Download lecture6_2009 - Dr. Rajeev Dhawan

Lecture 6: Macromodel Exercises
Dr. Rajeev Dhawan
Director
Given to the
EMBA 8400 Class
Buckhead Center
April 17, 2009
1B: Monetary-Stimulus (Inflation) Experiment
When Money Growth Stops Slowly by 2017
Rate of growth of the money supply is increased from 0% to 5% in 2009, and
then kept at 5% until 2013, and then decreased slowly to 0% by 2017 (stays
at 0% afterwards)
Money Supply
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
Years
Money Supply (Simulation)
Money Supply (Base)
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
$-
2007
$ Billions
•
5.0
4.0
3.0
2.0
(in Percentage %)
Money Supply Growth
6.0
1.0
0.0
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
Money Supply Growth (Simulation)
Money Supply Growth (Base)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Inflation follows the money growth path, lagging behind at first but then overshooting on the way down. Inflation, however, is equal to the growth rate of
money supply in the long-run
Money Supply Growth Vs. Inflation
7.0
6.0
5.0
(in Percentage %)
•
4.0
3.0
2.0
1.0
0.0
2034
2033
2032
Money Supply Growth
2031
Inflation
2030
Years
2029
-2.0
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
-1.0
•The real interest rate becomes cyclic. At first it drops which
helps investment and then when it rises it hurts investment.
Real Interest Rate
4.2
4.1
4.0
3.9
3.8
3.7
3.6
3.5
3.4
2033
2031
2029
2027
Real Interest Rate (Simulation)
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
Years
Investment
$1,040
$1,030
Real Interest
Rate (Base)
$1,020
$1,010
$ Billions
(In Percentage %)
4.3
$1,000
$990
$980
$970
$960
$950
$940
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Investment (Simulation)
Investment (Base)
$1,785
$1,780
$1,775
0.800
$1,770
($ Billions)
0.600
0.400
0.200
$1,765
$1,760
$1,755
$1,750
$1,745
0.000
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
$1,735
Years
Real Exchange Rate (Simulation)
Real Exchange Rate (Base)
Exports (Simulation)
Imports
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2009
2007
$1,740
Years
$2,040
$2,030
$2,020
$ Billions
(In Percentage %)
1.000
$2,010
$2,000
$1,990
$1,980
$1,970
Years
Imports (Simulation)
Imports (Base)
Exports (Base)
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
1.200
2017
Exports
Real Exchange Rate
• Real GDP shoots above the base case values, so that
there is a boom in the economy in the short-run. In the
long-run, once the prices adjust completely, the economy
is back to its potential GDP
GDP
$7,150
$7,100
Unemployment Drops
$ Billions
$7,050
$7,000
$6,950
$6,900
Unemployment Rises
$6,850
$6,800
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
GDP (Simulation)
GDP (Base)
1C: Monetary-Stimulus (Inflation) Experiment
When Money Growth Never Stops!
• Rate of growth of the money supply is increased
from 0% to 5%.
• This is done forever (till the end of simulation
period in 2034!)
Money Supply
$14,000
$12,000
$8,000
$6,000
$4,000
$2,000
Years
Money Supply (Simulation)
Money Supply (Base)
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
$-
2007
$ Billions
$10,000
• Money Supply Growth Rate is a constant 5% forever starting in
year 2007
Money Supply Growth
(in Percentage %)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2034
2033
Money Supply Growth (Simulation)
2032
Money Supply Growth (Base)
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Inflation follows the money growth path, lagging behind at first but then
over-shooting on the way down. Inflation, however, is equal to the
growth rate of money supply in the long-run
$14,000
7.0
$12,000
6.0
$10,000
5.0
$8,000
4.0
$6,000
3.0
$4,000
2.0
$2,000
1.0
$-
0.0
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Year
Money Supply
Inflation
Inflation
Money Supply Vs. Inflation
Money Supply
•
Real Interest Rate
4.1
4.0
3.9
3.8
3.7
3.6
3.5
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
Years
Real Interest Rate (Simulation)
Real Interest Rate (Base)
Investment
$1,040
$1,030
$1,020
$ Billions
(In Percentage %)
4.2
$1,010
$1,000
$990
$980
$970
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
In vestmen t (Simulatio n )
In vestmen t (Base)
Comparison of Real and Nominal Interest Rates
Real Vs Nominal Interest Rate
12.0
(In Percentage %)
10.0
8.0
6.0
4.0
