Classical Keynesian Monetarist New Classical. M is one of the AD components. Adaptive (backward looking)

Transcription

1 LECTURE NOTES Chapter 13: Macrecnmic Mdels: A Summary 1. Theretical Issues Classical Keynesian Mnetarist New Classical Labr demand ( ) ( ) ( ) ( ) Labr supply ( ) ( ) ( ) ( ) Aggregate demand Aggregate supply Expectatins Depends nly n M M is ne f the AD cmpnents Depends nly n M Vertical SRAS: ( ) SRAS: ( ) Perfect infrmatin: N expectatins Adaptive (backward lking) Adaptive (backward lking) The market Always in equilibrium Unstable Shck absrber M is ne f the AD cmpnents SRAS: ( ) Ratinal (frward lking) In disequilibrium if unexpected shck RBC: New Classical mdel but with supply shcks rather than AD shcks Page 1 f 8

2 2. Plicy Issues Classical mdels: Free market psitin Keynesian mdels: Market interventin psitin This can g frm intervene when necessary t scialize investment (J. M. Keynes) Page 2 f 8

3 3. Cnsensus as Well as Cntrversy What is the cnsensus acrss mdels? The quantity thery f mney: High inflatin can nly be explained with increase in mney supply Ratinal expectatins Few, if any, mdels use simple backward expectatins any mre. Unless there is a gd reasn, mdels are expected t be cnsistent with ratinal expectatins All mdern mdels accept that AD has a rle in determining utput Why cntrversy? It is nt abut the ability t perfrm labratry experiments This is a very ld (rarely held) epistemlgical psitin Labratry experiments cannt prve nr disprve a thery (Duhem-Quine thesis) It is abut assumptins cnsidered t be true a priri This means that empirical evidence and scientific discussin needs t persuasive Page 3 f 8

4 4. Macrecnmics Ging Frward The financial crisis f 2008 was the largest ne since the Great Depressin Hw is it pssible that it was cmpletely unfreseen Hw, just a few mnths befre the husing bubble burst, the Fed Chairman claim that there is n husing bubble Real wrld data is interpreted at the light f given theries Are macr theries well grunded (regardless f their mathematical cnsistency)? Read Ricard Caballer s paper Page 4 f 8

5 5. Digressin: Imprtant Ecnmic Tpics yu need t Knw Relative prices inside P Resurce allcatin des nt depend n, it depends n the prices inside P and W. Resurce allcatin depends n relative prices, nt n aggregate price indices If there are n gds and m different types f labr: Ecnmic rder (equilibrium) des nt depend n aggregates like, but n the cmbinatin f different relative prices: If macr des nt deal with relative prices, hw much explaining is actually ding and hw much f the prblem t explain is being assumed away? If macrecnmics des nt have micrecnmics, it is still ecnmics? That s why macr needs t have micrecnmic fundatins. Hwever Micrecnmic fundatins: Representative Agents Mdels are ppulated by n identical agents Therefre t mdel nly ne cnsumer and ne firm is enugh t represent all ecnmic agents Hwever: Exchange (the market prcess) ccurs because ecnmic agents are different rather than equal Yu cannt explain the market by assuming everyne is an identical Rbinsn Cruse Example: Business cycles may be driven by decisins f sme (marginal) entrepreneurs (nt all f them). This apprach is unable t capture this effect Say s Law Supply creates its demand Imprtant: Demand = preferences + purchasing pwer Then, hw much yu can demand depends n the market value f yur supply (nt in the physical quantity prduced) This means that there cannt be an excess f demand at the aggregate level, nly excess in sme markets with shrtages in ther markets But this als means that there cannt be a shrtage f demand at the aggregate level. If Say s Law is true, what happens then t Keynesian mdels? Fr Say s Law t nt hld ne f gd shuld nt be cnsidered a gd: mney This is why t demand mney (harding) is cnsidered bad (saving > investment) But mney has a price, therefre it is an ecnmic gd Page 5 f 8

