Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Macro > Ascari > Flashcards

Ascari Flashcards

1
Q

In response to a contractionary monetary policy shock

A 
interest rates up
money supply down
price responds little initially
output down (hump shaped)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Price puzzle

A

initially positive response of inflation in VAR IRFs
omitted variable
Look at a model intended to explain it none the less (with wage bills borrowed)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Monetary policy shocks

A

Non-endogenous response
That’s why they have little output effect
Good sign for policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Superneutrality

A

No long-run trade-off between the rate of inflation and unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

5 steps to solve classic model

A
  1. Solve agents’ optimal problems
  2. Steady state
  3. Log-linearise around steady state
  4. System of difference equations and solve for recursive law of motion
  5. Calculate IRFs in response to shocks
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Classic monetary model results

A

Neutral and superneutral in long-run
Neutral also in short run
(so real variables don’t depend on mon. pol.)
Price level responds more than one-of-one with increase in mon. sup.
nominal interest rate increases after increase in money supply (no liquidity effect)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

An exogenous path for the interest rate leads to

A

indeterminacy (all nominal variables)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Taylor principle to pin down unique equilibrium

A

Response to inflation >1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

General approaches to including money

A

Money in utility function
Transaction costs/ transaction technology
Search
OLG intertemporal transfers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

VAR effects of mon pol shock

A

output significant
unemployment significant
inflation significant and puzzling
Neoclassical with money cannot repeat

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

NK frictions needed

A 
Sticky prices (nominal rigidity)
Monopolistic competition (price setting)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Is excluding sales to get price stickiness a problem

A

Yes for distributional consequences
No for aggregate policy response
Frequency may not be independent of policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

2 stages to NK household problem

A
  1. Decide amount of consumption and labour (normal way)

2. Decide how to allocate consumption across goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Firms’ marginal costs

A

Identical across i due to constant returns to scale

=Wt/At

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Optimal price markup

A

e/(e-1)>1
e is really epsilon
P=markupMC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Calvo

A

proportion of firms can change price (1-theta), rest have to stay at previous price
implied average change 1/(1-theta)
higher theta, greater price stickiness

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

NKPC

A

New-Keynesian Phillips Curve
All in deviations
inflation=Amc+BE(inflationt+1)
A is a constant which depends on theta and B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

inflation equals PDV of future marginal costs

A

it does, remember this!

=AEsum(B^k*mct+k)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Higher degree of price stickiness leads to what in NKPC

A

Weaker effect of change in future mc on output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

2nd equation in NKPC model

A

IS:
output deviation from natural rate=E(output deviation from natural rate t+1)-constant*(i-E(inflation t+1)- natural rate of interest)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Output gap = what function of real rate deviations?

A

Proportional to sum of current and expected deviations of short real rate from natural rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

3 NK equations

A

NKPC
IS
Taylor rule (interest rate policy rule)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How to check determinacy

A 
write NK model in the form contemporaneous inflation and output= A (expectations) + B (rate and shock)
Key thing is A
need both eigenvalues in the unit circle
means det(A)<1
trace(A)<1+det(A)
24
Q

Taylor princible

A

Necessary and sufficient condition for unique equilibrium:
k(fipi-1)+(1-B)fiy>0
implies fipi>0 when fiy=0
(1-B)/k is long run multiplier of inflation on output
Can be generalised for different Taylor rules

25
Q

Under aggressive monetary policy (Taylor principle) belief shocks…

A

have no macroeconomic effects
so high expected inflation equilibrium cannot be supported by rational expectations
nominal and real rates move in same direction

26
Q

Under weak policy, belief shocks may

A

lead to self-fulfilling inflation expectations

27
Q

Effects of mon pol shock

A

i up means r higher than natural
relative prices up so HHs postpone cons
y falls
therefore pi falls too

28
Q

Effects of a tech shock

A 
natural y up, mc down, natural r down
y up but not to new natural yet
so output gap <0
inflation down due to -ve output gap
interest rates down too, more than 1-2-1 with pi
29
Q

Money supply rule instead of interest rates

A

model always determined under exog money supply
relatively in line with empirical evidence but no humped shaped responses, persistence is due to shock assumptions (not endog)