2.0
0.0
2034
2033
2032
2031
Nominal Interest Rate
2030
Real Interest Rate
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
• Real GDP shoots above the base case values, so that
there is a boom in the economy in the short-run. In the
long-run, once the prices adjust completely, the
economy is back to the potential GDP
GDP vs GDP Potential
$7,150
$ Billions
$7,100
$7,050
$7,000
$6,950
$6,900
$6,850
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
GDP
Years
GDP Potential
Lessons From the Three Monetary (Inflation)
Experiments
Money Supply Growth
(in Percentage %)
6.0
5.0
4.0
1c
3.0
1b
2.0
1a
1.0
0.0
Money Growth (Base)
Experiment 1-A
Experiment 1-B
Experiment 1-C
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
Years
Inflation Response Depends on How Long
Monetary Stimulus Lasts
Inflation
7.00
6.00
4.00
1c
3.00
2.00
1b
1a
1.00
0.00
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
-1.00
2005
(In Percentage %)
5.00
-2.00
-3.00
Years
Experiment 1-A
Inflation (Base)
Experiment 1-B
Experiment 1-C
Interest Rate Overshooting Depends on How
QUICKLY Monetary Growth Returns to Normal
Real Interest Rate
4.3
(In Percentage %)
4.2
1b
4.1
4.0
1c
3.9
3.8
1a
3.7
3.6
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
Years
Experiment 1-A
Interest Rate (Base)
Experiment 1-B
Experiment 1-C
Depth of the Recession Depends Upon How
Quickly the Monetary Stimulus is Withdrawn!
GDP
$7,150
$7,100
1b
$ Billions
$7,050
1c
$7,000
$6,950
$6,900
$6,850
1a
$6,800
$6,750
$6,700
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
Years
Experiment 1-A
GDP (Base)
Experiment 1-B
Experiment 1-C
2a. Fiscal-Stimulus Policy
Experiment
2a. Fiscal-Stimulus Policy Experiment
 In this experiment real government spending is increased in steps of
$100 billion higher from 2009 to 2012, and then spending stays
elevated at that level forever.
 NO INCREASE IN TAX RATE: A deficit-financed war provides the
historical context for large increases in government spending.
Government Spending
$1,400
$1,200
$ Billions
$1,000
$800
$600
$400
$200
$0
2034
2033
2032
2031
Govt. Spending (Base)
2030
Govt. Spending (Simulation)
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Government Spending and Tax Rate
$1,400
16.0%
$1,200
14.0%
12.0%
$1,000
10.0%
$800
8.0%
$600
6.0%
$400
4.0%
$200
2.0%
$-
0.0%
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Government Spending
Tax Rate
Tax Rate
Government Spending
Government Spending vs. Tax Rate
•Higher government spending adds directly to real GDP, by the national
income accounting identity. Since prices do not adjust completely in the
first year, the full adjustment is delayed and the economy goes into a
damped oscillations but in the long run GDP comes back to steady state
GDP
$7,100
Unemployment Drops
$ Billions
$7,050
$7,000
$6,950
$6,900
Unemployment Rises
$6,850
$6,800
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
GDP (Simulation)
GDP (Base)
Inflation follows the a cyclic path. Why? Because GDP has
risen. So initially it shoots up and then drops, but eventually
settles to the steady state values
Inflation
4.00
3.00
2.00
1.00
0.00
Inf lation (Base)
2033
Inf lation (Simulation)
2031
Years
2029
-2.00
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
-1.00
2007
(In Percentage %)
•
 The booming economy raises the demand for money and
forces the real interest rate higher.
Real Interest Rate
8.0
(In Percentage %)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2033
Real Interest Rate (Base)
2031
Real Interest Rate (Simulation)
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
Years
Rise in interest rate hurts investment
Investment Vs. Real Interest Rate
$1,020
8.0
$1,000
7.0
$960
6.0
$940
5.0
$920
4.0
$900
$880
3.0
$860
2.0
$840
1.0
$820
$800
0.0
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Investment
Real Interest Rate
Real Interest Rate
Investment
$980
Real Exchange Rate
Real Exchange Rate
1.010
1.005
(In Percentage %)
1.000
0.995
0.990
0.985
0.980
0.975
0.970
0.965
0.960
Real Exchange Rate (Simulation)
Real Exchange Rate (Base)
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
Years
 Higher real interest rates also raise the exchange
rate relative to the domestic price level and the restof-the-world price level. That is, the real exchange
rate rises. This lowers real exports.
