6. Budget Deficits and Fiscal Policy


 Kristian Barton
 4 years ago
 Views:
Transcription
1 Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS Budget Deficits and Fiscal Policy Introduction Ricardian equivalence Distorting taxes Debt crises
2 Introduction (1) Ricardian equivalence Keynesian theory holds that government spending financed by issuing bonds has a larger impact on aggregate demand than taxfinanced government spending. New Classical economists argue that rational, forwardlooking households do understand that issuing bonds today requires to raise taxes tomorrow such that the financing scheme is neutral w.r.t. consumption. We will look at the critical assumptions underlying this neutrality proposition and summarize the main empirical findings. Debt crises The occurrence of debt crisis remains an important topic. The answer to the following question appears especially interesting: Can economic theory help understanding causes of debt crises? Moreover, is a debt crises the result of bad fundamentals (hence unavoidable?) or is there an element of self fulfilling beliefs? 2
3 Ricardian equivalence (1) The Ricardian equivalence theorem was formulated by the British neoclassical economist David Ricardo (1817). The new classical economist Robert Barro (1974) forcefully argued that the Ricardian equivalence theorem is worthy of professional attention and yields important policy implications. Sketch of Ricardian Equivalence Theorem Proposition: For a given time path of government spending the particular method used to finance these expenditures (taxation or debt) does not affect real consumption, real investment, and real output. Corollary: Under Ricardian equivalence, government bonds held by private agents should not be counted as net wealth since it is exactly matched by future liabilities (expected tax increases). 3
4 Ricardian equivalence (2) Basic assumptions Consider a world that lasts for two periods (present,1, and future, 2) There is perfect foresight on the part of households and government. The capital market is perfect. The periodic budget constraints are given by 0 A 0 (stock variable, end of period) period 1 C 1 (flow variable) period C 2 A 1 A 2 From (2) one gets A 1 =(C 2 (1 τ 2 )Y 2 )/(1+r), noting (1) gives the intertemporal budget constraint 4
5 Ricardian equivalence (3) The government s periodic budget constraints read as follows The government does not issue money and is restricted to end without debt, i.e. B 2 =0. The government can finance government expenditures by issuing bonds or by levying taxes. Solving (4) w.r.t. B 1 gives B 1 =(τ 2 Y 2 G 2 )/(1+r). Plugging this into (3) and rearranging gives This is the intertemporal budget constraint of the government. Since government bonds are the only financial asset in the model economy, household lending (borrowing) can only take the form of positive (negative) holdings of government bonds. Hence, equilibrium in the financial market implies A i =B i for i=0,1,2. 5
6 Ricardian equivalence (4) The consolidated budget constraint of the whole economy results by merging the intertemporal budget constraints of the private sector and the government. Solving (5) w.r.t. (1+r)B 0 gives (1+r)B 0 =τ 1 Y 1 G 1 +(τ 2 Y 2 G 2 )/(1+r). Plugging the result into the household s intertemporal budget constraint yields Borrowing today requires repayment tomorrow and future repayment accordingly requires future tax revenues. Hence, rational, forward looking households take the consolidated budget constraint into account when deciding on optimal consumption plans. The consolidated intertemporal budget constraint says that the PDV of consumption {C 1,C 2 } must equal the PDV of income net of government expenditures. The time path of taxes {τ 1,τ 2 } does not show up implying that the way in which the government finances its expenditures has no effect on real consumption. 6
7 Ricardian equivalence (5) To fully understand the economic intuition behind Ricardian equivalence, we investigate the household s saving decision. The household is assumed to solve the following problem The associated Lagrangian and the first order conditions are given by 7
8 Ricardian equivalence (6) Combining FOC1 and FOC2 gives the Euler equation The Euler equation determines the optimal rate of change of consumption. The optimal levels of C 1 and C 2 can be obtained as follows Notice that the Euler equation implies C 2 =C 1 (1+r)/(1+ρ) and C 1 =C 2 (1+ρ)/(1+r). Combine these expressions with the consolidated budget constraints 8
9 Ricardian equivalence (7) Household saving in the 1 st period is as follows Optimal saving is affected by the tax rate τ 1. Consider the following Ricardian experiment : The government reduces the tax rate in the first period (dτ 1 <0) but keeps goods demand {G 1, G 2 } unchanged. Private saving changes according to ds 1 =Y 1 dτ 1 >0. The intertemporal budget constraint (5) implies A reduction in the tax rate today requires, via the intertemporal budget constraint, an increase in the tax rate tomorrow (holding {G 1, G 2 } unchanged). The household increases its saving such that it is able to repay the associated tax increase tomorrow, i.e. ds 1 = Y 1 dτ 1 =(Y 2 dτ 2 )/(1+r)>0. Hence, the expansive fiscal impulse dτ 1 <0 is offset by a reduction in C 1! 9
10 Distorting taxes (1) There are a number of simplifying assumptions which are indeed critical with regard to the Ricardian equivalence result. Even worse, most of these simplifying assumptions are critical and appear fairly unrealistic. Here, we consider the consequences of distorting taxes. Assume that noninterest income is exogenous but that there is a comprehensive income tax, and that interest income is taxable. The household s periodic budget constraints now read (noting A i =B i for i=0,1,2) Solving the 2 nd constraint w.r.t. B 1 and substituting into the 1 st constraint yields the intertemporal budget constraint 10
11 Distorting taxes (2) The periodic budget constraint of the government reads Solving the 2 nd constraint w.r.t. B 1 and substituting into the 1 st constraint yields the intertemporal budget constraint Finally, solving the preceding equation w.r.t. (1+(1 τ 1 )r))b 0 and substituting the result into the household s intertemporal budget constraint gives the consolidated budget constraint The income tax τ 2 does not drop out (τ 1 does not appear because it operates like a lump sum tax). The optimal consumption plan is affected by the timing of taxation. The tax rate in the 2 nd period changes the intertemporal prices of consumption now versus tomorrow and, hence, distorts the saving decision. 11
12 Summary and conclusion Some critical assumption underlying the Ricardian equivalence proposition Altruistic connection between generations in an infinite horizon context (such that a bond issued today is not viewed as wealth due to the future tax burden) Taxes do not affect allocations (intertemporal consumption, leisure versus working time) The capital market is perfect. Households are completely rational, not myopic, endowed with the cognitive power to calculate optimal consumption plans, and have all relevant information available. Notice that for Ricardian equivalence to hold, theses assumptions must be satisfied simultaneously; for critical comments, see Akerlof (AER, 2007). Sketch of empirical evidence The empirical evidence appears inconclusive. Seater (JEL, 1993) concludes that Ricardian equivalence is a good approximation, while Bernheim (NBER Macroeconomics Annual, 1987) comes to the conclusion that it is at variance with the facts. 12
13 A model of debt crises (1) A stylized model of debt crises is setup which rests on the following basic assumptions Government has a quantity D of maturing liabilities (debt). It has no funds immediately available and wants to roll the debt over (i.e. issue new bonds to repay principal and interest). Next period it will be obtaining tax revenues T and so wants the investors to hold the debt for one period. Tax revenues T is random and described by the continuous CDF F(T), described below. Government offers an interest factor of R. Two simplifying assumptions maturing Liabilities D 1 =RD 0 debt rollover, i.e. issuing new bonds: D 1 timing of events current period tax revenues are realized: T debt repay: RD 1 or complete default Default is all or nothing: if the government cannot pay RD, it repudiates the debt entirely. Investors are risk neutral and the riskfree interest factor R is independent of R and D. 13
14 A model of debt crises (2) Capital market equilibrium requires Notice that investors are assumed to be risk neutral. We distinguish between the expected probability of default π e and the fundamentally warranted probability of default π fw, to be explained bellow. Overall equilibrium requires that π e =π fw. R=