30
Q

Inflation persistence problem

A

Fuhrer and Moore 1995
Inflation autocorrelation remains positive for 4 years
Problem because traditional NKPC is purely forward looking jump variable
Also implies disinflationary booms (ie rise in unemployment leads to higher expected inflation)

31
Q

Theoretical vs empirical output gap

A

Detrended GDP potentially poor proxy for theoretical output gap

32
Q

Hybrid Phillips Curve

A

Derivation of NKPC with past inflation

33
Q

Ways of generating intrinsic inflation persistence

A
  1. Rule of thumb firms (Gali Gertler)
  2. Indexation
  3. Sticky expectations (adaptive or learning)
  4. Sticky info
  5. Sheedy
34
Q

Indexation

A

Non-reoptimising price firms partially update prices according to past inflation
But extent of indexation is not structural parameter in Lucas sense

35
Q

Sticky info

A

Inflation depends on past expectations of current variables rather than current expectations of future
(maybe can’t accurately observe contemporaneous inflation so must guess it)

36
Q

Sheedy

A

Hazard function

37
Q

Key feature of evidence on inflation persistence

A

Breaks in persistence

38
Q

Reason for indeterminacy in 70s

A

Didn’t meet Taylor principle in policy
Need to react more aggressively
Is this really what happened?

39
Q

Why might they not have missed Taylor principle in 70s?

A

Measurement error
Data suggesting they did is not the data they were making decisions with at the time
Real time Taylor rule very close to actual policy rate
Volker policy more aggressive than real time taylor rule (but maybe he was updating his beliefs after misses before- in the end he was more accurate)

40
Q

Mismeasurement trends in 70s

A

Inflation constantly underpredicted

underestimated the NAIRU

41
Q

Note on indeterminacy and temporary taylor principle violations

A

Still unique equil as long as agents expect policy to satisfy Taylor principle on average
As depends on what people think is steady state

42
Q

Counterfactual analysis of monetary policy impact on great moderation

A

Changes in monetary policy had relatively small role

Lucky with good shocks!

43
Q

Rank of Fed chairs with higher inflation response parameter top

A

Volker
Burns-Miller (70s)
Greenspan

44
Q

Maybe Greenspan the worst and luckiest fed chair

A

there you go

45
Q

Evidence on Taylor summary

A 
Evidence of breaks in policy and shock volatility
Systematic mon pol important for inflation dynamics
Tech shocks (particularly investment-specific) responsible for evolution of output growth
46
Q

effects of expansionary monetary policy shock in VAR

A
  1. Real variables effected
  2. Hump shaped with peak after 1.5-2yrs
  3. inflation response sluggish, hump shaped peaking 2yrs
  4. Interest rate falls for 1yr
  5. real profits, wages, labour productivity rise
  6. Liquidity effect: growth rate of money rises immediately
47
Q

How solve hump shaped response in cons and persistent fall in real rate?

A

Habit persistence

marginal utility of cons inversely proportional to change in cons not level

48
Q

How solve investment hump shaped response problem

A

Adjustment costs in changing investment (so also 2nd order sort of thing)

49
Q

How solve inflation persistence with hump (and output)

A

Make marginal cost inertial
Can add wage staggering (some market power for labour)
Also problem with forward looking so add some inertia like indexation
Also could have variable capital utilisation
Firm specific factor inputs (means firms internalise the effect their demand has on the price of that input)

50
Q

How to get the price puzzle?

Hardest thing

A

Working capital - firms borrow the wage bill

Even still depends on parameter values which would have to be unrealistic

51
Q

How to get the liquidity effect?

Also really hard

A

Limited participation like cash in advance

52
Q

2 types of frictions

A

real

nominal

53
Q

Real frictions

A 
habit
adjustment costs
variable utilisation - muted response of mc, output and inflation persistence there
firm specific indicator
intermediate goods
54
Q

Nominal frictions

A

Sticky prices
Sticky wages
Backward looking indexation - increased persistence
Limited participation in asset market - liq. effect
Working capital

55
Q

Investment shocks and costs are relevant

A

they improve forecast power

they are the most relevant

56
Q

Many frictions may be subject to…

A

Lucas Critique!

Macro (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions