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Mikro - Makro > Makro > Flashcards

Makro Flashcards

1
Q

Welfare and Development Measures

A
  • GDP (real income) → most common

- HDI (Human Development Index) → Depends on life expectancy, literacy rate, school and log(GDP)

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2
Q

2 Effects in time series

A
  • Economic growth
    

  • Business cycles (expansions and recessions)
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3
Q

HP Filter

A

Decompose a times series yt in the growth component gt and the cycle component ct

→ Weigh variations in the cyclical component against variations in the growth rate of the trend component

→ The parameter λ scales the penalty on the trend component.

• λ → ∞: linear trend (the smaller λ, the more variation in the trend)

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4
Q

HP Filter

Pros & Cons

A

Pros

  • simple and flexible procedure
  • no strong theoretical assumptions needed

Cons

  • no economic foundation
  • well-known statistical problems
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5
Q

Stylized facts on business cycles

A
  • Cyclical variation in GDP is mainly due to changes in hours (and employment), not so much a result of changes in productivity or capital stocks
  • Consumption varies less than output
  • Investment is much more volatile than output
  • Government spending is less correlated with GDP (usually countercyclical)
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6
Q

The Great Moderation

A

Period from the mid-1980s until 2007

→ Business cycle volatility was notably lower than in the decades before 


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7
Q

Kaldor’s stylized facts of growth

6

A

Stable growth behavior of developed economies

  1. GDP per worker (labor productivity) grows at a constant rate
  2. Capital per worker (K/L) grows at a constant rate
  3. Stable ratio of capital to output (K/Y)
  4. Stable real interest rate r (return on capital)
  5. Stable capital and labor share (rK/Y and wL/Y ) at around 1/3 and 2/3
  6. Large differences in growth rates across countries 

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8
Q

IS-LM model

A

i-Y-Diagramm

  • Prices are fixed, short-run perspective
  • IS: Goods market equilibrium
    • Consumers save a fixed a share c1 of their disposable income
  • LM: Money market equilibrium
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9
Q

IS-LM model

Increase of government spending

A

↑G
↑Y
↑i
IS shifts right

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10
Q

IS-LM model

Expansion monetary policy

A 
↑ M 
↑ M/P 
↓ i 
↑ I 
↑ Y
LM shifts down
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11
Q

AS-AD model

A

Y-P-Diagramm

  • AD: Aggregate demand → shows how changes in prices P affect output Y
    • Downward sloping: Higher prices imply less aggregate demand
  • AS: Aggregate supply

• SRAS: Short-run aggregate supply is upward sloping
- Firms tend to ↑ prices when demand ↑ (prices are sticky in the short run)

• LRAS: The long-run aggregate supply curve is vertical

  • long-run output does not depend on prices, but on (fixed) factors of production.
  • It represents potential output
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12
Q

AS-AD model

Increase in taxes in the short run & long run

A
  • Short run (↑i → ↓C → AD shifts left)

- Long run (↓P → ↓SRAS → ↓Y)

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13
Q

Why were “old-macro” models discarded?

A
  • Lucas critigue: No microfoundations
    • Too simple consumption hypothesis
    • No forward looking behavior/ no (rational) expectation formation
  • Empirical failure
  • Huge fiscal multiplier ΔY/ΔG (usually > 1 in these models)
  • Money as monetary instrument
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14
Q 
Microfoundations
D(S)GE → Dynamic (stochastic) general equilibrium models
A
  • Behavior is derived from basic assumptions about the preferences of consumers & production options of firms
  • Agents are rational → maximize welfare & profits
  • It does not require perfect competitions
  • It does not require representative consumers and firms.
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15
Q

What does the D(S)GE model imply?

A

It implies that individual decisions

  • relate to the present and the future (Intertemporal or dynamic)
  • are confronted with changes in exogenous variables or shocks (important in the short run)
    • Business cycle models are often specified as stochastic
  • are coordinated through various markets which are interdependent (general approach is needed)
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16
Q

Solow Growth Model

A

Production funktion

  • Total resources Yt are either consumed Ct, or invested
  • Cobb-Douglas production function

Capital accumulation

  • Capital is accumulated in the form of investment.
  • Capital depreciates geometrically

Behaviour
↳ no microfoundations

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17
Q

Assumptions for a unique steady state

Solow Growth Model

A
  1. The production function is continuous, differentiable, has positive and diminishing marginal products and
    constant returns to scale.
  2. Inada conditions
    → lim_{K→0} F_K′= ∞
    → lim_{K→∞} F_K′ = 0
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18
Q

Applications of the Solow model

A

Growth

  • Growth due to capital adjustment off-steady state (no long-term growth)
  • Endogenous growth: Variations with A

Business cycles
- Make productivity A stochastic (fluctuations)
↳ The curve in the above figure shifts up and down
- Output and savings fluctuate (even with constant δ)

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19
Q

Transversality condition

A

It cannot be optimal to postpone consumption forever

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20
Q

Consumption Euler Equation

A

How households choose between ‘consumption today’ and ‘consumption tomorrow’

