Inflation & Welfare 1
|
|
- Rosamund Elliott
- 5 years ago
- Views:
Transcription
1 1
2 INFLATION & WELFARE ROBERT E. LUCAS 2
3 Introduction In a monetary economy, private interest is to hold not non-interest bearing cash. Individual efforts due to this incentive must cancel out, because someone must hold it all. Real Recourses are wasted on a task that should not have to performed at all. 3
4 Introduction Opportunity cost of holding cash is nominal interest rate. The time devoted to economizing on holding cash, is an increasing function of nominal rate and so inflation. Inflation should have an adverse effect on individual s welfare. 4
5 In this paper Research on the welfare cost of inflation is surveyed. The welfare cost of inflation for U.S. is estimated in a variety of ways. 5
6 It is shown that The gain of reducing nominal interest rate to about 0.1 percent is positive. Reducing inflation from 10 to 0 is equivalent to about 1 percent increase in income. Using aggregate evidence, the gain of zero nominal interest, may not be estimate reliably. 6
7 Money Demand & Consumer Surplus Money demand, as a function of nominal interest rate is estimated. (Meltzer 1963a) Welfare Cost is calculated, based on the estimated demand function. (Bailey 1956). There is no any theoretical interpretation. 7
8 Money Demand & Consumer Surplus M t P t = L r t, y t, L r, y = m r y 8
9 Money Demand & Consumer Surplus m r = Ar η 9
10 Money Demand & Consumer Surplus m r = Bexp( ξr) 10
11 Money Demand & Consumer Surplus Actual and Predicted Real Balances m r = Ar
12 Money Demand & Consumer Surplus Welfare Cost Definition: The area under the inverse demand curve between m(r) and m(0): The Lost Surplus. r nominal interest rate m(r) m(0) w r = ψ x dx m(r) money/output w r = m x dx 0 r r = ψ(m) rm(r) 12
13 Money Demand & Consumer Surplus Welfare Function: r w r = m x dx 0 rm(r) m r = Ar η w r = A η 1 η r1 η m r = Be ξr w r = B,1 (1 + ξ ξr)e ξr - 13
14 Money Demand & Consumer Surplus Welfare Cost function 14
15 Money Demand & Consumer Surplus Welfare Cost relative to 3% interest 15
16 Money Demand & Consumer Surplus Results: The two curves are similar above 3 nominal interest, which relates to about 0 inflation. The benefit of reducing Inflation from 10 to 0 is less than 1 percent. 16
17 Money Demand & Consumer Surplus Results: The welfare function below 3% interest is so different between two curves. Minimum cost is in zero nominal interest, which means deflation. (Friedman Rule-1969) Aggregate evidences is not sufficient. 17
18 Money Demand & Consumer Surplus Critiques: There is no any theoretical interpretation of this estimate. we need a model to see what changes in monetary policy might generate m(r) & w(r). 18
19 Money Demand & Consumer Surplus Critiques: Simply labeling the point in the figures demand function does not tell us what is our estimate. Giving colorful names to statistical relationships is not a substitute for economic theory. 19
20 The Sidrauski Framework Welfare cost is obtained based on a theory of deterministic general equilibrium (Sidrauski 1967a,b). Real Money demand is entered directly in utility as a proxy of transaction facility. It is shown that for the range of U.S. interest rates the solution of welfare cost is very close to the last results. There is no labor-leisure trade-off and Fiscal Policies is not entered explicitly. 20
21 The Sidrauski Framework Representative Household: Supplies one unit of Labor in each period with productivity y t = y t 1 (1 + γ) Gains utility in each period, from the consumption of one nondurable good: c Gains utility in each period, from holding real balances: z = M/P 21
22 The Sidrauski Framework Representative Household: U c t, z t = 1 1 σ cφ(z) 1 σ c There is no long run trend in the real balance income ratio. The constant Risk aversion is consistent with balanced growth path. 22
23 The Sidrauski Framework Representative Household: Maximize the total utility over his lifetime: V = t=0 1/ 1 + ρ t U(c t, z t ) Subjected to his constraint by choosing c t, z t 23
24 The Sidrauski Framework Household Constraint: t M t+1 = M t H t + P t y t P t c t H t : Lump sum tax m t z t y t = M t P t y t, ω t c t y t, v t H t P t y t, 1 + π t = P t P t 1 (1 + γ) 1 + π t+1 m t+1 = m t v t + 1 ω t 24
25 The Sidrauski Framework Household Behavior: Household begins in period 1 with balance M and real wage y. t=0 V = V y, z = max 1/ 1 + ρ t U(c t, z t ) c 1, c 2, 25
26 The Sidrauski Framework Household Behavior: V = V y, z = max U c 1, z + max c 1 c 2, c 3, ρ t= ρ t U c t+1, z t+1 V = V y, z = max *U c 1, z ρ V(y, z )+ c 1 26
27 The Sidrauski Framework Household Behavior: 1 V = V y, z = max * 1 ς cφ(z c ) 1 σ ρ V(y(1 + γ), z )+ c z = z + y c 1 + π 27
28 The Sidrauski Framework Household Behavior: V = V y, m = max * y1 σ 1 σ 1 ς ωφ(m ω ) ω ρ V(y(1 + γ), m )+ m = m v + 1 ω (1 + π)(1 + γ) 28
29 The Sidrauski Framework Household Behavior: V y, m = y 1 σ v(m) 1 1 σ v(m) = max * 1 ς ωφ(m ω ) ω γ 1 σ 1 + ρ v(m )+ m = m v + 1 ω (1 + π)(1 + γ) 29
30 The Sidrauski Framework Household Behavior: F.O.C. : φ m ω σ φ m ω m ω φ m ω = 1 1+r v m r = 1 + γ σ 1 + ρ (1 + π) 30
31 The Sidrauski Framework Household Behavior: Envelope Condition : v m = φ m ω σ φ m ω r v m r = 1 + γ σ 1 + ρ (1 + π) 31
32 The Sidrauski Framework Monetary and Fiscal Policy: M t = 1 + μ M t 1 H t = v P t y t = v t 32
33 The Sidrauski Framework Balanced Growth Path: (1 + γ) 1 + π t+1 m t+1 = m t v + 1 ω t ω t = c t /y t = ω m t = M t P t y t = m 1 + π t = 1 + π = (1 + μ)/(1 + γ) μm = v + 1 ω 33
34 The Sidrauski Framework Household Behavior: φ m ω φ m ω m ω φ m ω = r r = 1 + γ σ 1 + ρ (1 + π) 34
35 The Sidrauski Framework Solving the Model: M t & Y t is known, but P t is unknown, so m. ω is unknown. There is only one relation for m & ω from Household maximization. 35
