final Flashcards
(207 cards)
1
Q
Growth
A
is the steady increase in aggregate output over time.
2
Q
measuring the standard of living
A
- We care about growth because we care about the standard of living.
- Output per person, rather than output itself, is the variable we compare over time or across countries.
- We need to correct for variations in exchange rates and systematic differences in prices across countries.
- When comparing the standard of living across countries, we use purchasing power parity (PPP) numbers which adjust the numbers for the purchasing power of different countries.
3
Q
Growth in Rich Countries since 1950
A
Countries with lower levels of output per person in 1950 have typically grown faster.
4
Q
Change in Growth in Rich Countries since 1950 VS 1960
A
When we look at 85 countries for which we have data, we see that there is no clear relation between the growth rate of output since 1960 and the level of output per person in 1960.
5
Q
For the OECD countries, evidence of convergence.
A
For the OECD countries, there is clear evidence of convergence.
- Convergence is also visible for many Asian countries, especially for those with high growth rates, called the four tigers—Singapore, Taiwan, Hong Kong, and South Korea.
- Most African countries were very poor in 1960, and some of them had negative growth of output per person between 1960 and 2011 due in part to internal or external conflicts.
6
Q
aggregate production function
A
Y = F ( K, N)
where Y is output,
K is capital, and N is labour.
The function F depends on the state of technology.
susieja visą ekonomikos produkciją su visu ekonomikoje įdarbinto darbo kiekiu
7
Q
Y = F ( K, N)
A
aggregate production function
where Y is output,
K is capital, and N is labour.
The function F depends on the state of technology.
8
Q
constant returns to scale:
A
xY =F ( xK, xN)
tai, kas atsitinka su ilgalaike grąža, kai didėja gamybos mastas, kai visi sąnaudų lygiai, įskaitant fizinio kapitalo naudojimą, yra kintami.
9
Q
production function and constant returns to scale imply
A
a simple relation between output per worker (Y/N) and capital per worker (K/N):
Y/N = F * ( K / N, 1)
10
Q
Decreasing returns to capital:
A
Increases in capital, given labour, lead to smaller and smaller increases in output per worker.
Kapitalo padidėjimas, atsižvelgiant į darbo jėgą, lemia vis mažesnį produkcijos vienam darbuotojui padidėjimą.
11
Q
Decreasing returns to labour:
A
Increases in labour, given capital, lead to smaller and smaller increases in output.
Darbo jėgos padidėjimas, atsižvelgiant į kapitalą, lemia vis mažesnį gamybos padidėjimą.
12
Q
Increases in capital per worker:
A
Movements along the production function.
13
Q
Improvements in the state of technology:
A
Shifts (up) of the production function, lead to an increase in output per worker for a given level of capital per worker.
14
Q
Growth comes from
A
capital accumulation (a higher saving rate) and technological progress (the improvement in the state of technology)
15
Q
Interactions between Output and Capital since 1970
A
Since 1970, the US saving ratio—the ratio of saving to gross domestic product—has averaged only 17%, compared to 22% in Germany and 30% in Japan.
Even if a lower saving rate does not permanently affect the growth rate, it does affect the level of output and the standard of living
16
Q
Output, in the long run, depends on two relations
A
- The amount of capital determines the amount of output
- The amount of output being produced determines the amount of saving, which in turn determines the amount of capital being accumulated over time.
17
Q
Higher capital per worker leads to …
A
to higher output per worker.
18
Q
Assume: the economy is closed, public saving is 0, and private saving is proportional –> So the relation between output and investment:
A
The economy is closed: I = S + (T − G)
Public saving (T − G) is 0: I = S
Private saving is proportional to income: S= sY
where s is a saving rate, which has a value between 0 and 1.
So the relation between output and investment:
It = sYt
19
Q
It = sYt
A
Investment is proportional to output.
The higher (lower) output is, the higher (lower) is saving and so the higher (lower) is investment
20
Q
It = sYt
the economy, public savings, and private savings are:
A
The economy is closed: I = S + (T − G)
Public saving (T − G) is 0: I = S
Private saving is proportional to income:S = sY
where s is a saving rate, which has a value between 0 and 1.