6 Frank H. Knight: Risk versus Uncertainty Risk is measurable The prbability f having f yur huse burning Uncertainty is unmeasurable (different than nt having a measure) Future market cnditins (demand, supply, etc.) Risk can be cvered with insurance (a bet against neself) There is n insurance against uncertainty Ecnmic agents face (1) risk and (2) uncertainty Mathematical mdels are nt designed t handle uncertainty Mathematical mdels are either incmplete r misdirected depending hw imprtant yu think uncertainty is Capital Thery Hetergeneity Financial capital: Hw much mney is needed t fund a prject Capital (gds): Actual physical gds used t prduce ther gds Capital gds are neither cmpletely hmgeneus nr hetergeneus Efficient capital allcatin is the efficient cmbinatin f hetergeneus capital gds Think f a jigsaw puzzle, all pieces are different (hetergeneus) but can be cmbined in different ways t prduce different shapes If ecnmics is abut resurce allcatin, then t assume capital is hetergeneus is t assume the ecnmic prblem away This has led t three capital thery cntrversies Böhm-Bawerk versus Jhn B. Clark Friedrich A. vn Hayek versus Frank H. Knight Cambridge US versus Cambridge UK Page 6 f 8

7 Capital Cntrversies Cnsider the prfit functin: Q is quantity f gd i per USD ( ). Similarly, N is ne hur f wrk per USD Then PQ and wn are numerical amunts f USD Hwever, K is in mney terms, and r is an interest rate. Then rk is als a mney term There are n capital gds Fr instance: P, Q, w, and N are vectrs, but K (and r) is a scalar [just ne number] r is the price f capital The price f capital is the marginal prductivity f capital The marginal prductivity f capital depends n the present value f future utput The present value is discunted with the interest rate ( ) Then there is a circular reference r depends n the marginal prductivity f capital Marginal prductivity f capital depends n r Unless r is the price f time, nt the price f capital gds. The price f capital gds is hw much yu have t pay t buy the capital gd ( ) Yu can buy the input required t build a tractr Or yu can buy the tractr already dne tday The difference in price is due t the price f time (interest rate) The (natural) interest rate equilibrates the price f capital gds between tday and tmrrw Time Structure f Prductin Prductin takes time Time has a price: the interest rate Then time is a scarce resurce Therefre, time allcatin shuld als be efficient (avid bttleneck effect in the chain f prductin) Pedaggically, this is captured in the Hayekian triangle (riginally depicted by Stanley Jevns) Output ges thrugh different stages f prductin Page 7 f 8

8 Hw much capital (and labr) shuld be allcated in each stage? Interest rate gverns hw lng prductin shuld take and hw much resurces wuld be allcated n each stage Nne f the mdels seen s far accunt fr time If the study f ecnmics is the study f prducing gds and services, and prductin takes time, shuldn t time be a key variable? Mney neutrality is an assumptin, nt a fact Mney neutrality: Unexpected shcks t mney supply have effects n resurce allcatin in the shrt run but nt in the lng run. The ecnmy returns t the same equilibrium it wuld have gne withut the mnetary shck (the nly difference is n nminal values: price level, etc.) Equilibrium depends n the lcatin f demand and supply Demand depends n preferences Supply depends n technlgy and the existence f resurces and inputs Then: (1) capital gds are hetergeneus (2) a mnetary shck affects relative prices (3) resurce allcatin is affected and capital gds transfrmed t prduce particular gds (4) If resurce endwment r preferences change, then equilibrium with and withut a mnetary shck will differ. Then mney supply is nt neutral Super-neutrality: Mney is neutral als in the shrt run Signal extractin prblem Ecnmic agents may crrectly predict a rise f x% n P. But they cannt predict hw each will behave until the new level f P is reached T assume such knwledge is like ging back frm ratinal expectatins t perfect infrmatin Page 8 f 8