15 A model of debt crises (3) Tax revenues are uncertain and distributed according to a bellshaped density function f(t). The (fundamentally warranted) probability of default can be described by π fw =P(T<RD). Let T min denote the smallest possible value for T and T max the largest possible value. For RD<T min we have P(T<RD)=0. For RD>T max we have P(T<RD)=1. Given f(t) the probability of default π fw =P(T<RD) in response to RD is Sshaped. Moreover, given f(t) and holding D fix, the probability of default π fw =P(T<RD) in response to R is Sshaped too. 15
16 A model of debt crises (4) B A B A C Equilibrium requires that two conditions must hold simultaneously: Condition 1: The interest factor on government debt R makes the investors willing to purchase the debt given the expected probability of default π e, i.e. π e =(RR)/R. Condition 2: The fundamentally warranted probability of default π fw is the probability that tax revenues are insufficient to pay off the debt given the interest factor R, i.e. π fw =P(T<RD). The intersections of the two curves π e =(R R)/R and π fw =P(T<RD) describe two equilibria. There is a third equilibrium, namely R=, π=1. If investors refuse to purchase the debt at any R, the probability of default is π fw =1. If π e =1, investors refuse to purchase the debt at any interest factor. Equilibrium A and C are stable, while equilibrium B is unstable (reasoning?). Multiplicity of equilibria implies that there can be a selffulfilling element of default. Assume that the economy is in B initially. Investors now start to believe that the probability of default has increased ( a rating agency has published new figures ), i.e. π e increases. Investors demand a higher interest factor, RD increases, such that π fw does indeed go up. The process converges to C where the government pays a very high interest rate and default occurs. 16
17 A model of debt crises (5) A A C Assume the economy is in the good equilibrium, point A, initially. Assume further that the riskfree interest factor R increases (USA start to borrow extensively). At first the equilibrium changes smoothly. An increase in R leads to a gradual increase in R and π. As R increase further, however, drastic changes may occur. The (good) equilibrium, characterized by combination of low R and π, collapses and the economy moves to the (bad) equilibrium (R=, π=1). The equilibrium probability of a default results from the interaction between fundamentals, as captured by R, D, and E(T) and self fulfilling beliefs. 17
18 Notation and abbreviations Notation A i B i C i G i r R R S i T Y i λ π e π fw Ω ρ τ i assets in period i debt in period i consumption in period i government purchases in period i interest rate interest factor offered by government riskfree interest factor Household saving in period i tax revenue income in period i Lagrangian multiplier expected probability of default fundamentally warranted probability of default wealth time preference rate tax rate in period i Abbreviations CDF cumulative distribution function FOC firstorder conditions PDV present discounted value w.r.t. with respect to 18
. 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 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 informationThe Real Business Cycle Model
The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the comovements in the uctuations
More informationThe Optimal Path of Government Debt
Chapter 4 The Optimal Path of Government Debt Up to this point we have assumed that the government must pay for all its spending each period. In reality, governments issue debt so as to spread their costs
More information2. Real Business Cycle Theory (June 25, 2013)
Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 13 2. Real Business Cycle Theory (June 25, 2013) Introduction Simplistic RBC Model Simple stochastic growth model Baseline RBC model Introduction
More 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 information12.10 A Model of Debt Crises
632 Chapter 12 BUDGET DEFICITS AND FISCAL POLICY and intermediaries are not bankrupted by the crisis, the worsening of their financial positions magnifies the effects of financialmarket imperfections.
