Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 13 Business Cycle Models with Flexible Prices and Wages Copyright © 2014 Pearson Education, Inc. Three Business Cycle Models • Real Business Cycle Model: Business cycles are caused by fluctuations in total factor productivity (real shocks) => fits the data well in normal times. • Keynesian Coordination Failure Model • New Monetarist Model: goo to explain the facts related to the recent financial crisis. © 2014 Pearson Education, Inc. 1-2 Figure 13.3 Average Labor Productivity with Total Factor Productivity (TFP) Shocks © 2014 Pearson Education, Inc. 1-3 Figure 13.1 Solow Residuals (proxy for TFP) and GDP © 2014 Pearson Education, Inc. 1-4 Figure 13.2 Effects of a Persistent (but temporary, not permanent) Increase in Total Factor Productivity in the Real Business Cycle Model a) ↑TFP=>Nd ↑: w ↑,N ↑ b) N ↑ =Ys ↑ • r MUST ↓ because z is higher today than in the future, so Y is expected to ↓ in the future=> consumption smoothing=> save more today (this makes r ↓) and consume in the future • Yd ↑ because of r ↓ and future Y ↑ (investment ↑, consumption ↑) c) Md ↑ because of r ↓ and Y ↑=>P ↓ © 2014 Pearson Education, Inc. 1-5 Table 13.1 Data Versus Predictions of the Real Business Cycle Model with Productivity Stocks Model fits the data well © 2014 Pearson Education, Inc. 1-6 Figure 13.4 Procyclical Money Supply in the Real Business Cycle Model with Endogenous Money © 2014 Pearson Education, Inc. 1-7 A New Monetarist Model: Financial Crises and Deficient Liquidity • Two classes of liquid assets in the economy: currency and financial liquid assets. • Financial liquid assets include relatively safe assets that are widely-traded in the financial system – e.g. government debt, asset-backed securities, (bank reserves). © 2014 Pearson Education, Inc. 1-8 Financial Liquid Assets • Can be expressed as a B k (r ) P • B = nominal government debt. • k is a decreasing function of r, and k(r) denotes financial liquid assets that are “produced” in / “supplied” by the private financial system. © 2014 Pearson Education, Inc. 1-9 Financial Liquid Assets • Assume that, in the model, there can be two possible states of the world: adequate financial liquidity and deficient financial liqudity. • Deficient financial liquidity occurs in a financial crisis due to factors that impair the ability of the financial sector to create financial liquid assets. © 2014 Pearson Education, Inc. 1-10 Modifying the Basic Monetary Intertemporal Model • In the New Monetarist model, financial liquid assets, a, have a positive effect on output demand if there is deficient financial liquidity. • Given equilibrium in the money market, BL(Y , r ) a k (r ) M © 2014 Pearson Education, Inc. 1-11 New Effect in the New Monetarist Model • An open market purchase (M goes up, B goes down) shifts the output demand curve to the left, if there is deficient financial liquidity. © 2014 Pearson Education, Inc. 1-12 Figure 13.13 A Reduction in Financial Liquid Assets, Producing Deficient Financial Liquidity © 2014 Pearson Education, Inc. 1-13 Excess Reserves and the Liquidity Trap • If reserves pay interest, as is the case currently in the United States, and there is a positive supply of reserves in the financial system, then the interest rate on reserves determines the market interest rate. • Open market operations have no effect. © 2014 Pearson Education, Inc. 1-14 Excess Reserves and the Liquidity Trap • Mr denotes reserve account balances, Mc denotes currency. • Now, re-define financial liquid assets as: ( M r B) L(Y , r ) a k (r ) Mc Conventional Open market operations have no effect. Monetary Policy with Excess Reserves and a Liquidity Trap, an Increase in the Interest Rate on Reserves can be beneficial. © 2014 Pearson Education, Inc. 1-15