In optimum, the household must be indifferent between consuming a marginal unit today, or investing this unit and consuming the return one period later (in utility terms)

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21
Q

Implications for saving (makes consumption endogenous)

A
  1. Consumption smoothing: HH prefers a smooth consumption path.
  2. Impatience:
    A low β (or a high discount rateθ = β1 − 1) → lower future consumption

    ↳ high impatience = low β
  3. The return on savings: Also affects savings, but is an endogenous object
    • If the return on investment ↑, HH will shift consumption from today to tomorrow and save more
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22
Q

The Ramsey-Cass-Koopmans-Model

General equilibrium

A

In general equilibrium, the time paths of consumption, capital, wages and rental rates are such that the FOCs and the market clearing conditions hold.

23
Q

The Ramsey-Cass-Koopmans-Model

Dynamic properties of the system

A

In steady state:
- Kt < Euler equation → C↑

  • Ct < Resource constraint → K↑
24
Q

Modified golden rule

A

Households maximize discounted utility, not the steady state level of consumption.
↳ HH care more about today than tomorrow ( β < 1)

25
Q

Saddle Path

A

→ For every K0, there is a unique initial level C0 that is consistent with the FOCs, the budget constraints, the transversality condition and the requirement that k may not be negative.

↳ The economy moves along the saddle path to the steady state. 


26
Q

Negative shock to the capital stock

Kt < K

A
  • The optimal consumption response → reduce consumption (increase savings) such that Ct < C
  • Some output is diverted to rebuild the capital stock and the economy returns to the long-run steady state.
  • Saving is endogenous (In Solow: savings are proportional to outcome)
27
Q

A fall in the discount rate

Ramsey Modell

A

HH now discount utility at a lower rate than before
↳ higher discount factor β → Tomorrow matters more

In steady state: A higher β implies a higher K for consumption to stay constant
↳ curve shifts to the right

  • K cannot immediately adjust
  • C can jump to a new level immediately
    • It falls immediately to the new saddle path (point A)
  • C & K adjust gradually along the (new) saddle path to the new steady state.
  • In the new steady state: ↑C & ↑K
28
Q

An increase in aggregate productivity At

Ramsey Modell

A

C increases a lot immediately and is then reduced to the new higher saddle path, the capital stock is slowly reduced 


29
Q

The effect of government purchases

Ramsey Modell

A

Government consumption does not affect
household utility and it does not affect future output

  • New resource constraint shifts down
  • Euler equation is not affected
  • C is adjusted immediately to the new saddle path
  • K and the real interest rates are unaffected
  • ↑T reduces the wealth of households permanently
30
Q

An increase in the depreciation rate δ (= increase capital tax τ)
(Ramsey Modell)

A
  • Both curves are shifted “left”
  • More K is required, so that C remains constant
  • C Increases a lot immediately and is then reduced to the new higher steady state, the capital stock is slowly
    reduced
  • HH reduce their savings
31
Q

Contrasts of the Ramsey model with the effects in old-style macro models

A
  • In these models, Ct depends on current disposable income Yt − Tt but it moves less than income
    • constant saving rate as in the Solow model
  • Ct falls by less than the increase in G → investment is crowded out and the capital stock is reduced
32
Q

Ricardian equivalence

A

Only the quantity of government purchases, not the division of financing between taxes and bonds affects the economy.

  • HH anticipate that taxes will rise in the future
  • HH save immediately to be able to pay these taxes in the future and smooth their consumption over time

→ Not realistic: Argument implies that the interest rates are equal

33
Q

What drives economic growth?

A
  • Even with endogenous saving, technological progress g is the only source of persistent growth in Y/L
  • Technological progress is outside of the model, policy cannot affect growth 


→ But the advantage of the neoclassical growth model is that it paves the way towards endogenous growth and business cycles 


34
Q

Convergence

A

economies with a lower K/L (those further away from the BGP) will grow faster


↳ poorer countries catch up with rich countries


35
Q

The convergence debate

A

→ No evidence for absolute convergence

→ Evidence for conditional convergence (i.e., for a rather homogeneous group of countries)
↳ similar production functions e.g. OECD countries

36
Q

Why was the neoclassical growth model so successful?

A
  1. It fits the most important Kaldor stylized growth facts for developed countries
  2. It provides a straightforward way to think about the sources of growth over time: growth accounting
37
Q

How to endogenize growth?