21
Q
The change in the capital stock per worker
A
is equal to saving per worker minus depreciation:
s* Yt/N - δ* Kt / N
Capital per worker refers to the measure of how much capital exists in the economy and how good that capital is. Moreover, improvement in the quality of capital per worker leads to economic growth since employees will make more services and goods with better capital.
22
Q
δ meaning
A
where (delta) is capital depreciation.
23
Q
If investment per worker exceeds (is less than) depreciation per worker
A
If investment per worker exceeds (is less than) depreciation per worker –> the change in capital per worker is positive (negative).
24
Q
When capital and output are low –> …
When capital and output are high –> …
A
When capital and output are low, investment exceeds depreciation and capital increases.
When capital and output are high, investment is less than depreciation and capital decreases.
25
Steady state of the economy.
The state in which output per worker and capital per worker are no longer changing is called the steady state of the economy.
26
The steady-state value of capital per worker
The steady-state value of capital per worker is such that the amount of saving per worker is sufficient to cover depreciation of the capital stock per worker.
27
The saving rate
has no effect on the long-run growth rate of output per worker, which is equal to zero.
The saving rate determines the level of output per worker in the long run.
An increase in the saving rate will lead to higher growth of output per worker for some time, but not forever.
28
A country with a higher saving rate achieves
a higher steady-state level of output per worker.
29
An increase in the saving rate leads to a
period of higher growth until output reaches its new higher steady-state level
30
Golden-rule level of capital:
The level of capital associated with the saving rate that yields the highest level of consumption in a steady state.
31
Implications of Alternative saving Rates
What matters to people is not how many is produced, but how much they consume.
32
For a saving rate between zero and the golden-rule level
a higher saving rate leads to higher capital per worker, higher output per worker and higher consumption per worker in the long-term.
33
For a saving rate greater than the golden-rule level leads
a higher saving rate still leads to higher capital per worker and output per worker, but lower consumption per worker.
34
In the long run, output per worker doubles when
the saving rate doubles.
35
It takes a long time for output to adjust to its new higher level after
an increase in the saving rate. Put another way, an increase in the saving rate leads to a long period of higher growth.
36
Human capital (H):
the set of skills of the workers in the economy is built through education and on-the-job training.
37
As for physical capital (K)
accumulation, countries that save more or spend more on education can achieve higher steady-state levels of output per worker.
38
Models of endogenous growth
: Steady-state growth in output per worker depends on variables such as the saving rate and the rate of spending on education, even without technological progress
the current consensus is that given the rate of technological progress, higher rates of saving or spending on education do not lead to a permanently higher growth rate.
39
to compare the standard of living across countries we use:
purchasing power parity (PPP)
numbers which adjust the numbers for the purchasing power of different countries.
40
Technological progress can lead to:
*larger quantities of output for given quantities of capital and labour
*better products
*new products
*a large variety of products.
41
The state of technology (A)
is a variable that tells us how much output can be produced from given amounts of capital and labour at any time:
Y = F ( K, AN )
42
AN
so AN is the amount of effective labour.
43
effective labour
AN
44
With constant returns to scale and a given state of technology (A), if the amounts of capital and labour changes by x times,
output changes by x times: xY = F (xK, xAN)
45
If x = 1/AN, output per effective worker is a function of capital per effective worker:
Y / AN = f ( K / AN)
46
Because of decreasing returns to capital, increases in capital per effective worker lead to
smaller and smaller increases in output per effective worker.
47
When the economy is in a steady state, capital per worker and output
per worker grow at the rate of technological progress (gA).
48
The steady state of the economy is such that capital per effective worker and output per effective worker are
constant and equal to (K/AN)* and (Y/AN)*, respectively
49
On the balanced growth path (steady state or long run):
* Capital per effective worker and output per worker are constant.
* Capital per worker and output per worker are growing at the rate of technological progress.
* Capital and output are growing at a rate equal to the sum of population growth and the rate of technological progress.
50
An increase in the saving rate leads to an
increase in the steady-state levels of output per effective worker and capital per effective worker.
51
The increase in the saving rate leads to higher growth until
the economy reaches its new, higher, balanced growth path.
52
Most technological progress is
the outcome of firms’ research and development (R&D) activities.
53
The level of R&D spending depends
not only on the fertility of research (how spending on R&D translates into new ideas and new products)
but also on the appropriability of research results (the extent to which firms can benefit from the results of their own R&D).
54
Patents give a firm
that has discovered a new product the right to exclude anyone else from the production or use of that new product for some time.
55
Some researchers believe that management practices
might be stronger than many of the other factors that determine a firm’s performance, including technological innovations.
56
After the Korean War, South Korea has provided private ownership and legal protection of
private producers, while North Korea relied on central planning with no property rights for individuals
Fifty years later, GDP per person was 10 times higher in South Korea.
57
To sustain growth must:
To sustain growth, advanced countries that are at the technology frontier must innovate.
58
Poorer countries that are further from the technological frontier, can instead grow largely by ...
by imitating rather than innovating, by importing and adapting existing technologies instead of developing new ones.
59
The difference between innovation and imitation explains
why countries that are less technologically advanced often have poor patent protection (e.g. China).
60
technological progress is the key to
increases in the standard of living.
61
technological progress is often blamed
for higher unemployment and for higher income inequality (bet statistika rodo kad didesnis darbingumas su technologijom)
62
For simplicity, we ignore capital so that the production function becomes:
Y = A N
so output is produced using only labour.
63
N = Y / A
employment equals output divided by productivity.
64
increase in productivity may increase or decrease the demand for goods. Thus, it may shift the
IS curve to the left or to the right. What happens depends on what triggered the increase in productivity in the first place.
65
there is a strong positive relation between output growth and productivity growth. But the causality runs from
output growth to productivity, not the other way around.
66
In the medium run, the economy tends to return
to the natural level of unemployment.
67
technological unemployment typically resurfaces
whenever unemployment is high, e.g., the Great Depression
Because the natural rate of unemployment is determined by the price-setting relation and the wage-setting relation (Chapter 7), we can consider how changes in technology affect each of the two relations.
68
increase in productivity
shifts both the wage- and the price-setting curves by the same proportion and thus has no effect on the natural rate.
69
There is little relation between the 10-year averages of productivity growth and the 10-year averages of the unemployment rate.
If anything, higher productivity growth is associated with lower unemployment.
70
Productivity and the Natural Rate of Unemployment In the short run
there is no reason to expect a systematic relation between movements in productivity growth and movements in unemploymen
71
Productivity and the Natural Rate of Unemployment In the medium run
if there is a relation between productivity growth and unemployment, it appears to be an inverse relation.
An inverse relationship is a situation where if one variable increases, the other tends to decrease
72
Fears of technological unemployment probably come from structural change
– the change in the structure of the economy induced by technological progress.
73
Openness in goods markets
The ability of consumers and firms to choose between domestic goods and foreign goods.
Even countries most committed to free trade have tariffs (taxes on imported goods) and quotas (restrictions on the quantity of goods that can be imported).
74
Openness in financial markets
The ability of financial investors to choose between domestic assets and foreign assets — until recently, even some rich countries had capital controls — restrictions on the foreign assets their domestic residents could hold and the domestic assets foreign could hold.
75
Openness in factor markets
The ability of firms to choose where to locate production, and of workers to choose where to work,
e.g., the North American Free Trade Agreement (NAFTA) signed in 1993 by the United States, Canada, and Mexico centered on how it would affect the relocation of US firms to Mexico.
76
Openness in Goods Markets
Since 1960, exports and imports have more than doubled in relation to GDP. The EU has become an increasingly open economy.
77
Real exchange rate
The price of domestic goods relative to foreign goods.
78
Nominal exchange rate
The price of the domestic currency in terms of foreign currency.
79
(Nominal) Appreciation
An increase in the price of the domestic currency in terms of a foreign currency, i.e., an increase in the exchange rate.
80
(Nominal) Depreciation:
A decrease in the price of the domestic cucurrency in terms of a foreign currency, i.e., a decrease in the exchange rate.
