kong 1 Lecture Outline 2. Determination
More informationWhy do emerging economies accumulate debt and reserves?
Why do emerging economies accumulate debt and reserves? Juliana Salomao June, 2013 University of Minnesota Abstract Reserve accumulation has the benet of decreasing external vulnerability but it comes
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common
More informationI. Introduction to Aggregate Demand/Aggregate Supply Model
University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model
More information