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Macro > McMahon > Flashcards

McMahon Flashcards

1
Q

Equilibrium requires…

A
  1. given rt, wt, the allocation satisfies the household problem for each group
  2. firms maximise profits
  3. markets clear
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2
Q

OLG pareto improvement

A

transfers from young to current old

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3
Q

In OLG, which type of technological progress can produce a balanced growth path consistent with Kaldor facts?

A

Labour-Augmenting: yt=f(Kt,AtLt)

Key is to write the law of motion in terms of Kt+1/At+1 and then not much changes

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4
Q

Kaldor Growth Facts

A
  1. Output per worker grows at roughly constant rate (though now seems lower than before but anyway)
  2. Capital per worker grows over time
  3. Capital/output ratio roughly constant
  4. Rate of return on capital constant
  5. Share of capital and labour in net income roughly constant
  6. Real wage grows over time
  7. Constant ratios of consumption to GDP and investment to GDP
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5
Q

Household problem (Ramsey)

A

Max ∫e^(−(ρ)t)*u(ct)dt

s.t. kdot=wl+rk+profits-c-δk

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6
Q

Hamiltonian

A

H= u(ct)e^(-pt) + μt(what kdot equals)
FOC: control: …=0
FOC: state: …=−μ ̇t
(These will be good to practice)

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7
Q

Look up TVC

A

Done this yet?

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8
Q

Features of Ramsey capital driven growth

A
  1. Interest rates fall over time as k increases
  2. Growth rate of output declines (to 0 in the limit)
  3. Capital to labour ratio grows
    (These are not in line with Kaldor facts)
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9
Q

Foreseen shocks in the future

A

Must get to new saddle path by date the economy changes. Must get there by obeying existing (old) laws of motion

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10
Q

Why is there no growth in typical Ramsey model?

A

Convergent dynamics caused by decreasing returns to capital

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11
Q

AK model

A

No steady state but balanced growth path with constant ratio of consumption to capital
(This BGP is not stable as must always have ratio equal to discount rate ρ)

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12
Q

Why is BGP unstable

A

if g>r, violates the TVC => always growing not discounting so discounted final value of K0 is not 0 => ponzi scheme
if g

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13
Q

Ways of microfounding AK

A

Knowledge externalities
Learning by doing
Human capital accumulation

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14
Q

Varieties incentives model

Efficient?

A

Fixed varieties: Profits in intermediate goods, no growth
Endogenous varieties: can create new variety at a cost, growth rate g, depends on scale as profits depend on size of market

Both types are inefficient:
Monopoly supplier produces too few intermediate goods
Growth rate also below optimal

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15
Q

Acyclical macroeconomics variables

A

wages, government spending, capital stock

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16
Q

Ct and Nt both procyclical only if

A

wt is procycylical
But wt is modestly procyclical so will need strong substitution way from leisure towards consumption to follow an increase

17
Q

inter-temporal and intra-temporal FOCs (RBC)

A

Inter: usual Euler
Intra: 1st derivative wrt C *wt=1st derivative wrt leisure

18
Q

To get labour to be more variable than output, one needs ? in their RBC model

A

procyclical savings rates

19
Q

Problems with special case RBC

A

Don’t get:

  1. pro-cyclical savings rates
  2. pro-cyclical labour effort
  3. large enough output responses
  4. enough endogenous persistence
20
Q

Get head around determinacy in computer model with matrices stuff

A

Done this yet?

21
Q

Steps to solve RBC model

A
  1. Solve for the non-stochastic BGP
  2. Rewrite model as log-deviations from the n-S BGP
  3. Study an alternative model that is log linear and an approximation around the n-S BGP
  4. Interpretation and calculation (made easier if equations are linear in % deviations from steady state)
22
Q

Log-linearisation options in order of preference

A
  1. exact (just take logs)
  2. use Yt=Y* x e^yt
  3. e^x = 1+x for small x
  4. taylor expansion around steady state
23
Q

7 log-linear equations

A
  1. Production function
  2. Resource constraint
  3. Interest rate
  4. Wage
  5. Labour-Leisure choice
  6. Euler equation
  7. Technology
24
Q

Just adding incomplete depreciation results in IRFs with

A

Insufficient (but present) employment response
Too short a business cycle
Insufficient consumption response
Wage too procyclical

25
Q

Adding persistent shock to depreciation

A

Not much amplification
Output inherits shock’s persistence
Unrealistic consumption dynamics
Even more procyclical wage

26
Q

adding very elastic labour supply

A

Gets desired labour supply response but changes little else

27
Q

very inelastic labour supply IRFs

A

No employment response

Huge wage increase

28
Q

Persistence problem

A

The stochastic growth model is unable to generate persistent effects from transitory shocks

29
Q

Amplification problem

A

Only in extreme cases does y go go up/down more than one-for-one with a change in a
Slower than normal but still positive technological growth can cause output growth to grow slower but not fall (would need negative tech shock)

30
Q

Hump-shaped response problem

A

VARs suggest output responses to transitory shocks are hump-shaped but RBC models tend to generate monotonic responses

31
Q

Blanchard-Kahn Condition

A

For stability, number of unstable eigenvalues= number of controls
If this is not satisfied we have indeterminacy so model cannot be solved with this technique

32
Q

What is the problem with labour supply inelasticities in the model compared to the data? How can this possibly be reconciled with the model?

A

Data estimate elasticity of around 1, model requires around infinity
Either have to argue that the volatility of wages is underestimated or elasticity is underestimated

33
Q

3 types of model to reconcile labour problem

A
  1. Lotteries
  2. Efficiency wages
  3. Search
34
Q

Lotteries results

A

Hours almost as volatile as output (good)

Hours and wages strongly correlated (bad)

35
Q

In efficiency wage models, the no-shirking wage increases if

A 
e increases
Vu increases
q (prob of being caught) decreases
discount rate increases
b (separation rate) increases
36
Q

Tobin’s q

A

Shadow price of installed capital =lambda-mu

investment responds immediately to changes in q

37
Q

Why is Solow residual probably not an accurate measure of technology?

A
  1. Labour hording may happen
  2. Capacity may not be fully utilised
  3. TFP growth is predictable by military spending and money supply shocks
  4. TFP growth -ve a third of the time (do we really forget stuff all the time!?)

Taking this into account, models predict small and countercyclical Solow residuals

Macro (5 decks)

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