36 The Sidrauski Framework Solving the Model: Market clearing in each time: c t = y t ω = 1 36
37 The Sidrauski Framework Solving the Model : φ m φ m m φ m = r r = 1 + γ σ 1 + ρ (1 + π) r is a function of economic growth, γ, which is taken exogenous. 37
38 The Sidrauski Framework Nominal interest rate: For small growth : r ρ + ςγ + π, π μ γ In a real economy with durable good, balanced growth is determined by the capital return. Real interest rate is : ρ + ςg. γ could be replaced by balanced growth in this economy. r is taken to be nominal interest rate. 38
39 The Sidrauski Framework Real balance output ratio: φ m(r) = r 1 + m(r)r φ m(r) Real balance output ratio is obtained as a function of nominal interest rate in this micro based theory model. 39
40 The Sidrauski Framework Real balance output ratio : φ m r = 1 + mr φ > 0, φ < 0 : m r < 0 φ m U c, z = U y, m r y is increasing function of z : U r < 0 Maximum Utility is obtained at zero nominal interest rate: Friedman Rule (1969) The best Policy Rule is deflation equal to real interest. 40
41 The Sidrauski Framework Welfare Cost: The percentage income compensation needed to leave the household indifferent between r and 0 U 1 + w r y, m r y = U,y, m 0 y- 1 + w r φ m r 1 + w r = φ,m(0)- 41
42 The Sidrauski Framework Welfare Cost: w r = ψ m r 1 + w r m (r) ψ is the inverse function of m(r) : r = ψ(m) For small w we have : w r = ψ m r m r w r = ψ m dm (Consumer Surplus) 42
43 The Sidrauski Framework Real balance output ratio : φ m φ m m φ m = r Note that φ is the utility of household over m. What is it for the American household? 43
44 The Sidrauski Framework Results: If the m(r) takes the form of m r best estimate for U.S. data: φ m = 1 + A2 m 1 = A/ r as is the 44
45 The Sidrauski Framework Results: Welfare Cost based on this theoretical model is obtained as: A r w r = 1 A r For A = 0.05, r < 10%(U.S. data), the difference between this relation and the formula based on consumer surplus is less than 2 percent. 45
46 The Sidrauski Framework Results: Based on this theoretical model, Curves m(r) and w(r) are tracing out Steady States of Deterministic economies in balanced growth path, Subjected to different constant rates of money growth. 46
47 The Sidrauski Framework Importance of Assumptions: In deterministic framework, the costs related to price and inflation variability is dismissed. Based on Cooley & Hansen (1989), the effect of introducing stochastic events is negligible. There is no labor-leisure trade-off and fiscal policies is not interred directly in this model. In the next model, labor-leisure trade-off and fiscal considerations are introduced in this model. 47
48 Fiscal Considerations Welfare cost is obtained based on a theory of general equilibrium (Sidrauski 1967a,b). Real Money demand is entered directly in utility as a proxy of transaction facility. Labor-leisure trade-off is considered. Fiscal policy and government consumption is entered directly to the model. It is shown that above very small interest rates, estimated welfare cost is the same as the last model. 48
49 Fiscal Considerations Fiscal Constraint: v = μm(r) r = (ρ + γς) + (μ γ) δ r μ v = δ r m(r) 49
50 Fiscal Considerations Fiscal Constraint: v = δ r m(r) m r = A/ r In the optimal interest (r = 0), m, so v Lump sum tax takes infinite value! 50
51 Fiscal Considerations Fiscal Constraint: The Policy r = 0 is not feasible. The Friedman Rule requires qualification. 51
52 Fiscal Considerations Representative Household: Gains utility in each period, from leisure share of its time : x Supplies 1 x unit of Labor in each period with productivity y t = y t 1 (1 + γ) Gains utility in each period, from the consumption of one nondurable good: c Gains utility in each period, from holding real balances: z = M/P 52
53 Fiscal Considerations Representative Household: U c t, z t = 1 1 σ 1 σ cφ(z ) (x) c There is no long run trend in the real balance income ratio. The constant Risk aversion is consistent with balanced growth path. There is no long run trend in the share of working. 53
54 Fiscal Considerations Representative Household: Maximize the total utility over his lifetime: V = t=0 1/ 1 + ρ t U(c t, z t, x t ) Subjected to his constraint by choosing c t, z t, x t 54
55 Fiscal Considerations Monetary and Fiscal Policy: M t = 1 + μ M t 1 Government purchase in each time: G t = g t y t Government collect tax from household income with rate of τ. 55
56 Fiscal Considerations Household Constraint: t M t+1 = M t + P t (1 τ)(1 x t )y t P t c t m t z t y t = M t P t y t, ω t c t y t, 1 + π t = P t P t γ 1 + π t+1 m t+1 = m t + (1 τ)(1 x t ) ω t 56
57 Fiscal Considerations Household Behavior: Household begins in period 1 with balance M and productivity y. t=0 V = V y, z = max 1/ 1 + ρ t U(c t, z t, x t ) c 1, c 2, x 1, x 2, 57
58 Fiscal Considerations Household Behavior: V y, m = y 1 σ v(m) 1 1 σ v(m) = max * 1 ς ωφ(m ω ) (x) ω, x γ 1 σ 1 + ρ v(m )+ m = m + (1 τ)(1 x) ω (1 + π)(1 + γ) 58
59 Fiscal Considerations Balanced Growth Path: 1 + γ 1 + π t+1 m t+1 = m t + (1 x t )(1 τ) ω t ω t = c t y t = ω x t = x m t = M t P t y t = m 1 + π t = 1 + π = (1 + μ)/(1 + γ) μm = (1 x)(1 τ) ω 59
60 Fiscal Considerations Household Behavior: There are 2 First Order and 1 Envelope Conditions r φ m ω m ω φ m ω = φ m ω φ m ω m ω φ m ω φ x 1 τ = ω φ m ω φ (x ) 60
61 Fiscal Considerations Market Clearing & Budget Constraint: There are 2 relations because of Market Clearing and Budget Constraint: c t + G t = y t 1 x t ω + g + x = 1 μm = 1 τ 1 x ω 61
62 Fiscal Considerations Solving the Model: There are 4 unknown variables: ω, x, τ, m The policy rule of g and μ is given, so r ρ + ςγ + μ γ = δ + μ For any given policy rules, μ, g, the four equations can be solved for ω, x, τ, m, as a function of r, g. 62
63 Fiscal Considerations Functional form of φ, φ φ m = 1/(1 + 1/(km)), k is constant. m(r) must take the form of m r = A/ r. k can be solved as a function of A φ x = x β, β is a constant. 63