81
Although the euro has appreciated relative to the pound,
this appreciation has come with large swings in the nominal exchange rate between the two currencies (2022-11-21: 1Eur = 0.87GBP)
82
The real exchange rate
the price of euro area goods in terms of UK goods, is ----> ε = EP/P*
ε - real exchange rate
E – exchange rate
P – domestic price level
P* – foreign price level
83
The real exchange rate formula
ε = EP/P*
ε - real exchange rate
E – exchange rate
P – domestic price level
P* – foreign price level
84
ε
real exchange rate
85
real exchange rate example
Ferrari is Italian product, while Jaguar is British luxury car.
Assume that the price of Jaguar is £40,000 and the price of Ferrari is €200,000. 1 EUR = 0.87 GBP. The price of Ferrari in pounds is €200,000 x £0.87 = £174,000.
The price of Ferrari in terms of Jaguars – real exchange rate between the euro area and the UK – £174,000/£40,000 = £4.35.
Ferrari is more than 4 times more expensive than a Jaguar.
86
Real appreciation:
An increase in the real exchange rate, i.e., an increase in the relative price of domestic goods in terms of foreign goods.
87
Real depreciation:
A decrease in the real exchange rate, i.e., a decrease in the relative price of domestic goods in terms of foreign goods.
88
Reasons of recent euro depreciation against US dollar:
monetary policy divergence, US dollar as safe-haven currency, (energy prices)
89
Multilateral exchange rate
is a weighted average of bilateral exchange rates, with the weight for each foreign country equal to its share in trade
yra dvišalių valiutų kursų svertinis vidurkis, kai kiekvienos užsienio šalies svoris yra lygus jos daliai prekyboje
90
The nominal effective exchange rate (NEER)
of the euro is a weighted average of nominal bilateral rates between the euro and a basket of foreign currencies. It is an indicator of the external values of the euro vis-à-vis the currencies of selected euro area’s trading partners
eurų yra nominaliųjų dvišalių euro ir užsienio valiutų krepšelio kursų svertinis vidurkis. Tai euro išorinės vertės, palyginimas su pasirinktų euro zonos prekybos partnerių valiutomis, rodiklis.
91
Foreign exchange:
Buying and selling foreign currency.
92
Balance of payments (BOP):
A set of accounts that summarize a country’s transactions with the rest of the world. The BOP divides transactions into two accounts: the current account and the capital account.
92
Balance of payments (BOP):
A set of accounts that summarize a country’s transactions with the rest of the world. The BOP divides transactions into two accounts: the current account and the capital account.
93
Current account, the sum of:
Exports and imports of goods and services (trade balance)
Net income balance between income received from the rest of the world and income paid to foreigners
Net transfers - the difference in foreign aid given and received
94
Capital account
measures the changes in national ownership of assets.
95
Capital account balance
is equal to capital inflows from the rest of the world minus capital outflows to the rest of the world
96
Capital account surplus:
Positive net capital inflows.
97
Capital account deficit:
Negative net capital outflows
98
Current account + capital account =
0
99
Statistical discrepancy:
Difference between current and capital account transactions.
100
GDP measures
value added domestically
101
Gross national product (GNP) measures
the value added by domestic factors of production
102
GNP formula
GNP= GDP + NI
NI denotes net income—payments received from the rest of the world minus income paid to the rest of the world.
103
NI
NI denotes net income—payments received from the rest of the world minus income paid to the rest of the world.
104
Uncovered interest parity
is an arbitrage condition stating that the expected rates of return in terms of domestic currency on domestic bonds and foreign bonds must be equal.
105
Interest parity
implies that the domestic interest rate must be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.
106
Interest parity
implies that the domestic interest rate must be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.
atspindinti pusiausvyros būseną, pagal kurią investuotojai gali taikyti palūkanų normas už bankų indėlius dviejose šalyse.
107
Openness in goods markets allows
people and firms to choose between domestic goods and foreign goods. This choice depends primarily on the real exchange rate.
108
Openness in financial markets allows
investors to choose between domestic assets and foreign assets. This choice depends primarily on their relative rates of return, and on the expected rate of appreciation of the domestic currency.
109
In an open economy, the demand for domestic goods formula
Z + C + I + G - IM / ε + X
110
IM / ε
the value of imports in terms of domestic goods
111
C, I, and G constitute the
total domestic demand for goods, domestic or foreign.
112
domestic demand formula
C + I + G = C ( Y - T ) + I ( Y , r ) + G
113
Imports are positively related
to domestic income (Y) and the real exchange rate (ε): IM = IM ( Y, ε)
114
Exports are positively related
to foreign income (Y*) and negatively related ε:
X = X ( Y* ,ε)
115
The demand for domestic goods and net exports:
The demand for domestic goods and net exports:
a) The domestic demand for goods is an increasing function of income (output).
(b and c) The demand for domestic goods is obtained by subtracting the value of imports from domestic demand and then adding exports.
(d) The trade balance is a decreasing function of output
116
what shows AA, DD, ZZ
The line AA represents the domestic demand for domestic goods, and the line DD represents domestic demand.
AA is flatter than DD.
The line ZZ represents the demand for domestic goods (including exports).
The distance between ZZ and AA is constant because exports do not depend on domestic income but they depend on foreign income.
117
The goods market is in equilibrium when
domestic output is equal to the demand for domestic goods.
At the equilibrium level of output, the trade balance may show a deficit or a surplus.
118
Differences from a closed economy:
Effect on trade balance: An increase in output leads to a trade deficit.
Smaller effect of government spending on output: Because ZZ is flatter than DD, the multiplier is smaller in the open economy.
An increase in government spending leads to an increase in output and to a trade deficit.
119
An increase in foreign demand leads to
an increase in output and to a trade surplus.
120
Summary of Demand− Domestic or Foreign
An increase in domestic demand leads to an increase in domestic output but leads also to a deterioration of the trade balance.
An increase in foreign demand leads to an increase in domestic output and an improvement in the trade balance.
121
Implications of Demand− Domestic or Foreign
Shocks to demand in one country affect all other countries.
.
.
Economic interactions complicate the task of policy makers. Policy coordination is not so easy to achieve.
122
Real deprecation affects the trade balance through three separate channels:
Exports, X, increase.
Imports, IM, decrease.
The relative price of foreign goods in terms of domestic goods, 1/ε , increases.
123
Marshall–Lerner condition
A real depreciation leads to an increase in net exports.
Depreciation leads to a shift in demand, both foreign and domestic, toward domestic goods. The shift in demand leads, in turn, to both an increase in domestic output and an improvement in their trade balance.
124
If the government wants to eliminate the trade deficit without changing output, it must do two things:
achieve a depreciation sufficient to eliminate the trade deficit
reduce government spending so as to shift ZZ back.
125
J-curve
: The adjustment process in the trade balance in response to a real depreciation.
A depreciation initially increases the trade deficit and, over time, exports increase and import decrease, reducing the trade deficit.
126
Uncovered interest parity relation
(or in short interest parity relation) –domestic and foreign bonds must have the same expected rate of return in terms of domestic currency.
127
Interest parity implies that the domestic interest rate must
be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.
128
expected future exchange
An increase in the domestic interest rate leads to an increase in the exchange rate (appreciation).
An increase in the foreign interest rate leads to a decrease in the exchange rate (depreciation).
An increase in the expected future exchange rate leads to an increase in the current exchange rate (appreciation).
129
A higher domestic interest rate leads
to a higher exchange rate — an appreciation
130
An increase in the interest rate now has two effects:
The direct effect on investment
The secondary effect through the exchange rate
131
An increase in the interest rate decreases demand
directly and indirectly – through the adverse effect of the appreciation on demand.
132
An increase in the interest rate leads to
a decrease in output and an appreciation.
133
An increase in government spending leads to
an increase in output. If the central bank keeps the interest rate unchanged, the exchange rate also remains unchanged.
NX decrease, as higher output increases imports
134
If the country pegs the exchange rate so the interest rate relation becomes
Under a fixed exchange rate and perfect capital mobility, the domestic interest rate must be equal to the foreign interest rate.
