Week 5 - Uncertainty and the Current Account Flashcards
What is a common measure of uncertainty?
The standard deviation of a variable.
What was the great moderation
A period where volatility of US output declined significantly
How has the standard deviation of output growth changed in the US between 1947-1983 and 1984-2015?
The volatility of US output over time has declined significantly with the decline starting in 1984
What happened to the CA/OUTPUT ratio before and after the great moderation?
Before the great moderation the US ran a +ve CA/GDP ratio, and then after ran a negative CA/GDP ratio.
When modelling uncertainty what do we assume about the endowments?
We assume constant endowments Q1=Q2=Q
When modelling uncertainty what do we assume about initial asset holding Bo, and the interest rate r?
Bo=0 and interest rate r=0
What do we assume our utility function to be when modelling uncertainty?
U(C1,C2)= ln C1 + 1/2 ln(2Q + Theta - C1) + 1/2ln(2Q- Theta - C1)
What do we derive C2 to be equal to?
What do we derive C2 to be equal to?
After substituting C2 into the utility function and taking FOC’s what do we find out?
We find out Q=C1
What are the 2 forms uncertainty can take?
- Q+ Theta ( This is an economy in a good state, where theta is a positive number )
- Q - Theta ( Economy in a bad state)
What is the standard deviation of Theta (Uncertainty)
What is the standard deviation of Theta (Uncertainty)
What is the expected consumption in period 2 equal to after taking into account uncertainty?
- C2= 2Q + Theta - C1
2. C2= 2Q - Theta - C1
After taking into account uncertainty and taking FOC’S what can we see:
We are able to see that Q=C1 no longer holds unless uncertainty = 0
This means C10, and CA1>0 as the extra Q not consumed will be exported and there will also be consumer saving so both TB and CA are +ve.