64 Fiscal Considerations Welfare Cost: The percentage income compensation needed to leave the household indifferent between r and 0 U 1 + w r c r, m r, x(r) = U,c δ, m δ, x(δ)- 64
65 Fiscal Considerations Welfare Cost δ = g = 0.35 β 1 = β 2 = 0.3 β 3 = 0.6 β 4 =
66 Fiscal Considerations Results: Based on this theoretical model, Curves m(r) and w(r) are tracing out Steady States of Deterministic economies in balanced growth path, Subjected to different constant rates of money growth and different constant size of government. 66
67 Fiscal Considerations Results: Deviation of Optimal r from 0 is positive for β > 0 but it is too small (0.1%) Friedman Rule needs qualification but with small magnitude! 67
68 Fiscal Considerations Results: Difference in the welfare cost with respect to the last models is small (0.1%): Labor-Leisure Trade off is not important! Fiscal Considerations is not important! 68
69 Fiscal Considerations Results: 69
70 Fiscal Considerations Critiques: Why real balances should increase the utility? What people do exactly with their money holdings? Holding money does not increase utility itself It is the ease of transaction, and the less time devoted to it that makes someone better off. 70
71 The McCallum-Goodfriend Framework Welfare cost is obtained based on a theory of general equilibrium (McCallum & Goodfriend 1987). Transaction behavior is directly interred to the model as labor-transaction trade-off. There is no labor-leisure trade-off and Fiscal Policies is not entered explicitly. Another theoretical justification of welfare cost formula in step 2 is provided. 71
72 The McCallum-Goodfriend Framework Representative Household: Devote the fraction s of its time in each period to carry out transactions. Supplies 1 s unit of Labor in each period with productivity y t = y t 1 (1 + γ) Gains utility in each period, from the consumption of one nondurable good: c 72
73 The McCallum-Goodfriend Framework Representative Household: U c t = 1 1 σ c t 1 σ c t = z t f(s t ) f is the transaction technology : f > 0 and f 0 = 0 73
74 The McCallum-Goodfriend Framework Representative Household: Maximize the total utility over his lifetime: V = t=0 1/ 1 + ρ t U(c t ) Subjected to his constraint by choosing c t, s t. 74
75 The McCallum-Goodfriend Framework Monetary and Fiscal Policy: M t = 1 + μ M t 1 Government take the lump sum tax H t in each period 75
76 The McCallum-Goodfriend Framework Household Budget Constraint : t M t+1 = M t H t + P t (1 s t )y t P t c t m t z t y t = M t P t y t, ω t c t y t, 1 + π t = P t P t 1, v t = H t /y t 1 + γ 1 + π t+1 m t+1 = m t v t + (1 s t ) ω t 76
77 The McCallum-Goodfriend Framework Household Transaction Constraint: c t = z t f(s t ) ω t = m t f(s t ) 77
78 The McCallum-Goodfriend Framework Household Behavior: Household begins in period 1 with balance M and productivity y. t=0 V = V y, z = max 1/ 1 + ρ t U(c t ) c 1, c 2, s 1, s 2, 78
79 The McCallum-Goodfriend Framework Household Behavior: V y, m = y 1 σ v(m) 1 v(m) = max * 1 ς ω1 σ + ω, s 1 + γ 1 σ 1 + ρ v(m )+ m = m v+1 s ω (1+π)(1+γ), ω = mf(s) 79
80 The McCallum-Goodfriend Framework Balanced Growth Path: 1 + γ 1 + π t+1 m t+1 = m t v t + 1 s t ω t ω t = c t y t = ω v t = v m t = M t P t y t = m 1 + π t = 1 + π = (1 + μ)/(1 + γ) μm = v + 1 ω s 80
81 The McCallum-Goodfriend Framework Household Behavior: From The F.O.C and envelope condition: f s = rmf (s ) 81
82 The McCallum-Goodfriend Framework Market Clearing: c t = y t 1 s t 1 s = mf(s ) 82
83 The McCallum-Goodfriend Framework Solving the Model: Having the functional form of f(s), m(r) and s(r) could be solved as a function of r. 83
84 The McCallum-Goodfriend Framework Welfare Cost: s r = 0 = 0, s r > 0 s(r), the time spent for economizing on cash use, has the dimension of a percentage reduction in consumption for each nominal interest. s r is itself a direct measure of the welfare cost of inflation 84
85 The McCallum-Goodfriend Framework Welfare Cost : Without having the transaction functional form, s(r) can be solved as a function of m r : s r = rm (r)(1 s r ) 1 s r + rm(r) 85
86 The McCallum-Goodfriend Framework Welfare Cost 86
87 The McCallum-Goodfriend Framework Welfare Cost : For small r, s r 1, so : s r = rm r r, s r = ψ m dm This is the same formula based on consumer surplus of money demand! 87
88 The McCallum-Goodfriend Framework Functional form of f: Suppose f s = ks, in which k is a constant. For small r: m(r) takes the form of m r = A/ r with A = 1/ k. s r = r/k 88
89 The McCallum-Goodfriend Framework Results: In U.S. Economy with A = 0.05, s 1 % for r = 4% and s 2 % for r = 16% s r is 0. > 0, so the optimal nominal interest rate 89
90 The McCallum-Goodfriend Framework Results: Based on this theoretical model, Curves m(r) and w(r) are tracing out Steady States of Deterministic economies, in balanced growth path and constant transactional technology, Subjected to different constant rates of money growth. 90
91 Conclusions and Further Directions Fixed Costs of Asset Holding: There is a fix cost of holding positive amount of interest bearing securities (Mulligan & Salai-Martin In low interest rates, fewer households would be using resources to economize on cash holdings. About 59% of American households in 1989 hold no financial assets. The estimated welfare cost for small interest rates, may be overestimated. 91
92 Conclusions and Further Directions M1 as a Measure of Money Holding for Transactions: In this paper, M1 is taken to be a measure of noninterest bearing cash used in transactions. Other interest bearing assets may serve as means of payment. The estimated money demand do very badly in the 1990s: M1 is too narrow an aggregate for this period. The estimated welfare cost, may be overestimated. 92