$1,800
($ Billions)
$1,750
$1,700
$1,650
$1,600
$1,550
$1,500
Years
Exports (Simulation)
Exports (Base)
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Exports
 The imports rise as exchange rate rises.
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Imports
$2,200
$2,150
$ Billions
$2,100
$2,050
$2,000
$1,950
$1,900
Years
Imports (Simulation)
Imports (Base)
 Higher imports and lower exports cause net exports
(trade deficit) to drop.
$$(100)
$ Billions
$(200)
$(300)
$(400)
$(500)
$(600)
Years
Trade Deficit (Simulation)
Trade Deficit (Base)
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Trade Deficit (Net Exports)
 Higher real GDP and constant tax rates, raises the real
disposable income and thus also increases
consumption in the short-run, but in the long-run it
settles back to steady state values
Consumption
$5,560
$5,540
$5,520
$ Billions
$5,500
$5,480
$5,460
$5,440
$5,420
$5,400
$5,380
$5,360
2034
2033
2032
Consumption (Base)
2031
Consumption (Simulation)
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Comparison of Government Spending and Consumption
Govt. Spending vs. Consumption
$1,400
$5,560
$1,000
$5,500
$5,480
$800
$5,460
$600
$5,440
$5,420
$400
$5,400
$200
$5,380
$-
$5,360
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Govt. Spending ($ Billions)
$5,520
Years
Govt. Spending
Consumption
Consumption ($ Billions)
$5,540
$1,200
 Even though the tax rate is constant, higher GDP
levels result in increased tax revenues
Tax Revenues
$1,065
$1,060
$ Billions
$1,055
$1,050
$1,045
$1,040
$1,035
$1,030
$1,025
2034
2033
2032
2031
2030
Tax Revenues (Base)
2029
2028
2027
2026
2025
2024
Years
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Tax Revenues (Simulation)
Government Deficit/Surplus and the Real Interest Rate
Surplus Vs. Real Interest Rate
$350
12.0
10.0
$250
$200
8.0
Surplus
$150
$100
6.0
$50
4.0
$$(50)
2.0
$(100)
$(150)
0.0
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Surplus
Real Interest Rate
Real Interest Rate (in%)
$300
A Somewhat “Sequential” Working
of the Model (Fiscal Policy)
 As Government Spending goes up (G↑), GDP goes up
(GDP↑) which causes price level to go up too (P↑).
 Real Interest Rate rises (R↑) which depresses
Investment (I↓).
 Also as Real Interest Rate rises the Real Exchange
Rate rises (EXCH↑) which hurts Exports (EX↓) but
boosts Imports (IM↑) causing the Trade Deficit to rise
(NETEX ↑).
 As GDP goes up the tax collections rise but not by as
much as the increase in government spending causing
the Government deficit to increases.
Summary of Reactions
 In this experiment real government spending is increased in steps of $100 billion
higher from 2007 to 2010, and then spending stays elevated at that level forever.
 Inflation follows the a cyclic path. Initially shoots and then drops, but eventually
settles to the steady state values
 Higher government spending adds directly to real GDP, by the national income
accounting identity. Since prices do not adjust completely in the first year, the full
adjustment is delayed and the economy goes into a damped oscillations but in the
long run GDP comes back to steady state
 The booming economy raises the demand for money and forces the real interest
rate higher.
 Higher real interest rates also raise the exchange rate relative to the domestic
price level and the rest-of-the-world price level. That is, the real exchange rate
rises. This lowers real exports and raises real Imports, causing net exports (trade
deficit) to drop for both the reasons.