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 informationPrep. Course Macroeconomics
Prep. Course Macroeconomics Intertemporal consumption and saving decision; Ramsey model TomReiel Heggedal tomreiel.heggedal@bi.no BI 2014 Heggedal (BI) Savings & Ramsey 2014 1 / 30 Overview this lecture
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 informationUniversidad de Montevideo Macroeconomia II. The RamseyCassKoopmans Model
Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The RamseyCassKoopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous
More informationEmpirical Applying Of Mutual Funds
Internet Appendix for A Model of hadow Banking * At t = 0, a generic intermediary j solves the optimization problem: max ( D, I H, I L, H, L, TH, TL ) [R (I H + T H H ) + p H ( H T H )] + [E ω (π ω ) A
More informationOn the irrelevance of government debt when taxes are distortionary
On the irrelevance of government debt when taxes are distortionary Marco Bassetto a,b,, Narayana Kocherlakota c,b a Department of Economics, University of Minnesota, 271 19th Ave. S., Minneapolis, MN 55455,
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 informationdoes the debt matter? comments
9 does the debt matter? comments Serge Coulombe The Point The question at issue in the Ricardian equivalence debate is whether a given path of public expenditure is best financed by raising taxes or issuing
More informationLecture 1: The intertemporal approach to the current account
Lecture 1: The intertemporal approach to the current account Open economy macroeconomics, Fall 2006 Ida Wolden Bache August 22, 2006 Intertemporal trade and the current account What determines when countries
More informationNOTES ON OPTIMAL DEBT MANAGEMENT
Journal of Applied Economics, Vol. II, No. 2 (Nov 1999), 281289 NOTES ON OPTIMAL DEBT MANAGEMENT 281 NOTES ON OPTIMAL DEBT MANAGEMENT ROBERT J. BARRO Harvard University Consider the finance of an exogenous
More informationLecture 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 informationChapter 4 Consumption, Saving, and Investment
Chapter 4 Consumption, Saving, and Investment Multiple Choice Questions 1. Desired national saving equals (a) Y C d G. (b) C d + I d + G. (c) I d + G. (d) Y I d G. 2. With no inflation and a nominal interest
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 informationThe Real Business Cycle model
The Real Business Cycle model Spring 2013 1 Historical introduction Modern business cycle theory really got started with Great Depression Keynes: The General Theory of Employment, Interest and Money Keynesian
More informationLongTerm Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge
LongTerm Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge Stefano Eusepi, Marc Giannoni and Bruce Preston The views expressed are those of the authors and are not necessarily re
More informationMacroeconomics, 6e (Abel et al.) Chapter 4 Consumption, Saving, and Investment. 4.1 Consumption and Saving
Macroeconomics, 6e (Abel et al.) Chapter 4 Consumption, Saving, and Investment 4.1 Consumption and Saving 1) Desired national saving equals A) Y  C d  G. B) C d + I d + G. C) I d + G. D) Y  I d  G.
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 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 informationFinal. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect?
Name: Number: Nova School of Business and Economics Macroeconomics, 11031st Semester 20132014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.
More informationThe Multiplier Effect of Fiscal Policy
We analyze the multiplier effect of fiscal policy changes in government expenditure and taxation. The key result is that an increase in the government budget deficit causes a proportional increase in consumption.
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 102103) 2. a. When the Fed buys bonds, the dollars that it pays to the public for the bonds increase
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 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 informationSEMINAR 16: INTERGENERATIONAL JUSTICE
SEMINAR 16: INTERGENERATIONAL JUSTICE Lecture 4: Public Debt and Intergenerational Redistribution Prof. Christian KEUSCHNIGG University of St. Gallen, FGNHSG FGNHSG Alpbach, August 2011 Christian Keuschnigg
More informationU = 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 informationChapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.)
Chapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter introduces you to a formal analysis of fiscal policy, and puts it in context with realworld data and
More informationTowards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey
Towards a Structuralist Interpretation of Saving, Investment and Current Account in Turkey MURAT ÜNGÖR Central Bank of the Republic of Turkey http://www.muratungor.com/ April 2012 We live in the age of
More 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 informationChapter 18. MODERN PRINCIPLES OF ECONOMICS Third Edition
Chapter 18 MODERN PRINCIPLES OF ECONOMICS Third Edition Fiscal Policy Outline Fiscal Policy: The Best Case The Limits to Fiscal Policy When Fiscal Policy Might Make Matters Worse So When Is Fiscal Policy
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 informationIntertemporal approach to current account: small open economy
Intertemporal approach to current account: small open economy Ester Faia Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 ster Faia (Johann Wolfgang Goethe Universität Intertemporal Frankfurt
More informationFiscal Policy and Debt Maturity Management Consequences
Debt Maturity Management, Monetary and Fiscal Policy Interactions Hao Jin April 22, 23 Abstract This paper examines the interactions of debt maturity management, monetary and fiscal policy in a DSGE model.