93 Conclusions and Further Directions The Best nominal interest rate: The estimated gain of reducing inflation is positive, starting from any interest rate above 0.1% The Optimal Monetary Policy Entails a deflation with interest rate at or near zero (Friedman Rule) 93
94 Conclusions and Further Directions The Cost of Inflation: Based on theoretical models, reducing Interest rate from 14% to 3% (zero inflation), would yield a benefit equivalent about 0.8% of real income. This estimate is not at all sensitive to assumptions about Fiscal Policy Used to effect the interest rate reduction Adding realistic productivity or money supply shock o The theory of these models is not adequate for estimation of costs near zero interest rates. 94
95 Conclusions and Further Directions 95
96 Questions? 96
MACROECONOMICS. Prelim Exam
MACROECONOMICS Prelim Exam Austin, June 1, 2012 Instructions This is a closed book exam. If you get stuck in one section move to the next one. Do not waste time on sections that you find hard to solve.
More informationMonetary Economics. Money in Utility. Seyed Ali Madanizadeh. February Sharif University of Technology
Monetary Economics Money in Utility Seyed Ali Madanizadeh Sharif University of Technology February 2014 Introduction MIU setup FOCs Interpretations and implications Neutrality and superneutrality Equilibrium
More informationMacroeconomics 2. Lecture 5 - Money February. Sciences Po
Macroeconomics 2 Lecture 5 - Money Zsófia L. Bárány Sciences Po 2014 February A brief history of money in macro 1. 1. Hume: money has a wealth effect more money increase in aggregate demand Y 2. Friedman
More informationMoney in an RBC framework
Money in an RBC framework Noah Williams University of Wisconsin-Madison Noah Williams (UW Madison) Macroeconomic Theory 1 / 36 Money Two basic questions: 1 Modern economies use money. Why? 2 How/why do
More informationSDP Macroeconomics Final exam, 2014 Professor Ricardo Reis
SDP Macroeconomics Final exam, 2014 Professor Ricardo Reis Answer each question in three or four sentences and perhaps one equation or graph. Remember that the explanation determines the grade. 1. Question
More informationMonetary Economics Final Exam
316-466 Monetary Economics Final Exam 1. Flexible-price monetary economics (90 marks). Consider a stochastic flexibleprice money in the utility function model. Time is discrete and denoted t =0, 1,...
More informationMenu Costs and Phillips Curve by Mikhail Golosov and Robert Lucas. JPE (2007)
Menu Costs and Phillips Curve by Mikhail Golosov and Robert Lucas. JPE (2007) Virginia Olivella and Jose Ignacio Lopez October 2008 Motivation Menu costs and repricing decisions Micro foundation of sticky
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 Instructions: Read the questions carefully and make sure to show your work. You
More informationMoney in a Neoclassical Framework
Money in a Neoclassical Framework Noah Williams University of Wisconsin-Madison Noah Williams (UW Madison) Macroeconomic Theory 1 / 21 Money Two basic questions: 1 Modern economies use money. Why? 2 How/why
More informationComprehensive Exam. August 19, 2013
Comprehensive Exam August 19, 2013 You have a total of 180 minutes to complete the exam. If a question seems ambiguous, state why, sharpen it up and answer the sharpened-up question. Good luck! 1 1 Menu
More informationReturn to Capital in a Real Business Cycle Model
Return to Capital in a Real Business Cycle Model Paul Gomme, B. Ravikumar, and Peter Rupert Can the neoclassical growth model generate fluctuations in the return to capital similar to those observed in
More informationThe Real Business Cycle Model
The Real Business Cycle Model Economics 3307 - Intermediate Macroeconomics Aaron Hedlund Baylor University Fall 2013 Econ 3307 (Baylor University) The Real Business Cycle Model Fall 2013 1 / 23 Business
More informationEndogenous Money, Inflation and Welfare
Endogenous Money, Inflation and Welfare Espen Henriksen Finn Kydland January 2005 What are the welfare gains from adopting monetary policies that reduce the inflation rate? This is among the classical
More informationTransactions and Money Demand Walsh Chapter 3
Transactions and Money Demand Walsh Chapter 3 1 Shopping time models 1.1 Assumptions Purchases require transactions services ψ = ψ (m, n s ) = c where ψ n s 0, ψ m 0, ψ n s n s 0, ψ mm 0 positive but diminishing
More informationSimple Analytics of the Government Expenditure Multiplier
Simple Analytics of the Government Expenditure Multiplier Michael Woodford Columbia University New Approaches to Fiscal Policy FRB Atlanta, January 8-9, 2010 Woodford (Columbia) Analytics of Multiplier
More information1 A tax on capital income in a neoclassical growth model
1 A tax on capital income in a neoclassical growth model We look at a standard neoclassical growth model. The representative consumer maximizes U = β t u(c t ) (1) t=0 where c t is consumption in period
More informationWORKING PAPER NO THE ELASTICITY OF THE UNEMPLOYMENT RATE WITH RESPECT TO BENEFITS. Kai Christoffel European Central Bank Frankfurt
WORKING PAPER NO. 08-15 THE ELASTICITY OF THE UNEMPLOYMENT RATE WITH RESPECT TO BENEFITS Kai Christoffel European Central Bank Frankfurt Keith Kuester Federal Reserve Bank of Philadelphia Final version
More informationTrade and Labor Market: Felbermayr, Prat, Schmerer (2011)
Trade and Labor Market: Felbermayr, Prat, Schmerer (2011) Davide Suverato 1 1 LMU University of Munich Topics in International Trade, 16 June 2015 Davide Suverato, LMU Trade and Labor Market: Felbermayr,
More informationEconomics 502. Nominal Rigidities. Geoffrey Dunbar. UBC, Fall November 22, 2012
Economics 502 Nominal Rigidities Geoffrey Dunbar UBC, Fall 2012 November 22, 2012 Geoffrey Dunbar (UBC, Fall 2012) Economics 502 November 22, 2012 1 / 68 Money Our models thusfar have been real models.
More informationCredit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal 1 / of19
Credit Crises, Precautionary Savings and the Liquidity Trap (R&R Quarterly Journal of nomics) October 31, 2016 Credit Crises, Precautionary Savings and the Liquidity Trap October (R&R Quarterly 31, 2016Journal
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 2010 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements, state
More informationConvergence of Life Expectancy and Living Standards in the World
Convergence of Life Expectancy and Living Standards in the World Kenichi Ueda* *The University of Tokyo PRI-ADBI Joint Workshop January 13, 2017 The views are those of the author and should not be attributed
More informationINDIVIDUAL CONSUMPTION and SAVINGS DECISIONS
The Digital Economist Lecture 5 Aggregate Consumption Decisions Of the four components of aggregate demand, consumption expenditure C is the largest contributing to between 60% and 70% of total expenditure.
More informationAdvanced Macro and Money (WS09/10) Problem Set 4
Advanced Macro and Money (WS9/) Problem Set 4 Prof. Dr. Gerhard Illing, Jin Cao January 6, 2. Seigniorage and inflation Seignorage, which is the real revenue the government obtains from printing new currency,
More informationLecture Notes. Macroeconomics - ECON 510a, Fall 2010, Yale University. Fiscal Policy. Ramsey Taxation. Guillermo Ordoñez Yale University
Lecture Notes Macroeconomics - ECON 510a, Fall 2010, Yale University Fiscal Policy. Ramsey Taxation. Guillermo Ordoñez Yale University November 28, 2010 1 Fiscal Policy To study questions of taxation in
More informationHeterogeneous Firm, Financial Market Integration and International Risk Sharing
Heterogeneous Firm, Financial Market Integration and International Risk Sharing Ming-Jen Chang, Shikuan Chen and Yen-Chen Wu National DongHwa University Thursday 22 nd November 2018 Department of Economics,
More informationMicro-foundations: Consumption. Instructor: Dmytro Hryshko
Micro-foundations: Consumption Instructor: Dmytro Hryshko 1 / 74 Why Study Consumption? Consumption is the largest component of GDP (e.g., about 2/3 of GDP in the U.S.) 2 / 74 J. M. Keynes s Conjectures
More informationPh.D. Preliminary Examination MICROECONOMIC THEORY Applied Economics Graduate Program June 2017
Ph.D. Preliminary Examination MICROECONOMIC THEORY Applied Economics Graduate Program June 2017 The time limit for this exam is four hours. The exam has four sections. Each section includes two questions.
More informationEco504 Spring 2010 C. Sims MID-TERM EXAM. (1) (45 minutes) Consider a model in which a representative agent has the objective. B t 1.
Eco504 Spring 2010 C. Sims MID-TERM EXAM (1) (45 minutes) Consider a model in which a representative agent has the objective function max C,K,B t=0 β t C1 γ t 1 γ and faces the constraints at each period
More informationMacro II. John Hassler. Spring John Hassler () New Keynesian Model:1 04/17 1 / 10
Macro II John Hassler Spring 27 John Hassler () New Keynesian Model: 4/7 / New Keynesian Model The RBC model worked (perhaps surprisingly) well. But there are problems in generating enough variation in
More informationProblem Set 3. Thomas Philippon. April 19, Human Wealth, Financial Wealth and Consumption
Problem Set 3 Thomas Philippon April 19, 2002 1 Human Wealth, Financial Wealth and Consumption The goal of the question is to derive the formulas on p13 of Topic 2. This is a partial equilibrium analysis
More informationChapter 4 Topics. Behavior of the representative consumer Behavior of the representative firm Pearson Education, Inc.