AK-model

A
  1. Take the neoclassical growth model
  2. Relax the assumption of diminishing returns to capital

• Continuous capital accumulation can be an engine of sustained economic growth

• If the marginal product of capital is constant and it is profitable to accumulate more capital initially, it will
remain to be profitable

38
Q

AK-model properties

A
  • K & Y grow at the same constant rate as consumption (balanced growth path)
  • No transition dynamics → the initial consumption-capital ratio is maintained forever
  • Growth is endogenous in the sense that it is affected by the underlying model parameters
    • Technology (A and δ) and preferences (β and σ)
  • wt = 0
39
Q

AK-model assessments

A
  • We need linearity for sustained growth
  • It can explain large differences in growth rates across countries for relatively small policy differences
  • The zero wages’ assumption can be relaxed when more sectors of production or externalities are introduced.
  • No role for technology growth
40
Q

Romer (1986):

Learning by doing

A
  • Model is closely related to the AK-model, but derives the constant returns from learning-by-doing.
    • Knowledge/ technology is accumulated as a byproduct of capital accumulation
    • Knowledge is a non-rival good
    • Knowledge can or cannot be excludable → depends on patent and copyright laws
  • Learning by doing → reduced form to introduce technology spillovers
    • spillovers generate an externality
41
Q

Policy trade-offs in the Romer model

A
  1. Present vs future
    - Governments could provide incentives for more people to go into education and research • These people will not be producing goods (and services) today → lower output today
  2. Competition vs growth
    - Too little R&D
    - Laws to strengthen patent protection may raise the incentives to conduct R&D and may bolster growth
    • Increases inefficiencies at the microeconomic level due to monopoly power
42
Q

Romer (1990): Endogenous growth with R&D

Comparative static

A

The equilibrium growth rate gY* is determined by the parameters:

  • θ: ↑θ (more impatience) → ↓gY* (R&D is a form of investment)
  • φ: ↑φ (better substitutes) → ↓gY* (less monopoly power)
  • B: ↑B (more productive R&D) → ↑gY* (directly via ↑B and indirectly due to more workers in R&D)
  • L: ↑L (larger economy) → ↑gY* (due to non-rivalry, an inventor can reach a larger market)
43
Q

Causes for economic growth and divergence

A
  • Human capital
  • Stress competition in innovation
  • Stress skill-biased technological change
  • Institutions and policies
  • Geography
  • Culture
44
Q

Business cycles in the neoclassical growth model

RBC (real business cycle) model

A

Productivity fluctuates stochastically

  • The Solow residuals (after discarding a trend) fluctuate considerably over the business cycle.
  • These fluctuations can be represented by a AR(1) time series model
    • εt: productivity shock → i.i.d. with mean zero and standard deviation σA
45
Q

How do households respond to an increase in real wages?

A
  • Substitution effect: An increase in wages makes leisure more expensive.
  • Wealth effect: Higher wages mean - for unchanged labor supply - higher income. 

    ↳ If consumption and leisure are both normal goods, labor supply must fall.

The overall effect is theoretically ambiguous. (Empirically: SE > WE)

46
Q

The Frisch elasticity of labor supply

A

Important determinant of labor supply behavior

↳ by how much do hours worked fluctuate in the business cycle

  • It is defined for a constant marginal utility of wealth λt
  • SE > WE: wt↑ → Nt↑
47
Q

State and control variables in the RBC Model

A

2 state variables

  • capital stock → inherited from the last period
  • current value of productivity

2 control variables (Agents control how they choose C and N)

  • consumption
  • labor
48
Q

Method of undetermined coefficients

A

One way to solve the set of linear difference equations

  1. Use an educated guess on the general functional form of the solution to the dynamic system
  2. Verify that the guess is correct by finding a solution to the undetermined coefficients (here the η’s)
49
Q

2 propagation mechanisms

RBC Model

A
  1. Wealth/capital accumulation mechanism: A↑ → r, w ↑ 

    ↳ HH feels more wealthy (if the shock is not purely temporary)

    ↳ Y, C, and I ↑ → ↑I increases the capital stock also in the next periods and generates additional persistence in the output effects.
  2. Intertemporal-substitution effects: A↑ → r, w ↑ 

    ↳ HH is motivated to supply more labor and save more in the current period and less later 

    ↳ More labor supply increases Y, C, and I and also builds up the capital stock.
50
Q

Findings of King and Rebelo’s model statistics compared to USA data

“Big successes” of RBC model

A
  • Output fluctuations are only moderately smaller compared to data - given the simplicity of the model and only one driving force (the productivity shock)
  • Consumption is considerably less volatile than output, investment three times as volatile.
51
Q

Findings of King and Rebelo’s model statistics compared to USA data

“Big failures” of RBC model

A
  • Labor is only about half as volatile as output in the model.
    • In the data, labor is nearly as volatile as output.
  • The correlation of output with labor productivity (Y/N), wages and interest rates in the model is very high, not so in the data.
52
Q

The cost of business cycles

A
  • Calculate the welfare gain from eliminating fluctuations in consumption (Lucas, 1987)

    ↳ how much are the consumers willing to pay for elimination fluctuations in consumption?
  • Eliminating all consumption fluctuations (i.e., eliminating the business cycle entirely) is worth only 1/20 of 1% (0.05%) of average annual consumption.

• Unrealistic (depends on preferences and wages) → rather 30% of annual consumption

53
Q

RBC Model limitations

A

A) What are these productivity shocks?

B) Lack of internal propagation and the micro-macro puzzle on labor supply elasticities

C) No real effects of nominal factors including monetary policy, no financial markets

D) No real unemployment

Mikro - Makro (3 decks)

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