OUTLINE OF THE PRESENTATION MDEF 2012 THE DYNAMICS OF AN ECONOMY

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1 MDEF 2012 Deparmen of Economics, Sociey, Poliics Urbino, Sepember 20-22, 2012 THE DYNAMICS OF AN ECONOMY WITH SLACK RESOURCES OUTLINE OF THE PRESENTATION Background and Moivaion Objecives and Mehodology The Model Resuls Conclusions and Perspecives 1

2 BACKGROUND AND MOTIVATION Mainsream dynamics recenly refers o DSGE varieies : RBC: exogenous real shocks + relaive price ransmission mechanisms NK: moneary shocks + price imperfecions Recen economic evens (big conracion) challenge such a view The Keynesian perspecive and he noion of moneary economy of producion radiionally offered an alernaive way o explain economic flucuaions OBJECTIVES Takinghe keynesian perspecivegroundedon fundamenal uncerainy, in he presen paper we explore he role of capaciy uilizaion Focus 1: definiionof slackresources(inside keynesianradiionreduciveviewon unemploymen, while we have o consider capaciy uilizaion oo) Focus 2: dynamicimplicaions (differen kindsof quaniy adjusmens: heoreical and policy challenge) Focus 3: macroeconomiccharacerizaionof capaciyuilizaion (noa maerof degreeaplanlevel, bu number of plans working; in oher words exensive insead of inensive) 2

3 METHODOLOGY Block-recursive log-linear model Simulaion Check under wo differen se-ups: no learning (backward expecaions) learning THE MODEL Labour demand Producion Funcion Capaciy Uilizaion Nominal Income Profi Rae (AD) Equilibrium Condiion N ( 1 λ) [ µ 2 Y + Z ] + λn 1 = Y = αh + ( 1 α) N h = Y Y * Z = P + Y q = µ 1 ( h h0 ) + µ 2( Y Y0 ) + q0 1 Z = [ γq 1 + ηh 1 ξr 1 + G ] 1 δ * Governmen Expendiure G = G ρ( Z Z 0 ) * Rae of Ineres R = R +ψ 1( ˆ π π 0) π P P Inflaion Expeced Inflaion = 1 ˆ = 1 π π 3

4 THE PARAMETERS OF THE SIMULATION α (sensiiviy of oupu o h) 0.45 δ(propensiy o consume) 0.30 γ(impac of profis on invesmen) 0.8 η(impac of h on invesmen) 0.3 µ 1 (sensiiviy of q o h) 0.65 µ 2 (sensiiviy of q o Y) 0.10 ξ(impac of R on invesmen) ψ(impac of inflaion on R) 1.8 ρ(sensiiviy of G o Z; bifurcaion par) 0.39 λ(impac of y on labour demand) THE DYNAMICS OF THE SYSTEM 4

5 RESULTS The dynamicsis affecedby ζhe valueof he parameerwhich measures he impac of ineres rae on invesmen If ζ =0(suchasunder liquidiy rap) increase in propensiy o consume (δ), increase in impac of profis on invesmen (γ) increase in impac of capaciy on invesmen (η) Increasehe maximum eigenvalue; however in his case λ max less han 1, so he sysem issable: only longer ime for convergence If ζ >0 valuein he ablehereare woforcesawork, because he previous forces are couner-balanced by he inflaionary process ha in his case affec ineres rae and hence invesmen (herehe hreespendingparameersacdifferenly: consumpion desabilizing, while invesmen sabilizing) ROLE OF POLICIES AND LEARNING Role of policies. The posiion on his debae depends boh on he heoreical model adoped and on he echnical assumpions made (see Woodford, 2010). Role of liquidiy rap: needed in order o have fiscal muliplier bigger han 1 (see Chrisiano e al, 2009 and Farmer, 2009,b). This resul has been indirecly confirmed by our analysis when he parameer ξhas been se equal o 0. I is, however, also very imporan o sress he presence of unuilized capaciy. The parameer ρ, ends o sabilize he sysem. And his is even more so he more he impac of unuilized resources is relevan (an. employmen!) 5

6 THE DYNAMICS UNDER LEARNING CONCLUSIONS AND PERSPECTIVES The presence of uncerainy, on he one hand, and he difficuly of adjusing capial, on he oher, brings ino he analysis he role of unuilized capaciy. Conrary o he hypohesis made by DSGE models, his variable is no deal wih inside he firm, bu i seled a a macro level Wihin his macro perspecive, he dynamics of he business cycle is srongly influenced, direcly or indirecly, by he presence of capaciy uilizaion, while he same happens for policy measures ha become more effecive in relaion o he presence of unuilized resources. 6

7 CONCLUSIONS AND PERSPECTIVES Consider he role of marke srucure in generaing unuilized capaciy. In paricular, one should sress he presence of imperfec compeiion (see Aoki M. and H. Yoshikawa (2007). Deepening he role of uncerainy in shaping aggregae demand (see for insance, Cynamon and Fazzari,2008 and Howi and Ozak,2009). Exend he analysis in order o consider he role of boh deb and axaion when dealing wih policy issues. Exending he analysis o a medium-run conex, capial adjusmen is o be aken ino accoun, while he concep of capaciy uilizaion mus be redefined. In his perspecive, he relaionship beween uilized capaciy and he varying naure of capial mus be deepened (see Gilchris and Williams, 2005). 7