Chapter 4 Topics Behavior of the representative consumer Behavior of the representative firm 1-1 Representative Consumer Consumer s preferences over consumption and leisure as represented by indifference
More informationMacroeconomics Qualifying Examination
Macroeconomics Qualifying Examination January 211 Department of Economics UNC Chapel Hill Instructions: This examination consists of three questions. Answer all questions. Answering only two questions
More information. Social Security Actuarial Balance in General Equilibrium. S. İmrohoroğlu (USC) and S. Nishiyama (CBO)
....... Social Security Actuarial Balance in General Equilibrium S. İmrohoroğlu (USC) and S. Nishiyama (CBO) Rapid Aging and Chinese Pension Reform, June 3, 2014 SHUFE, Shanghai ..... The results in this
More informationFINANCIAL REPRESSION AND LAFFER CURVES
Kanat S. Isakov, Sergey E. Pekarski FINANCIAL REPRESSION AND LAFFER CURVES BASIC RESEARCH PROGRAM WORKING PAPERS SERIES: ECONOMICS WP BRP 113/EC/2015 This Working Paper is an output of a research project
More informationRamsey s Growth Model (Solution Ex. 2.1 (f) and (g))
Problem Set 2: Ramsey s Growth Model (Solution Ex. 2.1 (f) and (g)) Exercise 2.1: An infinite horizon problem with perfect foresight In this exercise we will study at a discrete-time version of Ramsey
More informationMicroeconomic Foundations of Incomplete Price Adjustment
Chapter 6 Microeconomic Foundations of Incomplete Price Adjustment In Romer s IS/MP/IA model, we assume prices/inflation adjust imperfectly when output changes. Empirically, there is a negative relationship
More informationChapter 6. Endogenous Growth I: AK, H, and G
Chapter 6 Endogenous Growth I: AK, H, and G 195 6.1 The Simple AK Model Economic Growth: Lecture Notes 6.1.1 Pareto Allocations Total output in the economy is given by Y t = F (K t, L t ) = AK t, where
More informationConsumption-Savings Decisions and Credit Markets
Consumption-Savings Decisions and Credit Markets Economics 3307 - Intermediate Macroeconomics Aaron Hedlund Baylor University Fall 2013 Econ 3307 (Baylor University) Consumption-Savings Decisions Fall
More informationECON 4325 Monetary Policy and Business Fluctuations
ECON 4325 Monetary Policy and Business Fluctuations Tommy Sveen Norges Bank January 28, 2009 TS (NB) ECON 4325 January 28, 2009 / 35 Introduction A simple model of a classical monetary economy. Perfect
More informationDesigning the Optimal Social Security Pension System
Designing the Optimal Social Security Pension System Shinichi Nishiyama Department of Risk Management and Insurance Georgia State University November 17, 2008 Abstract We extend a standard overlapping-generations
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2009
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Spring, 2009 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements,
More informationThe n-dimensional Bailey-Divisia Measure as a General-Equilibrium Measure of the Welfare Costs of In ation
The n-dimensional Bailey-Divisia Measure as a General-Equilibrium Measure of the Welfare Costs of In ation Rubens Penha Cysne Getulio Vargas Foundation May 2011 Graduate School of Economics (EPGE/FGV)
More informationThe Costs of Losing Monetary Independence: The Case of Mexico
The Costs of Losing Monetary Independence: The Case of Mexico Thomas F. Cooley New York University Vincenzo Quadrini Duke University and CEPR May 2, 2000 Abstract This paper develops a two-country monetary
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Spring, 2007
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Spring, 2007 Instructions: Read the questions carefully and make sure to show your work. You
More informationHousehold Saving, Financial Constraints, and the Current Account Balance in China
Household Saving, Financial Constraints, and the Current Account Balance in China Ayşe İmrohoroğlu USC Marshall Kai Zhao Univ. of Connecticut Facing Demographic Change in a Challenging Economic Environment-
More informationAchieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals
Achieving Actuarial Balance in Social Security: Measuring the Welfare Effects on Individuals Selahattin İmrohoroğlu 1 Shinichi Nishiyama 2 1 University of Southern California (selo@marshall.usc.edu) 2
More informationGraduate Macro Theory II: Fiscal Policy in the RBC Model
Graduate Macro Theory II: Fiscal Policy in the RBC Model Eric Sims University of otre Dame Spring 7 Introduction This set of notes studies fiscal policy in the RBC model. Fiscal policy refers to government
More informationConsumption and Asset Pricing
Consumption and Asset Pricing Yin-Chi Wang The Chinese University of Hong Kong November, 2012 References: Williamson s lecture notes (2006) ch5 and ch 6 Further references: Stochastic dynamic programming:
More informationThe Ramsey Model. Lectures 11 to 14. Topics in Macroeconomics. November 10, 11, 24 & 25, 2008
The Ramsey Model Lectures 11 to 14 Topics in Macroeconomics November 10, 11, 24 & 25, 2008 Lecture 11, 12, 13 & 14 1/50 Topics in Macroeconomics The Ramsey Model: Introduction 2 Main Ingredients Neoclassical
More informationThe Transmission of Monetary Policy through Redistributions and Durable Purchases
The Transmission of Monetary Policy through Redistributions and Durable Purchases Vincent Sterk and Silvana Tenreyro UCL, LSE September 2015 Sterk and Tenreyro (UCL, LSE) OMO September 2015 1 / 28 The
More informationCapital Income Tax Reform and the Japanese Economy (Very Preliminary and Incomplete)
Capital Income Tax Reform and the Japanese Economy (Very Preliminary and Incomplete) Gary Hansen (UCLA), Selo İmrohoroğlu (USC), Nao Sudo (BoJ) December 22, 2015 Keio University December 22, 2015 Keio
More informationIntroduction. The Model Setup F.O.Cs Firms Decision. Constant Money Growth. Impulse Response Functions
F.O.Cs s and Phillips Curves Mikhail Golosov and Robert Lucas, JPE 2007 Sharif University of Technology September 20, 2017 A model of monetary economy in which firms are subject to idiosyncratic productivity
More informationSentiments and Aggregate Fluctuations
Sentiments and Aggregate Fluctuations Jess Benhabib Pengfei Wang Yi Wen June 15, 2012 Jess Benhabib Pengfei Wang Yi Wen () Sentiments and Aggregate Fluctuations June 15, 2012 1 / 59 Introduction We construct
More informationThe Macroeconomics of Universal Health Insurance Vouchers
The Macroeconomics of Universal Health Insurance Vouchers Juergen Jung Towson University Chung Tran University of New South Wales Jul-Aug 2009 Jung and Tran (TU and UNSW) Health Vouchers 2009 1 / 29 Dysfunctional
More informationThe science of monetary policy
Macroeconomic dynamics PhD School of Economics, Lectures 2018/19 The science of monetary policy Giovanni Di Bartolomeo giovanni.dibartolomeo@uniroma1.it Doctoral School of Economics Sapienza University
More information1 Dynamic programming
1 Dynamic programming A country has just discovered a natural resource which yields an income per period R measured in terms of traded goods. The cost of exploitation is negligible. The government wants
More information. Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective. May 10, 2013
.. Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective Gary Hansen (UCLA) and Selo İmrohoroğlu (USC) May 10, 2013 Table of Contents.1 Introduction.2 Model Economy.3 Calibration.4 Quantitative
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements, state
More informationChapter 5 Macroeconomics and Finance
Macro II Chapter 5 Macro and Finance 1 Chapter 5 Macroeconomics and Finance Main references : - L. Ljundqvist and T. Sargent, Chapter 7 - Mehra and Prescott 1985 JME paper - Jerman 1998 JME paper - J.
