MT - 01. Intro and GE Models

Question 1

Key Topic Equation:

Answer 1

• Consumption Euler equation  Expected growth/decline of consumption is linked to discount factor and rate of return R (Once we have a shape of utility function)

• Equate MU of Ct across all periods
• MRS = MRT
• Lagrangian = Shadow value interpretation

Question 2

• Kaldor stylised facts, basic measure of a model performance vs data

Kaldor (1957)

Answer 2

1. Output p/worker ↑ at fixed rate that doesn’t diminish over time
2. Capital p/worker ↑ over time
3. Real wage ↑ over time
4. Capital output ratio ≈ constant (1 + 2 = 4)
5. Return on capital ≈ constant
6. Share of K and L in net income ≈ constant
7. Consumption and Investment: GDP ratios = constant – “Great Ratios”

Question 3

• Business cycle facts:

Answer 3

1. Consumption smoother than output
2. Hours volatility ≈ GNP volatility  Cycle driven primarily by variation in hours
3. Employment volatility > Hours volatility  Extensive margin more important
4. Productivity slightly procyclical
5. Wage volatility < Productivity volatility
6. Wages and output uncorrelated  Hard for simple models to explain!

Question 4

Filters

Answer 4

• Filters used to distinguish trend and cycle components of data series

HP
Bandpass

Question 5

DSGE

Answer 5

• DSGE Modelling: Expectations are crucial, work by flipping Frisch Slutsky paradigm in reverse
- Flux

Question 6

GE

Answer 6

General Equilibrium

• All individuals satisfy their CEE
• Markets clear and the interest rate adjusts

Question 7

Hall (1978)

Answer 7

– Euler equation, consumption growth unpredicted by income growth but could be forecast by stock market prices

Question 8

Hamilton (2017)

Answer 8

Dangers of a HP Filter are spurious dynamics