 Higher real GDP and constant tax rates, raises the real disposable income and
thus also increases consumption in the short-run, but in the long-run it settles
back to steady state values
 Even though the tax rate is constant, higher GDP levels result in increased tax
revenues
Data Table 2 (a): Govt. Spending
EXOGENOUS VARIABLES
POLICY VARIABLES
Money Supply (M)
New Sim
Base Case
Diff
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
Government Purchases (G)
New Sim
Base Case
Diff
$764.9
$764.9
$0.0
$864.9
$764.9
$100.0
$964.9
$764.9
$200.0
$1,064.9
$764.9
$300.0
$1,164.9
$764.9
$400.0
$1,164.9
$764.9
$400.0
$1,164.9
$764.9
$400.0
$1,164.9
$764.9
$400.0
$1,164.9
$764.9
$400.0
Tax Rate (TAX%)
New Sim
Base Case
Diff
15%
15%
0%
15%
15%
0%
15%
15%
0%
15%
15%
0%
15%
15%
0%
15%
15%
0%
15%
15%
0%
15%
15%
0%
15%
15%
0%
Price Level, ROW
New Sim
Base Case
Diff
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
Real Interest Rate, ROW
New Sim
Base Case
Diff
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
GDP @ Rest of World
New Sim
Base Case
Diff
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
New Sim
Base Case
Diff
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
REST-OF-WORLD VARIABLES
OTHERS
Potential GDP (GDP@FULL)
Name of Experiment:
Deficit Financing Experiment
History
2008
ENDOGENOUS VARIABLES
ACCOUNTING IDENTITIES
****
2009
Short Run
2010
2011
****
2012
****
2019
Long Run
2024
2029
****
2034
Gross Domestic Product (GDP)
New Sim
Base Case
Diff
$7,000.0
$7,000.0
$0.0
$7,064.8
$7,000.0
$64.8
$7,067.9
$7,000.0
$67.9
$7,034.1
$7,000.0
$34.1
$6,995.3
$7,000.0
-$4.7
$7,014.1
$7,000.0
$14.1
$6,998.7
$7,000.0
-$1.3
$6,999.8
$7,000.0
-$0.2
$7,000.1
$7,000.0
$0.1
Taxes (T)
New Sim
Base Case
Diff
$1,050.0
$1,050.0
$0.0
$1,059.7
$1,050.0
$9.7
$1,060.2
$1,050.0
$10.2
$1,055.1
$1,050.0
$5.1
$1,049.3
$1,050.0
-$0.7
$1,052.1
$1,050.0
$2.1
$1,049.8
$1,050.0
-$0.2
$1,050.0
$1,050.0
$0.0
$1,050.0
$1,050.0
$0.0
Disposable Income (YDP)
New Sim
Base Case
Diff
$5,950.0
$5,950.0
$0.0
$6,005.1
$5,950.0
$55.1
$6,007.7
$5,950.0
$57.7
$5,979.0
$5,950.0
$29.0
$5,946.0
$5,950.0
-$4.0
$5,962.0
$5,950.0
$12.0
$5,948.9
$5,950.0
-$1.1
$5,949.9
$5,950.0
-$0.1
$5,950.1
$5,950.0
$0.1
Net Exports (NETEX)
New Sim
Base Case
Diff
($248.2)
($248.2)
$0.0
($320.5)
($248.2)
-$72.3
($392.6)
($248.2)
-$144.3
($466.8)
($248.2)
-$218.6
($544.2)
($248.2)
-$295.9
($544.2)
($248.2)
-$296.0
($544.2)
($248.2)
-$295.9
($544.2)
($248.2)
-$295.9
($544.2)
($248.2)
-$295.9
Price Level (P)
New Sim
Base Case
Diff
1.00
1.00
0.00
1.01
1.00
0.01
1.04
1.00
0.04
1.08
1.00
0.08
1.12
1.00
0.12
1.11
1.00
0.11
1.12
1.00
0.12
1.12
1.00
0.12
1.12
1.00
0.12
Consumption Expenditure ( C)
New Sim
Base Case
Diff
$5,483.3
$5,483.3
$0.0
$5,534.1
$5,483.3
$50.7
$5,536.5
$5,483.3
$53.1
$5,510.1
$5,483.3
$26.7
$5,479.6
$5,483.3
-$3.7
$5,494.4
$5,483.3
$11.0
$5,482.3
$5,483.3
-$1.0
$5,483.2
$5,483.3
-$0.1
$5,483.4
$5,483.3
$0.1
Real Interest Rate ( R)
New Sim
Base Case
Diff
4.0
4.0
0.0
4.5
4.0
0.5
5.2
4.0
1.2
6.0
4.0
2.0
6.9
4.0
2.9
6.9
4.0
2.9
6.9
4.0
2.9
6.9
4.0
2.9
6.9
4.0
2.9
Investment (I)
New Sim
Base Case
Diff
$1,000.0
$1,000.0
$0.0
$986.3
$1,000.0
-$13.7
$959.0
$1,000.0
-$40.9
$926.0
$1,000.0
-$74.0
$894.9
$1,000.0
-$105.1
$896.6
$1,000.0
-$103.4
$895.6
$1,000.0
-$104.3
$895.9
$1,000.0
-$104.1
$896.0
$1,000.0
-$104.0
Real Exchange Rate (EXCH)
New Sim
Base Case
Diff
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
0.99
1.00
-0.01
0.99
1.00
-0.01
0.99
1.00
-0.01
0.99
1.00
-0.01
0.99
1.00
-0.01
0.99
1.00
-0.01
Exports (EX)