More informationECON 815. A Basic New Keynesian Model II
ECON 815 A Basic New Keynesian Model II Winter 2015 Queen s University ECON 815 1 Unemployment vs. Inflation 12 10 Unemployment 8 6 4 2 0 1 1.5 2 2.5 3 3.5 4 4.5 5 Core Inflation 14 12 10 Unemployment
More informationIn the Name of God. Macroeconomics. Sharif University of Technology Problem Bank
In the Name of God Macroeconomics Sharif University of Technology Problem Bank 1 Microeconomics 1.1 Short Questions: Write True/False/Ambiguous. then write your argument for it: 1. The elasticity of demand
More informationBalance Sheet Recessions
Balance Sheet Recessions Zhen Huo and José-Víctor Ríos-Rull University of Minnesota Federal Reserve Bank of Minneapolis CAERP CEPR NBER Conference on Money Credit and Financial Frictions Huo & Ríos-Rull
More informationDynamic AD and Dynamic AS
Dynamic AD and Dynamic AS Pedro Serôdio July 21, 2016 Inadequacy of the IS curve The IS curve remains Keynesian in nature. It is static and not explicitly microfounded. An alternative, microfounded, Dynamic
More informationMidterm Exam. Monday, March hour, 30 minutes. Name:
San Francisco State University Michael Bar ECON 702 Spring 2019 Midterm Exam Monday, March 18 1 hour, 30 minutes Name: Instructions 1. This is closed book, closed notes exam. 2. No calculators of any kind
More informationNotes VI - Models of Economic Fluctuations
Notes VI - Models of Economic Fluctuations Julio Garín Intermediate Macroeconomics Fall 2017 Intermediate Macroeconomics Notes VI - Models of Economic Fluctuations Fall 2017 1 / 33 Business Cycles We can
More informationFinancing National Health Insurance and Challenge of Fast Population Aging: The Case of Taiwan
Financing National Health Insurance and Challenge of Fast Population Aging: The Case of Taiwan Minchung Hsu Pei-Ju Liao GRIPS Academia Sinica October 15, 2010 Abstract This paper aims to discover the impacts
More information1.3 Nominal rigidities
1.3 Nominal rigidities two period economy households of consumers-producers monopolistic competition, price-setting uncertainty about productivity preferences t=1 C it is the CES aggregate with σ > 1 Ã!
More informationChapter 9 Dynamic Models of Investment
George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Chapter 9 Dynamic Models of Investment In this chapter we present the main neoclassical model of investment, under convex adjustment costs. This
More informationINTERTEMPORAL ASSET ALLOCATION: THEORY
INTERTEMPORAL ASSET ALLOCATION: THEORY Multi-Period Model The agent acts as a price-taker in asset markets and then chooses today s consumption and asset shares to maximise lifetime utility. This multi-period
More informationLastrapes Fall y t = ỹ + a 1 (p t p t ) y t = d 0 + d 1 (m t p t ).
ECON 8040 Final exam Lastrapes Fall 2007 Answer all eight questions on this exam. 1. Write out a static model of the macroeconomy that is capable of predicting that money is non-neutral. Your model should
More informationThe Budgetary and Welfare Effects of. Tax-Deferred Retirement Saving Accounts
The Budgetary and Welfare Effects of Tax-Deferred Retirement Saving Accounts Shinichi Nishiyama Department of Risk Management and Insurance Georgia State University March 22, 2010 Abstract We extend a
More informationQuestion 1 Consider an economy populated by a continuum of measure one of consumers whose preferences are defined by the utility function:
Question 1 Consider an economy populated by a continuum of measure one of consumers whose preferences are defined by the utility function: β t log(c t ), where C t is consumption and the parameter β satisfies
More informationCash-in-Advance Model
Cash-in-Advance Model Prof. Lutz Hendricks Econ720 September 19, 2017 1 / 35 Cash-in-advance Models We study a second model of money. Models where money is a bubble (such as the OLG model we studied) have
More information1. Borrowing Constraints on Firms The Financial Accelerator
Part 7 1. Borrowing Constraints on Firms The Financial Accelerator The model presented is a modifed version of Jermann-Quadrini (27). Earlier papers: Kiyotaki and Moore (1997), Bernanke, Gertler and Gilchrist
More informationMacroeconomics: Policy, 31E23000, Spring 2018
Macroeconomics: Policy, 31E23000, Spring 2018 Lecture 8: Safe Asset, Government Debt Pertti University School of Business March 19, 2018 Today Safe Asset, basics Government debt, sustainability, fiscal
More informationSolutions to Problem Set 1
Solutions to Problem Set Theory of Banking - Academic Year 06-7 Maria Bachelet maria.jua.bachelet@gmail.com February 4, 07 Exercise. An individual consumer has an income stream (Y 0, Y ) and can borrow
More informationMulti-Dimensional Monetary Policy
Multi-Dimensional Monetary Policy Michael Woodford Columbia University John Kuszczak Memorial Lecture Bank of Canada Annual Research Conference November 3, 2016 Michael Woodford (Columbia) Multi-Dimensional
More information1 Answers to the Sept 08 macro prelim - Long Questions
Answers to the Sept 08 macro prelim - Long Questions. Suppose that a representative consumer receives an endowment of a non-storable consumption good. The endowment evolves exogenously according to ln
More informationIntermediate Macroeconomics
Intermediate Macroeconomics Lecture 12 - A dynamic micro-founded macro model Zsófia L. Bárány Sciences Po 2014 April Overview A closed economy two-period general equilibrium macroeconomic model: households