Under fixed exchange rates, the central bank gives up monetary policy as a policy instrument.
135
The real exchange rate is:
through a change in the nominal exchange rate, E: If the domestic price level and foreign price level do not change in the short run, this is the only way to adjust the real exchange rate in the short run.
through a change in the domestic price level relative to the foreign price level: In the medium run, as prices adjust, this option is open even to a country with a fixed nominal exchange rate.
136
Demand and output depend:
negatively on the real exchange rate, as higher Ꜫ implies a lower demand for domestic goods, and in turn lower output
positively on government spending and negatively on taxes
negatively on the domestic real interest rate
positively on foreign output through the effect on exports
137
if two economies are operating at potential, inflation rates
would be the same, relative prices would remain constant, and so would the real exchange rate.
138
In the short run, a fixed nominal exchange rate implies
In the medium run, the real exchange rate can
a fixed real exchange rate.
In the medium run, the real exchange rate can adjust even if the nominal exchange rate is fixed. This adjustment is achieved through movements in the relative price levels over time
139
gold standard
was a system in which each country fixed the price of its currency in terms of gold and stood ready to exchange gold for currency at the stated parity.
140
To let a currency float is to
allow a move from a fixed to a flexible exchange rate regime.
141
Faced with the expectations of devaluation, the government has two options:
give in and devalue, or
fight and maintain the parity, at the cost of high interest rates and a potential recession.
142
optimal currency area needs to satisfy one of the two conditions:
The countries have to experience similar shocks.
If the countries experience different shocks, they must have high factor mobility.
The common currency area composed of the 50 states of the United States is close to an optimal currency area, which has high factor mobility, although different states are affected by different shocks.
143
Ways to fix the exchange rate and convince financial investors that the exchange rate is fixed today and also in the future:
Make the fixed exchange rate be part of a more general macroeconomic package.
Make a hard peg so that it is symbolically or technically harder to change the parity
144
Examples of a hard peg:
Dollarization: Replace the domestic currency with the dollar (e.g. British Virgin Islands)
Currency board: A central bank stands ready to exchange foreign currency for domestic currency at the official exchange rate set by the government (e.g. Bulgaria)
145
The European Central Bank (ECB)
institution that governs the euro area’s central banking system and is responsible for shaping and implementing monetary policy in the euro area. The main objective of the ECB is to maintain price stability.
146
The Eurosystem
the ECB and the national central banks (NCBs) of those countries that have adopted the euro.
147
The European System of Central Banks (ESCB)
the ECB and the NCBs of all EU Member States.
148
Governing Council formulates
monetary policy for the euro area
It consists of the 6 members of the Executive Board, plus the governors of the 19 euro area NCBs
149
the decision making bodies of the ECB
governing council, executive board, general council
150
Executive Board prepares
Governing Council meetings and implements monetary policy for the euro area
151
General Council coordinates
monetary policies of the EU Member States whose currency is not the euro
152
Price Stability Definition
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of 2% over the medium term.
153
Interest rates were increased
3 times this year: in July (50 bps), September (75 bps) and October (75 bps) meetings. 200 bps in total.
Next Governing Council meeting: 15 December. Markets fully price-in 50 bps increase of interest rates. Terminal rate around 3% by mid-2023. Adjusted for term-premia: ~2.6%
154
,
.
155
Taylor rule
In the 1990s, John Taylor suggested a rule of the policy rate it, now known as the Taylor rule:
it -> nominal interest rate controlled by the central bank (policy rate)
i* -> nominal neutral interest rate, associated with the real neutral rate of interest rn and the target rate of inflation π*, so i* = rn + π*
πt -> rate of inflation
π* -> target rate of inflation
ut -> unemployment rate
un -> natural rate of unemployment
a and b -> positive coefficients chosen by the central bank
it = i* + alfa ( πt - π*) - b (ut - un)
156
If πt = π* and ut = un,
the central bank should set it = i*.
157
If πt > π*, the central bank should
increase it above i*.
158
If ut > un,
the central bank should decrease it.