New Sim
Base Case
Diff
$1,764.3
$1,764.3
$0.0
$1,670.4
$1,764.3
-$93.9
$1,631.1
$1,764.3
-$133.2
$1,620.2
$1,764.3
-$144.1
$1,619.8
$1,764.3
-$144.5
$1,633.9
$1,764.3
-$130.4
$1,631.6
$1,764.3
-$132.7
$1,631.8
$1,764.3
-$132.5
$1,631.8
$1,764.3
-$132.5
Imports (IM)
New Sim
Base Case
Diff
$2,012.5
$2,012.5
$0.0
$2,061.1
$2,012.5
$48.6
$2,101.0
$2,012.5
$88.4
$2,137.2
$2,012.5
$124.7
$2,175.2
$2,012.5
$162.7
$2,178.1
$2,012.5
$165.6
$2,175.8
$2,012.5
$163.2
$2,175.9
$2,012.5
$163.4
$2,176.0
$2,012.5
$163.4
Inflation (P%)
New Sim
Base Case
Diff
0.0
0.0
0.0
1.4
0.0
1.4
2.8
0.0
2.8
3.6
0.0
3.6
3.5
0.0
3.5
0.2
0.0
0.2
-0.1
0.0
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
BEHAVIORAL EQUATIONS
2b: When…Govt. Spending is Reduced
to its Original Spending Value by 2016
•Government Spending increases for four years and then
gradually reduced back to the original spending by 2016
Government Spending
$1,400
$1,200
$ Billions
$1,000
$800
$600
$400
$200
$0
2034
2033
2032
2031
Govt. Spending (Base)
2030
Govt. Spending (Simulation)
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
•Government Spending increases for four years and then
gradually reduced back to the original spending in 2012
whereas the tax rats remain constant
$1,400
16.0%
$1,200
14.0%
12.0%
$1,000
10.0%
$800
8.0%
$600
6.0%
$400
4.0%
$200
2.0%
$-
0.0%
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Government Spending
Tax Rate
Tax Rate
Government Spending
Government Spending vs. Tax Rate
•Because the government spending is reduced and
brought back to the original level in 2012, the real
interest rates are forced to come back to the original
as the stimulus is taken away.
Real Interest Rate
8.0
(In Percentage %)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2033
Real Interest Rate (Base)
2031
Real Interest Rate (Simulation)
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
Years
Inflation Behavior
Inflation
4.00
3.00
1.00
0.00
-5.00
Years
Inf lation (Simulation)
Inf lation (Base)
2033
-4.00
2031
-3.00
2029
-2.00
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
-1.00
2007
(In Percentage %)
2.00
•As inflation wears off and the real interest rate
returns to normal implies that the nominal interest
rate will drop
Real Vs Nominal Interest Rate
12.0
(In Percentage %)
10.0
8.0
6.0
4.0
2.0
0.0
2034
2033
Nominal Interest Rate
2032
Real Interest Rate
2031
Years
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
-2.0
Comparison of Government Spending and Consumption
$5,600
$1,200
$5,550
$1,000
$5,500
$800
$5,450
$600
$5,400
$400
$5,350
$200
$5,300
$-
$5,250
Years
Govt. Spending
Consumption
Consumption ($ Billions)
$1,400
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Govt. Spending ($ Billions)
Govt. Spending vs. Consumption
•Higher government spending adds directly to real GDP
from the national accounting identity. Since prices do not
adjust completely in the first year, the full adjustment is
delayed and the economy goes into a damped
oscillation toward the long run steady state
GDP vs GDP Potential
$7,150
$7,100
$ Billions
$7,050
$7,000
$6,950
$6,900
$6,850
$6,800
$6,750
$6,700
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
GDP
Years
GDP Potential
3. Neutral-Budget Policy Experiment
– In this experiment real government spending is increased by the same
one-step increase imposed in the fiscal-stimulus experiment.
– Instead of running a deficit, the government raises the tax rate high
enough to crowd out the exact amount of increase in government
spending by reducing consumption.