More information7: The CRR Market Model
Ben Goldys and Marek Rutkowski School of Mathematics and Statistics University of Sydney MATH3075/3975 Financial Mathematics Semester 2, 2015 Outline We will examine the following issues: 1 The CoxRossRubinstein
More informationReal Business Cycle Models
Real Business Cycle Models Lecture 2 Nicola Viegi April 2015 Basic RBC Model Claim: Stochastic General Equlibrium Model Is Enough to Explain The Business cycle Behaviour of the Economy Money is of little
More informationOptimal Paternalism: Sin Taxes and Health Subsidies
Optimal Paternalism: Sin Taxes and Health Subsidies Thomas Aronsson and Linda Thunström Department of Economics, Umeå University SE  901 87 Umeå, Sweden April 2005 Abstract The starting point for this
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 informationChapter 9. The ISLM/ADAS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson AddisonWesley. All rights reserved
Chapter 9 The ISLM/ADAS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:
More informationBehavior of Interest Rates
Behavior of Interest Rates Notes on Mishkin Chapter 5 (pages 91108) Prof. Leigh Tesfatsion (Iowa State U) Last Revised: 21 February 2011 Mishkin Chapter 5: Selected Key InClass Discussion Questions and
More informationPreparation course Msc Business & Econonomics
Preparation course Msc Business & Econonomics The simple Keynesian model TomReiel Heggedal BI August 2014 TRH (BI) Keynes model August 2014 1 / 19 Assumptions Keynes model Outline for this lecture: Go
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 twoperiod world with dates 0 and 1. At
More informationCONCEPT OF MACROECONOMICS
CONCEPT OF MACROECONOMICS Macroeconomics is the branch of economics that studies economic aggregates (grand totals):e.g. the overall level of prices, output and employment in the economy. If you want to
More informationEstimating Risk free Rates. Aswath Damodaran. Stern School of Business. 44 West Fourth Street. New York, NY 10012. Adamodar@stern.nyu.
Estimating Risk free Rates Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 Adamodar@stern.nyu.edu Estimating Risk free Rates Models of risk and return in finance start
More informationThis paper is not to be removed from the Examination Halls
This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas
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 informationBailouts and Stimulus Plans. Eugene F. Fama
Bailouts and Stimulus Plans Eugene F. Fama Robert R. McCormick Distinguished Service Professor of Finance Booth School of Business University of Chicago There is an identity in macroeconomics. It says
More informationSchooling, 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 informationLending in Last Resort to Governments
Olivier Jeanne, Johns Hopkins University Indiana University, March 2015 Introduction Fiscal fundamentals in 2009: an international comparison Net debt/gdp (%) 40 50 60 70 80 90 100 110 120 US JAP UK EUR
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 informationIn this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.
Chapter 11: Applying ISLM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the ISLM model
More informationCAPM, Arbitrage, and Linear Factor Models
CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, Linear Factor Models 1/ 41 Introduction We now assume all investors actually choose meanvariance e cient portfolios. By equating these investors
More informationRedistributive Taxation and Personal Bankruptcy in US States
Redistributive Taxation and Personal Bankruptcy in US States Charles Grant Reading Winfried Koeniger Queen Mary Key Words: Personal bankruptcy, Consumer credit, Redistributive taxes and transfers JEL Codes:
More informationDynamics of the current account in a small open economy microfounded model
Dynamics of the current account in a small open economy microfounded model Lecture 4, MSc Open Economy Macroeconomics Birmingham, Autumn 2015 Tony Yates Main features of the model. Small open economy.