The coefficient a reflects how much the CB cares about inflation, while coefficient b reflects how much it cares about unemployment.
159
The budget deficit
equals spending, including real interest payments on the debt (rBt-1), minus taxes net of transfers:
160
primary deficit
(Gt - Tt)
161
primary surplus
(Tt - Gt)
162
September 2022 ECB projections:
euro area government budget balance is expected to improve, driven by the economic cycle and lower cyclically adjusted primary deficit.
163
Government debt in the euro area
is expected to decline over time, reaching about 90% of GDP in 2024.
164
The change in the debt ratio over time (the left side of the equation) is equal to the sum of two terms:
The difference between the real interest rate and the growth rate times the initial debt ratio
The ratio of the primary deficit to GDP
165
The increase in the ratio of debt to GDP is larger:
the higher the real interest rate
the lower the growth rate of output
the higher the initial debt ratio
the higher the ratio of the primary debt to GDP
166
key variable for debt dynamics and sovereign sustainability analysis.
The difference between the average interest rate that governments pay on their debt (i) and the nominal growth rate of the economy (g) is a key variable for debt dynamics and sovereign sustainability analysis.
If i-g > 0, a primary fiscal surplus is needed to stabilise or reduce the debt-to-GDP ratio.
If i-g < 0, debt ratios could be reduced even in the presence of primary budget deficits.
167
The negative interest rate-growth differential before the pandemic helped to contain, or even reduce, debt-to-GDP ratios.
The differential still stands near historic lows but is about to become less favourable as interest rates are increasing.
168
Procyclical fiscal policy -
governments choose to increase government spending and reduce taxes during an economic expansion; reduce spending and increase taxes during a recession.
169
Countercyclical fiscal policy
- counteract the effects of the economic cycle. For example, in recession, governments would increase spending or reduce taxes.
170
To stabilize the economy, governments should
run deficits during recessions and surpluses during booms (countercyclical fiscal policy).
171
.
.
172
Increasingly procyclical during “good years” of 2016-2018,
although institutions recommended differentiated national fiscal policies: countries with fiscal space should have used it, while gradual consolidation should have been pursued by countries with high debt-to-GDP ratios.
173
The aggregate production function
is a relation between output on one hand and labour and capital on the other.
174
The economy will eventually reach a steady state
where output per worker does not increase.
175
Output per person is converging across countries but
most still lag far behind the United States.
176
Consider the following statement: “The Solow model shows that the saving rate does not affect the growth rate in the long run, so we should stop worrying about the low U.S. saving rate. Increasing the saving rate wouldn’t have any important effects on the economy.” Explain why you agree or disagree with this statement?
Disagree. An increase in the saving rate does not affect growth in the long run but does increase growth in the short run. In addition, an increase in the saving rate leads to an increase in the long-run level of output per worker. Finally, since the evidence suggests that the U.S. saving rate is below the golden-rule rate, an increase in the saving rate would increase steady-state consumption per worker.
177
If the rate of technological progress increases, the investment rate
(the ratio of investment to output) must increase to keep capital per effective worker constant.
178
The steady-state rate of growth of output per effective worker is
zero.
179
In steady state, output per worker grows
at the rate of technological progress.
180
Even if the potential returns from research and development (R&D) spending are identical to the potential returns from investing in a new machine,
R&D spending is much riskier for firms than investing in new machines
181
Technological progress leads to a decrease in employment if,
and only if, the increase in output is smaller than the increase in productivity.
182
creative destruction make
some skill sets outdated.
183
For each of the economic changes listed in assess the likely impact on the growth rate and the level of output per worker over the next 5 years and over the next 5 decades.
A permanent reduction in the rate of technological progress
The growth rate of output per worker falls in the short run and continues to fall over time. In the long run, the growth rate approaches a new steady state with a permanently lower (but still positive) growth rate. Level of output per worker continues to rise over time, just at a slower rate.
184
For each of the economic changes listed in assess the likely impact on the growth rate and the level of output per worker over the next 5 years and over the next 5 decades.
A permanent reduction in the saving rate.