Billions
Government Spending vs. Tax Rate
$880
(in %)
17.0%
$860
16.5%
$820
16.0%
$800
15.5%
$780
$760
15.0%
$740
14.5%
$720
$700
14.0%
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Government Spending
Tax Rate
Tax Rate
Government Spending
$840
Tax Revenues
$1,180
$1,160
$1,140
$ Billions
$1,120
$1,100
$1,080
$1,060
$1,040
$1,020
$1,000
$980
2034
2033
2032
2031
2030
Tax Revenues (Base)
2029
2028
2027
2026
2025
2024
Years
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Tax Revenues (Simulation)
•Higher taxes via higher tax rate leads to drop in
consumption
Consumption
$5,500
$5,480
$5,460
$ Billions
$5,440
$5,420
$5,400
$5,380
$5,360
$5,340
$5,320
2034
2033
2032
Consumption (Base)
2031
Consumption (Simulation)
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
Government Spending vs. Consumption
$5,500
$860
$5,480
$840
$5,460
$820
$5,440
$800
$5,420
$780
$5,400
$760
$5,380
$740
$5,360
$720
$5,340
$700
$5,320
Years
Govt. Spending
Consumption
Consumption ($ Billions)
$880
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Govt. Spending ($ Billions)
Govt. Spending vs. Consumption
No Change in Interest Rate!
Real Interest Rate
(In Percentage %)
4.5
4.3
4.0
3.8
3.5
2033
Real Interest Rate (Base)
2031
Real Interest Rate (Simulation)
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
Years
Increased G and Decreased C => Constant GDP
GDP
$7,500
$7,400
$7,300
$ Billions
$7,200
$7,100
$7,000
$6,900
$6,800
$6,700
$6,600
$6,500
2034
2033
2032
2031
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Years
GDP (Simulation)
GDP (Base)
Name of Experiment:
Neutral Experiment
History
2008
ENDOGENOUS VARIABLES
ACCOUNTING IDENTITIES
****
2009
Short Run
2010
2011
****
2012
****
2019
Long Run
2024
2029
****
2034
Gross Domestic Product (GDP)
New Sim
Base Case
Diff
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$6,999.9
$7,000.0
-$0.1
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
Taxes (T)
New Sim
Base Case
Diff
$1,050.0
$1,050.0
$0.0
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
$1,158.5
$1,050.0
$108.5
Disposable Income (YDP)
New Sim
Base Case
Diff
$5,950.0
$5,950.0
$0.0
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
$5,841.5
$5,950.0
-$108.5
Net Exports (NETEX)
New Sim
Base Case
Diff
($248.2)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
($248.3)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
($248.2)
($248.2)
$0.0
Price Level (P)
New Sim
Base Case
Diff
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
Consumption Expenditure ( C)
New Sim
Base Case
Diff
$5,483.3
$5,483.3
$0.0
$5,383.3
$5,483.3
-$100.0
$5,383.3
$5,483.3
-$100.0
$5,383.3
$5,483.3
-$100.0
$5,383.3
$5,483.3
-$100.0
$5,383.3
$5,483.3
-$100.0
$5,383.4
$5,483.3
-$100.0
$5,383.3
$5,483.3
-$100.0
$5,383.3
$5,483.3
-$100.0
Real Interest Rate ( R)
New Sim
Base Case
Diff
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
Investment (I)
New Sim
Base Case
Diff
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
$1,000.0
$1,000.0
$0.0
Real Exchange Rate (EXCH)
New Sim
Base Case
Diff
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
1.00
1.00
0.00
Exports (EX)
New Sim
Base Case
Diff
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
$1,764.3
$1,764.3
$0.0
Imports (IM)
New Sim
Base Case
Diff
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
$2,012.5
$2,012.5
$0.0
Inflation (P%)
New Sim
Base Case
Diff
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
BEHAVIORAL EQUATIONS
Second half of the data Neutral Experiment Table
EXOGENOUS VARIABLES
POLICY VARIABLES
Money Supply (M)
New Sim
Base Case
Diff
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
$3,500.0
$3,500.0
$0.0
Government Purchases (G)
New Sim
Base Case
Diff
$764.9
$764.9
$0.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
$864.9
$764.9
$100.0
Tax Rate (TAX%)
New Sim
Base Case
Diff
15%
15%
0%
17%
15%
2%
17%
15%
2%
17%
15%
2%
17%
15%
2%
17%
15%
2%
17%
15%
2%
17%
15%
2%
17%
15%
2%
Price Level, ROW
New Sim
Base Case
Diff
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
1.0
1.0
0.0
Real Interest Rate, ROW
New Sim
Base Case
Diff
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
4.0
4.0
0.0
GDP @ Rest of World
New Sim
Base Case
Diff
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
New Sim
Base Case
Diff
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
$7,000.0
$7,000.0
$0.0
REST-OF-WORLD VARIABLES
OTHERS
Potential GDP (GDP@FULL)