More informationOn the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information
Finance 400 A. Penati  G. Pennacchi Notes on On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information by Sanford Grossman This model shows how the heterogeneous information
More informationECON 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 informationGraduate Macroeconomics 2
Graduate Macroeconomics 2 Lecture 1  Introduction to Real Business Cycles Zsófia L. Bárány Sciences Po 2014 January About the course I. 2hour lecture every week, Tuesdays from 10:1512:15 2 big topics
More informationIfo Institute for Economic Research at the University of Munich. 6. The New Keynesian Model
6. The New Keynesian Model 1 6.1 The Baseline Model 2 Basic Concepts of the New Keynesian Model Markets are imperfect: Price and wage adjustments: contract duration, adjustment costs, imperfect expectations
More informationECON 20310 Elements of Economic Analysis IV. Problem Set 1
ECON 20310 Elements of Economic Analysis IV Problem Set 1 Due Thursday, October 11, 2012, in class 1 A Robinson Crusoe Economy Robinson Crusoe lives on an island by himself. He generates utility from leisure
More informationGrowth and public debt: what are the relevant tradeoffs?
Growth and public debt: what are the relevant tradeoffs? Kazuo NISHIMURA, Carine NOURRY, Thomas SEEGMULLER and Alain VENDITTI,. March 19, 2015 RIEB, Kobe University and KIER, Kyoto University AixMarseille
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 information2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE.
Macro final exam study guide True/False questions  Solutions Case, Fair, Oster Chapter 8 Aggregate Expenditure and Equilibrium Output 1.Firms react to unplanned inventory investment by reducing output.
More informationWalras' Law and Keynesian Macroeconomics. Abstract
Walras' Law and Keynesian Macroeconomics Abstract This paper examines the claim that Keynesian models violate Walras' law. Walras' law is founded in the logic of exchange. Standard statements misrepresent
More informationChap 3 CAPM, Arbitrage, and Linear Factor Models
Chap 3 CAPM, Arbitrage, and Linear Factor Models 1 Asset Pricing Model a logical extension of portfolio selection theory is to consider the equilibrium asset pricing consequences of investors individually
More informationA 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 information1 Portfolio mean and variance
Copyright c 2005 by Karl Sigman Portfolio mean and variance Here we study the performance of a oneperiod investment X 0 > 0 (dollars) shared among several different assets. Our criterion for measuring
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 informationINTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014
Duration: 120 min INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Format of the mock examination Section A. Multiple Choice Questions (20 % of the total marks) Section
More informationReforming the Tax System Lecture II: The Taxation of Savings. December 2015 Richard Blundell University College London
Econ 3007 Economic Policy Analysis Reforming the Tax System Lecture II: The Taxation of Savings December 205 Richard Blundell niversity ollege London Teaching Resources at: http://www.ucl.ac.uk/~uctp39a/lect.html
More informationANSWERS TO ENDOFCHAPTER QUESTIONS
ANSWERS TO ENDOFCHAPTER QUESTIONS 91 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investmentdemand curve, and (d) the investment schedule.
More informationAsymmetry and the Cost of Capital
Asymmetry and the Cost of Capital Javier García Sánchez, IAE Business School Lorenzo Preve, IAE Business School Virginia Sarria Allende, IAE Business School Abstract The expected cost of capital is a crucial
More informationA Simple Model of Price Dispersion *
Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper No. 112 http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0112.pdf A Simple Model of Price Dispersion
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 informationStatic and dynamic analysis: basic concepts and examples
Static and dynamic analysis: basic concepts and examples Ragnar Nymoen Department of Economics, UiO 18 August 2009 Lecture plan and web pages for this course The lecture plan is at http://folk.uio.no/rnymoen/econ3410_h08_index.html,
More informationThe Real Business Cycle School
Major Currents in Contemporary Economics The Real Business Cycle School Mariusz Próchniak Department of Economics II Warsaw School of Economics 1 Background During 197282,the dominant new classical theory
More informationKeynesian Macroeconomic Theory
2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The KeynesianCross Model 2.4. The ISLM Model 2.5. The Keynesian ADAS Model 2.6. Conclusion
More informationINTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT
Chapter 9 AGGREGATE DEMAND INTRODUCTION The Great Depression was a springboard for the Keynesian approach to economic policy. Keynes asked: What are the components of aggregate demand? What determines
More informationChapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.)
Chapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter first introduces the analysis of business cycles, and introduces you to the
More informationStudy Questions for Chapter 9 (Answer Sheet)
DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 MWF 13:0013:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:0017:00 Study
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 informationCapital Constraints, Lending over the Cycle and the Precautionary Motive: A Quantitative Exploration (Working Paper)
Capital Constraints, Lending over the Cycle and the Precautionary Motive: A Quantitative Exploration (Working Paper) Angus Armstrong and Monique Ebell National Institute of Economic and Social Research
More informationCorporate Taxes and Securitization
Corporate Taxes and Securitization The Journal of Finance by JoongHo Han KDI School of Public Policy and Management Kwangwoo Park Korea Advanced Institute of Science and Technology (KAIST) George Pennacchi
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 informationMonetary Neutrality, Home Mortgages, and the Phillips Curve
Macroeconomic Issues Macroeconomic Issues Monetary Neutrality, Home Mortgages, and the Phillips Curve Alan Day Haight State University of New York, Cortland Standard mortgage borrowing practices are incorporated
More informationGROWTH, INCOME TAXES AND CONSUMPTION ASPIRATIONS
GROWTH, INCOME TAXES AND CONSUMPTION ASPIRATIONS Gustavo A. Marrero Alfonso Novales y July 13, 2011 ABSTRACT: In a Barrotype economy with exogenous consumption aspirations, raising income taxes favors
More informationON THE RISK ADJUSTED DISCOUNT RATE FOR DETERMINING LIFE OFFICE APPRAISAL VALUES BY M. SHERRIS B.A., M.B.A., F.I.A., F.I.A.A. 1.
ON THE RISK ADJUSTED DISCOUNT RATE FOR DETERMINING LIFE OFFICE APPRAISAL VALUES BY M. SHERRIS B.A., M.B.A., F.I.A., F.I.A.A. 1. INTRODUCTION 1.1 A number of papers have been written in recent years that
More informationOn the Dual Effect of Bankruptcy
On the Dual Effect of Bankruptcy Daiki Asanuma Abstract This paper examines whether the survival of lowproductivity firms in Japan has prevented economic recovery since the bursting of the financial bubble
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 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 informationUnraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets
Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Nathaniel Hendren January, 2014 Abstract Both Akerlof (1970) and Rothschild and Stiglitz (1976) show that
More informationConsumption and Savings Decisions: A TwoPeriod Setting
Consumption and Savings Decisions: A TwoPeriod Setting Dynamic Macroeconomic Analysis Universidad Autonóma de Madrid Fall 2012 Dynamic Macroeconomic Analysis (UAM) Consumption and Savings Fall 2012 1
More informationSelffulfilling debt crises: Can monetary policy really help? By P. Bacchetta, E. Van Wincoop and E. Perazzi
Selffulfilling debt crises: Can monetary policy really help? By P. Bacchetta, E. Van Wincoop and E. Perazzi Discussion by Luca Dedola (ECB) Nonlinearities in Macroeconomics and Finance in Light of the
More informationGambling for Redemption and SelfFulfilling Debt Crises
Gambling for Redemption and SelfFulfilling Debt Crises Juan Carlos Conesa Universitat Autònoma de Barcelona Timothy J. Kehoe University of Minnesota, Federal Reserve Bank of Minneapolis, and MOVE, Universitat
More informationVI. Real Business Cycles Models
VI. Real Business Cycles Models Introduction Business cycle research studies the causes and consequences of the recurrent expansions and contractions in aggregate economic activity that occur in most industrialized
More informationChapter 12 Unemployment and Inflation
Chapter 12 Unemployment and Inflation Multiple Choice Questions 1. The origin of the idea of a tradeoff between inflation and unemployment was a 1958 article by (a) A.W. Phillips. (b) Edmund Phelps. (c)
More information