A permanent reduction in the saving rate has no affect on the steady-state growth rate of output per worker. The growth rate of output per worker falls (but remains positive) in the short run but in the long run it approaches its original steady-state rate.
185
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
An international treaty ensuring that each country’s patents are legally protected all over the world.
This proposal would probably lead to lower growth in poorer countries, at least for a while, but higher growth in rich countries.
186
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
Tax credits for each dollar of R&D spending.
This proposal would lead to an increase in R&D spending. If fertility did not fall, there would be an increase in the rates of technological progress and output growth.
187
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
A decrease in funding of government-sponsored conferences between universities and corporations.
Presumably, this proposal would lead to a (small) decrease in the fertility of applied research and therefore to a (small) decrease in growth.
188
How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?
The elimination of patents on breakthrough drugs, so the drugs can be sold at a low cost as soon as they become available.
This proposal would reduce the appropriability of drug research. Presumably, there would be a reduction in the development of new drugs, a reduction in the rate of technological progress, and a reduction in a growth rate.
189
Sources of technological progress: leaders versus followers
Where does technological progress come from for the economic leaders of the world?
the economic leaders typically achieve technological progress by generating new ideas through R&D.
190
Do developing countries have other alternatives to the sources of technological progress
Developing countries can import technology from the economic leaders by copying this technology or by receiving a transfer of technology as a result of joint ventures with firms headquartered in the economic leaders. Even in the absence of technology transfer, foreign direct investment (FDI) can increase technological progress in the host country by substituting more productive foreign production techniques for less efficient domestic ones.
191
Do you see any reasons developing countries may choose to have poor patent protection? Are there any dangers in such a policy (for developing countries)?
Poor patent protection may facilitate a more rapid adoption of new technologies in developing countries. The costs of such a policy are relatively small, since developing countries generate relatively few new technologies.
192
Interest rate parity means
exchange rates will adjust to equate returns in countries.
193
The central bank influences the value of the exchange rate by
changing the domestic interest rate relative to the foreign interest rate
194
Higher interest rates lead to the
appreciation of domestic currency, which negatively affects exports.
195
Fiscal expansion increases domestic output and leads
to deterioration of the trade balance via higher imports.
196
Real exchanges rates
adjust as the relative price levels change.
197
A devaluation is a decrease
in the nominal exchange rate.
198
Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. The goal of policy is to reduce the trade deficit and leave the level of output at its natural level.
What is the appropriate fiscal and monetary policy mix?
The appropriate mix is a cut in interest rates (shift the LM curve down) to decrease the value of the currency (and thereby to improve the trade balance) and a fiscal contraction (shift the IS curve to the left). If this is done correctly, the level of output will be unchanged and the trade balance will be less negative as net exports increase due to the depreciation of the currency. There would be more exports and less imports (at the same level of income) due to the depreciation.
199
Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.
In an IS-LM–UIP diagram, show the effect of an increase in foreign output, Y*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged. Explain in words.
The IS curve shifts right, because net exports tend to increase as foreign output rises. Domestic output increases if the central bank leaves the interest rate unchanged (the LM curve does not shift). The exchange rate will be unchanged.
200
In an IS-LM–UIP diagram, show the effect of an increase in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged. Explain in words.
When the foreign interest rate rises, the domestic interest rate is relatively lower. The UIP curve will shift to the left and the domestic currency depreciates. Note that the IS curve is also affected by the change in the foreign interest rate. A higher foreign interest rate, given the same domestic interest rate, will depreciate the domestic currency and increase net exports. The IS curve will shift to the right. Domestic output rises when the foreign country tightens its monetary policy. The exchange rate depreciates.
201
Eurosystem‘s objective is inflation measured with
HICP measure.
202
Public Sector Purchase Programme (PSPP)
constitute the largest part of Eurosystem‘s APP.
203
Taylor rule describes
it describes monetary policy reaction function.
204
According to Taylor rule, if unemployment gap is positive,
central bank should decrease policy interest rate.
205
To stabilise the economy, governments should
run countercyclical fiscal policy.
206
imply that governments can reduce debt ratios even in the presence of primary budget deficits.
i-g differential should be negative
