Teil 2 Flashcards
Agg. Consumption
-> Interest Rate effect
- Substitution Effect
* makes Savings more attractive relative to current consumption when increase of r - Income Effect
- for Creditor: increase in income -> increase in current and future consumption
- for Debitors: decrease in income -> decrease in consumption
Tobin’s q
q = (MR / MC)
- q > 1: Investieren
- q < 1: firms should disinvest
Econmic Reasoning:
- Firms that are borrowing to purchase additional phy. capital face higher cost
- > Increase in MC from Investment realtive to MR from investment
- Firms that do not Borrow
- > Opportunity cost
Goverment Expenditure
- Negative Output Gap:
- Long Run Y > Actual Y
- Time for Countercyclical Spending
- The bigger the gap the more Gov. expenditure to expect
- Long Run Y < Actual Y
- Positive Output Gap
- Gov. Expenditure should be cut
- Net Gov Income
- Goverment Debt
Price Quotation
Cost of 1 Unit of foreign Currency
Bilateral Nominal exchange rate eij
Increase in eij:
-
Depreciaton of the domestic currency
- the cost to buy one unit of of foreing currency increases
Decrease in eij:
-
Appreciation of the domestic currency
- the cost to buy one unit of foreign currency decreases
Bilateral real exchange rate
- free of units measurment
- measures the rate at which the goods of the domestic eco. & the foreign economy can be exchanged for one another
Increase in Eij:
- competitiveness of the domestic economy i improves
- fall in price of domestically relative to foregin produced goods
Decrease in Eij:
- competitiveness of the domestic economy i deterorates
- rise in price….
Effective Real Exchange Rate Ei
- of the domestic economy
- measured by using the trade volume as a weight between the domestic eco. and ALL the foreign economies
Trade Balance
Increase in…
- Domestic Net Income: Increases Import
- Foreing Net Income: Increases Export
- Effective Real exchange rate
Effective Real Exchange rate und TB
- Increase in Domestic interest rate
- Decrease in E
- dom. currency appreciates
- gets cheaper to buy abroad
- import increases
- Foreing Interest Rate increases
- Increase in E
- dom. currency depreciates
- gets chepaer to buy at home
- export increases
Marginal Propensity to Consume
- indicates by how much consumption increases if net income increases by one unit
- 0 < Cy < 1
- Household will want to increase both CURRENT and FUTURE Consumption to maintain a fixed ratio between them
Imports and increase in the domestic interest rate
Import raises as r increases
- Because as the interest rate increases -> a higher return on dom. currency denominated bonds
- Increase of dom. curry. denom. bonds purchases by foreign investors
- increase in purchase of our domestic currency
- DOM. CURRENCY APPRECIATES
–> Cheaper for us to purchase goods abroad (IMPORT)
Exports and increase in the domestic interest rate
Domestic interest rate increase:
–> Dom. Currency appreciates
–> Forein Currency depreciates
=> Foreigner purchase less from us (more Expensive)
=> Export fall
IS-Curve
- Real Sector
- shows all combinations of output and interest rate at which ouput supply = des. agg. demand
- direct impact of changes to A & interest rate sensitive components are amplified by the feedback effect of the KM
TR-Curve
Financial Sector
CB:
- keeps inflation low & stable
- adequate level of output
Taylor Rule
- raise rMP
- if macro activity does “overheat”
- Y> Y Long run
- if actural inflation is below target inflation
- lower rMP
- if macro. activity is “sluggish”
- Y< Y Long run
- if actural inflation is below target inflation
“Mark- Up”
- Mark up is charged by COMMERCIAL BANKS ontop the monetary policy rate
- for the risk involved in bank lending
- Varys over time
- Varys across borrowin entites (household vs. firms)
- different default risk
What drives the “Mark UP”
- Bank lending conditions determine the risk premium.
- The Risk involved in Bank lending implies that commerical banks charg a positive Mark-Up on the monetary policy rate
- loan risk (borrowers may default)
- degree of risk averison of comm Banks
- amount of Equity of the comm. banks
- its ability to bear risk
- the less Equity you hold, the higher leverage, the higher risk, the higher the mark up charged
Fiscal Policy Options in Deep Crises
Increase in Gov. Expenditure (Increase of Go)
Note:
- Fiscal Policy will be particularly effective as long as output remins below its YZLB
- No Crowding-Out
- rmp cannot rise (even though Y has risen)
- Endogenous Component of the RP falls as Y is increasing -> Crowding IN
- No Crowding-Out
Issue with Goverment Spending in Deep Crises
Funding!!!
In deep crises
- low tax revenue
- high level of gov. transfers
Unconvetional Monetary Policy in Deep Crises
Central Bank aims at stimulating macro. activity, beyond the normal B.C. Option
Lowering the cost of borrowing through lowering the exogenous component of the risk Premium
CB purchases up treasury bonds
leads to an increase in bond price
=> lowers the rate of return on these bonds
=> No Abitrage Condition: rate of return falls across all types of issures of bonds
=> Comm Banks will lower interest rate
Deep Crises
sharp reduction of output relative to long run output occurs when:
- rMP is constrained at ZLB
- risk premia rises endogenously for loans by commercial bank to household and firms
- Y < YZLB
Mark Up Depends Postively/Negatively
- NEGATIVELY on banks Equity
- increase in the mark up when equtiy decreaes
- POSTIVELY on banks risk aversion
- POSTIVELY on borrowers loan risk
Loan Supply by Commercial Banks Depend on:
- Expected Return, r
- Loan Risk
- Borrwers may default
- given loan risk even under perfect competiton Comm Bank need to charge a positive Mark Up
- abillity to Bear Risk
- measuerd by Equity, Eq
- cost to raise external funds, rMP
- degree of Risk Aversio
KM
KM > 1
-
Feedback between Output and Desired Demand goes on infinitley
- 1st Round, 2nd Round,..
- effect becomes smaller each time
- Increase in Slope -> Decrease in KM
- Decrease in Slop -> Increase in KM
Benefit of Low Inflation
- high inflation:
- Resources are not allocated efficiently
- high prices
- “inflation tax” (devaluation of money)
Benefit of a positive rate of inflation
- less risk of DEFLATION
- Deflation = Costly for Debt holders
- labor markets function better
- No need to lower wages
The role of Equtiy
The higher the volume of loans granted, the higher the banks leverage
- lager extend to which the bank loans are funded by debt rather than equity
- Tax Shield,…
=> To much Leverage
- In times of Distress, Equity will be wiped out to fast -> Bank fails
Interest Partiy Relationship
Suggest that exchange rate are driven by domestiv relative to foreign interest rate
In the LONG RUN exchange rate are driven by purchasing power partiy
Agg. Investment and changes in the interest rate
Investment is highley sensitive to changes in the rate of interest and thus rather VOLATILE over the course of Buisness Cycles
Vgl. Households only SMOOTH Consumption
Intertempoal Buget Constraint
Bilateral real exchange rate
- If larger then one:
- Domestic good is more competitive
- Foreign good is more expensive
- in the long run it is constant (=1)
*