More informationCash in Advance Models
Cash in Advance Models 1 Econ602, Spring 2005 Prof. Lutz Hendricks, February 1, 2005 What this section is about: We study a second model of money. Recall the central questions of monetary theory: 1. Why
More informationAsset purchase policy at the effective lower bound for interest rates
at the effective lower bound for interest rates Bank of England 12 March 2010 Plan Introduction The model The policy problem Results Summary & conclusions Plan Introduction Motivation Aims and scope The
More informationSang-Wook (Stanley) Cho
Beggar-thy-parents? A Lifecycle Model of Intergenerational Altruism Sang-Wook (Stanley) Cho University of New South Wales March 2009 Motivation & Question Since Becker (1974), several studies analyzing
More informationEco504 Fall 2010 C. Sims CAPITAL TAXES
Eco504 Fall 2010 C. Sims CAPITAL TAXES 1. REVIEW: SMALL TAXES SMALL DEADWEIGHT LOSS Static analysis suggests that deadweight loss from taxation at rate τ is 0(τ 2 ) that is, that for small tax rates the
More informationConsumption, Investment and the Fisher Separation Principle
Consumption, Investment and the Fisher Separation Principle Consumption with a Perfect Capital Market Consider a simple two-period world in which a single consumer must decide between consumption c 0 today
More information14.05 Lecture Notes. Endogenous Growth
14.05 Lecture Notes Endogenous Growth George-Marios Angeletos MIT Department of Economics April 3, 2013 1 George-Marios Angeletos 1 The Simple AK Model In this section we consider the simplest version
More informationPart A: Questions on ECN 200D (Rendahl)
University of California, Davis Date: September 1, 2011 Department of Economics Time: 5 hours Macroeconomics Reading Time: 20 minutes PRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Directions: Answer all
More informationProblem set Fall 2012.
Problem set 1. 14.461 Fall 2012. Ivan Werning September 13, 2012 References: 1. Ljungqvist L., and Thomas J. Sargent (2000), Recursive Macroeconomic Theory, sections 17.2 for Problem 1,2. 2. Werning Ivan
More informationDynamic Macroeconomics: Problem Set 2
Dynamic Macroeconomics: Problem Set 2 Universität Siegen Dynamic Macroeconomics 1 / 26 1 Two period model - Problem 1 2 Two period model with borrowing constraint - Problem 2 Dynamic Macroeconomics 2 /
More informationExercises on the New-Keynesian Model
Advanced Macroeconomics II Professor Lorenza Rossi/Jordi Gali T.A. Daniël van Schoot, daniel.vanschoot@upf.edu Exercises on the New-Keynesian Model Schedule: 28th of May (seminar 4): Exercises 1, 2 and
More informationAnswers to Microeconomics Prelim of August 24, In practice, firms often price their products by marking up a fixed percentage over (average)
Answers to Microeconomics Prelim of August 24, 2016 1. In practice, firms often price their products by marking up a fixed percentage over (average) cost. To investigate the consequences of markup pricing,
More informationLecture 2 General Equilibrium Models: Finite Period Economies
Lecture 2 General Equilibrium Models: Finite Period Economies Introduction In macroeconomics, we study the behavior of economy-wide aggregates e.g. GDP, savings, investment, employment and so on - and
More informationSang-Wook (Stanley) Cho
Beggar-thy-parents? A Lifecycle Model of Intergenerational Altruism Sang-Wook (Stanley) Cho University of New South Wales, Sydney July 2009, CEF Conference Motivation & Question Since Becker (1974), several
More informationNon-Time-Separable Utility: Habit Formation
Finance 400 A. Penati - G. Pennacchi Non-Time-Separable Utility: Habit Formation I. Introduction Thus far, we have considered time-separable lifetime utility specifications such as E t Z T t U[C(s), s]
More informationChapter 4. Consumer and Firm Behavior: The Work- Leisure Decision and Profit Maximization. Copyright 2014 Pearson Education, Inc.
Chapter 4 Consumer and Firm Behavior: The Work- Leisure Decision and Profit Maximization Copyright Chapter 4 Topics Behavior of the representative consumer Behavior of the representative firm 1-2 Representative
More informationA simple wealth model
Quantitative Macroeconomics Raül Santaeulàlia-Llopis, MOVE-UAB and Barcelona GSE Homework 5, due Thu Nov 1 I A simple wealth model Consider the sequential problem of a household that maximizes over streams
More informationNominal Exchange Rates Obstfeld and Rogoff, Chapter 8
Nominal Exchange Rates Obstfeld and Rogoff, Chapter 8 1 Cagan Model of Money Demand 1.1 Money Demand Demand for real money balances ( M P ) depends negatively on expected inflation In logs m d t p t =
More informationOptimal Credit Market Policy. CEF 2018, Milan
Optimal Credit Market Policy Matteo Iacoviello 1 Ricardo Nunes 2 Andrea Prestipino 1 1 Federal Reserve Board 2 University of Surrey CEF 218, Milan June 2, 218 Disclaimer: The views expressed are solely
More informationWhy are Banks Exposed to Monetary Policy?
Why are Banks Exposed to Monetary Policy? Sebastian Di Tella and Pablo Kurlat Stanford University Bank of Portugal, June 2017 Banks are exposed to monetary policy shocks Assets Loans (long term) Liabilities
More informationR.E.Marks 1997 Recap 1. R.E.Marks 1997 Recap 2
R.E.Marks 1997 Recap 1 R.E.Marks 1997 Recap 2 Concepts Covered maximisation (& minimisation) prices, CPI, inflation, purchasing power demand & supply market equilibrium, gluts, excess demand elasticity
More information